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FORM 10-K UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the Fiscal Year Ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934For 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)
 Registrants telephone number, including area code: (610) 617-7900 Securities registered pursuant to Section 12(g) of the Act:Common Stock, no par value   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). þ o
 The aggregate market value of the voting stock held by non-affiliates of the Registrant, based
upon the closing sale price of the Common Stock on March 14, 2005 as reported on the NASDAQ
National Market System, was $812,679,971. Shares of Common Stock held by each executive
officer and director and by each person who is known by the Registrant to beneficially own 5% or
more of the outstanding Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of March 14, 2005,
Registrant had outstanding 22,811,875 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE  (1)
    Portions of the definitive Proxy Statement for Registrants 2005 Annual Meeting of
Shareholders to be held April 28, 2005 are incorporated by reference in Part III.




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PART I Item 1. BUSINESS GENERAL As used in this Annual Report on Form 10-K, (i) Philadelphia Insurance refers to
Philadelphia Consolidated Holding Corp., (ii) the Company refers to Philadelphia Insurance and
its subsidiaries, doing business as Philadelphia Insurance Companies; (iii) the Insurance
Subsidiaries refers to Philadelphia Indemnity Insurance Company (PIIC), Philadelphia Insurance
Company (PIC), Mobile USA Insurance Company (MUSA) and Liberty American Insurance Company
(LAIC), collectively; (iv) MIA refers to Maguire Insurance Agency, Inc., a captive underwriting
manager; (v) MHIA refers to Mobile Homeowners Insurance Agencies, Inc., a managing general
agency; (vi) Premium Finance refers to Liberty American Premium Finance Company; and (vii) PCHC
Investment refers to PCHC Investment Corp., an investment holding company. Philadelphia Insurance
was incorporated in Pennsylvania in 1984 as an insurance holding company. Liberty American
Insurance Group, Inc., a Delaware insurance holding company, and its subsidiaries MUSA, LAIC, MHIA
and Premium Finance, are sometimes referred to herein collectively as Liberty. The Companys core strategy consists of three major principles:  
    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 sales, 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. During 2004, the Company continued its growth through adherence to its core principles of
profitable underwriting, mixed marketing and specialization. 2004 gross written premiums increased
29.3% to $1,171.3 million. Premium growth was primarily attributable to the Company capitalizing
on continuing turmoil in the property and casualty market, as well as better brand recognition
with agents and brokers, its A+ (Excellent) A.M. Best Company rating (for PIIC and for PIC) and
differentiated policy forms. The Companys GAAP basis combined ratio (the sum of the net loss and
loss adjustment expenses and acquisition costs and other underwriting expenses divided by net
earned premiums) was 89.6%, which was substantially lower than the combined ratio of the property
and casualty industry as a whole. The Companys combined ratio is inclusive of $46.7 million in net
catastrophe losses ($659.8 million gross catastrophe losses) it experienced from the four
hurricanes which made land fall in Florida during 2004. During 2004 total assets increased to $2.5
billion, and shareholders equity increased to $644.2 million. INDUSTRY TRENDS A tumultuous environment has existed in the property and casualty insurance industry during
the last few years due in large part to: the significant losses caused by the terrorists events of
September 11, 2001; continued rating downgrades and insolvencies, and lower interest rates
resulting in reduced investment income. Through 2003 these factors resulted in a general
environment of rate increases and conservative risk selection. Increased reinsurance costs, to
some extent, offset the benefits of these trends. The four destructive Florida hurricanes which
made landfall within a six-week time period during 2004 had a significant impact on many property
and casualty insurance companies. We were adversely impacted by the hurricanes with an estimated
$659.8 million in gross losses and $46.7 million in net losses incurred principally in its personal
lines segment. The industry appears to have rebounded steadily from the contraction of capacity caused by
significant losses that resulted from the terrorist events of
September 11, 2001. Also, the 2004 Florida hurricanes which, although significant, have not appeared to alter this
trend. Industry loss ratios have improved to a level that has caused increased competition.
Despite improved industry loss ratios, the current low interest rate environment  limiting the investment income realized by
insurance companies has mitigated the severity of price declines historically experienced by the industry in past transitions from hard
markets to soft markets. 2




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BUSINESS OVERVIEW AND STRATEGY The Company designs, markets and underwrites specialty commercial and personal property and
casualty insurance products incorporating value-added coverages and services for select target
markets or niches. The company targets markets and niches with specialized areas of demand,
designing innovative policy features. The company believes this approach allows it to compete on
coverage and customized solutions, rather than just price. Insurance products are distributed
through a diverse multi-channel delivery system centered around the Companys direct production
underwriting organization. A select group of 133 preferred agents and a broader network of
approximately 8,700 independent agents supplement the production underwriting organization, which
consisted of 234 professionals located in 36 regional and field offices across the United States as
of December 31, 2004. The Companys commercial products include commercial multi-peril package insurance targeting
specialized niches, including, among others, non-profit organizations, sports and recreation
centers, homeowners associations, condominium associations, private, vocational and specialty
schools, mental health facilities and day care facilities; commercial automobile insurance
targeting the leasing and rent-a-car industries; property insurance for large commercial accounts
such as shopping centers, business parks, hotels and medical facilities; and inland marine products
targeting larger risks such as new builders risk and miscellaneous property floaters. The Company also writes select classes of professional liability and management liability
products, as well as personal property and casualty products for the manufactured housing and
homeowners markets. The Company maintains detailed systems, records and databases that enable the monitoring of
its book of business in order to identify and react swiftly to positive or negative developments
and trends. The Company is able to track performance, including loss ratios, by segment, product,
region, state, producer and policyholder. Detailed profitability reports are produced and reviewed
on a routine (primarily monthly) basis as part of the policy of regularly analyzing and reviewing
the Companys book of business. The Company maintains a local presence to more effectively serve its producer (independent
agents and brokers) and customer base, operating through 12 regional offices and 24 field offices
throughout the country, which report to the regional offices. These offices are staffed with
marketers, field underwriters, accounts receivable and, in some cases, claim personnel, who
interact closely with home office management in making key decisions. This approach allows the
Company to adapt its marketing and underwriting strategies to local conditions and build
value-added relationships with its customers and producers. The Company selects and targets industries and niches that require specialized areas of
expertise where it believes it can grow business through creatively developing insurance products
with innovative features specially designed to meet those areas of demand. The Company believes
that these features are not included in typical property and casualty policies, enabling it to
compete based on the unique or customized nature of the coverage provided. Business Segments The Companys operations are classified into three reportable business segments:  
    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
manufactured housing and homeowners markets, principally in Florida. 3




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The following table sets forth, for the years ended December 31, 2004, 2003 and 2002, the
gross written premiums for each of the Companys business segments and the relative percentages
that such premiums represented. For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Dollars
    
    
    Percentage
    
    
    Dollars
    
    
    Percentage
    
    
    Dollars
    
    
    Percentage(dollars in thousands)Commercial Lines
    
    $
    874,018
    
    
    
    74.6
    %
    
    $
    662,339
    
    
    
    73.1
    %
    
    $
    473,100
    
    
    
    71.3
    %Specialty Lines
    
    
    184,419
    
    
    
    15.7
    
    
    
    154,105
    
    
    
    17.0
    
    
    
    110,176
    
    
    
    16.6Personal Lines
    
    
    112,880
    
    
    
    9.7
    
    
    
    89,549
    
    
    
    9.9
    
    
    
    80,463
    
    
    
    12.1Total
    
    $
    1,171,317
    
    
    
    100.0
    %
    
    $
    905,993
    
    
    
    100.0
    %
    
    $
    663,739
    
    
    
    100.0
    %
 Commercial Lines: Commercial Package:The Company has provided commercial multi-peril package policies to
targeted niche markets for over 16 years. The primary customers for these policies include:  
    non-profit and social service organizations;
    sports and recreation centers;
    homeowners associations;
    condominium associations;
    private, vocational and specialty schools;
    boat dealerships;
    mobile home parks;
    day care facilities;
    mental health facilities;
    amateur sports facilities;
    bowling centers;
    golf clubs; and
    public entity. The package policies provide a combination of comprehensive liability, property and automobile
coverage with limits of up to $1.0 million for casualty, $50.0 million for property, and umbrella
limits on an optional basis up to $10.0 million. The Company believes its ability to provide
professional liability and general liability coverages in one policy is advantageous and convenient
to producers and policyholders. Commercial Automobile and Commercial Excess:The Company has provided primary, excess,
contingent, interim and garage liability; physical damage; and property; to targeted markets for
over 35 years. The primary customers for these policies include:  
    rental car companies;
    leasing companies;
    banks; and
    credit unions. 4




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Specialty Property & Inland Marine: The Company has provided property and inland marine
coverage to targeted markets for the past 5 years. The primary customers for these policies
include:  
    shopping centers;
    business parks;
    medical facilities;
    hotels and motels;
    new construction (inland marine); and
    builders risk. Specialty Lines: The Company has provided management liability (directors and officers (D&O) liability,
employment practices liability, fiduciary liability, kidnap and ransom, work place violence and
internet liability) and errors and omissions (professional) to targeted classes of business for
approximately 14 years. The professional liability products provide errors and omissions coverage
primarily for:  
    lawyers;
    accountants;
    miscellaneous (marketing, management, computer, marriage/family counseling) consultants; and
    excess liability. The management liability products are offered to:  
    non-profit (501(c)(3) companies);
    for-profit public and private companies; and
    excess liability. Personal Lines: The Company entered the personal lines property and casualty business through the acquisition
of Liberty American Insurance Group, Inc. (Liberty) in 1999. This personal lines platform
produces and underwrites specialized manufactured housing and homeowners property and casualty
business principally in Florida, and to a lesser extent, in California and New Jersey. Liberty also
produces and services federal flood insurance under the National Flood Insurance Program for both
personal and commercial policyholders. Products offered include manufactured housing insurance for senior citizen retirees in
preferred parks, a program for newly constructed manufactured homes on private property; a
preferred homeowners program that targets newer homes valued between $100,000 and $375,000, and a
homeowners program excluding wind exposure in Florida coastal counties. As a result of Floridas
increased number of seasonal residents during the winter months, approximately 50% of the in-park
manufactured housing business is written in the first four calendar months of the year. Management
expects that this seasonality will be less pronounced in 2005 and forward due to a planned shift in
product mix which contemplates reducing manufactured housing product policies and increasing
homeowners product policies. The Company plans to reduce its manufactured housing exposures by
restricting new business and further limiting exposure concentrations. The preferred homeowners
program underwriting criteria is being expanded to increase the
maximum eligible home values from $375,000 to
$750,000. 5




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Geographic Distribution The following table provides the geographic distribution of direct earned premiums for all
reportable business segments of the Companys risks insureds, as represented by direct earned
premiums for the year ended December 31, 2004. No other state accounted for more than 2% of total
direct earned premiums for the year ended December 31, 2004. (dollars in thousands). State
    
    Direct Earned Premiums
    
    
    Percent of TotalFlorida
    
    $
    205,941
    
    
    
    19.5
    %California
    
    
    125,455
    
    
    
    11.9New York
    
    
    92,413
    
    
    
    8.8Texas
    
    
    53,696
    
    
    
    5.1Pennsylvania
    
    
    48,939
    
    
    
    4.6Massachusetts
    
    
    44,020
    
    
    
    4.2New Jersey
    
    
    43,151
    
    
    
    4.1Illinois
    
    
    38,240
    
    
    
    3.6Ohio
    
    
    30,819
    
    
    
    2.9Other
    
    
    372,478
    
    
    
    35.3Total Direct Earned Premiums
    
    $
    1,055,152
    
    
    
    100.0
    %
 See Note 17 to the Companys financial statements included with this Form 10-K for information
concerning the revenues, net income and assets of the Companys business segments. Underwriting and Pricing The Companys business segments are organized around its three underwriting divisions:
Commercial Lines, Specialty Lines, and Personal Lines. Each underwriting divisions
responsibilities include pricing, managing the risk selection process, and monitoring loss ratios
by product insured. The Company attempts to adhere to conservative underwriting and pricing practices. The
Companys underwriting strategy is detailed in a document which is signed by each underwriting
professional. Written underwriting guidelines are maintained and updated regularly for all classes
of business underwritten and adherence to these underwriting guidelines is maintained through
underwriting audits conducted by the Company. Product pricing levels are monitored utilizing a
system which measures the aggregate price level of a book of business. This system assists
management and underwriters to promptly recognize and respond to price deterioration. When
necessary, the Company re-underwrites, sharply curtails or discontinues a product deemed to present
unacceptable risks. The Commercial Lines Underwriting Group has underwriting responsibility for the Companys
commercial multi-peril package, commercial automobile and large property and inland marine
products. The Group currently consists of 63 home office and 59 regional office underwriters who
are supported by underwriting assistants, raters, and other policy administration personnel. The
Commercial Lines home office underwriting unit is responsible for underwriting, auditing, servicing renewal business, and authorizing quotes for new business which are in excess of the
regional office underwriters limits. The regional office underwriters have the responsibility for
pricing, underwriting, and policy issuance for new business. The commercial lines underwriting
group is under the immediate direction of Product Managers and Assistant Vice Presidents who
report to the Vice Presidents of Commercial Lines Underwriting. Overall management responsibility
for the book of business resides in the home office with the senior underwriting officers. The
Company believes that its ability to deliver excellent service and build long lasting relationships
is enhanced through its management structure. The Specialty Lines Underwriting Group has the underwriting responsibility for the errors and
omissions and management liability products. The Group consists of 32 home office underwriters and
underwriter trainees and 28 regional underwriters. These underwriters and underwriter trainees are
supported by underwriting assistants and other policy administration personnel. The home office
underwriting unit is responsible for underwriting, auditing and servicing renewal business, as well
as an authority referral for the regional office underwriters for quoting new business. The
regional office underwriters have the responsibility for pricing, underwriting, and policy issuance
of new business. The Specialty Lines Group is managed by a Vice President who reports directly to
the Chief Underwriting Officer. The Personal Lines Underwriting Group is located in Pinellas Park, Florida. The underwriting
staff consists of 10 professionals who are under the direction of the Personal Lines Underwriting
Vice President. Much of the underwriting 6




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function is automated through internet accessed rating software. Underwriting guidelines are
embedded within this software which prohibit binding of accounts if a risk does not meet the
underwriting guidelines. The Company has a proactive exposure distribution management system in
place to aid in portfolio optimization. The risk portfolio is managed at a zip code level through
the use of in-house software and external modeling tools. The Company inspects the properties for
its new preferred homeowners program and manufactured homes on private property product. The Company uses a combination of Insurance Services Office, Inc. (ISO) coverage forms and
rates and independently filed forms and rates. Coverage forms and rates are independently
developed for situations where the line of business is not supported by ISO or where management
believes the ISO forms and rates do not adequately address the risk. Departures from ISO forms are
also used to differentiate the Companys products from its competitors. Reinsurance The Company has entered into various reinsurance agreements for the purpose of limiting loss
exposure and managing capacity constraints as described below: The Companys casualty excess of loss reinsurance agreement (Excess Treaty) provides that
the Company bears: the first $1.0 million primary layer of liability on each occurrence and the
first $1.0 million layer of liability on umbrella risks for policies where the Company provides the
first $1.0 million primary layer of coverage. Casualty, fidelity, professional liability and
fiduciary liability risks in excess of $1.0 million up to $11.0 million are reinsured under the
Excess Treaty which has been placed through a reinsurance broker. As of January 2005 the reinsurers
participating on the Excess Treaty are Allied World Assurance Company, LTD, American Reinsurance
Company, ACE Property and Casualty Insurance Company , and Liberty Mutual Insurance Company, with a
pro rata participation of 25%, 30%, 20% and 25%, respectively. Facultative reinsurance
(reinsurance which is provided on an individual risk basis) is placed for each casualty risk in
excess of $11.0 million. The Companys property excess of loss reinsurance treaty provides that the Company bears the
first $2.0 million of loss on each risk with its reinsurers bearing two layers of loss up to $50.0
million on each risk. General Reinsurance Corporation provides limits of $8.0 million in excess of
$2.0 million, and Swiss Reinsurance American Corporation, provides limits of $40.0 million in
excess of $10.0 million. The Company also has automatic facultative excess of loss reinsurance
with General Reinsurance Corporation for each property loss in excess of $50.0 million up to $100.0
million. To mitigate potential exposures to losses arising from terrorist acts, the Company has
purchased per risk reinsurance coverage for terrorism with a $48.0 million aggregate policy limit
for 2004. Under this reinsurance coverage the Company bears the first $2.0 million layer of loss
on each risk and coverage. Effective April 1, 2003, the Company entered into a quota share reinsurance agreement. Under
this agreement, the Company ceded 22% of its net written premiums and loss and loss adjustment
expenses for substantially all lines of business on policies effective April 1, 2003 through
December 31, 2003, and 10% of its commercial and specialty lines net written premiums and loss and
loss adjustment expenses for policies effective January 1, 2004 and through December 31, 2004. The
Company received a provisional commission of 33.0% adjusted pro-rata based upon the ratio of losses
incurred to premiums earned. Pursuant to this reinsurance agreement the Company withheld the
reinsurance premiums due the reinsurers reduced by the reinsurers expense allowance and the
Companys ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds
Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses
under this agreement, and increased by an interest credit. In addition, the agreement allows for a
profit commission to be paid to the Company upon commutation. Effective as of January 1, 2005 the
Company entered into a Reinsurance Commutation and Release Agreement with respect to the 2003 quota
share reinsurance agreement. The Company purchases property catastrophe reinsurance covering both its commercial and
personal lines catastrophe losses. The Companys primary catastrophe reinsurance program provides
coverage for a one year period with a June 1 renewal date. For its personal lines catastrophe
losses the Companys reinsurance coverage is approximately $336.3 million in excess of the
Companys $3.5 million per occurrence retention. Of this total amount, the Florida Hurricane
Catastrophe Fund (the FHCF) provides on an aggregate basis for Mobile USA Insurance Company and
Liberty American Insurance Company 90% coverage for approximately
$194.5 million excess $52.4
million. Additionally, a 15% quota share reinsurance arrangement
provides $24.7 million of the
$336.3 million in coverage. Both the FHCF and the quota share arrangements inure to the benefit of
the Companys open-market catastrophe program. The coverage provided by the open-market
catastrophe program (large reinsurers that are rated at least A (excellent) by A.M. Best Company)
includes one mandatory reinstatement but the FHCF coverage does not reinstate. Since the FHCF
coverage cannot be reinstated, the Companys open-market program is structured such that
catastrophe reinsurance coverage excess of the FHCF coverage will 7




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drop down and fill in any portion of the FHCF coverage which has been utilized. The quota
share reinsurance arrangement provides 15% coverage for catastrophe losses without limit. Based
upon the various modeling methods utilized by the Company to estimate its probable maximum loss for
its personal lines business, the 100 year storm event is estimated at $171.4 million and the 250
year storm event is estimated at $283.3 million. These loss estimates were calculated using the
personal lines in-force exposures as of June 30, 2004. For its commercial lines catastrophe losses the companys catastrophe reinsurance coverage is
$108.0 million in excess of the Companys $7.0 million per occurrence retention. Based upon the
various modeling methods utilized by the Company to estimate its probable maximum loss for its
commercial lines business, the 100 year storm event is estimated at $67.1 million and 250 year
storm event is estimated at $108.0 million. The company also purchased reinstatement premium protection reinsurance contracts, effective
July 1, 2004, which pay 100% of the reinstatement premium for the one mandatory reinstatement which
the Company becomes liable to pay as a result of loss occurrences under both of its personal and
commercial lines open-market catastrophe reinsurance programs. As a result of the four hurricanes which made landfall in Florida during August and September
2004, the Company purchased the following additional catastrophe reinsurance coverages during
September and October 2004 to replace property catastrophe coverage which had been utilized. These
agreements are effective through May 31, 2005.  
    Additional personal lines excess reinsurance coverage providing $50.0 million of
catastrophe reinsurance coverage excess $140.0 million.
    Third and fourth catastrophe event reinsurance coverage on the first four layers
($46.5 million excess the Companys $3.5 million retention) of the personal lines
catastrophe reinsurance program.
    Third catastrophe event reinsurance coverage on the first two layers ($13.0 million
excess the Companys $7.0 million retention) of the commercial lines catastrophe
reinsurance program.
    Additional personal lines excess reinsurance coverage providing $50.0 million of
catastrophe reinsurance coverage excess of $190.0 million.
    Fifth event personal lines catastrophe reinsurance coverage which in the aggregate
provides $6.5 million of catastrophe reinsurance coverage excess $3.5 million.
    Additional personal lines excess reinsurance coverage providing $50.0 million of
coverage excess of $240.0 million.
    $50.0 million of coverage excess $140.0 million in excess $50.0 million otherwise
recoverable which provides an additional $50.0 million of reinsurance coverage excess
$140.0 million after the first $50.0 million of loss is recovered under the $50.0
million excess $140.0 million personal lines catastrophe program.
    $40.0 million excess $50.0 million in excess $80.0 million otherwise recoverable
which provides a third $40.0 million limit of reinsurance coverage after the $40.0
million in excess $50.0 million under the personal lines catastrophe program has been
exhausted. The Company also has an excess casualty reinsurance agreement which provides an additional
$18.0 million of coverage excess of a $2.0 million Company retention for protection from exposures
such as extra-contractual obligations and judgments in excess of policy limits. An errors and
omissions insurance policy provides an additional $10.0 million of coverage with respect to these
exposures. The Company seeks to limit the risk of a reinsurers default in a number of ways. First, the
Company principally contracts with large reinsurers that are rated at least A (Excellent) by A.M.
Best Company. Secondly, the Company seeks to collect the obligations of its reinsurers on a timely
basis. This collection effort is supported through the regular monitoring of reinsurance
receivables. Finally, the Company typically does not write casualty policies in excess of $11.0
million or property policies in excess of $50.0 million. Although the Company purchases reinsurance to limit its loss exposure by transferring the risk
to its reinsurers, reinsurance doesnt relieve the Company of its liability to policyholders. The Company regularly assesses its reinsurance needs and seeks to improve the terms of its
reinsurance arrangements as market conditions permit. Such improvements may involve increases in
retentions, modifications in premium rates, changes in reinsurers and other matters. 8




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Marketing and Distribution Proactive risk selection based on sound underwriting criteria and relationship selling in
clearly defined target markets continues to be the foundation of the Companys marketing plan.
Within this framework, the Companys marketing effort is designed to promote a systematic and
disciplined approach to developing business which is anticipated to be profitable. The Company distributes its products through its direct production underwriting organization,
an extensive network of approximately 8,700 independent brokers and its preferred agent program.
The Companys most important distribution channel is its production underwriting organization.
Although the Company has always written business directly, the production underwriting organization
was established by the Company to stimulate new sales through independent agents. The production
underwriting organization is currently comprised of 234 professionals located in 36 offices in
major markets across the country. The field offices are focused daily on interacting with
prospective and existing insureds. In addition to this direct prospecting, relationships with
approximately 8,700 brokers have been formed, either because the broker has a preexisting
relationship with the insured or has sought the Companys expertise in one of its specialty
products. This mixed marketing concept provides the Company with the flexibility to respond to
changing market conditions and, when appropriate, shift its emphasis to different product lines to
take advantage of opportunities as they arise. In addition, the production underwriting
organizations ability to gather market intelligence enables the rapid identification of soft
markets and redeployment to firmer markets, from a product line or geographic perspective. The
Company believes that its mixed marketing platform provides a competitive edge, not only in stable
market conditions. The Companys preferred agent program, in which business relationships are formed with brokers
specializing in certain of the Companys business niches, consisted of 133 preferred agents at
year-end 2004. Preferred agents are identified by the Company based on productivity and loss
experience, and receive additional benefits from the Company in exchange for meeting defined
production and profitability criteria. The Company supplements its marketing efforts through affinity programs, trade shows, direct
mailings, eflyers and national advertisements placed in trade magazines serving industries in which
the Company specializes, as well as links to industry web sites. The Company has also enhanced its
marketing with Internet-based initiatives, such as the Personal Lines Divisions Liberty American
In TouchSM real-time policy inquiry system, which allows agents to view account data,
process non-dollar endorsements, rate, quote and issue a policy over the Internet. Product Development The Company continually evaluates new product opportunities, consistent with its strategic
focus on selected market niches. Direct contacts between the Companys field and home office
personnel, preferred agent council and its customers have produced a number of new product ideas.
All new product ideas are presented to the Product Development Committee for consideration. Such
Committee, currently composed of the Companys President and members of senior management, meets
regularly to review the feasibility of products from a variety of perspectives, including
profitability, underwriting risk, marketing and distribution, reinsurance, long-term viability and
consistency with the Companys culture and philosophy. For each new product, an individualized
test market plan is prepared, addressing such matters as the appropriate distribution channel
(e.g., a limited number of selected production underwriters), an appropriate cap on premiums to be
generated during the test market phase and reinsurance requirements for the test market phase.
Test market products may involve lower retentions than customarily utilized. After a new product
is approved for test marketing, the Company monitors its success based on specified criteria (e.g.,
underwriting results, sales success, product demand and competitive pressures). If expectations
are not realized, the Company either moves to improve results by initiating adjustments or abandons
the product. Claims Management and Administration In accordance with its emphasis on underwriting profitability, the Company actively manages
claims under its policies in an effort to investigate reported incidents at an early stage, service
insureds and reduce fraud. Claim files are regularly audited by claims supervisors in an attempt
to ensure that claims are being processed properly and that reserves are being set at appropriate
levels. The Companys experienced staff of claims management professionals is assigned to dedicated
claim units within specific niche markets. Each of these units receive supervisory direction and
news, legislative and product development updates from the unit director. Claims management
personnel have an average of approximately twenty years of experience 9




---



##### 



in the industry. The dedicated claim units meet regularly to communicate changes within their
assigned specialty. Staff within the dedicated claim units have an average of ten years experience
in the industry. The claims department also maintains a Special Investigations Unit to investigate suspicious
claims and to serve as a clearinghouse for information concerning fraudulent practices. The
Special Investigations Unit works closely with a variety of industry contacts, including attorneys
and investigators to identify fraudulent claims. Loss and Loss Adjustment Expenses The Company is liable for losses and loss adjustment expenses under its insurance policies and
reinsurance treaties. While the Companys professional liability policies are written on
claims-made forms, and while claims on its other policies are generally reported promptly after the
occurrence of an insured loss, in many cases several years may elapse between the occurrence of an
insured loss, the reporting of the loss to the Company and the Companys payment of the loss. The
Company reflects its liability for the ultimate payment of all incurred losses and loss adjustment
expenses by establishing loss and loss adjustment expense reserves, which are balance sheet
liabilities representing estimates of future amounts needed to pay claims and related expenses with
respect to insured events that have occurred. When a claim involving a probable loss is reported, the Company establishes a case reserve for
the estimated amount of the Companys ultimate loss and loss adjustment expense. This estimate
reflects an informed judgment, based on the Companys reserving practices and the experience of the
Companys claims staff. Management also establishes reserves on an aggregate basis to provide for
losses incurred but not reported (IBNR), as well as future development on claims reported to the
Company. As part of the reserving process, historical data are reviewed and consideration is given to
the anticipated effect of various factors, including known and anticipated legal developments,
changes in societal attitudes, inflation and economic conditions. Reserve amounts are necessarily
based on managements estimates and judgments; as new data become available and are reviewed, these
estimates and judgments are revised, resulting in increases or decreases to existing reserves. The
Insurance Subsidiaries actuary provides the Companies with an
annual statement of opinion for the
statutory filings with regulators. The following table sets forth a reconciliation of beginning and ending reserves for unpaid
loss and loss adjustment expenses, net of amounts for reinsured losses and loss adjustment
expenses, for the years indicated. As of and For the Years Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Unpaid loss and loss adjustment expenses at
beginning of year
    
    $
    481,495
    
    
    $
    359,711
    
    
    $
    250,134Provision for losses and loss adjustment expenses for current
year claims
    
    
    440,989
    
    
    
    314,609
    
    
    
    239,834Increase in estimated ultimate losses and loss adjustment expenses
for prior year claims
    
    
    35,126
    
    
    
    44,568
    
    
    
    27,599Total incurred losses and loss adjustment expenses
    
    
    476,115
    
    
    
    359,177
    
    
    
    267,433Loss and loss adjustment expense payments for claims
attributable to:Current year
    
    
    107,129
    
    
    
    69,905
    
    
    
    58,530Prior years
    
    
    178,762
    
    
    
    167,488
    
    
    
    99,326Total payments
    
    
    285,891
    
    
    
    237,393
    
    
    
    157,856Unpaid loss and loss adjustment expenses at end of year(1)
    
    $
    671,719
    
    
    $
    481,495
    
    
    $
    359,711
   (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 $324,948, $145,591 and $85,837 at December 31, 2004,
2003 and 2002, respectively. 10




---



##### 



During 2004 the Company increased its estimated total gross and net ultimate losses and
loss adjustment expenses, primarily for accident years 1997 through 2002, and decreased its
estimated total gross and net ultimate losses and loss adjustment expenses for accident year 2003
by the following amounts: (In millions) Gross Basisincrease (decrease)Professional
    
    
    GeneralLiability
    
    
    Liability
    
    
    CommercialAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2003
    
    $
    9.4
    
    
    $
    (20.9
    )
    
    $
    (24.2
    )
    
    $
    (1.8
    )
    
    $
    (37.5
    )2002
    
    $
    22.4
    
    
    $
    11.9
    
    
    $
    8.4
    
    
    $
    2.7
    
    
    $
    45.42001
    
    $
    17.3
    
    
    $
    2.0
    
    
    $
    2.4
    
    
    $
    4.4
    
    
    $
    26.12000 & Prior
    
    $
    7.8
    
    
    $
    2.3
    
    
    $
    2.6
    
    
    $
    0.6
    
    
    $
    13.3Calendar Year
    
    $
    56.9
    
    
    $
    (4.7
    )
    
    $
    (10.8
    )
    
    $
    5.9
    
    
    $
    47.3
 (In millions) Net Basisincrease (decrease)Professional
    
    
    GeneralLiability
    
    
    Liability
    
    
    CommercialAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2003
    
    $
    2.4
    
    
    $
    (13.1
    )
    
    $
    (21.9
    )
    
    $
    (1.7
    )
    
    $
    (34.3
    )2002
    
    $
    16.8
    
    
    $
    13.3
    
    
    $
    10.2
    
    
    $
    2.9
    
    
    $
    43.22001
    
    $
    7.9
    
    
    $
    4.1
    
    
    $
    2.8
    
    
    $
    2.0
    
    
    $
    16.82000 & Prior
    
    $
    2.3
    
    
    $
    0.4
    
    
    $
    5.3
    
    
    $
    1.4
    
    
    $
    9.4Calendar Year
    
    $
    29.4
    
    
    $
    4.7
    
    
    $
    (3.6
    )
    
    $
    4.6
    
    
    $
    35.1
 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. During 2003 the Company increased the liability for unpaid loss and loss adjustment expenses
by $51.7 million ($44.6 million net of reinsurance recoverables), primarily for accident years 1997
through 2001. This increase in the liability for unpaid loss and loss adjustment expense, net of
reinsurance recoverables, was primarily due to the following:  - -
    The Company increased the estimated gross and net loss for unreported claims incurred
and related claim adjustment expenses on residual value polices issued during the years
1998 through 2002 by $38.8 million. 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 11




---



##### 



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 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. During 2002, the Company increased the estimated loss for unreported claims incurred and related
claim adjustment expenses on residual value polices issued during the years 1998 through 2001 by
$30.2 million ($20.7 million net of reinsurance). As of December 31, 2001 the Company had
estimated a total liability for unpaid loss and loss adjustment expenses for these policies of
$14.5 million ($8.7 million net of reinsurance recoverables). During 2002 adverse trends further
deteriorated in both frequency and severity on leases expiring in 2002. As part of the Companys
monitoring and evaluation process, consulting firms were engaged during the third quarter of 2002
to aid in evaluating this deterioration and the ultimate potential loss exposure under these
policies. As a result of the indications and subsequent evaluation by the Company and changes in
the Companys assumptions relating to future frequency and severity of losses, the estimate for
unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this
deterioration to the following factors that led to a softening of prices in the used car market
subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and
other incentives which increased new car sales and the volume of trade-ins, daily rental units
being sold into the market earlier and in greater numbers than expected further adding to the over
supply of used cars; and the overall uncertain economic conditions. The Company also increased the liability for unpaid loss and loss adjustment expenses on the
Commercial Automobile Excess Liability Insurance (Excess Liability) product sold to rental car
companies (Commercial Lines Underwriting Segment) primarily for the 2000 and 2001 accident years by
$6.9 million ($4.9 million net of reinsurance). As of December 31, 2001 the Company had estimated
a total liability for unpaid loss and loss adjustment expenses for the Excess Liability policies
issued in these years of $23.0 million ($21.6 million net of reinsurance). Excess Liability
provides automobile liability coverage in excess of the state mandated limits which are provided by
the rental car company. During the third quarter of 2002, pursuant to a routine underwriting
review focusing on price adequacy and loss experience, the Company non-renewed a significant Excess
Liability customer as a result of an unacceptable underwriting risk profile. This adverse loss
development was primarily due to pricing inadequacy and the adverse loss experience of this
customer. Additionally, the Company has experienced a delay in both the reporting of claims and
the claim litigation discovery process as a result of this policyholder and another Excess
Liability policyholder filing for bankruptcy protection during the third quarter 2002 and fourth
quarter 2001, respectively. The following table presents the development of
unpaid loss and loss adjustment expenses, net of
amounts for reinsured losses and loss adjustment
expenses, from 1994 through 2004. The top line
of the table shows the estimated reserve for
unpaid loss and loss adjustment expenses at the
balance sheet date for each of the indicated
years. These figures represent the estimated
amount of unpaid loss and loss adjustment
expenses for claims arising in the current year
and all prior years that were unpaid at the
balance sheet date, including IBNR losses. The
table also shows the re-estimated amount of the
previously recorded unpaid loss and loss
adjustment expenses based on experience as of the
end of each succeeding year. The estimate may
change as more information becomes known about
the frequency and severity of claims for individual years. 12




---



##### 



AS OF AND FOR THE YEARS ENDED DECEMBER 31,(Dollars in Thousands)1994
    
    
    1995
    
    
    1996
    
    
    1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, AS
STATED
    
    $
    53,595
    
    
    $
    68,246
    
    
    $
    85,723
    
    
    $
    108,928
    
    
    $
    136,237
    
    
    $
    161,353
    
    
    $
    195,464
    
    
    $
    250,134
    
    
    $
    359,711
    
    
    $
    481,496
    
    
    $
    671,719Cumulative Paid as of:1 year later
    
    
    12,390
    
    
    
    15,214
    
    
    
    22,292
    
    
    
    26,870
    
    
    
    43,769
    
    
    
    60,922
    
    
    
    70,757
    
    
    
    99,325
    
    
    
    167,489
    
    
    
    178,7622 years later
    
    
    23,139
    
    
    
    31,410
    
    
    
    38,848
    
    
    
    56,488
    
    
    
    84,048
    
    
    
    109,092
    
    
    
    131,649
    
    
    
    211,851
    
    
    
    291,3253 years later
    
    
    33,511
    
    
    
    40,637
    
    
    
    52,108
    
    
    
    80,206
    
    
    
    115,900
    
    
    
    144,435
    
    
    
    213,286
    
    
    
    277,7834 years later
    
    
    38,461
    
    
    
    47,994
    
    
    
    63,738
    
    
    
    95,047
    
    
    
    131,062
    
    
    
    201,779
    
    
    
    247,2985 years later
    
    
    42,366
    
    
    
    51,806
    
    
    
    69,116
    
    
    
    99,755
    
    
    
    151,753
    
    
    
    217,6776 years later
    
    
    43,860
    
    
    
    53,198
    
    
    
    70,779
    
    
    
    106,915
    
    
    
    158,1587 years later
    
    
    44,243
    
    
    
    53,701
    
    
    
    73,939
    
    
    
    110,1948 years later
    
    
    44,627
    
    
    
    55,541
    
    
    
    74,4969 years later
    
    
    45,902
    
    
    
    55,51710 years later
    
    
    45,921Unpaid Loss and Loss Adjustment
Expenses re-estimated as of End
of Year:1 year later
    
    
    52,671
    
    
    
    67,281
    
    
    
    84,007
    
    
    
    105,758
    
    
    
    135,983
    
    
    
    163,896
    
    
    
    208,899
    
    
    
    277,733
    
    
    
    404,279
    
    
    
    516,6222 years later
    
    
    52,062
    
    
    
    66,061
    
    
    
    81,503
    
    
    
    103,513
    
    
    
    138,245
    
    
    
    177,782
    
    
    
    232,582
    
    
    
    334,802
    
    
    
    473,6803 years later
    
    
    51,149
    
    
    
    63,872
    
    
    
    76,348
    
    
    
    104,712
    
    
    
    146,679
    
    
    
    196,735
    
    
    
    274,166
    
    
    
    361,0524 years later
    
    
    49,805
    
    
    
    59,085
    
    
    
    73,992
    
    
    
    109,061
    
    
    
    151,077
    
    
    
    228,082
    
    
    
    283,6195 years later
    
    
    47,366
    
    
    
    56,673
    
    
    
    75,672
    
    
    
    107,796
    
    
    
    163,657
    
    
    
    230,3916 years later
    
    
    45,797
    
    
    
    55,861
    
    
    
    74,645
    
    
    
    110,845
    
    
    
    164,2727 years later
    
    
    45,245
    
    
    
    55,439
    
    
    
    75,272
    
    
    
    111,5828 years later
    
    
    44,878
    
    
    
    55,606
    
    
    
    74,9829 years later
    
    
    45,764
    
    
    
    55,55210 years later
    
    
    45,705Cumulative Redundancy (Deficiency)Dollars
    
    $
    7,890
    
    
    $
    12,694
    
    
    $
    10,741
    
    
    $
    (2,654
    )
    
    $
    (28,035
    )
    
    $
    (69,038
    )
    
    $
    (88,155
    )
    
    $
    (110,918
    )
    
    $
    (113,969
    )
    
    $
    (35,126
    )Percentage
    
    
    14.7
    %
    
    
    18.6
    %
    
    
    12.5
    %
    
    
    (2.4
    )%
    
    
    (20.6
    )%
    
    
    (42.8
    )%
    
    
    (45.1
    )%
    
    
    (44.3
    )%
    
    
    (31.7
    %)
    
    
    (7.3
    %)
   (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 $324,948, $145,591, $85,837, $52,599, $42,030, $26,710, $16,120, $13,502,
$10,919, $9,440, and $5,580 at December 31, 2004, 2003, 2002, 2001, 2000, 1999, 1998,
1997, 1996, 1995, and 1994, 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. 13




---



##### 



The cumulative redundancy (deficiency) represents the aggregate change in the reserve
estimated over all prior years, and does not present accident year loss development. Therefore,
each amount in the table includes the effects of changes in reserves for all prior years. The unpaid loss and loss adjustment expense of the Insurance Subsidiaries, as reported in
their Annual Statements prepared in accordance with statutory accounting practices and filed with
state insurance departments, differ from those reflected in the Companys financial statements
prepared in accordance with generally accepted accounting principles (GAAP) with respect to
recording the effects of reinsurance. Unpaid loss and loss adjustment expenses under statutory
accounting practices are reported net of the effects of reinsurance, whereas under GAAP these
amounts are reported without giving effect to reinsurance. Under GAAP, reinsurance receivables,
with a corresponding increase in unpaid loss and loss adjustment expense, have been recorded. (See
footnote (1) on Page 13 for amounts). There is no effect on net income or shareholders equity due
to the difference in reporting the effects of reinsurance between statutory accounting practices
and GAAP as discussed above. Operating Ratios Statutory Combined Ratio The statutory combined ratio, which is the sum of (a) the ratio of loss and loss adjustment
expenses incurred to net earned premiums (loss ratio) and (b) the ratio of policy acquisition costs
and other underwriting expenses to net written premiums (expense ratio), is the traditional measure
of underwriting profit and loss for insurance companies. If the combined ratio is below 100%, an
insurance company has an underwriting profit, and if it is above 100%, the insurer has an
underwriting loss. The following table reflects the consolidated loss, expense and combined ratios of the
Insurance Subsidiaries, together with the property and casualty industry-wide combined ratios after
policyholders dividends. For the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Loss Ratio
    
    
    61.5
    %
    
    
    63.1
    %
    
    
    63.5
    %
    
    
    60.7
    %
    
    
    57.8
    %Expense Ratio
    
    
    27.2
    %
    
    
    27.2
    %
    
    
    28.0
    %
    
    
    31.2
    %
    
    
    31.3
    %Combined Ratio
    
    
    88.7
    %
    
    
    90.3
    %
    
    
    91.5
    %
    
    
    91.9
    %
    
    
    89.1
    %Industry Statutory Combined Ratio, after Policyholders
Dividends
    
    
    97.6
    %
    
    
    100.1
    %
    
    
    107.4
    %
    
    
    115.9
    %
    
    
    110.4
    %(1
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
   (1)
    
    Source: A.M. Best Company Review/Preview January 2005 (Estimated 2004).(2)
    
    Source: A.M. Best Company Review/Preview January 2005 Premium-to-Surplus Ratio: While there are no statutory provisions governing premium-to-surplus ratios, regulatory
authorities regard this ratio as an important indicator as to an insurers ability to withstand
abnormal loss experience. Guidelines established by the National Association of Insurance
Commissioners (the NAIC) provide that an insurers net written premium-to-surplus ratio is
satisfactory if it is below 3 to 1. The following table sets forth, for the periods indicated, net written premiums to surplus as
regards policyholders for the Insurance Subsidiaries (statutory basis): As of and For the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Net Written Premiums
    
    $
    919,152
    
    
    $
    601,253
    
    
    $
    523,962
    
    
    $
    333,817
    
    
    $
    263,637Surplus as Regards Policyholders
    
    $
    503,657
    
    
    $
    415,900
    
    
    $
    312,626
    
    
    $
    280,960
    
    
    $
    193,292Premium to Surplus Ratio
    
    
    1.8 to 1.0
    
    
    
    1.5 to 1.0
    
    
    
    1.7 to 1.0
    
    
    
    1.2 to 1.0
    
    
    
    1.4 to 1.0
 14




---



##### 



Investments The Companys investment objective is the realization of relatively high levels of investment
income while generating competitive after-tax total rates of return within a prudent level of risk
and within the constraints of maintaining adequate securities in amount and duration to meet cash
requirements of current operations and long-term liabilities, as well as maintaining and improving
the Companys A.M. Best rating. The Company utilizes external independent professional investment
managers for its fixed maturity and equity investments. At December 31, 2004, the Company had total investments with a carrying value of $1,428.2
million, and 91.0% of the Companys total investments were fixed maturity securities, including
U.S. treasury securities and obligations of U.S. government corporations and agencies, obligations
of states and political subdivisions, corporate debt securities, asset backed securities, mortgage
pass-through securities and collateralized mortgage obligations, with a weighted average quality of
AAA. The asset backed, mortgage pass-through and collateralized mortgage obligation securities
are amortizing securities possessing favorable prepayment risk and/or extension profiles. The
remaining 9.0% of the Companys total investments consisted primarily of publicly-traded common
stocks. The following table sets forth information concerning the composition of the Companys total
investments at December 31, 2004: Estimated
  

    
    
    


    

    
    Percent ofMarket
    

    
    Carrying
    
    

    CarryingAmortized Cost
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in Thousands)Fixed Maturities:Obligations of States and Political
Subdivisions
    
    $
    617,464
    
    
    $
    626,592
    
    
    $
    626,592
    
    
    
    43.9
    %U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    
    62,929
    
    
    
    62,669
    
    
    
    62,669
    
    
    
    4.4Corporate and Bank Debt Securities
    
    
    218,434
    
    
    
    219,269
    
    
    
    219,269
    
    
    
    15.3Asset Backed Securities
    
    
    96,029
    
    
    
    97,056
    
    
    
    97,056
    
    
    
    6.8Mortgage Pass-Through Securities
    
    
    229,623
    
    
    
    231,610
    
    
    
    231,610
    
    
    
    16.2Collateralized Mortgage Obligations
    
    
    62,615
    
    
    
    62,508
    
    
    
    62,508
    
    
    
    4.4Equity Securities
    
    
    110,601
    
    
    
    128,447
    
    
    
    128,447
    
    
    
    9.0Total Investments
    
    $
    1,397,695
    
    
    $
    1,428,151
    
    
    $
    1,428,151
    
    
    
    100.0
    %
 At December 31, 2004, approximately 99.4% of the Insurance Subsidiaries fixed maturity
securities (cost basis) consisted of U.S. government securities or securities rated 1 (highest
quality) or 2 (high quality) by the NAIC. The cost and estimated market value of fixed maturity securities at December 31, 2004, by
remaining original contractual maturity, is set forth below. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or prepay obligations, with
or without call or prepayment penalties: Amortized Cost
    
    
    Estimated Market Value(Dollars in Thousands)Due in one year or less
    
    $
    74,930
    
    
    $
    75,089Due after one year through five years
    
    
    293,054
    
    
    
    294,265Due after five years through ten years
    
    
    263,826
    
    
    
    266,441Due after ten years
    
    
    267,017
    
    
    
    272,735Asset Backed, Mortgage Pass-Through and
Collateralized Mortgage Obligation Securities
    
    
    388,267
    
    
    
    391,174Total
    
    $

    1,287,094
    
    
    $
    1,299,704
 Investments of the Insurance Subsidiaries must comply with applicable laws and regulations
which prescribe the type, quality and diversification of investments. In general, these laws and
regulations permit investments, within specified 15




---



##### 



limits and subject to certain qualifications, in federal, state and municipal obligations,
corporate bonds, secured obligations, preferred and common equity securities, real estate mortgages
and real estate. Regulation General:The Company is subject to extensive supervision and regulation in the states in which
it operates. Such supervision and regulation relate to numerous aspects of the Companys business
and financial condition. The primary purpose of the supervision and regulation is the protection
of insurance policyholders and not the Companys investors. The extent of regulation varies but
generally is governed by state statutes. These statutes delegate regulatory, supervisory and
administrative authority to state insurance departments. This system of regulation covers, among
other things:  
    issuance, renewal, suspension and revocation of licenses to engage in the insurance business;
    standards of solvency, including risk-based capital measurements;
    restrictions on the nature, quality and concentration of investments;
    restrictions on the types of terms that the Company can include in the insurance policies it offers;
    certain required methods of accounting;
    maintenance of reserves for unearned premiums, losses and other purposes; and
    potential assessments for the provision of funds necessary for the
settlement of covered claims under certain insurance policies provided by impaired,
insolvent or failed insurance companies. The regulations and any actions taken by the state insurance departments, may affect the cost
or demand for the Companys products and may present impediments to obtaining rate increases or
taking other actions to increase profitability. Also, regulatory authorities have relatively broad
discretion to grant, renew or revoke licenses and approvals. If the Company does not have the
requisite licenses and approvals, or does not comply with applicable regulatory requirements, the
insurance regulatory authorities could stop or temporarily suspend the Company from carrying on
some or all of its activities. In light of several recent significant property and casualty
insurance company insolvencies, it is possible that assessments paid to state guaranty funds may
increase. Because the Insurance Subsidiaries are domiciled in Pennsylvania and Florida, the
Pennsylvania Department of Insurance and the Florida Office of Insurance Regulation have primary
authority over the Company. Regulation of Insurance Holding Companies:Pennsylvania and Florida, like many other states,
have laws governing insurance holding companies (such as Philadelphia Insurance). Under these
laws, a person generally must obtain the applicable Insurance Departments approval to acquire,
directly or indirectly, 5% to 10% or more of the outstanding voting securities of Philadelphia
Insurance or the Insurance Subsidiaries. Such Departments determination of whether to approve any
such acquisition would be based on a variety of factors, including an evaluation of the acquirers
financial stability, the competence of its management, the effect of rates on coverages provided,
if any, and whether competition in Pennsylvania or Florida would be reduced. The Pennsylvania and Florida statutes require every Pennsylvania and Florida domiciled insurer
which is a member of an insurance holding company system to register with Pennsylvania or Florida,
respectively, by filing and keeping current a registration statement on a form prescribed by the
NAIC. The Pennsylvania statute also specifies that at least one-third of the board of directors, and
each committee thereof, of either the domestic insurer or its publicly owned holding company (if
any), must be comprised of outsiders (i.e., persons who are neither officers, employees nor
controlling shareholders of the insurer or any affiliate). In addition, the domestic insurer or
its publicly held holding company must establish one or more committees comprised solely of outside
directors, with responsibility for recommending the selection of independent certified public
accountants; reviewing the insurers financial condition, the scope and results of the independent
audit and any internal audit; nominating candidates for director; evaluating the performance of
principal officers; and recommending to the board the selection and compensation of principal
officers. Under the Florida statute, a majority of the directors of a Florida insurer must be citizens
of the United States. In addition, no Florida insurer may make any contract whereby any person is
granted or is to enjoy in fact the management of the insurer to the substantial exclusion of its
board of directors or to have the controlling or preemptive right to produce substantially all
insurance business for the insurer, unless the contract is filed with and approved by the Florida
Office of 16




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##### 



Insurance Regulation. A Florida insurer must give the Department written notice of any change of
personnel among the directors or principal officers of the insurer within 45 days of such change.
The written notice must include all information necessary to allow the Department to determine that
the insurer will be in compliance with state statutes. Dividend Restrictions:As an insurance holding company, Philadelphia Insurance will be largely
dependent on dividends and other permitted payments from the Insurance Subsidiaries to pay any cash
dividends to its shareholders. The ability of the Insurance Subsidiaries to pay dividends to the
Company is subject to certain restrictions imposed under Pennsylvania and Florida insurance laws.
Accumulated statutory profits of the Insurance Subsidiaries from which dividends may be paid
totaled $257.5 million at December 31, 2004. Of this amount, the Insurance Subsidiaries are
entitled to pay a total of approximately $58.6 million of dividends in 2005 without obtaining prior
approval from the Pennsylvania Insurance Department or Florida Office of Insurance Regulation.
During 2004 the insurance subsidiaries did not pay any dividends. The National Association of Insurance Commissioners:In addition to state-imposed insurance
laws and regulations, the Insurance Subsidiaries are subject to Statutory Accounting Principles
(SAP) as codified by the NAIC in the Accounting Practices and Procedures Manual which was
adopted by the Pennsylvania Insurance Department and Florida Office of Insurance Regulation
effective January 1, 2001. The NAIC also promulgates model insurance laws and regulations relating
to the financial and operational regulation of insurance companies. These model laws and
regulations generally are not directly applicable to an insurance company unless and until they are
adopted by applicable state legislatures or departments of insurance. However, NAIC model laws and
regulations have become increasingly important in recent years, due primarily to the NAICs state
regulatory accreditation program. Under this program, states which have adopted certain required
model laws and regulations and meet various staffing and other requirements are accredited by the
NAIC. Such accreditation is the cornerstone of an eventual nationwide regulatory network, and
there is a certain degree of political pressure on individual states to become accredited by the
NAIC. Because the adoption of certain model laws and regulations is a prerequisite to
accreditation, the NAICs initiatives have taken on a greater level of practical importance in
recent years. The NAIC accredited both Pennsylvania and Florida under the NAIC Financial
Regulation Standards. All the states have adopted the NAICs financial reporting form, which is typically referred
to as the NAIC Annual Statement, and most states, including Pennsylvania and Florida, generally
defer to the NAIC with respect to SAP. In this regard, the NAIC has a substantial degree of
practical influence and is able to accomplish certain quasi-legislative initiatives through
amendments to the NAIC annual statement and applicable accounting practices and procedures. For
instance, the NAIC requires all insurance companies to have an annual statutory financial audit and
an annual actuarial certification as to loss reserves by including such requirements within the
annual statement instructions. Capital and Surplus Requirements:PICs eligibility to write insurance on a surplus lines
basis in most jurisdictions is dependent on its compliance with certain financial standards,
including the maintenance of a requisite level of capital and surplus and the establishment of
certain statutory deposits. In recent years, many jurisdictions have increased the minimum
financial standards applicable to surplus lines eligibility. For example, California and certain
other states have adopted regulations which require surplus lines companies operating therein to
maintain minimum capital of $15 million, calculated as set forth in the regulations. PIC maintains
capital to meet these requirements. Risk-Based Capital:Risk-based capital is designed to measure the acceptable amount of capital
an insurer should have, based on the inherent specific risks of each insurer. Insurers failing to
meet this benchmark capital level may be subject to scrutiny by the insurers domiciliary insurance
department, and ultimately rehabilitation or liquidation. Based on the standards currently
adopted, the policyholders surplus of each of the Insurance Subsidiaries at December 31, 2004 is
in excess of the minimum prescribed risk-based capital requirements. Insurance Guaranty Funds:The Insurance Subsidiaries are subject to guaranty fund laws which
can result in assessments, up to prescribed limits, for losses incurred by policyholders as a
result of the impairment or insolvency of unaffiliated insurance companies. Typically, an
insurance company is subject to the guaranty fund laws of the states in which it conducts insurance
business; however, companies which conduct business on a surplus lines basis in a particular state
are generally exempt from that states guaranty fund laws. Shared Markets:As a condition of its license to do business in various states, PIIC, MUSA and
LAIC are required to participate in mandatory property-liability shared market mechanisms or
pooling arrangements which provide various insurance coverages to individuals or other entities
that otherwise are unable to purchase coverage voluntarily provided by private insurers. In
addition, some states require automobile insurers to participate in reinsurance pools for claims
that exceed a certain amount. PIICs, MUSAs and LAICs participation in such shared markets or
pooling mechanisms is 17




---



##### 



generally in proportion to the amount of their direct writings for the type of coverage
written by the specific pooling mechanism in the applicable state. Mold Contamination:The property-casualty insurance industry experienced an increase in claim
activity in the last few years pertaining to mold contamination. Significant plaintiffs verdicts
and increased media attention to the subject have caused insurers to develop and/or refine relevant
insurance policy language that excludes mold coverage. The Company will closely monitor litigation
trends in 2005, and continue to review relevant insurance policy exclusion language. The Company
has experienced an immaterial impact from mold claims and attaches a mold exclusion to policies
where applicable. Health Insurance Portability and Accessibility Act:Regulations under the Health Insurance
Portability and Accessibility Act of 1996 (HIPAA) were adopted on April 14, 2003 to protect the
privacy of individual health information. While property/casualty insurers are not required to
comply with the various administrative requirements of the act, the regulations have an impact on
obtaining information within the context of claims information. The Company continues to monitor
regulatory developments under HIPAA. Certain Legislative Initiatives and Developments:A number of new, proposed or potential
legislative or industry developments could further increase competition in the insurance industry.
These developments include:  
    the enactment of the Gramm-Leach-Bliley Act of 1999 (which permits
financial services companies such as banks and brokerage firms to engage in the
insurance business), which could result in increased competition from new entrants to
the Companys markets;
    the formation of new insurers and an influx of new capital in the
marketplace as existing companies attempt to expand their business as a result of
better pricing and/or terms;
    programs in which state-sponsored entities provide property insurance in catastrophe-prone areas; and
    changing practices caused by the Internet, which have led to greater competition in the insurance business. These developments could make the property and casualty insurance marketplace more competitive
by increasing the supply of insurance capacity. In that event, recent favorable industry trends
that have reduced insurance and reinsurance supply and increased demand could be reversed and may
negatively influence the Companys ability to maintain or increase rates. Accordingly, these
developments could have an adverse effect on the Companys earnings. The federal Terrorism Risk Insurance Act of 2002 (the Act) established a temporary federal
program that provides for a system of shared public and private compensation for insured commercial
property and casualty losses resulting from acts of terrorism, as defined in the Act. The
Terrorism Insurance Program (the Program) requires all commercial property and casualty insurers
licensed in the United States to participate. The Program provides that in the event of a
terrorist attack, as defined, resulting in insurance industry losses exceeding $5 million, the U.S.
government will provide funding to the insurance industry on an annual aggregate basis of 90% of
covered losses up to $100 billion. Each insurance company is subject to a deductible based upon a
percentage of the previous years direct earned premium, with the percentage increasing each year.
The Program requires that insurers notify in-force commercial policyholders by February 24, 2003
that coverage for terrorism acts is provided and the cost for this coverage. It also requires
notices to be given at certain specified times to insureds to which policies are issued after the
date of the Acts enactment. Policyholders have the option to accept or decline the coverage, or
negotiate other terms. Property and casualty insurers, including the Company, are required to
offer this coverage at each subsequent renewal even if the policyholder elected to exclude this
coverage in the previous policy period. The Program became effective upon enactment and runs
through December 31, 2005. With the signing of the Act, all previously approved exclusions for
terrorism in any contract for property and casualty insurance in force as of November 26, 2002 are
excluded. However, an insurer may reinstate a preexisting provision in a contract for property and
casualty insurance that is in force on the date of enactment and that excludes coverage for an act
of terrorism only: (1) if the insurer has received a written statement from the insured that affirmatively
authorizes such reinstatement; or (2) if (A) the insured fails to pay any increased premium charged by the insurer for providing such
terrorism coverage; and (B) the insurer provided notice, at least 30 days before any such reinstatement, of (i) the
increased premium for such terrorism coverage; and (ii) the rights of the insured with respect to
such coverage, including any date upon which the exclusion would be reinstated if no payment is
received. 18




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##### 



Sarbanes-Oxley Act of 2002:The Sarbanes-Oxley Act of 2002, enacted on July 30, 2002, presents
a significant expansion of securities law regulation of corporate governance, accounting practices,
reporting and disclosure that affects publicly traded companies. The Act, in part, sets forth
requirements for certification by company CEOs and CFOs of certain reports filed with the SEC,
disclosures pertaining to the adoption of a code of ethics applicable to certain management
personnel, and safeguards against actions to fraudulently influence, manipulate or mislead
independent public or certified accountants of the issuers financial statements. It also requires
stronger guidance for development and evaluation of internal control procedures, as well as
provisions pertaining to a companys audit committee and other committees of the board of
directors. Competition The Company competes with a large number of other companies in its selected lines of business,
including major U.S. and non-U.S. insurers and other regional companies, as well as mutual
companies, specialty insurance companies, underwriting agencies and diversified financial services
companies. Some of these competitors have greater financial and marketing resources than the
Company. Profitability could be adversely affected if business is lost due to competitors offering
similar or better products at or below the Companys prices. In addition, a number of new,
proposed or potential legislative or industry developments could further increase competition. New
competition from these developments could cause the demand for the Companys products to fall,
which could adversely affect profitability. The current business climate remains competitive from a solicitation standpoint. The Company
will walk away, if necessary, from writing business that does not meet established underwriting
standards and pricing guidelines. Management believes though that the Companys mixed marketing
strategy is a strength in that it provides the flexibility to quickly deploy the marketing efforts
of the Companys direct production underwriters from soft market segments to market segments with
emerging opportunities. Additionally, through the mixed marketing strategy, the Companys
production underwriters have established relationships with approximately 8,700 brokers, thus
facilitating a regular flow of submissions. Employees As of February 22, 2005, the Company had 997 full-time employees and 46 part-time employees.
The Company actively encourages its employees to continue their educational efforts and aids in
defraying their educational costs (including 100% of education costs related to the insurance
industry). Management believes that the Companys relations with its employees are generally
excellent. Company Website and Availability of Securities and Exchange Commission (SEC) Filings The Companys Internet website is www.phly.com. Information on the Companys website is not a
part of this Form 10-K. The Company makes available free of charge on its website, or provides a
link to, the Companys Forms 10-K, 10-Q and 8-K filed or furnished on or after May 14, 1996, and
any amendments to these Forms, that have been filed with the SEC on or after May 14, 1996 as soon
as reasonably practicable after the Company electronically files such material with, or furnishes
it to the SEC. To access these filings, go to the Companys website and click on Investor
Relations, then click on SEC Filings. Item 2. PROPERTIES The Company leases certain office space at One Bala Plaza, Bala Cynwyd, PA which serves as
its headquarters location, and also leases 36 offices for its field marketing organization. Item 3. LEGAL PROCEEDINGS The Company is not subject to any material pending legal proceedings, other than ordinary
routine litigation incidental to its business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2004. 19




---



##### 



PART II Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES(a) The Companys common stock, no par value, trades on The Nasdaq Stock Market under the
symbol PHLY. As of February 25, 2005, there were 566 holders of record and 9,391
beneficial shareholders of the Companys common stock. The high and low sales prices of the
common stock, as reported by the National Association of Securities Dealers, were as
follows:
 2004
    
    
    2003Quarter
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst
    
    
    61.360
    
    
    
    45.700
    
    
    
    38.700
    
    
    
    28.571Second
    
    
    60.750
    
    
    
    52.610
    
    
    
    41.050
    
    
    
    35.550Third
    
    
    60.290
    
    
    
    52.400
    
    
    
    46.270
    
    
    
    38.000Fourth
    
    
    68.860
    
    
    
    48.970
    
    
    
    52.730
    
    
    
    45.000
  The Company did not declare cash dividends on its common stock in 2004 or 2003, 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, 2004, 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 2004
are shown in the following table: (c) Total Number ofShares Purchased as
    
    
    (d) Approximate DollarPart of Publicly
    
    
    Value of Shares That May(a) Total Number of Shares
    
    
    (b) Average Price
    
    
    Announced Plans or
    
    
    Yet Be Purchased UnderPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    the Plans or ProgramsOctober 1  October 31
    
    
    
    (1)
    
    $
    
    
    
    
    
    
    
    $
    45,000,000
    (2)November 1  November 30
    
    
    100
    (1)
    
    $
    34.02
    
    
    
    
    
    
    $
    45,000,000
    (2)December 1  December 31
    
    
    108
    (1)
    
    $
    47.41
    
    
    
    
    
    
    $
    45,000,000
    (2)Total
    
    
    208
   (1)
    
    Such shares were issued under the Companys Employee Stock Purchase Plan and
were repurchased by the Company upon an employees termination.(2)
    
    The Companys total stock purchase authorization which was publicly announced
in August 1998, amounts to $75.3 million, of which $30.3 million has been utilized. 20




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##### 



Item 6. SELECTED FINANCIAL DATA As of and For the Years Ended December 31,(In Thousands, Except Share and Per Share Data)2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Operations and Comprehensive Income
Statement Data:Gross Written Premiums
    
    $
    1,171,317
    
    
    $
    905,993
    
    
    $
    663,739
    
    
    $
    473,565
    
    
    $
    361,872Gross Earned Premiums
    
    $
    1,062,057
    
    
    $
    789,498
    
    
    $
    555,485
    
    
    $
    421,063
    
    
    $
    328,350Net Written Premiums
    
    $
    914,532
    
    
    $
    602,300
    
    
    $
    519,707
    
    
    $
    337,281
    
    
    $
    263,429Net Earned Premiums
    
    $
    770,248
    
    
    $
    574,518
    
    
    $
    417,722
    
    
    $
    299,557
    
    
    $
    227,292Net Investment Income
    
    
    43,490
    
    
    
    38,806
    
    
    
    37,516
    
    
    
    32,426
    
    
    
    25,803Net Realized Investment Gain (Loss)
    
    
    761
    
    
    
    794
    
    
    
    (3,371
    )
    
    
    3,357
    
    
    
    11,718Other Income
    
    
    4,357
    
    
    
    5,519
    
    
    
    911
    
    
    
    587
    
    
    
    8,981Total Revenue
    
    
    818,856
    
    
    
    619,637
    
    
    
    452,778
    
    
    
    335,927
    
    
    
    273,794Net Loss and Loss Adjustment
Expenses
    
    
    476,115
    
    
    
    359,177
    
    
    
    267,433
    
    
    
    179,655
    
    
    
    131,304Acquisition Costs and Other
Underwriting Expenses
    
    
    214,369
    
    
    
    162,912
    
    
    
    129,918
    
    
    
    97,020
    
    
    
    75,054Other Operating Expenses
    
    
    9,439
    
    
    
    7,822
    
    
    
    6,372
    
    
    
    6,841
    
    
    
    14,679Total Losses and Expenses
    
    
    699,923
    
    
    
    529,911
    
    
    
    403,723
    
    
    
    283,516
    
    
    
    221,037Minority Interest: Distributions on
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,749
    
    
    
    7,245Income Before Income Taxes
    
    
    118,933
    
    
    
    89,726
    
    
    
    49,055
    
    
    
    49,662
    
    
    
    45,512Total Income Tax Expense
    
    
    35,250
    
    
    
    27,539
    
    
    
    15,302
    
    
    
    16,851
    
    
    
    14,742Net Income
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811
    
    
    $
    30,770Weighted-Average Common Shares
Outstanding
    
    
    22,154,820
    
    
    
    21,908,788
    
    
    
    21,611,053
    
    
    
    16,528,601
    
    
    
    12,177,989Weighted-Average Share Equivalents
Outstanding
    
    
    1,152,033
    
    
    
    751,600
    
    
    
    682,382
    
    
    
    656,075
    
    
    
    2,411,552Weighted-Average Shares and Share
Equivalents Outstanding
    
    
    23,306,853
    
    
    
    22,660,388
    
    
    
    22,293,435
    
    
    
    17,184,676
    
    
    
    14,589,541Basic Earnings Per Share
    
    $
    3.78
    
    
    $
    2.84
    
    
    $
    1.56
    
    
    $
    1.99
    
    
    $
    2.53Diluted Earnings Per Share
    
    $
    3.59
    
    
    $
    2.74
    
    
    $
    1.51
    
    
    $
    1.91
    
    
    $
    2.11Year End Financial Position:Total Investments and Cash
and Cash Equivalents
    
    $
    1,623,647
    
    
    $
    1,245,994
    
    
    $
    950,861
    
    
    $
    723,318
    
    
    $
    487,028Total Assets
    
    
    2,485,656
    
    
    
    1,870,941
    
    
    
    1,358,334
    
    
    
    1,019,974
    
    
    
    730,464Unpaid Loss and Loss Adjustment
Expenses
    
    
    996,667
    
    
    
    627,086
    
    
    
    445,548
    
    
    
    302,733
    
    
    
    237,494Minority Interest in Consolidated
Subsidiaries(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,905Total Shareholders Equity
    
    
    644,157
    
    
    
    545,646
    
    
    
    477,823
    
    
    
    430,944
    
    
    
    182,325Common Shares Outstanding
    
    
    22,273,917
    
    
    
    22,007,552
    
    
    
    21,868,877
    
    
    
    21,509,723
    
    
    
    13,431,408Insurance Operating Ratios
(Statutory Basis):Net Loss and Loss Adjustment
Expenses to Net Earned Premiums
    
    
    61.5
    %
    
    
    63.1
    %
    
    
    63.5
    %
    
    
    60.7
    %
    
    
    57.8
    %Underwriting Expenses to Net
Written Premiums
    
    
    27.2
    %
    
    
    27.2
    %
    
    
    28.0
    %
    
    
    31.2
    %
    
    
    31.3
    %Combined Ratio
    
    
    88.7
    %
    
    
    90.3
    %
    
    
    91.5
    %
    
    
    91.9
    %
    
    
    89.1
    %A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+A.M. Best Rating(3)
    
    (Superior)
    
    (Superior)
    
    (Superior)
    
    (Superior)
    
    (Superior)
 21




---



##### 



(1)
    
    Amount represents cash distributions related to Trust Originated Preferred Securities
that were issued on May 5, 1998.(2)
    
    Minority Interest amount represents mandatorily redeemable preferred securities of a
consolidated subsidiary trust. The trust solely held debentures issued by the Company.(3)
    
    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+. 22




---



##### 



Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 GENERAL Overview The Company designs, markets, and underwrites specialty commercial and personal property and
casualty insurance products for select markets or niches. The Companys operations are classified
into three reportable business segments which are organized around its three underwriting
divisions: The Commercial Lines Underwriting Group, which has underwriting responsibility for the
commercial 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 and management liability insurance products; and The Personal Lines Group,
which has responsibility for personal property and casualty insurance products for the manufactured
housing and homeowners markets. The Company operates solely within the United States through its
12 regional and 24 field offices. The Company generates most of its revenues through the sale of commercial and personal
property and casualty insurance policies. The commercial insurance policies are sold through the
Companys five distribution channels which include direct sales, retail insurance agents/open
brokerage, wholesalers, preferred agents and the Internet. The Company believes that consistency
in its field office representation has created excellent relationships with local insurance
agencies across the country. The personal insurance policies are almost exclusively sold over the
Internet via the Companys proprietary In-Touch system. The Company also generates revenue from its investment portfolio, which approximated $1.5
billion at December 31, 2004 and generated $51.2 million in gross pre-tax investment income during
2004. The Company utilizes external independent professional investment managers with the
objective of realizing relatively high levels of investment income while generating competitive
after-tax total rates of return within duration and credit quality targets. Management measures the results of operations through monitoring certain measures of growth
and profitability, including, but not limited to: number of policies written, pricing, risk
selection, loss ratio (sum of net loss and loss adjustment expenses divided by net earned premiums)
and expense levels. Although further premium rate increases were realized during 2004, the increases moderated
from those realized in 2003. The increases resulted primarily from the significant property and
casualty industry losses as a result of the tragic terrorist attacks of September 11, 2001, lower
interest rates, and diminished risk capacity. During 2004, the Company experienced catastrophe losses attributable to Hurricanes Charley,
Frances, Ivan and Jeanne. These catastrophe losses, as noted in the table below, impacted both the
Companys personal and commercial lines segments. Loss estimates may still change in the future
due in part to the number of claims which have not yet been completely remediated or for which the
property covered by the claim has not been repaired. 8/13/04
    
    
    9/5/04
    
    
    9/15/04
    
    
    9/25/04Date of Event:

    
    Charley
    
    
    Frances
    
    
    Ivan
    
    
    Jeanne
    
    
    TotalHurricane:
    
    (In millions)Gross Loss and Loss
Adjustment Expense
Estimates:Personal Lines Segment
    
    $
    208.2
    
    
    $
    191.5
    
    
    $
    16.3
    
    
    $
    202.3
    
    
    $
    618.3Commercial Lines Segment
    
    
    19.2
    
    
    
    11.4
    
    
    
    3.4
    
    
    
    7.5
    
    
    
    41.5Total
    
    $
    227.4
    
    
    $
    202.9
    
    
    $
    19.7
    
    
    $
    209.8
    
    
    $
    659.8
 23




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##### 



Under the Companys catastrophe reinsurance programs in place for these hurricanes, the
Company had a $3.5 million pre-tax per occurrence loss retention for its personal lines catastrophe
losses and a $7.0 million pre-tax per occurrence loss retention for its commercial lines
catastrophe losses. The Companys loss retention by hurricane is summarized in the table below: Charley
    
    
    Frances
    
    
    Ivan
    
    
    Jeanne
    
    
    TotalHurricane:
    
    (In millions)Net Loss and Loss
Adjustment Expense
Estimates:Personal Lines Segment
    
    $
    3.5
    
    
    $
    3.5
    
    
    $
    3.5
    
    
    $
    3.5
    
    
    $
    14.0Commercial Lines Segment
    
    
    7.0
    
    
    
    7.0
    
    
    
    3.4
    
    
    
    7.0
    
    
    
    24.4Total
    
    $
    10.5
    
    
    $
    10.5
    
    
    $
    6.9
    
    
    $
    10.5
    
    
    $
    38.4
 The Company revised its original estimates as of December 31, 2004 for gross losses due to
Hurricanes Charley, Frances, Ivan and Jeanne as noted below (in millions): Hurricane:
    
    Charley
    
    
    Frances
    
    
    Ivan
    
    
    Jeanne
    
    
    TotalChange in gross loss estimate
Increase (Decrease)
    
    $
    5.3
    
    
    $
    75.5
    
    
    $
    2.3
    
    
    
    <$68.9>
    
    
    $
    14.2
 The higher loss estimate for Hurricane Frances, which, when combined with the aggregate loss
estimates for Hurricanes Charley and Jeanne, resulted in $8.3 million of Hurricane Jeanne losses to
be in excess of the aggregate $80.0 million coverage limit available on the $40.0 million excess
$50.0 million loss layer of the Companys catastrophe reinsurance program. This $8.3 million of
losses is in addition to the Companys per occurrence loss retention under its catastrophe
reinsurance program. The additional $8.3 million in Hurricane Jeanne losses reduced net income for
the fourth quarter 2004 by $5.4 million. Based upon the current catastrophe loss estimates, recoveries for Hurricane Frances are
approaching the limit of the Companys catastrophe reinsurance program. Catastrophe reinsurance
recoveries available to the Company for development on Hurricane Frances beyond current estimates
are dollar for dollar for approximately the next $3.5 million of additional increase in catastrophe
losses, and 34% of the next $50.0 million of additional increase in catastrophe losses. Because of
the interaction of the Florida Hurricane Catastrophe Fund (FHCF) and the Companys open market
reinsurance program, development on Hurricane Charley would reduce the coverage limit available
from the FHCF for Hurricane Frances. Additionally since the hurricane losses currently exceed the
aggregate $80.0 million coverage limit available on the $40.0 million excess $50.0 million coverage
loss layer of the Companys catastrophe reinsurance program, each dollar of additional development
on Hurricane Charley in this layer would diminish coverage available for Hurricane Jeanne losses
and result in approximately an additional $.085 of losses being retained by the Company. Due to the multiple hurricane events the Company purchased additional reinsurance coverages to
supplement the original catastrophe reinsurance coverage in 2004 which was utilized. These
multiple hurricane events resulted in accelerating the recognition of $26.0 million in catastrophe
reinsurance premium expense as a result of utilizing certain of the catastrophe reinsurance
coverages. Of this $26.0 million in accelerated reinsurance premium expense, $10.3 million of the
accelerated premium expense was attributable to the additional reinsurance coverages which were
purchased. As a result of the active 2004 hurricane season there have been a small number of insurers
that have announced their intention to either withdraw from the Florida Marketplace or reduce
homeowners and related product writings. The Company doesnt believe these events will have a
material impact on its marketing plan. However, the Company plans to
shift its product mix by reducing manufactured housing product policies
and increasing homeowners product policies. The Company plans to
reduce its manufactured housing exposures by restricting new business and
further limiting exposure  concentrations. Although one Florida Company has declared insolvency as a
result of losses incurred during the 2004 hurricane season, the Company is not aware of any pending
assessment from the Florida Insurance Guarantee Association (FIGA) to pay for losses resulting
from the insolvency. Any assessment from FIGA is recoverable through policy surcharges.
Additionally, Citizens Property Insurance Company (CPIC) is the Florida market mechanism for
homeowners coverage. CPIC experienced significant losses from the 2004 hurricanes and has
indicated the 24




---



##### 



possibility of an assessment. As of this date no assessment has been levied, and any such CPIC
assessment will be recoverable through policy surcharges. Gross written premium growth was strong during 2004 across all the Companys business segments
with in-force policy counts increasing 14.7%, 30.0% and 16.0% for the commercial, specialty and

personal lines segments, respectively. Weighted average premium rate increases on renewal business
approximated 2.2%, 2.7% and 7.1% for the commercial, specialty and personal lines segments,
respectively. Commercial
    
    
    Specialty
    
    
    Personal($s in millions)
    
    Lines
    
    
    Lines
    
    
    Lines
    
    
    Total2004 Gross Written Premium
    
    $
    874.0
    
    
    $
    184.4
    
    
    $
    112.9
    
    
    $
    1,171.32003 Gross Written Premium
    
    $
    662.4
    
    
    $
    154.1
    
    
    $
    89.5
    
    
    $
    906.0Percentage Increase
    
    
    32.0
    %
    
    
    19.7
    %
    
    
    26.1
    %
    
    
    29.3
    %2004 Weighted Average Premium Rate Increase on
Renewal Business
    
    
    2.2
    %
    
    
    2.7
    %
    
    
    7.1
    %2003 Weighted Average Premium Rate Increase on
Renewal Business
    
    
    4.3
    %
    
    
    10.2
    %
    
    
    9.4
    %
 The Company believes its core strategy of adhering to an underwriting philosophy of sound risk
selection and pricing discipline, a mixed marketing platform for its product distribution and the
creation of value added features not typically found in property and casualty products have also
contributed to generating premium growth above industry averages, as well as enabling the Company
to produce combined ratios (the sum of net loss and loss adjustment expenses and acquisition costs
and other underwriting expenses, divided by net earned premiums) well below industry averages. The GAAP combined ratio for the year ended December 31, 2004 was 89.6%, which, once again, was
substantially lower than the property and casualty industry as a whole. Included in the 2004
calendar year net loss and loss adjustment expenses was $35.1 million of prior accident year
development. The following table illustrates the 2004 calendar year and accident year loss ratios
by segment. Commercial
    
    
    Specialty
    
    
    Personal
    
    
    WeightedLines
    
    
    Lines
    
    
    Lines
    
    
    Average2004 calendar year
net loss and loss
adjustment expense
ratio
    
    
    49.5
    %
    
    
    92.2
    %
    
    
    220.8
    %
    
    
    61.8
    %2004 accident year
net loss and loss
adjustment expense
ratio
    
    
    49.0
    %
    
    
    70.0
    %
    
    
    208.4
    %
    
    
    57.2
    %
 In October, 2004, the New York Attorney Generals office filed a complaint in New York state court
against Marsh & McClennan Companies, Inc. (Marsh), the nations largest insurance broker. The
complaint accuses Marsh of participating in bid-rigging schemes and improper disclosure to its
customers of the fact that Marsh was receiving contingent commissions from insurers which issued
insurance policies to such customers. These commissions are based on the volume and/or
profitability of business placed by Marsh. The complaint also asserted that a number of insurers
engaged in bid rigging. Shortly after this complaint was filed, Marsh and a number of the insurers
named in the complaint publicly announced that they would be terminating their contingent
commission arrangements. Marsh has agreed to pay a significant amount in settlement of the
matters referred to in the complaint. The Pennsylvania Insurance Department and insurance regulatory agencies in other states are
currently reviewing this practice. One or more of such agencies may in the future issue
regulations concerning the payment of contingent commissions and/or the disclosure thereof to
customers. In 2004, the Company, as well as many other Pennsylvania domiciled insurance companies,
received an inquiry from the Pennsylvania Insurance Department requesting information concerning
compensation and other arrangements with our brokers and agents, and the Company has responded to
that inquiry. 25




---



##### 



Insurance regulatory agencies are likely to impose requirements on the insurance industry with
respect to the payment of contingent commissions and/or the disclosure of contingent commissions to
customers and proposed customers. If these requirements are imposed, they may impact the manner in
which the Company compensates its brokers and may have an impact on the Companys business. In
November 2004, the National Association of Insurance Commissioners Executive Task Force on Broker
Activities proposed model legislation that would impose disclosure requirements on brokers, and
would require brokers to obtain the insureds written consent before receiving compensation from an
insurance company for the same transaction. The California and Oregon Insurance Departments have also proposed new regulations which would
require disclosure of brokerage fees to customers, and would require brokers to advise clients
regarding the best available insurer. The Company has arrangements with approximately 56 agents and 77 brokers (collectively
Preferred Agents) under which the Company pays profit share based on the profitability to the
Company of business placed by these Preferred Agents with the Company. Approximately 25% of the
Companys gross written premiums are produced through Preferred Agents with which the Company has
profit share arrangements. It is possible that the filing of the complaint against Marsh and the
settlement thereof and/or future legislation, regulations and/or case law could affect these
arrangements. The Company is not able at this time to predict the impact of such matters, if any,
on the Company. As
of September 30, 2004, the Companys four insurance
subsidiaries participated in an intercompany reinsurance pooling
agreement and were rated A+ (Superior) by A.M. Best
Company. According to A.M. Best Company, companies rated A+ (Superior) have, on balance,
superior financial strength, operating performance and market profile, when compared to the
standards established by A.M. Best Company, and have a very strong ability to meet their ongoing
obligations to policyholders. Effective October 1, 2004 the
Companys four insurance  subsidiaries entered into a new
intercompany reinsurance pooling arrangement. 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+. A.M. Best Company continually reviews the ratings it assigns to insurance companies and has
advised the Company that it must enhance the capital position of its
Philadelphia Indemnity Insurance Company and Philadelphia Insurance
Company insurance subsidiaries in order for
them to maintain their rating. The Company anticipates that it will
be able to do so in order to maintain the A.M. Best Company
A+ (Superior) rating for Philadelphia Indemnity Insurance Company and Philadelphia Insurance
Company. Investments The Companys investment objective is the realization of relatively high levels of after-tax net
investment income while generating competitive after-tax total rates of return within a prudent
level of risk and within the constraints of maintaining adequate securities in amount and duration
to meet cash requirements of current operations and long-term liabilities, as well as maintaining
and improving the Companys A.M. Best rating. The Company utilizes external independent
professional investment managers for its fixed maturity and equity investments. These investments
consist of diversified issuers and issues, and as of December 31, 2004, approximately 84.9% and
7.3% of 26




---



##### 



the total invested assets (total investments plus cash equivalents) on a cost basis consisted of
investments in fixed maturity and equity securities, respectively, versus 87.8% and 6.6%,
respectively, at December 31, 2003. Of the total investments in fixed maturity securities, asset backed, mortgage pass-through, and
collateralized mortgage obligation securities, on a cost basis, amounted to $96.0 million, $229.6
million and $62.6 million, respectively, as of December 31, 2004 and $183.0 million, $159.2 million
and $53.8 million, respectively, as of December 31, 2003. The asset backed, mortgage pass-through,
and collateralized mortgage obligation investments are amortizing securities possessing favorable
prepayment risk and/or extension profiles. The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security whose fair value is below its cost. Upon identification of such
securities, a detailed review is performed for all securities, except interests in securitized
assets, meeting predetermined thresholds to determine whether such decline is other than temporary.
If the Company determines a decline in value to be other than temporary, based upon its detailed
review, or if a decline in value for an equity investment has persisted continuously for nine
months, the cost basis of the security is written down to its fair value. The factors considered
in reaching the conclusion that a decline below cost is other than temporary include, but are not
limited to: whether the issuer is in financial distress; the 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 of fair value. The amount of any
write down is included in earnings as a realized loss in the period the impairment arose. This
evaluation resulted in non-cash realized investment losses of $2.5 million and $1.0 million for the
years ended December 31, 2004 and 2003, respectively. The Company attributes these other than
temporary declines in fair value primarily to issuer specific conditions, except for as noted in
the following paragraph. During 2004 the Companys Investment Committee (The Committee) engaged an investment consulting
firm under a full service retainer relationship. The Committee initially directed the investment
firm to review the Companys common stock portfolio and managers with respect to style,
diversification and performance. Based upon the results of this review and recommendations of the
investment firm, the Committee conducted an investment manager search for a large cap growth and
large cap value manager. Upon conclusion of the interview process the Committee, in December 2004,
decided to change three of its current common stock managers and engaged a new large cap growth and
large cap value manager. As a result of this decision $1.4 million in non-cash investment losses
was realized in the fourth quarter due to writing down certain common stock securities, for which
there was no longer an intent to hold such securities to recovery of cost. Additionally, the Company conducts its impairment evaluation and recognition for interests in
securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of
the Financial Accounting Standards Board (the EITF). Under this guidance, impairment losses on
securities must be recognized if both the fair value of the security is less than its book value
and the net present value of expected future cash flows is less than the net present value of
expected future cash flows at the most recent estimation date. If these criteria are met, an
impairment charge, calculated as the difference between the current book value of the security and
its fair value, is included in earnings as a realized loss in the period the impairment arose.
This evaluation resulted in non-cash realized investment losses of $7.3 million and $9.3 million
for the years ended December 31, 2004 and 2003, respectively. These non-cash realized investment
losses were from investments primarily in collateralized bond obligations which were impacted by
recent years non investment grade default rates that were higher than historic averages and from
investments in other asset backed securities which experienced extension of cash flows on the
underlying collateral. The Companys fixed maturity portfolio amounted to $1,299.7 million and $1,081.7 million, as of
December 31, 2004 and December 31, 2003, respectively, of which 99.3% and 98.6% of the portfolio as
of December 31, 2004 and December 31, 2003, respectively, was comprised of investment grade
securities. The Company had fixed maturity investments with unrealized losses amounting to $4.9
million and $10.6 million as of December 31, 2004 and December 31, 2003, respectively. Of these
amounts, interests in securitized assets had unrealized losses amounting to $1.3 million and $9.2
million as of December 31, 2004 and December 31, 2003, respectively. This decrease in fixed
maturity unrealized losses between December 31, 2003 and December 31, 2004 can be largely
attributed to the impairment losses on interests in securitized assets recognized in the third
quarter of 2004. The remaining unrealized losses are attributable largely to market price changes
due to interest rate increases, since the investments were 27




---



##### 



purchased, and are not considered to be other than temporary impairments, given the ability and
intent to hold the securities to recovery. As discussed above, the Companys impairment evaluation
and recognition for interests in securitized assets is conducted in accordance with the guidance
provided by the EITF. The following table identifies the period of time securities with an unrealized loss at December
31, 2004 have continuously been in an unrealized loss position. Included in the amounts displayed
in the table are $0.1 million of unrealized losses due to non-investment grade fixed maturity
securities having a fair value of $1.2 million. No issuer of securities or industry represents
more than 3.6% and 16.0%, respectively, of the total estimated fair value, or 4.6% and 11.9%,
respectively, of the total gross unrealized loss included in the table below. As mentioned above,
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 such underlying security 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. Should the Company subsequently determine a decline in the fair value below the cost basis
to be other than temporary, the security would be written down to its fair value and the difference
would be included in earnings as a realized loss for the period such determination was made. Gross Unrealized Losses(in millions)Fixed MaturitiesAvailable for Sale
    
    
    
    
    
    
    TotalExcluding Interests
    
    
    Interests in
    
    
    Fixed MaturitiesContinuous time in unrealized loss position
    
    in Securitized Assets
    
    
    Securitized Assets
    
    
    Available for Sale
    
    
    Equity Securities
    
    
    Total Investments0  3 months
    
    $
    1.1
    
    
    $
    0.3
    
    
    $
    1.4
    
    
    $
    
    
    
    $
    1.4>3  6 months
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.6>6  9 months
    
    
    1.3
    
    
    
    0.4
    
    
    
    1.7
    
    
    
    0.1
    
    
    
    1.8>9  12 months
    
    
    0.7
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    0.7>12  18 months
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3>18  24 months
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    
    
    
    
    0.4> 24 months
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Total Gross Unrealized Losses
    
    $
    3.6
    
    
    $
    1.3
    
    
    $
    4.9
    
    
    $
    0.4
    
    
    $
    5.3Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    423.2
    
    
    $
    164.9
    
    
    $
    588.1
    
    
    $
    6.7
    
    
    $
    594.8
 Based upon the Companys impairment evaluation as of December 31, 2004, it was concluded that the
remaining unrealized losses in the table above are not other than temporary. During 2004 the Companys gross loss on the sale of fixed maturity and equity securities amounted
to $1.3 million and $1.9 million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $30.7 million and $7.5 million, respectively. During 2003 the
Companys gross loss on the sale of fixed maturity and equity securities amounted to $0.7 million
and $0.8 million, respectively. The fair value of the fixed maturity and equity securities at the
time of sale was $20.1 million and $4.4 million, respectively. The decision to sell these securities was based upon an assessment of economic conditions and
ongoing portfolio management objectives of maximizing the Companys after-tax net investment
income. Market Risk of Financial Instruments The Companys financial instruments are subject to the market risk of potential losses from adverse
changes in market rates and prices. The primary market risks to the Company are equity price risk
associated with investments in equity securities and interest rate risk associated with investments
in fixed maturities. The Company has established, among other criteria, duration, asset quality
and asset allocation guidelines for managing its investment 28




---



##### 



portfolio market risk exposure. The Companys investments are held for purposes other than trading
and consist of diversified issuers and issues. The table below provides information about the Companys financial instruments that are sensitive
to changes in interest rates and shows the effect of hypothetical changes in interest rates as of
December 31, 2004. The selected hypothetical changes do not indicate what could be the potential
best or worst case scenarios (dollars in thousands). Loan balances outstanding under the Companys
borrowing agreement with the Federal Home Loan Bank of Pittsburgh are not included in the table
below. Interest rates on the amounts outstanding under this agreement are reset frequently, which
limits the impact of changing interest rates. The Company does not have any derivative financial
instruments. The information is presented in U.S. dollar equivalents, which is the Companys
reporting currency. EstimatedHypothetical
    
    
    Fair Value after
    
    

    Hypothetical PercentageChange in Interest
    
    
    Hypothetical
    
    

    Increase (Decrease) inEstimated
    
    
    Rates (bp=basis
    
    
    Changes in Interest
    
    
    
    
    
    
    ShareholdersFair Value
    
    
    points)
    
    
    Rates
    
    
    Fair Value
    
    
    EquityInvestmentsTotal 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
    %)
 29




---



##### 



Certain Critical Accounting Estimates and Judgments  
    Investments  - -
    Fair valuesThe carrying amount for the Companys investments approximates their estimated fair value.
The Company measures the fair value of investments based upon quoted market prices or by
obtaining quotes from third party broker-dealers. Material assumptions and factors utilized
by such broker-dealers in pricing these securities include: future cash flows, constant
default rates, recovery rates and any market clearing activity that may have occurred since
the prior month-end pricing period. The Companys total investments include $4.7 million in
securities for which there is no readily available independent market price.- -
    Other than temporary impairment, excluding interests in securitized assetsThe Company regularly performs various analytical procedures with respect to its
investments, including identifying any security whose fair value is below its cost. Upon
identification of such securities, a detailed review is performed for all securities,
meeting predetermined thresholds, to determine whether such decline is other than temporary.
If the Company determines a decline in value to be other than temporary, based upon its
detailed review, or if a decline 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; a significant
credit rating action has occurred; scheduled interest payments have been delayed or missed;
changes in laws and/or regulations have impacted an issuer or industry; and assessment of
the timing of a securitys recovery to fair value; and an ability and intent to hold. 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, 2004 were $4.0 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. Under this guidance, impairment losses on securities
must be recognized if both the fair value of the security is less than its book value and
the net present value of expected future cash flows is less than the net present value of
expected future cash flows at the most recent (prior) estimation date. If these criteria
are met, an impairment charge, calculated as the difference between the current book value
of the security and its fair value, is included in earnings as a realized loss in the period
the impairment arose (see Investments). Gross unrealized losses for investments in
securitized assets at December 31, 2004 were $1.3 million.  
    Liability for Unpaid Loss and Loss Adjustment Expenses:The liability for unpaid loss and loss adjustment expenses (gross basis  $996.7 million and
$627.1 million as of December 31, 2004 and 2003, respectively; net basis  $671.7 million and
$481.5 million as of December 31, 2004 and 2003, respectively) reflects the Companys best
estimate for future amounts needed to pay losses and related settlement expenses with respect
to insured events. Based upon the past ten year experience the estimate for the net liability for unpaid
loss and loss adjustment expenses has been redundant by as much as 18.6% and deficient by as
much as 45.1%. The process of establishing the liability for property and casualty unpaid loss
and loss adjustment expenses is a complex and imprecise process, requiring the use of informed
estimates and judgments. This liability includes an amount determined on the basis of claim
adjusters evaluations with respect to insured events that have occurred and an amount for
losses incurred that have not been reported to the Company. In some cases significant periods
of time, up to several years or more, may elapse between the occurrence of an insured loss and
the reporting of such to the Company. 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 30




---



##### 



developments. These estimates are reviewed regularly and any adjustments resulting therefrom
are made in the accounting period in which the adjustment arose.
    Deferred Acquisition Costs:Policy acquisition costs ($91.6 million and $56.3 million as of December 31, 2004 and 2003,
respectively) which include commissions (net of ceding commissions), premium taxes, fees, and
certain other costs of underwriting policies, are deferred and amortized over the same period
in which the related premiums are earned. Deferred acquisition costs are limited to the
estimated amounts recoverable after providing for losses and expenses that are expected to be
incurred, based upon historical and current experience. Anticipated investment income is
considered in determining whether a premium deficiency exists. The methods of making such
estimates and establishing the deferred costs are continually reviewed by the Company, and any
adjustments therefrom are made in the accounting period in which the adjustment arose.
    GoodwillThe carrying amount of goodwill is subject, at a minimum, to an annual impairment test to
identify potential goodwill impairment and measure the amount of a goodwill impairment loss to
be recognized (if any). This annual test is performed at December 31 of each year or more
frequently if events or circumstance change that require the Company to perform the impairment
analysis on an interim basis. Goodwill impairment testing requires the evaluation of the fair
value of each reporting unit to its carrying value, including the goodwill, and recording of an
impairment charge if the carrying amount of the reporting unit exceeds its estimated fair
value. The determination of a reporting units fair value is based on managements best
estimate, which generally considers the units expected future cash flows. The primary
assumptions used in the expected future cash flow calculations include premium growth and
premium rates, loss ratios, expenses, reinsurance rates and discount rates. Should the
assumptions used in the calculation of the expected future cash flows differ substantially from
the actual results the estimated fair value of the applicable reporting unit could fall below
its carrying value and result in the recognition of an impairment loss. As of December 31,
2004 and 2003, the carrying amount of goodwill was $25.7 million. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements (as that term is defined in Item 303(a) (4) of
Regulation S-K) that have or are reasonably likely to have a current or, as of December 31, 2004,
future effect on its financial condition, changes in financial condition, revenue or expenses,
results of operations, liquidity, capital expenditures or capital resources that is material to
investors as of December 31, 2004. RESULTS OF OPERATIONS
(2004 versus 2003) Premiums: Premium information relating to the Companys business segments is as follows (in
millions): 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
    %
 The overall growth in gross written premiums is primarily attributable to the following:  
    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. 31




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##### 




    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. The respective net written premium changes for commercial lines, specialty lines and personal lines
segments for the year ended December 31, 2004 vs. December 31, 2003 were (in millions): 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
    %
 The differing percentage changes in net premiums versus gross premiums for the commercial lines,
specialty lines and personal lines segments during the year results primarily from the following:  
    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). 32




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##### 




    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 IncomeNet investment income approximated $43.5 in
2004 and $38.8 in 2003. Total investments grew to $1,428.2 million at December 31, 2004 from $1,172.1 million at December
31, 2003. The growth in investment income is due to investing net cash flows provided from
operating activities. The Companys average duration of its fixed income portfolio was 4.1 years
at December 31, 2004, compared to 4.0 years at December 31, 2003. The Companys taxable equivalent
book yield on its fixed income holdings approximated 4.7% at December 31, 2004, compared to 4.9% at
December 31, 2003. Net investment income was reduced by $4.9 million and $2.3 million for the
years ended December 31, 2004 and 2003, respectively, due to the interest credit on the Funds Held
Account balance pursuant to the Companys quota share reinsurance agreement (see Premiums). The total return, which includes the effects of both income and price returns on securities,
of the Companys fixed income portfolio was 4.05% and 4.36% for the years ended December 31, 2004
and 2003, respectively, as compared to the Lehman Brothers Intermediate Aggregate Bond Index (the
Index) total return of 3.76% and 3.81% for the same periods, respectively. The Company expects
some variation in its portfolios total return compared to the Index because of the differing
sector, security and duration composition of its portfolio compared to the Index. Net Realized Investment Gain (Loss):Net realized investment gains were $0.8 million for the
years ended December 31, 2004 and 2003. The Company realized net investment gains of $4.2 million
and $6.4 million from the sale of fixed maturity and equity securities, respectively, for the year
ended December 31, 2004, and $6.1 million and $3.7 million in non-cash realized investment losses
for fixed maturity and common stock investments, respectively, as a result of the Companys
impairment evaluation. $1.4 million of the $3.7 million non-cash realized investment losses is due
to a December 2004 decision to change certain of the Companys common stock investment managers.
As a result of this decision the Company wrote down certain common stock securities since there was
no longer an intent to hold the securities to recovery. The Company realized net investment gains of $7.1 million and $4.0 million from the sale of
fixed maturity and equity securities, respectively, for the year ended December 31, 2003, and $4.0
million and $6.3 million in non-cash realized investment losses for fixed maturity and common stock
investments, respectively, as a result of the Companys impairment evaluation. Other Income: Other income approximated $4.4 million for the year ended December 31, 2004 and
$5.5 million for the same period of 2003. Other income primarily consists of commissions earned on
brokered personal lines business, and to a lesser extent brokered commercial lines business. The
decrease in other income is due primarily to reduced commissions earned on brokered personal lines
business due to terminations of certain brokering agreements. 33




---



##### 



Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment expenses increased $116.9
million (32.5%) to $476.1 million for the year ended December 31, 2004 from $359.2 million for the
same period of 2003 and the loss ratio decreased to 61.8% in 2004 from 62.5% in 2003. This
increase in net loss and loss adjustment expenses and/or loss ratio was primarily due to:  
    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. These increases to the loss and loss adjustment expenses and/or loss ratio were offset in part by:  
    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.  Reserve actions taken during the year ended December 31, 2003 wherein the estimated gross
and net liability for residual value policies were increased by $38.8 million and a $5.8
million net increase in the estimated gross and net loss reserves for loss and loss adjustment
expenses primarily for claims made professional liability and commercial automobile lines of
business in prior accident years. Additionally, during the years ended December 31, 2004 and 2003, the Company ceded $132.5
million and $116.8 million of net earned premium, respectively, and $59.7 million and $62.7 million
in net loss and loss adjustment expenses, respectively, pursuant to a quota share reinsurance
agreement (see Premiums). Acquisition Costs and Other Underwriting Expenses:Acquisition costs and other underwriting
expenses increased $51.5 million (31.6%) to $214.4 million for the year ended December 31, 2004
from $162.9 million for the same period of 2003, and the expense ratio decreased to 27.8% in 2004
from 28.4% in 2003. This increase in acquisition costs and other underwriting expenses was due
primarily to the 34.1% growth in net earned premiums. The decrease in the expense ratio is due
primarily to an increase in ceding commissions earned and an increase in the ceding commission
percentage earned under a quota share reinsurance agreement (see Premiums). This decrease was
offset in part by the accelerated recognition of $26.0 million in catastrophe reinsurance expense
which reduced net earned premiums. For the years ended December 31, 2004 and 2003, the Company
ceded $132.5 million and $116.8 million, respectively, of net earned premiums and earned $61.5
million and $46.7 million, respectively, in ceding commission under a quota share reinsurance
agreement. The quota share reinsurance agreement lowered the reported expense ratio by 3.1 and 2.0
percentage points during 2004 and 2003, respectively. Other Operating Expenses: Other operating expenses increased $1.6 million to $9.4 million for
the year ended December 31, 2004 from $7.8 million for the same period of 2003. The increase in
the level of expenses is primarily due to the growth of the business, offset in part by reduced
commission paid on brokered personal lines business (see Other Income). 34




---



##### 



Income Tax Expense:The Companys effective tax rate for the years ended December 31, 2004
and 2003 was 29.6% and 30.7%, respectively. The effective rates differed from the 35% statutory
rate principally due to investments in tax-exempt securities and the relative proportion of
tax-exempt income to total income before tax. RESULTS OF OPERATIONS
(2003 versus 2002) Premiums: Premium information relating to the Companys business segments is as follows (in
millions): Commercial Lines
    
    
    Specialty Lines
    
    
    Personal Lines
    
    
    Total2003 Gross Written Premiums
    
    $
    662.4
    
    
    $
    154.1
    
    
    $
    89.5
    
    
    $
    906.02002 Gross Written Premiums
    
    $
    473.1
    
    
    $
    110.2
    
    
    $
    80.4
    
    
    $
    663.7Percentage Increase (Decrease)
    
    
    40.0
    %
    
    
    39.9
    %
    
    
    11.3
    %
    
    
    36.5
    %2003 Gross Earned Premiums
    
    $
    566.1
    
    
    $
    138.3
    
    
    $
    85.1
    
    
    $
    789.52002 Gross Earned Premiums
    
    $
    384.4
    
    
    $
    93.9
    
    
    $
    77.2
    
    
    $
    555.5Percentage Increase (Decrease)
    
    
    47.3
    %
    
    
    47.2
    %
    
    
    10.2
    %
    
    
    42.1
    %
 The overall growth in gross written premiums is primarily attributable to the following:  
    Further rating downgrades of certain major competitor property and casualty insurance
companies have led to their diminished presence in the Companys commercial and specialty
lines business segments and continue to result in additional prospects and increased
premium writings, most notably for the Companys various commercial package and non-profit
D&O product lines.  
    The displacement of certain competitor property and casualty insurance companies and their
independent agency relationships continues to result in new agency relationship opportunities
for the Company. These relationship opportunities have resulted in additional policyholders
and premium writings for the Companys commercial and specialty lines segments.  
    Continued expansion of marketing efforts relating to commercial lines and specialty
lines products through the Companys field organization and preferred agents.
    In-force policy counts have increased 22.8% and 39.7% for the commercial and specialty
lines segments, respectively, primarily as a result of the factors discussed above. Policy
counts were approximately the same for the personal lines segment as a result of
restricting new business and not renewing certain business to manage overall property
exposures and the related catastrophe loss considerations. Firming prices in the property
and casualty industry resulted in weighted average rate increases on renewal business
approximating 4.3%, 10.2%, and 9.4% for the commercial, specialty and personal lines
segments, respectively. The respective net written premium changes for commercial lines, specialty lines and personal lines
segments for the year ended December 31, 2003 vs. December 31, 2002 were (in millions): Commercial Lines
    
    
    Specialty Lines
    
    
    Personal Lines
    
    
    Total2003 Net Written Premiums
    
    $
    463.9
    
    
    $
    107.9
    
    
    $
    30.5
    
    
    $
    602.32002 Net Written Premiums
    
    $
    381.0
    
    
    $
    101.6
    
    
    $
    37.1
    
    
    $
    519.7Percentage Increase (Decrease)
    
    
    21.8
    %
    
    
    6.2
    %
    
    
    (17.8
    %)
    
    
    15.9
    %2003 Net Earned Premiums
    
    $
    431.5
    
    
    $
    108.8
    
    
    $
    34.2
    
    
    $
    574.52002 Net Earned Premiums
    
    $
    297.6
    
    
    $
    85.0
    
    
    $
    35.1
    
    
    $
    417.7Percentage Increase (Decrease)
    
    
    45.0
    %
    
    
    28.0
    %
    
    
    (2.6
    %)
    
    
    37.5
    %
 The differing percentage changes in net written premiums versus gross written premiums for the
commercial lines, specialty lines and personal lines segments during the year results from: 35




---



##### 




    The Company entering into a Quota Share reinsurance agreement (effective April 1, 2003)
covering all of the Companys lines of business. Under this agreement, the Company cedes
22% of its net written premium (including 22% of the net unearned premium reserves at April
1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional
commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums
earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance
premium reduced by the reinsurers expense allowance and the Companys ceding commission
allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to
Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under
this agreement, and increased by an interest credit. During the year ended December 31,
2003, the Company ceded $194.0 million of written premium, which included unearned premium
reserves of $63.6 million at April 1, 2003.
    Relatively lower reinsurance costs (ceded premiums) as a result of increasing the
Companys loss retention from $0.5 million to $2.0 million on its commercial lines per-risk
property reinsurance treaty and from $0.9 million to $1.0 million on its excess liability
reinsurance treaty, effective January 1, 2003. Net Investment IncomeNet investment income approximated $38.8 in 2003 and $37.5 million in
2002. Total investments grew to $1,172.1 million at December 31, 2003 from $908.9 million at
December 31, 2002. The growth in investment income is due to investing net cash flows provided
from operating activities. The Companys average duration of its fixed income portfolio increased
to approximately 4.0 years at December 31, 2003, compared to 3.2 years at December 31, 2002 as a
result of investing in overall AAA rated intermediate to longer tax exempt fixed income
securities due to their perceived relative value to taxable alternatives. The Companys taxable
equivalent book yield on its fixed income holdings declined to 4.9% at December 31, 2003, from 5.2%
at December 31, 2002, as a result of investing strong cash inflows due to premium increases at
relatively low interest rates during the Federal Reserves latest easing cycle. Net investment
income was reduced by $2.3 million due to the interest credit on the Funds Held Account balance
pursuant to the Companys quota share reinsurance agreement (see Premiums). The total return, which includes the effects of both income and price returns on securities,
of the Companys fixed income portfolio was 4.36% and 9.09% for the years ended December 31, 2003
and 2002, respectively, and was similar to the Lehman Brothers Intermediate Aggregate Bond Index
(the Index) total return of 3.81% and 9.51% for the same periods, respectively. The Company
expects some variation in its portfolios total return compared to the index because of the
differing sector, security and duration composition of its portfolio compared to the index. Net Realized Investment Gain (Loss):Net realized investment gains (losses) were $0.8 million
for the year ended December 31, 2003 and ($3.4) million for the same period in 2002. The Company
realized net investment gains of $7.1 million and $4.0 million from the sale of fixed maturity and
equity securities, respectively, for the year ended December 31, 2003, and $4.0 million and $6.3
million in non-cash realized investment losses for fixed maturity and common stock investments,
respectively, as a result of the Companys impairment evaluations. The Company realized $3.4 million in net investment gains from the sale of fixed maturity
securities and $3.1 million in net investment losses from the sale of common stock equity
securities for the year ended December 31, 2002. Additionally, $2.1 million and $1.6 million in
non-cash realized investment losses were recorded for common stock and fixed maturity investments,
respectively as a result of the Companys impairment evaluations. Other Income: Other income approximated $5.5 million for the year ended December 31, 2003 and
$0.9 million for the same period of 2002. Other income primarily consists of commissions earned on
brokered personal lines business, and to a lesser extent brokered commercial lines business. The
Company is seeking to increase brokering activities in its personal lines segment as it is
restricting new business and not renewing certain policies in designated areas of Florida as a
result of its property exposures in these areas and related catastrophe loss considerations. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment expenses increased $91.8
million (34.3%) to $359.2 million for the year ended December 31, 2003 from $267.4 million for the
same period of 2002 and the loss ratio decreased to 62.5% in 2003 from 64.0% in 2002. This
increase in net loss and loss adjustment expenses was due to the 37.5% growth in net earned
premiums, a $38.8 million increase in the estimated gross and 36




---



##### 



net loss for unreported claims incurred and related claim adjustment expenses on residual
value polices issued during the years 1998 through 2002, and a $5.8 million net increase in the
estimated gross and net loss reserves for loss and loss adjustment expenses primarily for claims
made professional liability and commercial automobile lines of business in prior accident years.
Additionally, during the year the Company ceded $111.5 million of net earned premium and $62.7
million in net loss and loss adjustment expenses pursuant to the quota share reinsurance agreement
(see Premiums). As of December 31, 2003, the Company has estimated a total liability for gross and net unpaid
loss and loss adjustment expenses for the residual value policies of $30.3 million. The residual
value policies provide coverage guaranteeing the value of a leased automobile at the lease
termination, which can be up to five years from lease inception. As part of the Companys
monitoring and evaluation process, a consulting firm was engaged during the second quarter of 2003
to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the
result of the indications and subsequent evaluation by the Company and changes in the Companys
assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and
loss adjustment expenses was increased by $33.0 million. The Company primarily attributes this
deterioration to the following factors that led to a softening of prices in the used car market
subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and
other incentives which increased new car sales and the volume of trade-ins, daily rental units
being sold into the market earlier and in greater numbers than expected further adding to the
oversupply of used cars; and the overall general economic conditions. As of December 31, 2003,
approximately 22,000 leases were outstanding under the Companys residual value policies. Acquisition Costs and Other Underwriting Expenses:Acquisition costs and other underwriting
expenses increased $33.0 million (25.4%) to $162.9 million for the year ended December 31, 2003
from $129.9 million for the same period of 2002. This increase was due primarily to the 37.5%
growth in net earned premiums and in part to the Company establishing a $1.4 million allowance for
doubtful reinsurance receivables based upon its review of collectibility from its reinsurers.
During the year the Company ceded $111.5 million of net earned premium and earned $46.7 million in
ceding commission under the quota share reinsurance agreement (see Premiums). Other Operating Expenses: Other operating expenses increased $1.4 million to $7.8 million for
the year ended December 31, 2003 from $6.4 million for the same period of 2002 as the Company
continues to control its expenses during this period of premium growth. Income Tax Expense:The Companys effective tax rate for the years ended December 31, 2003
and 2002 was 30.7% and 31.2%, respectively. The effective rates differed from the 35% statutory
rate principally due to investments in tax-exempt securities and the relative proportion of tax
exempt income to total income before tax. LIQUIDITY AND CAPITAL RESOURCES Philadelphia Consolidated Holding Corp. (PCHC) is a holding company whose principal assets
currently consist of 100% of the capital stock of its subsidiaries. PCHCs primary sources of funds
are dividends from its subsidiaries, and payments received pursuant to tax allocation agreements
with the insurance subsidiaries and proceeds from the issuance of shares pursuant to the Companys
Stock Purchase and Option Plans. For the year ended December 31, 2004, payments to PCHC pursuant to
such tax allocation agreements totaled $41.4 million. The payment of dividends to PCHC from the
insurance subsidiaries is subject to certain limitations imposed by the insurance laws of the
Commonwealth of Pennsylvania and State of Florida. Accumulated statutory profits or policyholders
surplus of the insurance subsidiaries from which dividends may be paid totaled $257.5 million at
December 31, 2004. Of this amount, the insurance subsidiaries are entitled to pay a total of
approximately $58.6 million of dividends in 2005 without obtaining prior approval from the
Insurance Commissioner of the Commonwealth of Pennsylvania or State of Florida. During 2004 Mobile
Homeowners Insurance Agencies, Inc. paid dividends of $3.5 million to Liberty American Insurance
Group, Inc. (LAIG), a subsidiary of PCHC, and LAIG paid dividends of $1.0 million to PCHC.
During 2004 there were no stock repurchases under the stock repurchase authorization. At December
31, 2004 the remaining stock repurchase authorization is $45.0 million. During 2004, the Company experienced catastrophe losses attributable to Hurricanes Charley,
Frances, Ivan, and Jeanne. The catastrophe losses primarily impacted the Companys personal lines
segment and, to a lesser extent, its commercial lines segment. The gross catastrophe loss and loss
adjustment expense estimates as a result of these hurricanes was $618.3 million for the personal
lines segment and $41.5 million for the commercial lines segment. 37




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##### 



Loss estimates may still
change in the future due in part to the number of claims which have
not yet been completely remediated or for which the property covered
by the claim has not been repaired. Under the Companys catastrophe
reinsurance programs in place at the time of these hurricane events, the Company had a $3.5 million
pre-tax per occurrence loss retention for its personal lines catastrophe losses and a $7.0 million
pre-tax per occurrence loss retention for its commercial lines catastrophe losses. The Company
estimates its net aggregate retention losses for the four hurricane events is $46.7 million. The Companys catastrophe reinsurance program consists of its open market (OM) program which has
been placed principally with large reinsurers that are rated at least A (Excellent) by A.M.
Best, a 15% quota share reinsurance arrangement, and the Florida Hurricane Catastrophe Fund
(FHCF). Certain of the Companys reinsurers have agreed to be billed and make payments to the
Company based upon expected catastrophe claims payments to be made by the Company in the near
future. Although the Company believes that it will collect all of its reinsurance recoverables,
there can be no assurance as to this. The Company believes it will have adequate funds to pay the
estimated hurricane catastrophe losses noted above. The Companys estimated total reinsurance
recoverables, reinsurance recoverables on paid, catastrophe reinsurance billings and reinsurance
collections with respect to its catastrophe reinsurance programs as of December 31, 2004 for the
above mentioned hurricane events are summarized in the table below. TotalFHCF
    
    
    OM
    
    
    Total(In Millions)Personal Lines Segment:Total Estimated Loss and LAE Recoverables
    
    $
    169.1
    
    
    $
    426.9
    
    
    $
    596.0Recoverable on Catastrophe Loss and LAE Paid
    
    $
    158.0
    
    
    $
    339.0
    
    
    $
    497.0Catastrophe Loss and LAE Billed to Reinsurers
    
    $
    166.8
    
    
    $
    338.5
    
    
    $
    505.3Catastrophe Loss and LAE Collected from
Reinsurers
    
    $
    166.7
    
    
    $
    326.0
    
    
    $
    492.7Commercial Lines Segment:Total Estimated Loss and LAE Recoverables
    
    $
    1.7
    
    
    $
    15.4
    
    
    $
    17.1Recoverable on Catastrophe Loss and LAE Paid
    
    $
    1.1
    
    
    $
    0.9
    
    
    $
    2.0Catastrophe Loss and LAE Billed to Reinsurers
    
    $
    1.1
    
    
    $
    0.9
    
    
    $
    2.0Catastrophe Loss and LAE Collected from
Reinsurers
    
    $
    
    
    
    $
    
    
    
    $
    
 The Company produced net cash from operations of $390.5 million in 2004, $298.5 million in
2003 and $205.0 million in 2002. Sources of operating funds consist primarily of net premiums
written and investment income. Funds are used primarily to pay claims and operating expenses and
for the purchase of investments. Cash from operations in 2004 was primarily generated from strong
premium growth during such year due to increases in the number of policies written and price
increases realized on renewal business. Net loss and loss expense payments were $285.9 million in
2004, $237.4 million in 2003, and $157.9 million in 2002. Net cash from operations also included
cash provided from tax savings as a result of the exercise of employee stock options amounting to
$1.0 million, $0.9 million and $1.3 million for 2004, 2003 and 2002, respectively. Management
believes that the Company has adequate liquidity to pay all claims and meet all other cash needs. Two of the Companys insurance subsidiaries are members of the Federal Home Loan Bank of Pittsburgh
(FHLB). A primary advantage of FHLB membership is the ability of members to access credit
products from a reliable capital markets provider. The availability of any one members access to
credit is based upon its FHLB eligible collateral. The insurance subsidiaries have utilized a
portion of their borrowing capacity to purchase a diversified portfolio in investment grade
floating rate securities. These purchases were funded by floating rate FHLB borrowings to achieve
a positive spread between 38




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##### 



the rate of interest on these securities and borrowing rates. At December 31, 2004 the insurance
subsidiaries unused borrowing capacity was $248.1 million. The remaining borrowing capacity will
provide an immediately available line of credit. Borrowings aggregated $33.4 million at December
31, 2004, bear interest at adjusted LIBOR, mature twelve months or less from inception and are
collateralized by $46.8 million of the Companys fixed maturity securities. The weighted-average
interest rate on borrowings outstanding as of December 31, 2004 was 2.52%. In the normal course of business, the Company has entered into various reinsurance contracts with
unrelated reinsurers. The Company participates in such agreements for the purpose of limiting loss
exposure and diversifying business. Reinsurance contracts do not relieve the Company from its
obligations to policyholders. To reduce the potential for a write-off of amounts due from
reinsurers, the Company evaluates the financial condition of its reinsurers, principally contracts
with large reinsurers that are rated at least A (Excellent) by A.M. Best Company, regularly
monitors its reinsurance receivables and attempts to collect the obligations of its reinsurers on a
timely basis. At December 31, 2004 approximately 95.8% of the Companys reinsurance receivables are either with
reinsurers rated A or better by A.M. Best Company or are fully collateralized. Approximately
$14.5 million of the Companys reinsurance receivable balances at December 31, 2004 are with
Converium Reinsurance North American Inc. (CRNA). During the third quarter of 2004, Converium AG
(Switzerland), CRNAs parent company, placed CRNA into an orderly runoff. Of the $14.5 million
reinsurance receivable balances with CRNA, $2.5 million are
receivables on paid losses and $12.0
million are receivables on case reserves and IBNR. The Company is monitoring CRNAs ability to pay
claims, and at this time, believes that the amounts with CRNA will be collectible. Under certain reinsurance agreements, the Company is required to maintain investments in trust
accounts to secure its reinsurance obligations (primarily the payment of losses and loss adjustment
expenses on business it does not write directly). At December 31, 2004, the investment and cash
balances in such trust accounts totaled approximately $1.7 million. In addition, various insurance
departments of states in which the Company operates require the deposit of funds to protect
policyholders within those states. At December 31, 2004, the balance on deposit for the benefit of
such policyholders totaled approximately $15.3 million. The Insurance Subsidiaries, which operate under an intercompany reinsurance pooling agreement, must
have certain levels of surplus to support premium writings. Guidelines of the National Association
of Insurance Commissioners (the NAIC) suggest that a property and casualty insurers ratio of
annual statutory net premium written to policyholders surplus should not exceed 3-to-1. The ratio
of combined annual statutory net premium written by the insurance subsidiaries to their combined
policyholders surplus was 1.8-to-1.0 and 1.5-to-1.0 for 2004 and 2003, respectively. The NAICs risk-based capital method is designed to measure the acceptable amount of capital and
surplus an insurer should have based on the inherent specific risks of each insurer. The adequacy
of a companys actual capital and surplus is evaluated by a comparison to the risk-based capital
results. Insurers failing to meet minimum risk-based capital requirements may be subject to
scrutiny by the insurers domiciliary insurance department and ultimately rehabilitation or
liquidation. As of December 31, 2004, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based
capital requirements of $194.3 million, $13.0 million, $17.3 million and $13.5 million,
respectively, by 115%, 185%, 30% and 96%, respectively. 39




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##### 



CONTRACTUAL OBLIGATIONS The Company has certain contractual obligations and commitments as of December 31, 2004 which are
summarized below: 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)
    
    $
    996,667
    
    
    $
    416,745
    
    
    $
    362,643
    
    
    $
    159,269
    
    
    $
    58,010Reinsurance Premiums Payable Under Terms
of Reinsurance Contracts (2)
    
    
    57,452
    
    
    
    57,452
    
    
    
    
    
    
    
    
    
    
    
    Long-Term Debt Obligations (3)
    
    
    33,406
    
    
    
    33,406
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    16,413
    
    
    
    5,220
    
    
    
    10,620
    
    
    
    573
    
    
    
    Other Long-Term Commercial Commitments
(4)
    
    
    2,917
    
    
    
    2,456
    
    
    
    461
    
    
    
    
    
    
    
    Total
    
    $
    1,106,855
    
    
    $
    515,279
    
    
    $
    373,724
    
    
    $
    159,842
    
    
    $
    58,010
   (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 12 month collateralized borrowings from the Federal Home Loan Bank of
Pittsburgh.(4)
    Represents open commitments under certain limited partnership agreements,
information technology development agreements and audit services.(5)
    Under the terms of an employment agreement with James J. Maguire, Philadelphia
Insurances Chairman, the Company is required to pay a bonus of two million dollars
($2,000,000) in the event that the closing price on any five consecutive trading days prior to
May 1, 2009 of Philadelphia Insurances common stock is equal to or greater than $80 per share
(such price shall be appropriately adjusted in the event of any stock split, stock dividend or
stock combinations affecting the shares of Philadelphia Insurances common stock generally)
and at such time the employee is still an employee of MIA or any affiliate thereof.
Notwithstanding the foregoing, if such employment is terminated subsequent to a Hostile Change
Of Control, as that term is defined in the employment agreement, then the employee need not be
employed by Philadelphia Insurance or an affiliate when the closing price reaches such amount.
The employee would also receive such bonus if prior to May 1, 2009 there has been a Hostile
Change of Control and subsequent thereto Philadelphia Insurances common stock is no longer
publicly traded. This payment, if any, has been excluded from the table as the timing of such
is uncertain. INFLATION Property and casualty insurance premiums are established before the amount of losses and loss
adjustment expenses, or the extent to which inflation may affect such amounts, is known. The
Company attempts to anticipate the potential impact of inflation in establishing its premiums and
reserves. Substantial future increases in inflation could result in future increases in interest
rates, which, in turn, are likely to result in a decline in the market value of the Companys
investment portfolio and resulting unrealized losses and/or reductions in shareholders equity. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
123® (SFAS 123R) Share-Based Payment. SFAS 123R replaces SFAS 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion 25, Accounting for Stock Issued to
Employees. SFAS 123R requires that the cost of share-based 40




---



##### 



payment transactions (including those with employees and non-employees) be recognized in the
financial statements. SFAS 123R applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share options, or other
equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts
based (even in part) on the price of the entitys shares or other equity instruments, or (2) that
require (or may require) settlement by the issuance of an entitys shares or other equity
instruments. SFAS 123R is effective for public companies for interim and annual periods beginning
after June 15, 2005. The Company will adopt the provisions of SFAS 123R on July 1, 2005 and
anticipates a material, but not yet determinable impact on operations and financial position. In March 2004, the FASB issued EITF No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. The standard provides guidance for evaluating whether an
investment is other-than-temporarily impaired and was effective for other-than-temporary impairment
evaluations made in reporting periods beginning after June 15, 2004. However, the guidance
contained in paragraphs 10-20 of EIFT No. 03-1 has been delayed by FSP EITF Issue 03-1-1,
Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, posted September 30, 2004. The delay of
the effective date for paragraphs 10-20 will be superseded concurrent with the final issuance of
proposed FSP EITF Issue 03-1a, Implementation Guidance for the Application of Paragraph 16 of EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The disclosures continue to be effective in annual financial statements for fiscal
years ending after December 15, 2003, for investments accounted for under Statements 115 and 124.
For all other investments within the scope of EITF No 03-1, the disclosures continue to be
effective in annual financial statements for fiscal years ending after June 15, 2004. The
additional disclosures for cost method investments continue to be effective for fiscal years ending
after June 15, 2004. The Executive Committee of the American Institute of Certified Public Accountants has issued an
exposure draft Statement of Position, Accounting by Insurance Enterprises for Deferred Acquisition
Costs on Internal Replacements. The exposure draft provides guidance on accounting by insurance
enterprises for deferred acquisition costs on certain internal replacements other than those
specifically described in FASB Statement No. 97. The Company is evaluating the exposure draft and
does not presently anticipate a material effect on its operations or financial position as a result
of adoption. FORWARD-LOOKING INFORMATION Certain information included in this report and other statements or materials published or to be
published by the Company are not historical facts but are forward-looking statements relating to
such matters as anticipated financial performance, business prospects, technological developments,
new and existing products, expectations for market segment and growth, and similar matters. In
connection with the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, the Company provides the following cautionary remarks regarding important factors which,
among others, could cause the Companys actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Companys forward-looking statements.
The risks and uncertainties that may affect the operations, performance, development, results of
the Companys business, and the other matters referred to above include, but are not limited to:
(i) changes in the business environment in which the Company operates, including inflation and
interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii) competitive
product and pricing activity; (iv) difficulties of managing growth profitably; (v) claims
development and the adequacy of our liability for unpaid loss and loss adjustment expenses; (vi)
severity of natural disasters and other catastrophe losses; (vii) adequacy of reinsurance coverage
which may be obtained by the Company; (viii) ability and willingness of our reinsurers to pay; and
(ix) future terrorist attacks. The Company does not intend to publicly update any forward looking
statement, except as may be required by law. 41




---



##### 



Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about the Companys financial instruments that are sensitive
to changes in interest rates and shows the effect of hypothetical changes in interest rates as of
December 31, 2004. The selected hypothetical changes do not indicate what could be the potential
best or worst case scenarios (dollars in thousands). Loan balances outstanding under the Companys
borrowing agreement with the Federal Home Loan Bank of Pittsburgh are not included in the table
below. Interest rates on the amounts outstanding under this agreement reset frequently, which
limits the impact of changing interest rates. The Company does not have any derivative financial
instruments. The information is presented in U.S. dollar equivalents, which is the Companys
reporting currency. Estimated
    
    

    Hypothetical PercentageHypothetical Change
    
    
    Fair Value after
    
    
    Increase (Decrease) inEstimated
    
    
    in Interest Rates
    
    
    Hypothetical Changes
    
    
    
    
    
    
    ShareholdersFair Value
    
    
    (bp=basis points)
    
    
    in Interest Rates
    
    
    Fair Value

    
    EquityInvestmentsTotal 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
    %)
 42




---



##### 



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Philadelphia Consolidated Holding Corp. and Subsidiaries
Index to Financial Statements and Schedules Financial Statements
    
    
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    44Consolidated Balance Sheets - As of December 31, 2004 and 2003
    
    
    45Consolidated Statements of Operations and Comprehensive Income
- For the Years Ended      December 31, 2004, 2003 and 2002
    
    
    46Consolidated Statements of Changes in Shareholders Equity - For the Years Ended
     December 31, 2004, 2003 and 2002
    
    
    47Consolidated Statements of Cash Flows - For the Years Ended      December 31,
2004, 2003, and 2002
    
    
    48Notes to Consolidated Financial Statements
    
    
    49-71Financial Statement Schedules:ScheduleI
    
    Summary of Investments - Other Than Investments in
Related Parties As of December 31, 2004
    
    
    S-1II
    
    Condensed Financial Information of Registrant As of
December 31, 2004 and 2003 and For Each of the Three
Years in the Period Ended December 31, 2004
    
    S-2 3⁄4 S-4III
    
    Supplementary Insurance Information As of and For the
Years Ended December 31, 2004, 2003 and 2002
    
    
    S-5IV
    
    Reinsurance For the Years ended December 31, 2004,
2003 and 2002
    
    
    S-6VI
    
    Supplementary Information Concerning Property-Casualty
Insurance Operations As of and For the Years Ended
December 31, 2004, 2003 and 2002
    
    
    S-7
 43




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##### 



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Philadelphia Consolidated Holding Corp.: We have completed an integrated audit of Philadelphia Consolidated Holding Corp. and Subsidiaries
2004 consolidated financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and related consolidated statements of
operations and comprehensive income, of changes in shareholders equity and of cash flows present
fairly, in all material respects, the financial position of the Company at December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2004 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. Internal control over financial reporting Also, in our opinion, managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2004 based on criteria established in Internal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
Control  Integrated Framework issued by the COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, 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. PricewaterhouseCoopers LLP
Philadelphia, PA
March 15, 2005 44




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) As of December 31,2004
    
    
    2003ASSETSInvestments:Fixed Maturities Available for Sale at Market
(Amortized Cost $1,287,094 and $1,066,523)
    
    $
    1,299,704
    
    
    $
    1,081,694Equity Securities at Market (Cost $110,601 and $79,813)
    
    
    128,447
    
    
    
    90,358Total Investments
    
    
    1,428,151
    
    
    
    1,172,052Cash and Cash Equivalents
    
    
    195,496
    
    
    
    73,942Accrued Investment Income
    
    
    13,475
    
    
    
    11,008Premiums Receivable
    
    
    229,502
    
    
    
    179,509Prepaid Reinsurance Premiums and Reinsurance
Receivables
    
    
    429,850
    
    
    
    292,157Deferred Income Taxes
    
    
    14,396
    
    
    
    18,147Deferred Acquisition Costs
    
    
    91,647
    
    
    
    56,288Property and Equipment, Net
    
    
    21,281
    
    
    
    16,821Goodwill
    
    
    25,724
    
    
    
    25,724Other Assets
    
    
    36,134
    
    
    
    25,293Total Assets
    
    $
    2,485,656
    
    
    $
    1,870,941LIABILITIES and SHAREHOLDERS EQUITYPolicy Liabilities and Accruals:Unpaid Loss and Loss Adjustment Expenses
    
    $
    996,667
    
    
    $
    627,086Unearned Premiums
    
    
    531,849
    
    
    
    422,589Total Policy Liabilities and Accruals
    
    
    1,528,516
    
    
    
    1,049,675Funds Held Payable to Reinsurer
    
    
    131,119
    
    
    
    110,011Loans Payable
    
    
    33,406
    
    
    
    48,482Premiums Payable
    
    
    48,111
    
    
    
    35,044Other Liabilities
    
    
    100,347
    
    
    
    82,083Total Liabilities
    
    
    1,841,499
    
    
    
    1,325,295Commitments and ContingenciesShareholders Equity:Preferred Stock, $.01 Par Value,
10,000,000 Shares Authorized,
None Issued and Outstanding
    
    
    
    
    
    
    Common Stock, No Par Value,
100,000,000 Shares Authorized, 22,273,917 and
22,007,552 Shares Issued and Outstanding
    
    
    292,856
    
    
    
    281,088Notes Receivable from Shareholders
    
    
    (5,465
    )
    
    
    (5,444
    )Accumulated Other Comprehensive Income
    
    
    19,796
    
    
    
    16,715Retained Earnings
    
    
    336,970
    
    
    
    253,287Total Shareholders Equity
    
    
    644,157
    
    

    
    545,646Total Liabilities and Shareholders Equity
    
    $
    2,485,656
    
    
    $
    1,870,941
 The accompanying notes are an integral part of the consolidated financial statements. 45




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Revenue:Net Earned Premiums
    
    $
    770,248
    
    
    $
    574,518
    
    
    $
    417,722Net Investment Income
    
    
    43,490
    
    
    
    38,806
    
    
    
    37,516Net Realized Investment Gain (Loss)
    
    
    761
    
    
    
    794
    
    
    
    (3,371
    )Other Income
    
    
    4,357
    
    
    
    5,519
    
    
    
    911Total Revenue
    
    
    818,856
    
    
    
    619,637
    
    
    
    452,778Losses and Expenses:Loss and Loss Adjustment Expenses
    
    
    1,232,645
    
    
    
    469,547
    
    
    
    361,154Net Reinsurance Recoveries
    
    
    (756,530
    )
    
    
    (110,370
    )
    
    
    (93,721
    )Net Loss and Loss Adjustment Expenses
    
    
    476,115
    
    
    
    359,177
    
    
    
    267,433Acquisition Costs and Other
Underwriting Expenses
    
    
    214,369
    
    
    
    162,912
    
    
    
    129,918Other Operating Expenses
    
    
    9,439
    
    
    
    7,822
    
    
    
    6,372Total Losses and Expenses
    
    
    699,923
    
    
    
    529,911
    
    
    
    403,723Income Before Income Taxes
    
    
    118,933
    
    
    
    89,726
    
    
    
    49,055Income Tax Expense (Benefit):Current
    
    
    33,158
    
    
    
    38,430
    
    
    
    22,018Deferred
    
    
    2,092
    
    
    
    (10,891
    )
    
    
    (6,716
    )Total Income Tax Expense
    
    
    35,250
    
    
    
    27,539
    
    
    
    15,302Net Income
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753Other Comprehensive Income, Net of Tax:Holding Gain Arising during Year
    
    $
    3,576
    
    
    $
    1,046
    
    
    $
    5,533Reclassification Adjustment
    
    
    (495
    )
    
    
    (516
    )
    
    
    2,191Other Comprehensive Income
    
    
    3,081
    
    
    
    530
    
    
    
    7,724Comprehensive Income
    
    $
    86,764
    
    
    $
    62,717
    
    
    $
    41,477Per Average Share Data:Basic Earnings Per Share
    
    $
    3.78
    
    
    $
    2.84
    
    
    $
    1.56Diluted Earnings Per Share
    
    $
    3.59
    
    
    $
    2.74
    
    
    $
    1.51Weighted-Average Common Shares Outstanding
    
    
    22,154,820
    
    
    
    21,908,788
    
    
    
    21,611,053Weighted-Average Share Equivalents Outstanding
    
    
    1,152,033
    
    
    
    751,600
    
    
    
    682,382Weighted-Average Shares and Share Equivalents
Outstanding
    
    
    23,306,853
    
    
    
    22,660,388
    
    
    
    22,293,435
 The accompanying notes are an integral part of the consolidated financial statements. 46




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Common Shares:Balance at Beginning of Year
    
    
    22,007,552
    
    
    
    21,868,877
    
    
    
    21,509,723Exercise of Employee Stock Options
    
    
    67,250
    
    
    
    99,875
    
    
    
    107,000Issuance of Shares Pursuant to Stock Purchase Plans, net
    
    
    199,115
    
    
    
    38,800
    
    
    
    252,154Balance at End of Year
    
    
    22,273,917
    
    
    
    22,007,552
    
    
    
    21,868,877Treasury Shares:Balance at Beginning of Year
    
    
    
    
    
    
    
    
    
    
    Exercise of Employee Stock Options
    
    
    
    
    
    
    (6,500
    )
    
    
    Issuance of Shares Pursuant to Stock Purchase Plans, net
    
    
    
    
    
    
    (3,500
    )
    
    
    (75,000
    )Shares Repurchased Pursuant to Authorization
    
    
    
    
    
    
    10,000
    
    
    
    75,000Balance at End of Year
    
    
    
    
    
    
    
    
    
    
    Common Stock:Balance at Beginning of Year
    
    $
    281,088
    
    
    $
    276,945
    
    
    $
    268,509Exercise of Employee Stock Options
    
    
    2,183
    
    
    
    2,852
    
    
    
    2,115Issuance of Shares Pursuant to Stock Purchase Plans
    
    
    9,585
    
    
    
    1,291
    
    
    
    6,321Balance at End of Year
    
    
    292,856
    
    
    
    281,088
    
    
    
    276,945Notes Receivable from Shareholders:Balance at Beginning of Year
    
    
    (5,444
    )
    
    
    (6,407
    )
    
    
    (3,373
    )Notes Receivable Issued Pursuant to Employee
Stock Purchase Plans
    
    
    (2,326
    )
    
    
    (1,065
    )
    
    
    (4,017
    )Collection of Notes Receivable
    
    
    2,305
    
    
    
    2,028
    
    
    
    983Balance at End of Year
    
    
    (5,465
    )
    
    
    (5,444
    )
    
    
    (6,407
    )Accumulated Other Comprehensive Income,
Net of Deferred Income Taxes:Balance at Beginning of Year
    
    
    16,715
    
    
    
    16,185
    
    
    
    8,461Other Comprehensive Income, Net of Taxes
    
    
    3,081
    
    
    
    530
    
    
    
    7,724Balance at End of Year
    
    
    19,796
    
    
    
    16,715
    
    
    
    16,185Retained Earnings:Balance at Beginning of Year
    
    
    253,287
    
    
    
    191,100
    
    
    
    157,347Net Income
    
    
    83,683
    
    
    
    62,187
    
    
    
    33,753Balance at End of Year
    
    
    336,970
    
    
    
    253,287
    
    
    
    191,100Common Stock Held in Treasury:Balance at Beginning of Year
    
    
    
    
    
    
    
    
    
    
    Common Shares Repurchased
    
    
    
    
    
    
    (300
    )
    
    
    (2,023
    )Exercise of Employee Stock Options
    
    
    
    
    
    
    94
    
    
    
    Issuance of Shares Pursuant to Stock Purchase Plans
    
    
    
    
    
    
    206
    
    
    
    2,023Balance at End of Year
    
    
    
    
    
    
    
    
    
    
    Total Shareholders Equity
    
    $
    644,157
    
    
    $
    545,646
    
    
    $
    477,823
 The accompanying notes are an integral part of the consolidated financial statements. 47




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Cash Flows from Operating Activities:Net Income
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:Net Realized Investment (Gain) Loss
    
    
    (761
    )
    
    
    (794
    )
    
    
    3,371Depreciation and Amortization Expense
    
    
    12,669
    
    
    
    8,097
    
    
    
    2,142Deferred Income Tax Expense (Benefit)
    
    
    2,092
    
    
    
    (10,891
    )
    
    
    (6,716
    )Change in Premiums Receivable
    
    
    (49,993
    )
    
    
    (49,502
    )
    
    
    (33,982
    )Change in Prepaid Reinsurance Premiums and Reinsurance
Receivables, Net of Funds Held Payable to Reinsurer
    
    
    (116,585
    )
    
    
    (30,794
    )
    
    
    (51,751
    )Change in Other Receivables
    
    
    (2,467
    )
    
    
    (2,437
    )
    
    
    (1,989
    )Change in Deferred Acquisition Costs
    
    
    (35,359
    )
    
    
    4,984
    
    
    
    (19,746
    )Change in Income Taxes Payable
    
    
    (8,563
    )
    
    
    513
    
    
    
    367Change in Other Assets
    
    
    (6,392
    )
    
    
    (14,721
    )
    
    
    1,026Change in Unpaid Loss and Loss Adjustment Expenses
    
    
    369,581
    
    
    
    181,538
    
    
    
    142,815Change in Unearned Premiums
    
    
    109,260
    
    
    
    116,496
    
    
    
    108,254Change in Other Liabilities
    
    
    32,341
    
    
    
    32,958
    
    
    
    26,173Tax Benefit from Exercise of Employee Stock Options
    
    
    1,031
    
    
    
    889
    
    
    
    1,251Net Cash Provided by Operating Activities
    
    
    390,537
    
    
    
    298,523
    
    
    
    204,968Cash Flows from Investing Activities:Proceeds from Sales of Investments in Fixed
Maturities
    
    
    198,442
    
    
    
    184,082
    
    
    
    226,981Proceeds from Maturity of Investments in Fixed
Maturities
    
    
    195,317
    
    
    
    202,284
    
    
    
    147,850Proceeds from Sales of Investments in Equity
Securities
    
    
    43,734
    
    
    
    23,992
    
    
    
    18,546Cost of Fixed Maturities Acquired
    
    
    (622,238
    )
    
    
    (628,879
    )
    
    
    (576,564
    )Cost of Equity Securities Acquired
    
    
    (71,924
    )
    
    
    (54,956
    )
    
    
    (36,421
    )Purchase of Property and Equipment, Net
    
    
    (7,954
    )
    
    
    (6,692
    )
    
    
    (5,191
    )Net Cash Used for Investing Activities
    
    
    (264,623
    )
    
    
    (280,169
    )
    
    
    (224,799
    )Cash Flows from Financing Activities:Proceeds from Loans Payable
    
    
    76,104
    
    
    
    62,340
    
    
    
    9,923Repayments on Loans Payable
    
    
    (91,180
    )
    
    
    (52,971
    )
    
    
    (2,151
    )Proceeds from Exercise of Employee Stock Options
    
    
    1,151
    
    
    
    2,057
    
    
    
    864Proceeds from Collection of Notes Receivable
    
    
    2,305
    
    
    
    2,028
    
    
    
    983Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    7,260
    
    
    
    432
    
    
    
    4,327Cost of Common Stock Repurchased
    
    
    
    
    
    
    (300
    )
    
    
    (2,023
    )Net Cash Provided (Used) by Financing Activities
    
    
    (4,360
    )
    
    
    13,586
    
    
    
    11,923Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    121,554
    
    
    
    31,940
    
    
    
    (7,908
    )Cash and Cash Equivalents at Beginning of Year
    
    
    73,942
    
    
    
    42,002
    
    
    
    49,910Cash and Cash Equivalents at End of Year
    
    $
    195,496
    
    
    $
    73,942
    
    
    $
    42,002Cash Paid During the Year for:Income Taxes
    
    $
    41,442
    
    
    $
    36,319
    
    
    $
    20,110Interest
    
    
    639
    
    
    
    638
    
    
    
    616Non-Cash Transactions:Issuance of Shares Pursuant to Employee
Stock Purchase Plans in Exchange for Notes Receivable
    
    $
    2,326
    
    
    $
    1,065
    
    
    $
    4,017
 The accompanying notes are an integral part of the consolidated financial statements. 48




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##### 



Philadelphia Consolidated Holding Corp. and Subsidiaries Notes to Consolidated Financial Statements 1. General Information and Significant Accounting Policies Philadelphia Consolidated Holding Corp. (Philadelphia Insurance), and its subsidiaries
(collectively the Company) doing business as Philadelphia Insurance Companies, include four
property and casualty insurance companies, Philadelphia Indemnity Insurance Company (PIIC) and
Philadelphia Insurance Company (PIC), which are domiciled in Pennsylvania; and Mobile USA
Insurance Company (MUSA) and Liberty American Insurance Company (LAIC), which are domiciled in
Florida (collectively the Insurance Subsidiaries); an underwriting manager, Maguire Insurance
Agency, Inc.; a managing general agency, Mobile Homeowners Insurance Agencies, Inc; a premium
finance company Liberty American Premium Finance Company; and an investment subsidiary, PCHC
Investment Corp. The Company designs, markets, and underwrites specialty commercial and personal
property and casualty insurance products for select target industries or niches including, among
others, nonprofit organizations; the health, fitness and wellness industry; select classes of
professional liability; the rental car industry; automobile leasing industry; and personal property
and casualty insurance products for the manufactured housing and homeowners markets. All
marketing, underwriting, claims management, investment, and general administration is provided by
the underwriting manager and managing general agency. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company prepared in conformity
with accounting principles generally accepted in the United States of America (GAAP). All
significant intercompany balances and transactions have been eliminated in consolidation. The
preparation of financial statements requires making estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain prior years amounts
have been reclassified for comparative purposes. (a) Investments Fixed maturity investments, classified as Available for Sale, are carried at market value with the
change in unrealized appreciation (depreciation) credited or charged directly to shareholders
equity, net of applicable deferred income taxes. Income on fixed maturities is recognized on the
accrual basis. The carrying amount for the Companys investments approximates their estimated fair value. The
Company measures the fair value of investments based upon quoted market prices or by obtaining
quotes from third party broker-dealers. Material assumptions and factors utilized by such
broker-dealers in pricing these securities include: future cash flows, constant default rates,
recovery rates and any market clearing activity that may have occurred since the prior month-end
pricing period. For mortgage and asset-backed securities (structured securities) of high
credit quality, changes in expected cash flows are recognized using the retrospective method. For
structured securities where the possibility of credit loss is other than remote, changes in
expected cash flows are recognized on the prospective method over the remaining life of the
securities. Cash flow assumptions for structured securities are obtained from broker dealer survey
values or internal estimates consistent with the current interest rate and economic environments.
These assumptions represent the Companys best estimate of the amount and timing of estimated
principal and interest cash flows based on current information and events that a market participant
would use in determining the current fair value of the security. The Companys total investments
include $4.7 million in securities for which there is no readily available independent market
price. The decision to purchase or sell investments is based on managements assessment of various factors
such as foreseeable economic conditions, including current interest rates and the interest rate
risk, and the liquidity and capital positions of the Company. Investments in fixed maturities are adjusted for amortization of premiums and accretion of
discounts to maturity date, except for asset backed, mortgage pass-through and collateralized
mortgage obligation securities which are adjusted for amortization of premiums and accretion of
discounts over their estimated lives. Certain asset backed, mortgage pass-through and
collateralized mortgage obligation security repayment patterns will change based on interest rate
movements and, accordingly, could impact future investment income if the reinvestment of the repayment amounts are at lower
interest rates than the underlying securities. Asset backed, mortgage pass-through and
collateralized mortgage obligation securities amounted to 49




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##### 



$96.0 million, $229.6 million and $62.6 million, respectively, at December 31, 2004 and $183.0
million, $159.2 million and $53.8 million, respectively, at December 31, 2003. The asset backed,
mortgage pass-through and collateralized mortgage obligation securities are amortizing securities
possessing favorable prepayment risk and/or extension profiles. Equity securities are carried at market value with the change in unrealized appreciation
(depreciation) credited or charged directly to shareholders equity, net of applicable deferred
income taxes. Realized investment gains and losses are calculated on the specific identification basis and
recorded as income when the securities are sold. The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security whose fair value is below its cost. Upon identification of such
securities, a detailed review is performed for such securities, excluding interests in securitized
assets, meeting predetermined thresholds to determine whether a decline in fair value below a
securitys cost basis is other than temporary. If the Company determines a decline in value to be
other than temporary, the cost basis of the security is written down to its fair value with the
amount of the write down included in earnings as a realized loss in the period the impairment
arose. This evaluation resulted in non-cash realized investment losses of $2.5 million, $1.0
million and $2.1 million for the years ended December 31, 2004, 2003 and 2002, respectively. The Companys impairment evaluation and recognition for interests in securitized assets is
conducted in accordance with the guidance provided by the Emerging Issues Task Force of the
Financial Accounting Standards Board. Under this guidance, impairment losses on securities must be
recognized if both the fair value of the security is less than its book value and the net present
value of expected future cash flows is less than the net present value of expected future cash
flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge,
calculated as the difference between the current book value of the security and its fair value, is
included in earnings as a realized loss in the period the impairment arose. Non-cash realized
investment losses recorded for the years ended December 31, 2004, 2003 and 2002 were $7.3 million,
$9.3 million, and $1.6 million, respectively, as a result of the Companys impairment evaluation
for investments in securitized assets. The Company held no derivative financial instruments, nor embedded financial derivatives, as of
December 31, 2004 and 2003. (b) Cash and Cash Equivalents Cash equivalents, consisting of fixed maturity investments with maturities of three months or less
when purchased and money market funds, are stated at market value. (c) Deferred Acquisition Costs Policy acquisition costs, which include commissions (net of ceding commissions), premium taxes,
fees, and certain other costs of underwriting policies, are deferred and amortized over the same
period in which the related premiums are earned. Deferred acquisition costs are limited to the
estimated amounts recoverable from future income, including anticipated investment income, after
providing for losses and expenses included in future income that are expected to be incurred, based
upon historical and current experience. If such costs are estimated to be unrecoverable, they are
expensed. (d) Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the
estimated useful lives of the respective assets. Costs incurred in developing information systems
technology are capitalized and included in property and equipment. These costs are amortized over
their useful lives from the dates the systems technology becomes operational. Upon disposal of
assets, the cost and related accumulated depreciation are removed from the accounts and the
resulting gain or loss is included in earnings. The carrying value of property and equipment is
reviewed for recoverability including an evaluation of the estimated useful lives of such assets. (e) Goodwill The Company performs an annual impairment analysis to identify potential goodwill impairment and
measure the amount of a goodwill impairment loss to be recognized (if any). This annual test is
performed at December 31 of each year or more frequently if events or circumstance change that
require the Company to perform the impairment analysis on an interim basis. 50




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##### 



Goodwill impairment testing requires the evaluation of the fair value of each reporting unit to its carrying value,
including the goodwill, and an impairment charge is recorded if the carrying amount of the
reporting unit exceeds its estimated fair value. As a result of the impairment analysis, no change
in the carrying amount of goodwill, which arose from the purchase of Liberty, was recorded by the
Company for the years ended December 31, 2004, 2003 and 2002, respectively. (f) Liability for Unpaid Loss and Loss Adjustment Expenses The liability for unpaid loss and loss adjustment expenses reflects the Companys best estimate for
future amounts needed to pay losses and related settlement expenses with respect to insured events.
The process of establishing the ultimate claims liability is necessarily a complex imprecise
process, requiring the use of informed estimates and judgments using data currently available. The
liability includes an amount determined on the basis of claim adjusters evaluations with respect
to insured events that have occurred and an amount for losses incurred that have not been reported
to the Company. In some cases significant periods of time, up to several years or more, may elapse
between the occurrence of an insured loss and the reporting of such
to the Company. Estimates for unpaid loss and loss adjustment
expenses are based upon 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 adjustments are reviewed regularly and any adjustments therefrom are made in the
accounting period in which the adjustment arose. If the Companys ultimate losses, net of
reinsurance, prove to differ substantially from the amounts recorded at December 31, 2004, the
related adjustments could have a material adverse impact on the Companys financial condition, and
results of operations. (g) Premiums Premiums are generally earned on a pro rata basis over the terms of the policies. Premiums
applicable to the unexpired terms of the policies in-force are reported as unearned premiums. The
Company records an allowance for doubtful accounts for premiums receivable balances estimated to be
uncollectible. At December 31, 2004 and 2003 the allowance for doubtful accounts amounted to $0.6
million and $2.2 million, respectively. (h) Reinsurance Ceded In the normal course of business, the Company seeks to reduce the loss that may arise from events
that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas
of exposure with reinsurers. Amounts recoverable from reinsurers are estimated in a manner
consistent with the reinsured policy. At December 31, 2004 and 2003 the allowance for
uncollectible reinsurance amounted to $1.0 million and $1.2 million, respectively. Amounts for
reinsurance assets and liabilities are reported gross. (i) Assessments The Insurance Subsidiaries are subject to state guaranty fund assessments, which provide for the
payment of covered claims or meet other insurance obligations from insurance company insolvencies,
and other assessments related to its insurance activities. Each state has enacted legislation
establishing guaranty funds and other insurance activity related assessments resulting in a variety
of assessment methodologies. Expense for guaranty fund and insurance activity related assessments
are recognized when it is probable that an assessment will be imposed, the obligatory event has
occurred and the amount of the assessment is reasonably estimatable. As of December 31, 2004 and
2003, included in Other Liabilities in the Consolidated Balance Sheets were $12.4 million and $10.3
million, respectively, of liabilities for state guaranty fund and other assessments. As of
December 31, 2004 and 2003, included in other assets were $0.4 million and $0.1 million,
respectively, of related assets for premium tax offsets or policy surcharges. The related asset is
limited to the amount that is determined based upon future premium collections or policy surcharges
from policies in force. (j) Income Taxes The Company files a consolidated federal income tax return. Deferred income taxes are recognized
for the tax consequences of temporary differences by applying enacted statutory tax rates
applicable to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that includes the enactment
date. 51




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##### 



(k) Earnings Per Share Basic earnings per share has been calculated by dividing net income by the weighted-average common
shares outstanding. Diluted earnings per share has been calculated by dividing net income by the
weighted-average common shares outstanding and the weighted-average share equivalents outstanding. (l) Comprehensive Income Components of comprehensive income, as detailed in the Consolidated Statements of Operations and
Comprehensive Income, are net of tax. The related tax effect of Holding Gains (Losses) arising
during the year was $1.9 million, $0.6 million and $3.0 million in 2004, 2003 and 2002,
respectively. The related tax effect of Reclassification Adjustments was $0.3 million, $0.3
million, and ($1.2) million in 2004, 2003 and 2002, respectively. (m) Stock Based Compensation Plans The Company continues to maintain its accounting for stock-based compensation in accordance with
APB No. 25, but has adopted the disclosure provisions of SFAS No. 148. The following represents
pro forma information as if the Company recorded compensation costs using the fair value of the
issued compensation instruments (the results may not be indicative of the actual effect on net
income in future years) (in thousands, except per average common share data): 2004
    
    
    2003
    
    
    2002Net Income As Reported
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753Assumed Stock Compensation Cost
    
    
    4,107
    
    
    
    3,029
    
    
    
    2,254Pro Forma Net Income
    
    $
    79,576
    
    
    $
    59,158
    
    
    $
    31,499Diluted Earnings Per Average Common Share as Reported
    
    $
    3.59
    
    
    $
    2.74
    
    
    $
    1.51Pro Forma Diluted Earnings Per Average Common Share
    
    $
    3.41
    
    
    $
    2.61
    
    
    $
    1.41
 (n) New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
123R (SFAS 123R) Share-Based Payment. SFAS 123R replaces SFAS 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion 25, Accounting for Stock Issued to
Employees. SFAS 123R requires that the cost of share-based payment transactions (including those
with employees and non-employees) be recognized in the financial statements. SFAS 123R applies to
all share-based payment transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments (except for those held by
an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the
entitys shares or other equity instruments, or (2) that require (or may require) settlement by the
issuance of an entitys shares or other equity instruments. SFAS 123R is effective for public
companies for interim and annual periods beginning after June 15, 2005. The Company will adopt the
provisions of SFAS 123R on July 1, 2005 and anticipates a material, but not yet determinable impact
on operations and financial position. In March 2004, the FASB issued EITF No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. The standard provides guidance for evaluating whether an
investment is other-than-temporarily impaired and was effective for other-than-temporary impairment
evaluations made in reporting periods beginning after June 15, 2004. However, the guidance
contained in paragraphs 10-20 of EIFT No. 03-1 has been delayed by FSP EITF Issue 03-1-1,
Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, posted September 30, 2004. The delay of
the effective date for paragraphs 10-20 will be superseded concurrent with the final issuance of
proposed FSP EITF Issue 03-1a, Implication Guidance for the Application of Paragraph 16 of EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The disclosures continue to be effective in annual financial statements for fiscal
years ending after December 15, 2003, for investments accounted for under Statements 115 and 124.
For all other investments within the scope of EITF No 03-1, the disclosures continue to be
effective in annual financial statements for fiscal years ending after June 15, 2004. The
additional disclosures for cost method investments continue to be effective for fiscal years ending
after June 15, 2004. The Executive Committee of the American Institute of Certified Public Accountants has issued an
exposure draft Statement of Position, Accounting by Insurance Enterprises for Deferred Acquisition
Costs on Internal Replacements. The exposure 52




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##### 



draft provides guidance on accounting by insurance enterprises for deferred acquisition costs on
certain internal replacements other than those specifically described in FASB Statement No. 97.
The Company is evaluating the exposure draft and does not presently anticipate a material effect on
its operations or financial position as a result of adoption. 2. Statutory Information Accounting Principles: GAAP differs in certain respects from Statutory Accounting Principles
(SAP) prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania
and/or the State of Florida. The principal differences between SAP and GAAP are as follows:  
    Under SAP, investments in debt securities are carried at amortized
cost, while under GAAP, investments in debt securities classified
as Available for Sale are carried at fair value.  
    Under SAP, policy acquisition costs, such as commissions, premium
taxes, fees, and other costs of underwriting policies are charged
to current operations as incurred, while under GAAP, such costs
are deferred and amortized on a pro rata basis over the period
covered by the policy.  
    Under SAP, certain assets, designated as Non-admitted Assets
(such as prepaid expenses) are charged against surplus.  
    Under SAP, net deferred income tax assets are admitted following
the application of certain criteria, with the resulting admitted
deferred tax amount being credited directly to policyholder
surplus.  
    Under SAP, premiums receivable are considered nonadmitted if
determined to be uncollected based upon aging criteria as defined
in SAP.  
    Under SAP, the costs and related recoverables for guaranty funds
and other assessments are recorded based on managements estimate
of the ultimate liability and related recoverable settlement,
while under GAAP, such costs are accrued when the liability is
probable and reasonably estimatable and the related recoverable
amount is based on future premium collections or policy surcharges
from in-force policies.  
    Under SAP, unpaid losses and loss adjustment expenses and unearned
premiums are reported net of the effects of reinsurance
transactions, whereas under GAAP, unpaid loss and loss adjustment
expenses and unearned premiums are reported gross of reinsurance. Financial Information: The combined statutory capital and surplus of the Insurance Subsidiaries as
of December 31, 2004 and 2003 was $503.7 million and $415.9 million, respectively. Combined
statutory net income for the years ended December 31, 2004, 2003 and 2002 was $48.2 million, $49.9
million, and $14.5 million, respectively. The Company made capital contributions of $9.5 million
and $47.0 million to the Insurance Subsidiaries for the years ended December 31, 2004 and 2003,
respectively. Dividend Restrictions: The Insurance Subsidiaries are subject to various regulatory restrictions
which limit the maximum amount of annual shareholder dividends allowed to be paid. The maximum
dividend which the Insurance Subsidiaries may pay to Philadelphia Insurance during 2005 without
prior approval is $58.6 million. Dividends paid for the years ended December 31, 2004 and 2003
were $0 million and $4.0 million, respectively. Risk-Based Capital: Risk-based capital is a method developed by the National Association of
Insurance Commissioners (NAIC) designed to measure the acceptable amount of capital and surplus
an insurer should have based on the inherent specific risks of each insurer. The adequacy of a
companys actual capital and surplus is evaluated by a comparison to the risk-based capital
results. Insurers failing to meet minimum risk-based capital requirements may be subject to
scrutiny by the insurers domiciliary insurance department and ultimately rehabilitation or
liquidation. As of December 31, 2004, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based
capital requirement of $194.3 million, $13.0 million, $17.3 million and $13.5 million,
respectively, by 115%, 185%, 30% and 96%, respectively. 53




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##### 



3. Investments The Company invests primarily in investment grade fixed maturities which possessed a weighted
average quality of AAA at December 31, 2004. The cost, gross unrealized gains and losses and
estimated market value of investments as of December 31, 2004 and 2003 are as follows (in
thousands): Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    MarketCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Value (2)December 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
    
    
    $
    1,428,151December 31, 2003Fixed Maturities:Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    51,480
    
    
    $
    456
    
    
    $
    18
    
    
    $
    51,918Obligations of States and
Political Subdivisions
    
    
    476,762
    
    
    
    12,876
    
    
    
    662
    
    
    
    488,976Corporate and Bank Debt Securities
    
    
    142,264
    
    
    
    5,558
    
    
    
    768
    
    
    
    147,054Asset Backed Securities
    
    
    183,065
    
    
    
    2,688
    
    
    
    8,078
    
    
    
    177,675Mortgage Pass-Through Securities
    
    
    159,160
    
    
    
    3,692
    
    
    
    323
    
    
    
    162,529Collateralized Mortgage Obligations
    
    
    53,792
    
    
    
    454
    
    
    
    704
    
    
    
    53,542Total Fixed Maturities Available
for Sale
    
    
    1,066,523
    
    
    
    25,724
    
    
    
    10,553
    
    
    
    1,081,694Equity Securities
    
    
    79,813
    
    
    
    12,148
    
    
    
    1,603
    
    
    
    90,358Total Investments
    
    $
    1,146,336
    
    
    $
    37,872
    
    
    $
    12,156
    
    
    $
    1,172,052
   (1)
    
    Original cost of equity securities; original cost of fixed maturities adjusted for
amortization of premiums and accretion of discounts. All amounts are shown net of impairment
losses.(2)
    
    Estimated market values have been based on quoted market prices or quotes from third party
broker-dealers. The 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 54




---



##### 



securities, except interests in securitized assets, meeting predetermined thresholds to determine whether such decline is other than temporary.
If the Company determines a decline in value to be other than temporary, based upon its detailed
review, or if a decline in value for an equity investment has persisted continuously for nine
months, the cost basis of the security is written down to its fair value. The factors considered
in reaching the conclusion that a decline below cost is other than temporary include, but are not
limited to: whether the issuer is in financial distress; the 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 cost; and an ability and intent to hold
the security to recovery of cost. The amount of any
write down is included in earnings as a realized loss in the period the impairment arose. This
evaluation resulted in non-cash realized investment losses of $2.5 million and $1.0 million for the
years ended December 31, 2004 and 2003, respectively. The Company attributes these other than temporary declines in fair value primarily to issuer
specific conditions, except for as noted in the following paragraph. Additionally, the Company conducts its impairment evaluation and recognition for interests in
securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of
the Financial Accounting Standards Board (the EITF). Under this guidance, impairment losses on
securities must be recognized if both the fair value of the security is less than its book value
and the net present value of expected future cash flows is less than the net present value of
expected future cash flows at the most recent estimation date. If these criteria are met, an
impairment charge, calculated as the difference between the current book value of the security and
its fair value, is included in earnings as a realized loss in the period the impairment arose.
This evaluation resulted in non-cash realized investment losses of $7.3 million and $9.3 million
for the years ended December 31, 2004 and 2003, respectively. These non-cash realized investment
losses were from investments primarily in collateralized bond obligations which were impacted by
recent years non investment grade default rates that were higher than historic averages and from
investments in other asset backed securities which experienced extension of cash flows on the
underlying collateral. The following table (in thousands) identifies the period of time securities with an unrealized loss
at December 31, 2004 have continuously been in an unrealized loss position. Included in the
amounts displayed in the table are $0.1 million of unrealized losses due to non-investment grade
fixed maturity securities having a fair value of $1.2 million. No issuer of securities or industry
represents more than 3.6% and 16.0%, respectively, of the total estimated fair value, or 4.6% and
11.9%, respectively, of the total gross unrealized loss included in the table below. As previously
discussed, there are certain risks and uncertainties inherent in the Companys impairment
methodology, such as the financial condition of specific industry sectors and the resultant effect
on underlying security collateral values. Should the Company subsequently determine a decline in
the fair value below the cost basis to be other than temporary, the security would be written down
to its fair value and the difference would be included in earnings as a realized loss for the
period such determination was made. Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesFixed Maturities:Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    57,982
    
    
    $
    411
    
    
    $
    587
    
    
    $
    21
    
    
    $
    58,569
    
    
    $
    432Obligations of States and
Political Subdivisions
    
    
    202,496
    
    
    
    1,244
    
    
    
    13,562
    
    
    
    203
    
    
    
    216,058
    
    
    
    1,447Corporate and Bank Debt Securities
    
    
    147,156
    
    
    
    1,719
    
    
    
    1,426
    
    
    
    26
    
    
    
    148,582
    
    
    
    1,745Asset Backed Securities
    
    
    30,180
    
    
    
    266
    
    
    
    4,435
    
    
    
    167
    
    
    
    34,615
    
    
    
    433Mortgage Pass-Through Securities
    
    
    88,155
    
    
    
    240
    
    
    
    6,805
    
    
    
    243
    
    
    
    94,960
    
    
    
    483Collateralized Mortgage Obligations
    
    
    31,503
    
    
    
    288
    
    
    
    3,812
    
    
    
    129
    
    
    
    35,315
    
    
    
    417Total Fixed Maturities Available
for Sale
    
    
    557,472
    
    
    
    4,168
    
    
    
    30,627
    
    
    
    789
    
    
    
    588,099
    
    
    
    4,957Equity Securities
    
    
    6,709
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    6,709
    
    
    
    370Total Investments
    
    $
    564,181
    
    
    $
    4,538
    
    
    $
    30,627
    
    
    $
    789
    
    
    $
    594,808
    
    
    $
    5,327
 55




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##### 



Based upon the Companys impairment evaluation as of December 31, 2004, it was concluded that the
remaining unrealized losses in the table above are not other than temporary. During 2004 the Companys gross loss on the sale of fixed maturity and equity securities amounted
to $1.3 million and $1.9 million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $30.7 million and $7.5 million, respectively. During 2003 the
Companys gross loss on the sale of fixed maturity and equity securities amounted to $0.7 million
and $0.8 million, respectively. The fair value of the fixed maturity and equity securities at the
time of sale was $20.1 million and $4.4 million, respectively. The decision to sell these
securities was based upon managements assessment of economic conditions. The Company had no debt or equity investments in a single issuer totaling in excess of 10% of
shareholders equity at December 31, 2004. The cost and estimated market value of fixed maturity securities at December 31, 2004, by remaining
contractual maturity, are shown below (in thousands). Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or prepay obligations with
or without call or prepayment penalties. EstimatedAmortized
    
    
    MarketCost (1)
    
    
    Value (2)Due in One Year or Less
    
    $
    74,930
    
    
    $
    75,089Due After One Year Through Five Years
    
    
    293,054
    
    
    
    294,265Due After Five Years through Ten Years
    
    
    263,826
    
    
    
    266,441Due After Ten Years
    
    
    267,017
    
    
    
    272,735Asset Backed, Mortgage Pass-Through
and Collateralized Mortgage
Obligation Securities
    
    
    388,267
    
    
    
    391,174$
    1,287,094
    
    
    $
    1,299,704
   (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. The sources of net investment income for the years ended December 31, 2004, 2003, and 2002 are as
follows (in thousands): 2004
    
    
    2003
    
    
    2002Fixed Maturities
    
    $
    47,739
    
    
    $
    41,393
    
    
    $
    37,959Equity Securities
    
    
    2,046
    
    
    
    1,373
    
    
    
    706Cash and Cash Equivalents
    
    
    1,443
    
    
    
    656
    
    
    
    1,113Total Investment Income
    
    
    51,228
    
    
    
    43,422
    
    
    
    39,778Funds Held Interest Credit
    
    
    (4,853
    )
    
    
    (2,318
    )
    
    
    Investment Expense
    
    
    (2,885
    )
    
    
    (2,298
    )
    
    
    (2,262
    )Net Investment Income
    
    $
    43,490
    
    
    $
    38,806
    
    
    $
    37,516
 During the fourth quarter of 2004 the Company sold one fixed maturity security which was nonincome
producing. There were no remaining non-income producing fixed maturity securities as of December
31, 2004. Investment expense includes $0.0 million, $0.0 million, and $0.1 million, in investment
management fees paid to a director of the Company in 2004, 2003, and 2002, respectively. These
transactions are in the ordinary course of business at negotiated prices comparable to those of
transactions with other investment advisors. 56




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##### 



Realized pre-tax investment gains (losses) for the years ended December 31, 2004, 2003, and 2002
are as follows (in thousands): 2004
    
    
    2003
    
    
    2002Fixed MaturitiesGross Realized Gains
    
    $
    5,472
    
    
    $
    7,832
    
    
    $
    3,771Gross Realized Losses
    
    
    7,437
    
    
    
    (4,718
    )
    
    
    (1,952
    )Net Gain (Loss)
    
    
    (1,965
    )
    
    
    3,114
    
    
    
    1,819Equity SecuritiesGross Realized Gains
    
    
    8,340
    
    
    
    4,903
    
    
    
    177Gross Realized Losses
    
    
    5,614
    
    
    
    (7,223
    )
    
    
    (5,367
    )Net Gain (Loss)
    
    
    2,726
    
    
    
    (2,320
    )
    
    
    (5,190
    )Total Net Realized
Investment Gain (Loss)
    
    $
    761
    
    
    $
    794
    
    
    $
    (3,371
    )
 4. Restricted Assets The Insurance Subsidiaries have investments, principally U.S. Treasury securities, on deposit with
the various states in which they are licensed insurers. The carrying value of the securities on
deposit was $15.3 million and $15.5 million as of December 31, 2004 and 2003, respectively. Additionally, the Insurance Subsidiaries have investments, principally pass-through mortgage backed
and collateralized mortgage obligation securities, which collateralize the borrowings from the
Federal Home Loan Bank of Pittsburgh, see Note 9. The carrying value of these investments was
$46.8 million and $59.1 million as of December 31, 2004 and 2003, respectively. PIIC and PIC are required to hold a certain minimum amount of Federal Home Loan Bank of Pittsburgh
common stock as a requirement of membership in the Federal Home Loan Bank of Pittsburgh. The
required minimum amount of common stock is based on the amount of PIICs and PICs outstanding
borrowings plus the unused maximum borrowing capacity, as defined by the Federal Home Loan Bank of
Pittsburgh. As of December 31, 2004, the carrying value of Federal Home Loan Bank of Pittsburgh
common stock was $1.8 million. 5. Trust Accounts The Company maintains investments in trust accounts under reinsurance agreements with unrelated
insurance companies. These investments collateralize the Companys obligations under the
reinsurance agreements. The Company possesses sole responsibility for investment and reinvestment
of the trust account assets. All dividends, interest and other income, resulting from investment
of these assets are distributed to the Company on a monthly basis. At December 31, 2004 and 2003
the carrying values of these trust fund investments were $1.7 million. The Companys share of the investments in the trust accounts is included in investments and cash
equivalents, as applicable, in the accompanying consolidated balance sheets. 57




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##### 



6. Property and Equipment The following table summarizes property and equipment at December 31, 2004 and 2003 (dollars in
thousands): December 31,
    
    

    Estimated Useful2004
    
    
    2003
    
    

    Lives (Years)Furniture, Fixtures and Automobiles
    
    $
    6,027
    
    
    $
    5,225
    
    
    
    5Information Systems Technology
Costs
    
    
    18,434
    
    
    
    13,257
    
    
    
    5Software, Computer Hardware and
Telephone Equipment
    
    
    12,666
    
    
    
    11,039
    
    
    
    3  7Land and Building
    
    
    3,602
    
    
    
    3,598
    
    
    
    40Leasehold Improvements
    
    
    2,344
    
    
    
    2,186
    
    
    
    10 1243,073
    
    
    
    35,305Accumulated Depreciation and
Amortization
    
    
    (21,792
    )
    
    
    (18,484
    )Property and Equipment
    
    $
    21,281
    
    
    $
    16,821
 At December 31, 2004, costs incurred for Property and Equipment not yet placed in service was $3.6
million. Amortization of information systems technology costs was $1.9 million, $1.1 million and
$1.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. Depreciation
expense, excluding amortization of information systems technology costs, was $1.5 million, $1.6
million and $1.5 million, for the years ended December 31, 2004, 2003, and 2002, respectively. 7. Liability for Unpaid Loss and Loss Adjustment Expenses Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is summarized as follows (in
thousands): 2004
    
    
    2003
    
    
    2002Balance at January 1,
    
    $
    627,086
    
    
    $
    445,548
    
    
    $
    302,733Less Reinsurance Recoverables
    
    
    145,591
    
    
    
    85,837
    
    
    
    52,599Net Balance at January 1,
    
    
    481,495
    
    
    
    359,711
    
    
    
    250,134Incurred related to:Current Year
    
    
    440,989
    
    
    
    314,609
    
    
    
    239,834Prior Years
    
    
    35,126
    
    
    
    44,568
    
    
    
    27,599Total Incurred
    
    
    476,115
    
    
    
    359,177
    
    
    
    267,433Paid related to:Current Year
    
    
    107,129
    
    
    
    69,905
    
    
    
    58,530Prior Years
    
    
    178,762
    
    
    
    167,488
    
    
    
    99,326Total Paid
    
    
    285,891
    
    
    
    237,393
    
    
    
    157,856Net Balance at December 31,
    
    
    671,719
    
    
    
    481,495
    
    
    
    359,711Plus Reinsurance Recoverables
    
    
    324,948
    
    
    
    145,591
    
    
    
    85,837Balance at December 31,
    
    $
    996,667
    
    
    $
    627,086
    
    
    $
    445,548
 58




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##### 



During 2004 the company increased its estimated gross and net ultimate losses and loss
adjustment expenses primarily for accident years 1997 through 2002 and decreased its estimated
gross and net ultimate losses and loss adjustment expenses for accident year 2003 by the following
amounts: (In millions) Gross Basisincrease (decrease)ProfessionalLiability
    
    
    General Liability
    
    
    Commercial AutoAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Coverages
    
    
    Other
    
    
    Total2003
    
    $
    9.4
    
    
    $
    (20.9
    )
    
    $
    (24.2
    )
    
    $
    (1.8
    )
    
    $
    (37.5
    )2002
    
    $
    22.4
    
    
    $
    11.9
    
    
    $
    8.4
    
    
    $
    2.7
    
    
    $
    45.42001
    
    $
    17.3
    
    
    $
    2.0
    
    
    $
    2.4
    
    
    $
    4.4
    
    
    $
    26.12000 & Prior
    
    $
    7.8
    
    
    $
    2.3
    
    
    $
    2.6
    
    
    $
    0.6
    
    
    $
    13.3Calendar Year
    
    $
    56.9
    
    
    $
    (4.7
    )
    
    $
    (10.8
    )
    
    $
    5.9
    
    
    $
    47.3
 (In millions) Net Basisincrease (decrease)ProfessionalLiability
    
    
    General Liability
    
    
    Commercial AutoAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Coverages
    
    
    Other
    
    
    Total2003
    
    $
    2.4
    
    
    $
    (13.1
    )
    
    $
    (21.9
    )
    
    $
    (1.7
    )
    
    $
    (34.3
    )2002
    
    $
    16.8
    
    
    $
    13.3
    
    
    $
    10.2
    
    
    $
    2.9
    
    
    $
    43.22001
    
    $
    7.9
    
    
    $
    4.1
    
    
    $
    2.8
    
    
    $
    2.0
    
    
    $
    16.82000 & Prior
    
    $
    2.3
    
    
    $
    0.4
    
    
    $
    5.3
    
    
    $
    1.4
    
    
    $
    9.4Calendar Year
    
    $
    29.4
    
    
    $
    4.7
    
    
    $
    (3.6
    )
    
    $
    4.6
    
    
    $
    35.1
 The increase in 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 in 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. During 2003 the Company increased the liability for unpaid loss and loss adjustment expenses by
$51.7 million ($44.6 million net of reinsurance recoverables), primarily for accident years 1997
through 2001. This increase in the liability for unpaid loss and loss adjustment expense, net of
reinsurance recoverables, was primarily due to the following:  -
    The Company increased the estimated gross and net loss for unreported claims incurred
and related claim adjustment expenses on residual value polices issued during the years
1998 through 2002 by $38.8 million. As of December 31, 2003 the Companys total liability
for gross and net unpaid loss and loss adjustment expenses for these policies is estimated
to be $30.3 million. The residual value policies provide coverage guaranteeing the value
of a leased automobile at the lease termination, which can be up to five years from lease
inception. The increase in the estimated gross and net loss was a result of:  
    Adverse trends further deteriorating in both claims frequency and severity for
leases expiring in 2003. During the second quarter of 2003, the Company engaged a
consulting firm to aid in evaluating the ultimate potential loss exposure under
these policies. Based upon the study and subsequent evaluation by the Company the
Company changed its assumptions relating to future frequency and severity of losses,
and increased the estimate for unpaid loss and loss adjustment expenses by $33.0
million. The Company primarily attributes this deterioration to the following
factors that led to a softening of prices in the used car market subsequent to the
September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and
other incentives which increased new car sales and the volume of trade-ins, daily
rental units being sold into the market earlier and in greater numbers than
expected, further adding to the over supply of used cars and the overall uncertain
economic conditions. 59




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##### 




    The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank
(Firstar) for residual value insurance policies purchased by Firstar. Under the
terms of the agreement, the Company paid Firstar $27.5 million in satisfaction of
any and all claims made or which could have been made by Firstar under the residual
value policies. The Company increased the gross and net reserves for loss and loss
adjustment expenses from $21.7 million to $27.5 million.  -
    The Company increased its estimate for unpaid loss and loss adjustment expenses for
non residual value policies by $43.5 million ($30.8 million net of reinsurance
recoverables) primarily for accident years 1999 to 2001 and decreased its estimate of the
unpaid loss and loss adjustment expenses by $30.6 million ($25.0 million net of
reinsurance recoverables) for the 2002 accident year. The increase in accident years 1999
to 2001 is principally attributable to:  
    $19.6 million ($13.7 million net of reinsurance recoverables) of development in
professional liability products as a result of case reserves developing greater than
anticipated from the year-end 2002 ultimate loss estimate; $18.1 million ($11.1 million
net of reinsurance recoverables) of development in the automobile and general liability
coverages for commercial package products due to losses developing beyond the
underlying pricing assumptions; and $5.8 million ($6.0 million net of reinsurance
recoverables) of development in the commercial automobile excess liability insurance
and GAP commercial automobile products due to losses developing beyond the underlying
pricing assumptions.  -
    The decrease in unpaid loss and loss adjustment expenses in accident year 2002 is
principally attributable to:  
    $4.2 million ($4.7 million net of reinsurance recoverables) and $26.4 million ($20.3
million net of reinsurance recoverables) of favorable development in professional
liability products and commercial package products, respectively, due to conservative
initial loss estimates combined with favorable product pricing. During 2002, the Company increased the estimated loss for unreported claims incurred and related
claim adjustment expenses on residual value polices issued during the years 1998 through 2001 by
$30.2 million ($20.7 million net of reinsurance). As of December 31, 2001 the Company had
estimated a total liability for unpaid loss and loss adjustment expenses for these policies of
$14.5 million ($8.7 million net of reinsurance recoverables). During 2002 adverse trends further
deteriorated in both frequency and severity on leases expiring in 2002. As part of the Companys
monitoring and evaluation process, consulting firms were engaged during the third quarter of 2002
to aid in evaluating this deterioration and the ultimate potential loss exposure under these
policies. As a result of the indications and subsequent evaluation by the Company and changes in
the Companys assumptions relating to future frequency and severity of losses, the estimate for
unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this
deterioration to the following factors that led to a softening of prices in the used car market
subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and
other incentives which increased new car sales and the volume of trade-ins, daily rental units
being sold into the market earlier and in greater numbers than expected further adding to the over
supply of used cars; and the overall uncertain economic conditions. The Company also increased the liability for unpaid loss and loss adjustment expenses on the
Commercial Automobile Excess Liability Insurance (Excess Liability) product sold to rental car
companies (Commercial Lines Underwriting Segment) primarily for the 2000 and 2001 accident years by
$6.9 million ($4.9 million net of reinsurance). As of December 31, 2001 the Company had estimated
a total liability for unpaid loss and loss adjustment expenses for the Excess Liability policies
issued in these years of $23.0 million ($21.6 million net of reinsurance). Excess Liability
provides automobile liability coverage in excess of the state mandated limits which are provided by
the rental car company. During the third quarter of 2002, pursuant to a routine underwriting
review focusing on price adequacy and loss experience, the Company non-renewed a significant Excess
Liability customer as a result of an unacceptable underwriting risk profile. This adverse loss
development was primarily due to pricing inadequacy and the adverse loss experience of this
customer. Additionally, the Company has experienced a delay in both the reporting of claims and
the claim litigation discovery process as a result of this policyholder and another Excess
Liability policyholder filing for Chapter 11 during the third quarter 2002 and fourth quarter 2001,
respectively. 8. Funds Held Payable to Reinsurer Effective April 1, 2003, the Company entered into a quota share reinsurance agreement. Under this
agreement, the Company ceded 22% of its net written premiums and loss and loss adjustment expenses
for substantially all of the Companys lines of 60




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##### 



business on policies effective April 1, 2003 through December 31, 2003, and 10% of its commercial
and specialty lines net written premiums and loss and loss adjustment expenses for policies
effective January 1, 2004 and thereafter. The Company receives a provisional commission of 33.0%
adjusted pro-rata based upon the ratio of losses incurred to premiums earned. Pursuant to this
reinsurance agreement the Company withholds the reinsurance premium due the reinsurers reduced by
the reinsurers expense allowance, and the Companys ceding commission allowance in a Funds Held
Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by
ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest
credit. In addition, the agreement allows for a profit commission to be paid to the Company upon
commutation. Activity for the Funds Held Payable to Reinsurer is summarized as follows (in
thousands): As of and For the
    
    
    As of and For theYear Ended December
    
    
    Year Ended December31, 2004
    
    
    31, 2003Funds Held Payable to Reinsurer Balance at Beginning of
Period
    
    $
    110,011
    
    
    $
    Net Written Premiums Ceded
    
    
    94,474
    
    
    
    199,358Reinsurer Expense Allowance
    
    
    (3,318
    )
    
    
    (7,376
    )Provisional Commission
    
    
    (48,971
    )
    
    
    (73,933
    )Paid Loss and Loss Adjustment Expenses
    
    
    (25,585
    )
    
    
    (10,701
    )Interest Credit
    
    
    4,853
    
    
    
    2,318Other
    
    
    (345
    )
    
    
    345Subtotal Activity
    
    
    21,108
    
    
    
    110,011Funds Held Payable to Reinsurer Balance at End of Period
    
    $
    131,119
    
    
    $
    110,011
 The Company has also accrued a profit commission receivable, which is recorded in Other Assets,
based upon the experience of the underlying business ceded to this reinsurance agreement, in the
amounts of $16.7 million and $5.4 million for the year ended December 31, 2004 and 2003,
respectively. The profit commission reduces ceded written and earned premiums and increases net
written and earned premiums. 9. Loans Payable The Company had aggregate borrowings of $33.4 million and $48.5 million as of December 31, 2004 and
2003, respectively, from the Federal Home Loan Bank of Pittsburgh. These borrowings bear interest
at adjusted LIBOR and mature twelve months or less from inception. The proceeds from these
borrowings are invested in asset backed and collateralized mortgage obligation securities to
achieve a positive spread between the rate of interest on these securities and the borrowing rates.
The weighted-average interest rate on borrowings outstanding as of December 31, 2004 was 2.52%. 61




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##### 



10. Income Taxes The composition of deferred tax assets and liabilities and the related tax effects as of December
31, 2004 and 2003 are as follows (in thousands): December 31,2004
    
    
    2003Assets:Excess of Tax Over Financial Reporting Earned Premium
    
    $
    30,862
    
    
    $
    21,142Loss Reserve Discounting
    
    
    27,376
    
    
    
    19,868Excess of Financial Reporting Over Tax Net Realized Investment Losses
    
    
    1,855
    
    
    
    6,720Excess of Financial Reporting Over Tax Guaranty Fund Expense
    
    
    1,382
    
    
    
    1,370Deferred Compensation
    
    
    616
    
    
    
    471Other Assets
    
    
    85
    
    
    
    1,083Total Assets
    
    
    62,176
    
    
    
    50,654Liabilities:Deferred Acquisition Costs
    
    
    32,077
    
    
    
    19,701Unrealized Appreciation of Securities
    
    
    10,660
    
    
    
    9,001Property and Equipment Basis
    
    
    1,919
    
    
    
    985Excess of Financial Reporting Over Tax Net Investment Income
    
    
    1,074
    
    
    
    892Other Liabilities
    
    
    2,050
    
    
    
    1,928Total Liabilities
    
    
    47,780
    
    
    
    32,507Net Deferred Income Tax Asset
    
    $
    14,396
    
    
    $
    18,147
 The following table summarizes the differences between the Companys effective tax rate for
financial statement purposes and the federal statutory rate (dollars in thousands): Amount of Tax
    
    
    PercentFor the year ended December 31, 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
    %For the year ended December 31, 2002:Federal Tax at Statutory Rate
    
    $
    17,170
    
    
    
    35
    %Nontaxable Municipal Bond Interest and Dividends Received Exclusion
    
    
    (2,525
    )
    
    
    (5
    )Other, Net
    
    
    657
    
    
    
    1Income Tax Expense
    
    $
    15,302
    
    
    
    31
    %
 Philadelphia Insurance has entered into tax sharing agreements with each of its subsidiaries.
Under the terms of these agreements, the income tax provision is computed as if each subsidiary
were filing a separate federal income tax return, including adjustments for the income tax effects
of net operating losses and other special tax attributes, regardless of whether those attributes
are utilized in the Companys consolidated federal income tax return. 62




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##### 



11. Shareholders Equity Basic and diluted earnings per share are calculated as follows (dollars and share data in
thousands, except per share data): As of and For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Weighted-Average Common Shares Outstanding
    
    
    22,155
    
    
    
    21,909
    
    
    
    21,611Weighted-Average Share Equivalents Outstanding
    
    
    1,152
    
    
    
    751
    
    
    
    682Weighted-Average Shares and Share Equivalents Outstanding
    
    
    23,307
    
    
    
    22,660
    
    
    
    22,293Net Income
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753Basic Earnings Per Share
    
    $
    3.78
    
    
    $
    2.84
    
    
    $
    1.56Diluted Earnings Per Share
    
    $
    3.59
    
    
    $
    2.74
    
    
    $
    1.51
 The number of weighted share equivalents not included in the weighted-average share equivalents
outstanding calculation amounted to 24, 2,730 and 9,620 for the years ended December 31, 2004, 2003
and 2002, respectively. Under the Companys stock option plan, stock options may be granted for the purchase of common
stock at a price not less than the fair market value on the date of grant. Options are primarily
exercisable after the expiration of five years following the grant date. Under this plan, as
amended, the Company has reserved 5,500,000 shares of common stock for issuance pursuant to options
granted under the plan. As of December 31, 2004, 1,645,975 shares of common stock remain reserved
for future issuance pursuant to options granted under this plan. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure
(SFAS No. 148) which amends SFAS Statement No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). The objective of SFAS No. 148 is to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 does not change the provisions of SFAS No. 123 that permit entities to
continue to apply the intrinsic value method of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25). In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company continues to maintain its accounting for
stock-based compensation in accordance with APB No. 25, but has adopted the disclosure provisions
of SFAS No. 148. The following table presents certain information regarding the Companys stock option plan. 63




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##### 



2004
    

    
    2003
    
    
    2002Exercise Price
    
    
    
    
    
    
    Exercise Price
    
    
    
    
    
    
    Exercise PriceOptions
    
    
    Per Option(1)
    
    
    Options
    
    
    Per Option(1)
    
    
    Options
    
    
    Per Option(1)Outstanding at beginning
of year
    
    
    2,234,700
    
    
    $
    27.55
    
    
    
    1,890,075
    
    
    $
    24.82
    
    
    
    1,453,075
    
    
    $
    19.32Granted
    
    
    480,250
    
    
    $
    53.10
    
    
    
    484,000
    
    
    $
    36.60
    
    
    
    549,500
    
    
    $
    36.14Exercised
    
    
    (67,250
    )
    
    $
    17.12
    
    
    
    (106,375
    )
    
    $
    19.34
    
    
    
    (107,000
    )
    
    $
    8.07Canceled
    
    
    (4,000
    )
    
    $
    44.91
    
    
    
    (33,000
    )
    
    $
    30.68
    
    
    
    (5,500
    )
    
    $
    29.60Outstanding at end of year
    
    
    2,643,700
    
    
    $
    32.59
    

    
    
    2,234,700
    
    
    $
    27.55
    
    
    
    1,890,075
    
    
    $
    24.82Exercisable at end of year
    
    
    454,450
    
    
    
    
    
    
    
    323,200
    
    
    
    
    
    
    
    194,950Weighted-average fair
value of options
granted during the
year (2)
    
    
    
    
    
    $
    18.63
    
    
    
    
    
    
    $
    11.27
    
    
    
    
    
    
    $
    14.46
 Outstanding
    
    
    Exercise Price
    
    
    Remaining
    
    
    
    
    
    
    Exercise PriceAt December
    
    
    Per
    
    
    Contractual Life
    
    
    Exercisable at
    
    
    PerRange of Exercise Prices
    
    31, 2004
    
    
    Option(1)
    
    

    (Years)(1)
    
    
    December 31, 2004
    
    
    Option(1)$8.13 to $9.31
    
    
    176,800
    
    
    $
    9.05
    
    
    
    1.4
    
    
    
    176,800
    
    
    $
    9.05$13.88 to $19.75
    
    
    362,500
    
    
    $
    14.97
    
    
    
    4.8
    
    
    
    185,000
    
    
    $
    15.17$20.50 to $27.00
    
    
    505,650
    
    
    $
    25.33
    
    
    
    5.8
    
    
    
    64,650
    
    
    $
    29.40$27.31 to $34.63
    
    
    395,000
    
    
    $
    30.60
    
    
    
    7.6
    
    
    
    
    
    
    
    $36.05 to $57.43
    
    
    1,203,750
    
    
    $
    45.06
    
    
    
    8.5
    
    
    
    28,000
    
    
    $
    38.482,643,700
    
    
    $
    32.59
    
    
    
    
    
    
    
    454,450
    
    
    $
    16.25
   (1)
    
    Weighted Average.(2)
    
    The Company uses the Black-Scholes pricing model to calculate the fair value of the
options awarded as of the date of grant. The Company has established the following stock purchase plans: Employee Stock Purchase Plan (the Stock Purchase Plan): The aggregate maximum number of shares
that may be issued pursuant to the Stock Purchase Plan as amended is 1,000,000. Shares may be
purchased under the Stock Purchase Plan by eligible employees during designated one-month offering
periods established by the Compensation Committee of the Board of Directors at a purchase price of
the lesser of 85% of the fair market value of the shares on the first business day of the offering
period or the date the shares are purchased. The purchase price of shares may be paid by the
employee over six years pursuant to the execution of a promissory note. The promissory note(s) are
collateralized by such shares purchased under the Stock Purchase Plan and are interest free. Under
the Stock Purchase Plan, the Company issued 46,666 and 36,265 shares in 2004 and 2003,
respectively. The weighted-average fair value of those purchase rights granted in 2004 and 2003
was $8.37 and $6.00, respectively. The Nonqualified Employee Stock Purchase Plan (the Nonqualified Stock Plan): The aggregate
maximum number of shares that may be issued pursuant to the Nonqualified Stock Plan is 1,000,000.
Shares may be purchased under the Nonqualified Stock Plan by eligible employees during designated
one-month offering periods established by the Compensation Committee of the Board of Directors at a
purchase price of the lesser of 85% of the fair market value of the shares on the first business
day of the offering period or the date the shares are purchased. The purchase price of shares may
be paid by the employee over nine years pursuant to the execution of a promissory note. The
promissory note(s) are collateralized by such shares purchased under the Nonqualified Stock Plan
and are interest free. Under the Nonqualified Stock Plan, the Company issued 130,274 and 5,939
shares in 2004 and 2003, respectively. The weighted-average fair value of those purchase rights
granted in 2004 and 2003 was $8.37 and $6.00, respectively. 64




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Directors Stock Purchase Plan (Directors Plan): The Directors Plan has been established for the
benefit of non-employee Directors. The aggregate maximum number of shares that may be issued
pursuant to the Directors Plan is 50,000. Non-employee Directors, during monthly offering
periods, may designate a portion of his or her fees to be used for the purchase of shares under the
terms of the Directors Plan at a purchase price of the lesser of 85% of the fair market value of
the shares on the first business day of the offering period or the date the shares are purchased.
Under the Directors Plan, the Company issued 5,209 and 3,325 shares in 2004 and 2003, respectively.
The weighted-average fair value of those purchase rights granted in 2004 and 2003 was $8.43 and
$5.96, respectively. Preferred Agents Stock Purchase Plan (Preferred Agents Plan): The Preferred Agents Plan has been
established for the benefit of eligible Preferred Agents. The aggregate maximum number of shares
that may be issued pursuant to the Preferred Agents Plan is 200,000. Eligible Preferred Agents
during designated offering periods may either remit cash or have the Company withhold from
commissions or other compensation amounts to be used for the purchase of shares under the terms of
the Preferred Agents Plan at a purchase price of the lesser of 85% of the fair market value of the
shares on the first business day of the offering period or the date the shares are purchased.
Under the Preferred Agents Plan, the Company issued 20,999 and 7,056 shares in 2004 and 2003,
respectively. The weighted-average fair value of those purchase rights granted in 2004 and 2003
was $8.37 and $6.00, respectively. The fair value of options at date of grant was estimated using the Black-Scholes valuation model
with the following weighted-average assumptions: 2004
    
    
    2003
    
    
    2002Expected Stock Volatility
    
    
    28.3
    %
    
    
    23.2
    %
    
    
    33.0
    %Risk-Free Interest Rate
    
    
    3.8
    %
    
    
    3.1
    %
    
    
    4.1
    %Expected Option Life (Years)
    
    
    6.0
    
    
    
    6.0
    
    
    
    6.0Expected Dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 12. Stock Repurchase Authorization During the three years ended December 31, 2004, the Company repurchased 0.1 million shares for
approximately $2.3 million under its stock repurchase authorization. At December 31, 2004, $45.0
million remains under a $75.3 million stock purchase authorization. 13. Reinsurance In the normal course of business, the Company has entered into various reinsurance contracts with
unrelated reinsurers. The Company participates in such agreements for the purpose of limiting loss
exposure and diversifying business. Reinsurance contracts do not relieve the Company from its
obligation to policyholders. The loss and loss adjustment expense reserves ceded under such arrangements were $324.9 million and
$145.6 million at December 31, 2004 and 2003, respectively. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The
percentage of ceded reinsurance reserves (excluding reserves ceded to voluntary and mandatory pool
mechanisms) that are with companies rated A (Excellent) or better by A.M. Best Company is 95.8%
and 99.3% as of December 31, 2004 and 2003, respectively. Additionally, approximately 1%, 1% and
1% of the Companys net written premiums for the years ended December 31, 2004, 2003, and 2002,
respectively, were assumed from an unrelated reinsurance company. 65




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##### 



As of December 31, 2004, the Company had aggregate unsecured reinsurance receivables that exceeded
3% of shareholders equity from the following reinsurers. Unsecured reinsurance receivables include
amounts receivable for paid and unpaid losses and loss adjustment expenses and unearned premium
less reinsurance receivables secured by collateral. Reinsurance
    
    A.M. Best RatingsReceivables
    
    (As of December 31, 2004)(Dollars in millions)Swiss Reinsurance America Corporation
    
    $
    66.4
    
    
    A+American Reinsurance Company
    
    
    23.3
    
    
    A+Empire Fire & Marine Insurance
Company
    
    
    22.2
    
    
    ALiberty Mutual Insurance Company
    
    
    21.2
    
    
    A$
    133.1
 Approximately $14.5 million of the Companys reinsurance receivable balances at December 31, 2004
are with Converium Reinsurance North American Inc. (CRNA). During the third quarter of 2004,
Converium AG (Switzerland), CRNAs parent company, placed CRNA
into an orderly runoff, of the $14.5
million reinsurance receivable balances with CRNA, $2.5 million are receivables on paid losses and
$12.0 million are receivables on unpaid loss and loss adjustment
expense. The Company is monitoring CRNAs ability
to pay claims, and at this time, believes, that the amounts with CRNA will be
collectible. The effect of reinsurance on premiums written and earned is as follows (in thousands): Written
    
    
    EarnedFor 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
    %For the Year Ended December 31, 2002:Direct Business
    
    $
    660,789
    
    
    $
    550,443Reinsurance Assumed
    
    
    2,950
    
    
    
    5,042Reinsurance Ceded
    
    
    144,032
    
    
    
    134,299Net Premiums
    
    $
    519,707
    
    
    $
    421,186Percentage Assumed of Net
    
    
    0.6
    %
    
    
    1.2
    %
 14. Compensation Plans The Company has a defined contribution Profit Sharing Plan, which includes a 401K feature, covering
substantially all employees. Under the plan, employees may contribute up to an annual maximum of
the lesser of 15% of eligible compensation or the applicable Internal Revenue Code limit in a
calendar year. The Company makes a matching contribution in an amount equal to 75% of the
participants pre-tax contribution, subject to a maximum of 6% of the participants eligible
compensation. The Company may also make annual discretionary profit sharing contributions at each
plan year end. Participants are fully vested in the Companys contribution upon completion of four
years of service. The Companys total contributions to the plan were $1.2 million, $0.9 million
and $0.8 million in 2004, 2003, and 2002, respectively. 66




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##### 



The Company sponsors an unfunded nonqualified key employee deferred compensation plan. Under the
plan deferred compensation benefits are provided through deferrals of base salary and bonus
compensation (Employee Deferrals) and discretionary contributions by the Company (Employer
Contributions) for a select group of management and highly compensated employees of the Company
and its subsidiaries. Each participant is permitted to specify an investment or investments from
among permissible investments which shall be the basis for determining the gain or loss adjustment
applicable to such participants plan deferral account. A participants interest in the portion of
his or her plan deferral account that is attributable to Employee Deferrals are fully vested at all
times. That portion of a participants plan deferral account attributable to Employer
Contributions generally will vest over the course of a five year period beginning on the last day
of the first year after the plan year for which the Employer Contribution was made. The amounts in
each participants plan deferral account represent an obligation of the Company to pay the
participant at some time in the future. The Company had a deferred compensation obligation
pursuant to the plan amounting to $3.2 million and $1.8 million as of December 31, 2004 and 2003,
respectively. The Company also sponsors an unfunded nonqualified executive deferred compensation plan. Under the
plan deferred compensation benefits are provided by the Company through deferrals of base salary
and bonus compensation for management and highly compensated executives designated by the Board of
Directors. Each participant is permitted to specify an investment or investments from among
permissible investments which shall be the basis for determining the gain or loss adjustment
applicable to such participants plan deferral account. A participants benefit under the plan is
the amount of such participants plan deferral amount. The Company had a deferred compensation
obligation pursuant to the plan amounting to $1.1 million and $0.8 million as of December 31, 2004
and 2003, respectively. 15. Commitments and Contingencies The Company is subject to routine legal proceedings in connection with its property and casualty
insurance business. The Company also is not involved in any pending or threatened legal or
administrative proceedings which management believes can reasonably be expected to have a material
adverse effect on the Companys financial condition or results of operations. The Company currently leases office space to serve as its headquarters location and 36 field
offices for its production underwriters. In addition, the Company leases certain computer
equipment. Rental expense for these operating leases was $4.0 million, $3.5 million and $3.1
million for the years ended December 31, 2004, 2003, and 2002, respectively. The future minimum rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2004 were as follows (in
thousands): Year Ending December 31:2005
    
    $
    5,2202006
    
    
    4,8482007
    
    
    4,3872008
    
    
    1,3862009 and Thereafter
    
    
    572Total Minimum Payments Required
    
    $
    16,413
 Under the terms of an employment agreement with James J. Maguire, Philadelphia Insurances
Chairman, the Company is required to pay a bonus of two million dollars ($2,000,000) in the event
that the closing price on any five consecutive trading days prior to May 1, 2009 of Philadelphia
Insurances common stock is equal to or greater than $80 per share (such price shall be
appropriately adjusted in the event of any stock split, stock dividend or stock combinations
affecting the shares of Philadelphia Insurances common stock generally) and at such time the
employee is still an employee of MIA or any affiliate thereof. Notwithstanding the foregoing, if
such employment is terminated subsequent to a Hostile Change Of Control, as that term is defined in
the employment agreement, then the employee need not be employed by Philadelphia Insurance or an
affiliate when the closing price reaches such amount. The employee would also receive such bonus
if prior to May 1, 2009 there has been a Hostile Change of Control and subsequent thereto
Philadelphia Insurances common stock is no longer publicly traded. At December 31, 2004 the Company has open commitments of $2.9 million under certain limited
partnership and information technology development agreements. 67




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##### 



16. Summary of Quarterly Financial Information  Unaudited The following quarterly financial information for each of the three months ended March 31, June 30,
September 30 and December 31, 2004 and 2003 is unaudited. However, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary to present fairly the
results of operations for such periods, have been made for a fair presentation of the results shown
(in thousands, except share and per share data): Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2004 (1)(2)
    
    
    2004 (1)(2)
    
    
    2004 (1)(2)
    
    
    2004 (1)(2)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)
    
    $
    12,428
    
    
    $
    26,667
    
    
    $
    (2,095
    )
    
    $
    32,351Basic Earnings (Loss) Per Share
    
    $
    1.22
    
    
    $
    1.21
    
    
    $
    (0.09
    )
    
    $
    1.45Diluted Earnings (Loss) Per Share
    
    $
    1.16
    
    
    $
    1.15
    
    
    $
    (0.09
    )
    
    $
    1.38Weighted-Average Common Shares
Outstanding
    
    
    22,018,270
    
    
    
    22,111,232
    
    
    
    22,230,729
    
    
    
    22,257,090Weighted-Average Share Equivalents
Outstanding
    
    
    1,082,611
    
    
    
    1,081,954
    
    
    
    1,132,451
    
    
    
    1,258,771Weighted-Average Shares and Share
Equivalents Outstanding
    
    
    23,100,881
    
    
    
    23,193,186
    
    
    
    23,363,180
    
    
    
    23,515,861
 March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2003(4)
    
    
    2003(3)(4)
    
    
    2003(3)(4)
    
    
    2003(3)(4)Net Earned Premiums
    
    $
    148,362
    
    
    $
    123,349
    
    
    $
    146,676
    
    
    $
    156,131Net Investment Income
    
    $
    9,805
    
    
    $
    9,370
    
    
    $
    9,173
    
    
    $
    10,458Net Realized Investment Gain (Loss)
    
    $
    (1,133
    )
    
    $
    (650
    )
    
    $
    474
    
    
    $
    2,103Net Loss and Loss Adjustment Expenses
    
    $
    90,360
    
    
    $
    93,026
    
    
    $
    79,405
    
    
    $
    96,386Acquisition Costs and Other
Underwriting Expenses
    
    $
    46,420
    
    
    $
    32,158
    
    
    $
    41,542
    
    
    $
    42,792Net Income
    
    $
    13,233
    
    
    $
    4,863
    
    
    $
    23,575
    
    
    $
    20,517Basic Earnings Per Share
    
    $
    0.61
    
    
    $
    0.22
    
    
    $
    1.08
    
    
    $
    0.93Diluted Earnings Per Share
    
    $
    0.59
    
    
    $
    0.22
    
    
    $
    1.04
    
    
    $
    0.89Weighted-Average Common Shares
Outstanding
    
    
    21,865,269
    
    
    
    21,860,396
    
    
    
    21,913,053
    
    
    
    21,994,960Weighted-Average Share Equivalents
Outstanding
    
    
    562,552
    
    
    
    706,608
    
    
    
    787,627
    
    
    
    981,017Weighted-Average Shares and Share
Equivalents Outstanding
    
    
    22,427,821
    
    
    
    22,567,004
    
    
    
    22,700,680
    
    
    
    22,975,977
   (1)
    
    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.(2)
    
    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. 68




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##### 



(3)
    Net Earned Premiums for the three months ended June 30, 2003, September 30, 2003 and
December 31, 2003 includes accrued profit commissions on certain reinsurance contracts of
$1.9 million, $4.0 million and $4.6 million, respectively.(4)
    Net Realized Investment Gain (Loss) for the three months ended March 31, 2003, June 30,
2003, September 30, 2003 and December 31, 2003 includes non-cash realized losses of $1.5
million, $1.7 million, $0.4 million and $6.7 million, respectively, as a result of
impairment evaluations. 17. Segment Information The Companys operations are classified into three reportable business segments which are organized
around its three underwriting divisions: The Commercial Lines Underwriting Group which has
underwriting responsibility for the Commercial Automobile and Commercial Property and Commercial
multi-peril package insurance products; The Specialty Lines Underwriting Group which has
underwriting responsibility for the professional liability insurance products; and The Personal
Lines Group which designs, markets and underwrites personal property and casualty insurance
products for the Manufactured Housing and Homeowners markets. Each business segments
responsibilities include: pricing, managing the risk selection process, and monitoring the loss
ratios by product and insured. The reportable segments operate solely within the United States and
have not been aggregated. The segments follow the same accounting policies used for the Companys consolidated financial
statements as described in the summary of significant accounting policies. Management evaluates a
segments performance based upon premium production and the associated loss experience which
includes paid losses, an amount determined on the basis of claim adjusters evaluation with respect
to insured events that have occurred and an amount for losses incurred that have not been reported.
Investments and investment performance including investment income and net realized investment
gain (loss); acquisition costs and other underwriting expenses including commissions, premium taxes
and other acquisition costs; and other operating expenses are managed at a corporate level by the
corporate accounting function in conjunction with other corporate departments and are included in
Corporate. Following is a tabulation of business segment information for each of the past three years.
Corporate information is included to reconcile segment data to the consolidated financial
statements (in thousands): 69




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##### 



Commercial
    
    
    Specialty
    
    
    PersonalLines
    
    
    Lines
    
    
    Lines
    
    
    Corporate
    
    
    Total2004: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
    
    
    $
    1,870,9412002:Gross Written Premiums
    
    $
    473,100
    
    
    $
    110,176
    
    
    $
    80,463
    
    
    $
    
    
    
    $
    663,739Net Written Premiums
    
    $
    380,991
    
    
    $
    101,623
    
    
    $
    37,093
    
    
    $
    
    
    
    $
    519,707Revenue:Net Earned Premiums
    
    $
    297,635
    
    
    $
    85,030
    
    
    $
    35,057
    
    
    $
    
    
    
    $
    417,722Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,516
    
    
    
    37,516Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,371
    )
    
    
    (3,371
    )Other Income
    
    
    
    
    
    
    
    
    
    
    645
    
    
    
    266
    
    
    
    911Total Revenue
    
    
    297,635
    
    
    
    85,030
    
    
    
    35,702
    
    
    
    34,411
    
    
    
    452,778Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    202,604
    
    
    
    43,310
    
    
    
    21,519
    
    
    
    
    
    
    
    267,433Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,918
    
    
    
    129,918Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    6,242
    
    
    
    6,372Total Losses and Expenses
    
    
    202,604
    
    
    
    43,310
    
    
    
    21,649
    
    
    
    136,160
    
    
    
    403,723Income Before Income Taxes
    
    
    95,031
    
    
    
    41,720
    
    
    
    14,053
    
    
    
    (101,749
    )
    
    
    49,055Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,302
    
    
    
    15,302Net Income
    
    $
    95,031
    
    
    $
    41,720
    
    
    $
    14,053
    
    
    $
    (117,051
    )
    
    $
    33,753Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    135,753
    
    
    $
    1,222,581
    
    
    $
    1,358,334
 70




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##### 



18. Subsequent Event During February 2005, the Company entered into a Reinsurance Commutation and Release Agreement
effective as of January 1, 2005 with respect to the 2003 Whole Account Net Quota Share Reinsurance
contract. As a result of this commutation, the Company reduced its Funds Held Payable to Reinsurer
liability by approximately $76.7 million, offset by an increase to its net Unpaid Loss and Loss
Adjustment Expenses by $64.3 million, an increase to its net Unearned Premiums by $0.2 million and
a reduction to its previously recorded profit commission receivable by approximately $12.2 million,
in each case effective as of January 1, 2005. No gain or loss was realized as a result of this
commutation. 71




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##### 



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE  Not applicable. Item 9A. CONTROLS AND PROCEDURES  (a)
    Evaluation of Disclosure Controls and Procedures. The Companys disclosure
controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the Exchange Act), are designed with the objective
of providing reasonable assurance that information required to be disclosed in the
Companys reports filed or submitted under the Exchange Act, such as this report, is
recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission (the SEC). In designing
and evaluating the Companys disclosure controls and procedures, management recognizes
that any disclosure controls and procedures, no matter how well designed and operated,
can provide only reasonable, rather than absolute, assurance of achieving the desired
control objectives.An evaluation was performed 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, 2004. Our
managements assessment of the effectiveness of internal control over financial reporting
as of December 31, 2004 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. Item 9B. OTHER INFORMATION  Not applicable. 72




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##### 



PART III Certain information required by Part III is omitted from this Report in that the Company will file
a definitive proxy statement pursuant to Regulation 14A (the Proxy Statement) not later than 120
days after the end of the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Companys director and executive officers required by this
Item is incorporated by reference to the Proxy Statement under the caption
Management-Directors and Executive Officers. Item 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Proxy Statement
under the captions Executive Compensation, Stock Option Grants, Stock Option Exercises
and Holdings and Directors Compensation. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS  (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 The following table sets forth certain information relating to the Companys equity
compensation plans as of December 31, 2004: Number ofsecurities to beissued upon
    
    Weighted-average
    
    Number of securities remainingexercise of
    
    exercise price of
    
    available for future issuanceoutstanding
    
    outstanding
    
    under equity compensation plansoptions, warrants
    
    options, warrants
    
    (excluding securities reflectedand rights
    
    and rights
    
    in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    2,643,700
    
    $32.59
    
    2,621,325
(1)Equity compensation
plans not approved
by security holders
    


    


    
    147,451
(2)Total
    
    2,643,700
    
    $32.59
    
    2,768,776
   (1) Includes 622,505, 342,532, 1,645,975 and 10,313 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, Employee Stock Option Plan and
Directors Stock Purchase Plan, respectively.(2) 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 73




---



##### 



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.(1) Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Proxy Statement
under the caption Additional Information Regarding the Board. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to the Proxy Statement
under the caption Principal Accountant Fees and Services. 74




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##### 



PART IV Item 15.  EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES (a) Financial Statements and Exhibits 1. The Financial Statements and Financial Statement Schedules listed in the accompanying
index on page 43 are filed as part of this Report. 2. Exhibits: The Exhibits listed below are filed as part of, or incorporated by
reference into, this Report. Exhibit No.
    
    
    
    Description3.1
    
    A
    
    Articles of Incorporation of Philadelphia Insurance, as amended to date.3.1.1
    
    A
    
    Amendment to Articles of Incorporation of Philadelphia Insurance.3.1.2
    
    L
    
    Amendment to Articles of Incorporation, Philadelphia Consolidated Holding Corp.3.2
    
    A
    
    By-laws of Philadelphia Insurance, as amended to date.10.1
    
    A(1)
    
    Amended and Restated Key Employees Stock Option Plan.10.1.1
    
    H (1)
    
    Amended and Restated Key Employees Stock Option Plan.10.2
    
    A(1)
    
    Key Employees Stock Bonus Plan.10.2.1
    
    A (1)
    
    Excerpt of Board of Directors and Shareholders Resolution amending Key Employees Stock
Bonus Plan.10.3
    
    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.10.4
    
    A
    
    E & O Insurance Policy effective July 20, 1993.10.4.1
    
    G
    
    E & O Insurance Policy effective July 20, 1996.10.4.2
    
    I
    
    E & O Insurance Policy effective July 20, 1997.10.5
    
    A
    
    Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from the Minutes of the Board of Directors Meeting dated
November 16, 1992.10.6
    
    A (1)
    
    Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements concerning
options.10.7
    
    A (1)
    
    James J. Maguire Stock Option Agreements.10.7.1
    
    C(1)
    
    Amendment to James J. Maguire Stock Option Agreements.10.8
    
    A(1)
    
    Wheelways Salary Savings Plus Plan Summary Plan Description.10.9
    
    A
    
    Key Man Life Insurance Policies on James J. Maguire10.10
    
    A
    
    Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC.10.11
    
    A
    
    Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date.10.12
    
    A
    
    Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to date.10.13
    
    A (1)
    
    Management Agreement dated May 20, 1991, between PIIC and MIA, as amended to date.10.13.1
    
    G (1)
    
    Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996.10.14
    
    A(1)
    
    Management Agreement dated October 23, 1991, between PIC and MIA, as amended to date.10.14.1
    
    G (1)
    
    Management Agreement dated October 23, 1991, between PIC and MIA, as amended
September 25, 1996.10.15
    
    A
    
    General Mutual Release and Settlement of All Claims dated July 2, 1993, with the Liquidator of Integrity Insurance Company.10.16
    
    A
    
    Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18, 1993.10.17
    
    B
    
    Lease tracking portfolio assignment agreement.10.18
    
    D (1)
    
    James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and Joint and Last Survivor Flexible Premium Adjustable
Life Insurance Policy Survivorship Life.10.19
    
    E
    
    Allenbrook Software License Agreement, dated September 26, 1995.10.20
    
    E
    
    Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A.10.21
    
    E
    
    Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America.10.22
    
    F (1)
    
    Employee Stock Purchase Plan.
 75




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##### 



Exhibit No.
    
    
    
    Description10.23
    
    F (1)
    
    Cash Bonus Plan.10.24
    
    F (1)
    
    Executive Deferred Compensation Plan.10.25
    
    H (1)
    
    Directors Stock Purchase Plan10.26
    
    I
    
    Lease Agreement dated May 8, 1997 with Bala Plaza, Inc.10.27
    
    I
    
    Casualty Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Property
Per Risk Excess of Loss Reinsurance Agreement effective January 1, 1997 and Property Facultative Excess of Loss Automatic
Reinsurance Agreement effective January 1, 1997.10.28
    
    I
    
    Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement effective January 1,
1997, together with Second Casualty Excess of Loss Reinsurance
Agreement, effective January 1, 1997.10.29
    
    J
    
    Inspire Software License Agreement, dated December 31, 1998.10.30
    
    J
    
    Lease Agreement dated July 6, 1998 with Bala Plaza, Inc.10.31
    
    K
    
    Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc.10.32
    
    L
    
    Philadelphia Insurance Companies Non Qualified Employee Stock Purchase Plan  incorporated by
reference to Exhibit 4 to Registration Statement on Form S-8 (file no. 333-91216) filed with the
Securities and Exchange Commission on June 26, 2002.10.33
    
    L
    
    Philadelphia Consolidated Holding Corp. Employees Stock Option Plan (Amended and Restated
Effective March 24, 2002)  incorporated by reference to Exhibit 4 to Registration Statement on
Form S-8 (file no. 333-91218) filed with the Securities and Exchange Commission on June 26, 2002.10.34
    
    L
    
    Philadelphia Insurance Companies Key Employee Deferred Compensation Plan  incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-8 (file no. 333-90534) filed with the
Securities and Exchange Commission on June 14, 2002.10.35
    
    L (1)
    
    Employment Agreement with James J. Maguire, Jr. effective June 1, 2002.10.36
    
    L (1)
    
    Employment Agreement with Sean S. Sweeney effective June 1, 2002.10.37
    
    L (1)
    
    Employment Agreement with Craig P. Keller effective June 1, 2002.10.38
    
    M (1)
    
    Employment Agreement with James J. Maguire effective June 1, 2002.10.39
    
    M (1)
    
    Employment Agreement with Christopher J. Maguire effective June 1, 2002.10.40
    
    N
    
    AQS, Inc. Software License Agreement, dated October 1, 2002.10.41
    
    N(1)
    
    Employment Agreement with P. Daniel Eldridge effective October 1, 2002.10.42
    
    O
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract Effective June 1, 2003.10.43
    
    P
    
    Quota Share Reinsurance Contract with Swiss Reinsurance America Corporation effective May 15, 2003
covering policies within the Custom Harvest Program.10.44
    
    P
    
    Excess of Loss Agreement of Reinsurance No. 9034 with General Reinsurance Corporation effective
January 1, 2003.10.45
    
    P
    
    Addendum No. 3 to the Casualty Excess of Loss Reinsurance Agreement No. TC988A, B with Swiss
Reinsurance American Corporation effective January 1, 2003.10.46
    
    P
    
    Property Excess of Loss Agreement of Reinsurance No. TP1600E with Swiss Reinsurance America
Corporation effective January 1, 2003.10.47
    
    P
    
    Casualty Excess of Loss Reinsurance Contract with American Re-Insurance Company, Converium
Reinsurance (North America) Inc., Endurance Specialty Insurance Limited, Liberty Mutual Insurance
Company effective January 1, 2003.10.48
    
    Q
    
    Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance,
Ltd. effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015555 and
Philadelphia Indemnity Insurance Company Master Policy PHUB015555-01.10.49
    
    Q
    
    Casualty Semi-Automatic Excess of
Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd. effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015557 and
Philadelphia Indemnity Insurance Company Master Policy PHUB015557-01.10.50
    
    Q
    
    Non Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing Reinsurer (s)
Executing the Interests and Liabilities Agreement (s) effective June 1, 2003.10.51
    
    Q
    
    Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing Reinsurer (s)
Executing the Interests and Liabilities Agreement (s) effective June 1, 2003.10.52
    
    Q
    
    Excess Catastrophe Reinsurance Contract with Federal Insurance Company through Chubb Re, Inc.
effective June 1, 2003.10.53
    
    Q
    
    Whole Account Net Quota Share Reinsurance Contract with Federal Insurance Company through Chubb Re,
Inc. and Swiss Reinsurance America Corporation effective April 1, 2003.
 76




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##### 



Exhibit No.
    
    
    
    Description10.54
    
    R
    
    Whole Account Net Quota Share Reinsurance Contract effective as of January 1, 2004 (Addendum No. 1)10.55
    
    R
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective as of June 1, 200410.56
    
    R
    
    Casualty Excess of Loss Reinsurance Contract effective as of January 1, 200410.57
    
    R
    
    Property Per Risk 1st and 2nd Excess Reinsurance Contract effective as of
January 1, 2004 (Endorsement No. 1)10.58
    
    R(1)
    
    Amended and Restated Employment
Agreement with James J. Maguire effective as of January 1, 200410.59
    
    S
    
    Gap Quota Share Reinsurance Contract effective as of April 1, 200410.60
    
    S
    
    Casualty Excess of Loss Reinsurance contract effective January 1, 2004 (Preliminary Agreement). The
participating reinsurers are ACE Tempest Re USA Inc., Allied World Assurance Company, American
Re-Insurance Company and Liberty Mutual Insurance10.61
    
    S
    
    Casualty (Clash) Excess of Loss effective January 1, 200410.62
    
    S
    
    Casualty Semi-Automatic Facultative Excess of Loss reinsurance binder with Berkley Insurance
Company effective April 1, 200410.63
    
    S
    
    Casualty Automatic Facultative certificate with B F Re Underwriters, LLC effective June 1, 2004. RE
Philadelphia Insurance Companies certificate number 423004P110.64
    
    S
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Liberty
American Insurance Company)10.65
    
    S
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Mobile USA
Insurance Company)10.66
    
    S
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2004 (Preliminary Agreement).The participating reinsurers on the $10.0 million excess of $10.0 million in
coverage are ACE Tempest Reinsurance LTD., AXIS Specialty Limited (Bermuda),
Everest Reinsurance Company, GE Frankona Ruckversicherungs AG, Folksamerica
Reinsurance Company, Munchener Ruckversicherungs  Gesellschaft, PXRE
Reinsurance, Renaissance Reinsurance Limited (Bermuda), Swiss Reinsurance
America, Swiss Re Underwriting Agency Inc., XL Re Limited (Bermuda), Aspen
Insurance UK LTD., Syndicate #0033, Syndicate #0623, Syndicate #2623 and
Syndicate # 2003 at varying levels of participation.The participating reinsurers on the $20.0 million excess of $20 million in
coverage are American Re Broker Market, AXIS Specialty Limited (Bermuda),
Everest Reinsurance Company, Folksamerica Reinsurance Company, GE Frankona
Ruckversicherungs , General Reinsurance Corporation, Munchener
Ruckversicherungs  Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance,
Renaissance Reinsurance Limited (Bermuda), Swiss Reinsurance America, Swiss Re
Underwriting Agency Inc., Transatlantic Reinsurance Co., Aspen Insurance UK
LTD., Syndicate #0033, Syndicate #0623, Syndicate #2623, and Syndicate # 2003
and XL Re Limited at varying levels of participation.The participating reinsurers on the $25.0 million excess of $40.0 million in
coverage are American Re Broker Market, Everest Reinsurance Company,
Folksamerica Reinsurance Company, GE Frankona Ruckversicherungs , General
Reinsurance Corporation, Hannover Re (Bermuda) Ltd., Munchener
Ruckversicherungs  Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance,
Swiss Reinsurance America, Transatlantic Reinsurance Co., Aspen Insurance UK
LTD., Syndicate #0033 and Syndicate # 2003 and XL Re Limited at varying levels
of participation.The participating reinsurers on the $50.0 million excess of
$65.0 million in coverage are American Re Broker Market,
Folksamerica Reinsurance Company, GE Frankona
Ruckversicherungs , Hannover Re (Bermuda) Ltd., Munchener
Ruckversicherungs  Gesellschaft, PXRE Reinsurance, Swiss
Reinsurance America, Swiss Re Underwriting Agency Inc.,
Tokio Millennium Re LTD, Transatlantic Reinsurance Co.,
Aspen Insurance UK LTD., Syndicate #0033 and Syndicate #
2003 and XL Re Limited at varying levels of participation.10.67
    
    S
    
    Florida Only Excess Catastrophe Reinsurance Contract
effective June 1, 2004 (Preliminary Agreement).The participating reinsurers on the $13.0 million excess of $7.0 million in
coverage are Montpelier Reinsurance Ltd, Munchener Ruckversicherungs -
Gesellschaft, Platinum Underwriters Re, PXRE Reinsurance, Sirius International
Insurance Corp., Swiss Reinsurance America, Aspen Insurance
 77




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##### 



Exhibit No.
    
    
    
    DescriptionUK LTD., Syndicate #2623, Syndicate #0566, Syndicate #0623, Syndicate #0780,
Syndicate #0958, Syndicate #2001, 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 American Re Broker Market, General Reinsurance Corporation,
Montpelier Reinsurance Ltd , Munchener Ruckversicherungs  Gesellschaft,
Platinum Underwriters Re, PXRE Reinsurance, Sirius International Insurance
Corp., Swiss Reinsurance America, Aspen Insurance UK LTD., Syndicate #2623,
Syndicate #0566, Syndicate #0623, Syndicate #0780, Syndicate #0958, Syndicate
#2001, Syndicate #2010, Syndicate #2488 and Syndicate #2791 at varying levels
of participation.The participating reinsurers on the $15.0 million excess of $35.0 million
layer in coverage are American Re Broker Market, General Reinsurance
Corporation, Hannover Re (Bermuda) Ltd, Montpelier Reinsurance Ltd, Munchener
Ruckversicherungs  Gesellschaft, Platinum Underwriters Re, PXRE Reinsurance,
Sirius International Insurance Corp., Swiss Re Underwriting Agency Inc., Aspen
Insurance UK LTD., Syndicate #2623, Syndicate #0033, Syndicate #0566,
Syndicate #0623, Syndicate #0780, Syndicate #2001 and Syndicate #2010 at
varying levels of participation.The participating reinsurers on the $40.0 million excess of $50.0 million in coverage are American Re
Broker Market, Hannover Re (Bermuda) Ltd., Montpelier Reinsurance Ltd., Munchener Ruckversicherungs -
Gesellschaft, Platinum Underwriters Re, Sirius International Insurance Corp., Tokio Millennium Re LTD,
Syndicate #0033, Syndicate #0566, Syndicate #0780, Syndicate #2001Syndicate #2010, Syndicate #2488 and
Syndicate #2791 at varying levels of participation.10.68
    
    S
    
    $50 million excess of $90 million Florida Only Excess Catastrophe Reinsurance Contract effective June 1,
2004 (Preliminary Agreement). The participating reinsurers are AXA Re, Hannover Re (Bermuda), Montpelier
Reinsurance Ltd., Munchener Ruckversicherungs  Gesellschaft, Sirius International Insurance Corp., Swiss
Re Underwriting Agency Inc., Tokio Millennium Re LTD, Syndicate #0033 and Syndicate #2791 at varying
levels of participation.10.69
    
    S
    
    Underlying Excess Catastrophe Coverage effective July 1, 2004 (Preliminary Agreement). The participating
reinsurers are AXA Re, Everest Reinsurance Company, Transatlantic Reinsurance Company, Syndicate #0033,
Syndicate #0623, Syndicate #2623 and Syndicate # 2020 at varying levels of participation.10.70
    
    S
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract placement slip
effective September 1, 2004. The participating reinsurers are Hannover Re (Bermuda) Ltd., Sirius
International Insurance Corporation and Tokio Millennium Re LTD at varying levels of participation, in
total equaling 50% of $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance
coverage.10.71
    
    S
    
    65% Florida Only Third and Fourth Catastrophe Event Reinsurance Contract (Preliminary Agreement) effective
September 1, 2004. The participating reinsurers are ACE Tempest Reinsurance Ltd, AXIS Specialty Limited,
Syndicate #2791, Sirius International Insurance Corporation at varying levels of participation, in total
equaling 65% of Florida Only Third and Fourth Event Catastrophe Reinsurance coverage.10.72
    
    S
    
    Third Catastrophe Event Reinsurance Contract placement slip effective September 3, 2004. The participating
reinsurers are Syndicate #0623, Syndicate #2623, Syndicate #0033, Syndicate #0958, Syndicate #2791 and
Catlin Ins. Co. Ltd at varying levels of participation, in total equaling 50% of Third Event Catastrophe
Reinsurance coverage.10.73
    
    S
    
    Third Catastrophe Event Reinsurance Contract effective September 3, 2004 (Preliminary Agreement). The
participating reinsurers are Renaissance Reinsurance Ltd and DaVinci Reinsurance Ltd, at varying levels of
participation, in total equaling 50% of Third Event Catastrophe Reinsurance coverage.10.74
    
    S
    
    $5 million excess of $190 million Florida Only Catastrophe Excess Reinsurance Contract placement slip
effective September 10, 2004. The participating reinsurer is Hannover Re (Bermuda) Ltd.10.75
    
    S
    
    $45.0 million excess of $195 million Florida Only Catastrophe Excess Reinsurance Contract placement slip
effective September 10, 2004. The participating reinsurers are American Re Broker Market, ACE Tempest
Reinsurance LTD., AXIS Specialty Limited, Catlin Insurance Company LTD., Montpelier Reinsurance Ltd.,
Partner Re, Syndicate #0033, Syndicate #2003, Syndicate #2020, Syndicate #2791, Syndicate #2987and Sirius
International Insurance Corporation at varying levels of participation.
 78




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##### 



Exhibit No.
    
    
    
    Description1076
    
    S
    
    $6.5 million excess of $3.5 million Florida Only Fifth Event Catastrophe Reinsurance placement slip
effective September 24, 2004. The participating reinsurers are Syndicate #0557, Syndicate #0510, Syndicate
#0570, Syndicate #2147, Syndicate #0780, Syndicate #2003, Syndicate #2010, Syndicate #4444, Syndicate
#2987, Syndicate #0033, Syndicate #0958, Syndicate #2791, Syndicate #2001 and Syndicate #2020 at varying
levels of participation.10.77
    
    T
    
    Reinstatement Premium Protection Reinsurance Contract effective July 1, 2004 (Preliminary Agreement). The
participating reinsurer is AXIS Specialty Limited.10.78
    
    T
    
    Underlying Excess Catastrophe and Reinstatement Premium Protection Reinsurance Contract effective July 1,
2004 (Preliminary Agreement). The participating reinsurer is Swiss Re Underwriting Agency Inc.10.79
    
    T
    
    35% Florida Only Third and Fourth Catastrophe Event Reinsurance Contract (Preliminary Agreement) effective
September 2, 2004. The participating reinsurers are Renaissance Reinsurance Ltd and DaVinci Reinsurance
Ltd at varying levels of participation, in total equaling 35% of Florida Only Third and Fourth Event
Catastrophe Reinsurance coverage.10.80
    
    T
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract placement slip
effective September 3, 2004. The participating reinsurer is Swiss Re Underwriting Agency Inc. equaling 66%
of $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance coverage.10.81
    
    T
    
    $50.0 million excess of $240.0 million Florida Only Catastrophe Reinsurance Contract Reinsurance placement
slip effective October 1, 2004. The participating reinsurers on the $50.0 million excess $240.0 million
coverage include: ACE Tempest Reinsurance Ltd., AXIS Specialty Limited (Bermuda), Catlin Ins Co. Ltd,
Syndicate 33 (HIS), Syndicate 958 (GSL), Syndicate 1414 (RTH), Syndicate 2001 (AML), Syndicate 2003 (SJC),
Syndicate 2020 (WEL) and Syndicate 2791 (MAP) at varying levels of participation.10.82
    
    T
    
    $50 million excess of $140.0 million Florida Only Catastrophe Reinsurance Contract Reinsurance placement
slip effective October 1, 2004. The participating reinsurers at
varying levels of participation are: Hannover Re (Bermuda) LTD, Syndicate 33 (HIS), Syndicate 510 (KLN), Syndicate 557 (KCS), Syndicate 570
(GNR), Syndicate 623 (AFB), Syndicate 2623 (XXX),Syndicate 626 (HIS), Syndicate 727 (SAM), Syndicate 780
(BFC), Syndicate 1414 (RTH), Syndicate 2147 (SVB), Syndicate 2791 (MAP), and Munich Ruckversicherungs
Insurance Company.10.83
    
    T
    
    $40.0 million excess $50.0 million Florida Only Third Event Catastrophe Reinsurance Contract Reinsurance
placement slip effective October 1, 2004. The participating reinsurers for this coverage include: Platinum
Re, Hannover Re (Bermuda), Syndicate 33 (HIS), Syndicate 510 (KLN), Syndicate 557 (KCS), Syndicate 566
(QBE), Syndicate 570 (GNR), Syndicate 623 (AFB), Syndicate 626 (HIS), Syndicate 2623 (XXX), Syndicate 727
(SAM), Syndicate 780 (BFC), Syndicate 958 (GSC), Syndicate 1414 (RTH), Syndicate 2001 (AML), Syndicate
2147 (ADH), Syndicate 2791 (MAP), Syndicate 4444 (CNP), and Munich Ruckversicherungs Insurance Company at
varying levels of participation.21
    
    T
    
    List of Subsidiaries of the Registrant.23
    
    T
    
    Consent of PricewaterhouseCoopers LLP.24
    
    A
    
    Power of Attorney31.1
    
    T
    
    Certification of the Companys chief executive officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.31.2
    
    T
    
    Certification of the Companys chief financial officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.32.1
    
    T
    
    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
    
    T
    
    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 2002.99.1
    
    T
    
    Report of Independent Registered Public Accounting Firm on Financial Statement
Schedules.
   A
    
    Incorporated by reference to the Exhibit filed with the Registrants Form S-1
Registration Statement under the Securities Act of 1933 (Registration No. 33-65958).
 79




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##### 



B
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated by reference.C
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994 and incorporated by reference.D
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1995 and incorporated by reference.E
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated by reference.F
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996 and incorporated by reference.G
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated by reference.H
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997 and incorporated by reference.I
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1997.J
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1998.K
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999.L
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2002 and incorporated by reference.M
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002 and incorporated by reference.N
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 2002.O
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2003 and incorporated by reference.P
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2003 and incorporated by reference.Q
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 and incorporated by reference.R
    
    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.S
    
    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.T
    
    Filed herewith.(1)
    
    Compensatory Plan or Arrangement, or Management Contract.
 80




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Philadelphia Consolidated Holding Corp.By: James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive OfficerMarch 14, 2005
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Signature
    
    Title
    
    DateJames J. Maguire, Jr.
    
    President & Chief Executive Officer,
    
    March 14, 2005(Principal Executive Officer)James J. Maguire, Jr.Craig P. Keller
    
    Executive Vice President, Secretary,
    
    March 14, 2005Treasurer, and Chief Financial OfficerCraig P. Keller
    
    (Principal Financial andAccounting Officer)James J. Maguire
    
    Chairman of the Board of
    
    March 14, 2005DirectorsJames J. MaguireSean S. Sweeney
    
    Executive Vice President, Director
    
    March 14, 2005Sean S. SweeneyMichael J. Cascio
    
    Director
    
    March 14, 2005Michael J. CascioElizabeth H. Gemmill
    
    Director
    
    March 14, 2005Elizabeth H. GemmillWilliam J. Henrich, Jr.
    
    Director
    
    March 14, 2005William J. Henrich, Jr.Director
    
    March 14, 2005Margaret M. MattixMaureen H. McCullough
    
    Director
    
    March 14, 2005Maureen H. McCulloughMichael J. Morris
    
    Director
    
    March 14, 2005Michael J. MorrisDonald A. Pizer
    
    Director
    
    March 14, 2005Donald A. Pizer
 81




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##### 



Signature
    
    Title
    
    DateDirk A. Stuurop
    
    Director
    
    March 14, 2005Dirk A. StuuropDirector
    
    March 14, 2005J. Eustace Wolfington
 82




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##### 



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule I  Summary of Investments  Other than Investments in Related Parties
As of December 31, 2004
(Dollars in Thousands) 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
    
    $
    292,481
    
    
    $
    294,207
    
    
    
    294,207States, Municipalities and Political Subdivisions
    
    
    617,464
    
    
    
    626,592
    
    
    
    626,592Public Utilities
    
    
    32,412
    
    
    
    32,430
    
    
    
    32,430All Other Corporate Bonds
    
    
    341,444
    
    
    
    343,231
    
    
    
    343,231Redeemable Preferred Stock
    
    
    3,293
    
    
    
    3,244
    
    
    
    3,244Total Fixed Maturities
    
    
    1,287,094
    
    
    
    1,299,704
    
    
    
    1,299,704Equity Securities:Common Stocks:Public Utilities
    
    
    952
    
    
    
    1,199
    
    
    
    1,199Banks, Trust and Insurance Companies
    
    
    21,334
    
    
    
    24,666
    
    
    
    24,666Industrial, Miscellaneous and all other
    
    
    85,287
    
    
    
    99,528
    
    
    
    99,528Non-redeemable Preferred Stocks
    
    
    3,028
    
    
    
    3,054
    
    
    
    3,054Total Equity Securities
    
    
    110,601
    
    
    
    128,447
    
    
    
    128,447Total Investments
    
    $
    1,397,695
    
    
    $
    1,428,151
    
    
    $
    1,428,151
   *
    
    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




---



##### 



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(In Thousands, Except Share Data) As of December 31,2004
    
    
    2003ASSETSCash and Cash Equivalents
    
    $
    117
    
    
    $
    125Equity in and Advances to Unconsolidated Subsidiaries (a)
    
    
    645,404
    
    
    
    547,229Other Assets
    
    
    
    
    
    
    1Total Assets
    
    $
    645,521
    
    
    $
    547,355LIABILITIES AND SHAREHOLDERS EQUITYIncome Taxes Payable
    
    $
    881
    
    
    $
    1,282Other Liabilities
    
    
    483
    
    
    
    427Total Liabilities
    
    
    1,364
    
    
    
    1,709Commitments and ContingenciesShareholders EquityPreferred Stock, $.01 Par Value, 10,000,000 Shares
Authorized, None Issued and Outstanding
    
    
    
    
    
    
    Common Stock, No Par Value, 100,000,000 Shares
Authorized, 22,273,917 and 22,007,552 Shares
Issued and Outstanding
    
    
    292,856
    
    
    
    281,088Notes Receivable from Shareholders
    
    
    (5,465
    )
    
    
    (5,444
    )Accumulated Other Comprehensive Income
    
    
    19,796
    
    
    
    16,715Retained Earnings
    
    
    336,970
    
    
    
    253,287644,157
    
    
    
    545,646Total Liabilities and Shareholders Equity
    
    $
    645,521
    
    
    $
    547,355
   (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8. S-2




---



##### 



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Operations
(In Thousands) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Revenue:Dividends from Subsidiaries (a)
    
    $
    11,838
    
    
    $
    61,348
    
    
    $
    27,804Total Revenue
    
    
    11,838
    
    
    
    61,348
    
    
    
    27,804Other Expenses
    
    
    2,573
    
    
    
    778
    
    
    
    1,062Total Expenses
    
    
    2,573
    
    
    
    778
    
    
    
    1,062Income, Before Income Taxes and Equity in Earnings of
Unconsolidated Subsidiaries
    
    
    9,265
    
    
    
    60,570
    
    
    
    26,742Income Tax Benefit
    
    
    (901
    )
    
    
    (272
    )
    
    
    (372
    )Income, Before Equity in Earnings of Unconsolidated
Subsidiaries
    
    
    10,166
    
    
    
    60,842
    
    
    
    27,114Equity in Earnings of Unconsolidated Subsidiaries
    
    
    73,517
    
    
    
    1,345
    
    
    
    6,639Net Income
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753
   (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8. S-3




---



##### 



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Cash Flows
(In Thousands) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Cash Flows From Operating Activities:Net Income
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:Equity in Earnings of Unconsolidated Subsidiaries
    
    
    (73,517
    )
    
    
    (1,345
    )
    
    
    (6,639
    )Change in Other Liabilities
    
    
    56
    
    
    
    (188
    )
    
    
    39Change in Other Assets
    
    
    1
    
    
    
    
    
    
    
    Change in Income Taxes Payable
    
    
    (401
    )
    
    
    35
    
    
    
    1,936Tax Benefit from Exercise of Employee Stock Options
    
    
    1,031
    
    
    
    889
    
    
    
    1,251Net Cash Provided by Operating Activities
    
    
    10,853
    

    
    
    61,578
    
    
    
    30,340Cash Flows Used by Investing Activities:Net Transfers to Subsidiaries (a)
    
    
    (21,577
    )
    
    
    (65,794
    )
    
    
    (34,367
    )Net Cash Used by Investing Activities
    
    
    (21,577
    )
    
    
    (65,794
    )
    
    
    (34,367
    )Cash Flows From Financing Activities:Proceeds from Exercise of Employee Stock Options
    
    
    1,151
    
    
    
    2,057
    
    
    
    864Proceeds from Collection of Notes Receivable
    
    
    2,305
    
    
    
    2,028
    
    
    
    983Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    7,260
    
    
    
    432
    
    
    
    4,327Cost of Common Stock Repurchased
    
    
    
    
    
    
    (300
    )
    
    
    (2,023
    )Net Cash Provided by Financing Activities
    
    
    10,716
    
    
    
    4,217
    
    
    
    4,151Net Increase (Decrease) in Cash and Equivalents
    
    
    (8
    )
    
    
    1
    
    
    
    124Cash and Cash Equivalents at Beginning of Year
    
    
    125
    
    
    
    124
    
    
    
    Cash and Cash Equivalents at End of Year
    
    $
    117
    
    
    $
    125
    
    
    $
    124Cash Dividends Received From Unconsolidated Subsidiaries
    
    $
    11,838
    
    
    $
    61,348
    
    
    $
    27,804Non-Cash Transactions:Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange
for Notes Receivable
    
    $
    2,326
    
    
    $
    1,065
    
    
    $
    4,017
   (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8. S-4




---



##### 



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule III  Supplementary Insurance Information
As of and For the Years Ended December 31, 2004, 2003 and 2002
(In Thousands) 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
    
    
    Written2004: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
    
    
    $
    602,3002002:Commercial Lines
    
    $
    
    
    
    $
    337,791
    
    
    $
    214,021
    
    
    
    
    
    
    $
    297,635
    
    
    $
    
    
    
    $
    202,604
    
    
    $
    
    
    
    $
    
    
    
    $
    380,991Specialty Lines
    
    
    
    
    
    
    96,837
    
    
    
    55,251
    
    
    
    
    
    
    
    85,030
    
    
    
    
    
    
    
    43,310
    
    
    
    
    
    
    
    
    
    
    
    101,623Personal Lines
    
    

    
    
    
    
    10,920
    
    
    
    36,821
    
    
    
    
    
    
    
    35,057
    
    
    
    
    
    
    
    21,519
    
    
    
    
    
    
    
    
    
    
    
    37,093Corporate
    
    
    61,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,516
    
    
    
    
    
    
    
    108,097
    
    
    
    21,821
    
    
    
    Total
    
    $
    61,272
    
    
    $
    445,548
    
    
    $
    306,093
    
    
    
    
    
    
    $
    417,722
    
    
    $
    37,516
    
    
    $
    267,433
    
    
    $
    108,097
    
    
    $
    21,821
    
    
    $
    519,707
 S-5




---



##### 



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule IV  Reinsurance
Earned Premiums
For the Years Ended December 31, 2004, 2003 and 2002
(Dollars in Thousands) COLUMN A
    
    COLUMN B
    
    
    COLUMN C
    
    
    COLUMN D
    
    
    COLUMN E
    
    
    COLUMN FPercentage ofGross
    
    
    Ceded to Other
    
    
    Assumed from Other
    
    
    
    
    
    
    Amount Assumed toAmount
    
    
    Companies
    
    
    Companies
    
    
    Net Amount
    
    
    Net2004Property 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
    %2002Property and Casualty Insurance
    
    $
    550,443
    
    
    $
    137,763
    
    
    $
    5,042
    
    
    $
    417,722
    
    
    
    1.2
    %
 S-6




---



##### 



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule VI  Supplemental Information Concerning Property  Casualty Insurance Operations
As of and For the Years Ended December 31, 2004, 2003 and 2002
(Dollars in Thousands) Claims and ClaimsAdjustment ExpensesIncurred Related toReserve for Unpaid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1)
    
    
    (2)
    
    
    Amortization of
    
    
    Paid Claims andAffiliation with
    
    Deferred Policy
    
    
    Claims and Claim
    
    
    Discount if any
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    Current
    
    
    Prior
    
    
    deferred policy
    
    
    Claim AdjustmentRegistrant
    
    Acquisition Costs
    
    
    Adjustment Expenses
    
    
    deducted in Column C
    
    
    Unearned Premiums
    
    
    Earned Premiums
    
    
    Investment Income
    
    
    Year
    
    
    Year
    
    
    acquisition costs
    
    
    Expenses
    
    
    Net Written 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, 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
    
    
    $
    574,517
    
    
    $
    38,806
    
    
    $
    314,609
    
    
    $
    44,568
    
    
    $
    109,888
    
    
    $
    237,393
    
    
    $
    602,300December 31, 2002
    
    $
    61,272
    
    
    $
    445,548
    
    
    $
    0
    
    
    $
    306,093
    
    
    $
    417,722
    
    
    $
    37,516
    
    
    $
    239,834
    
    
    $
    27,599
    
    
    $
    108,097
    
    
    $
    157,856
    
    
    $
    519,707
 S-7