##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Fiscal Year Ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Transition Period from  to
 Commission File Number: 0-22280
 PHILADELPHIA CONSOLIDATED HOLDING CORP.
  PENNSYLVANIA
    
    23-2202671(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)One Bala Plaza, Suite 100Bala Cynwyd, Pennsylvania
    
    19004(Address of principal executive offices)
    
    (Zip Code)
 (610) 617-7900
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on which RegisteredCommon Stock, no par value
    
    The NASDAQ Stock Market, LLC
  þ o
  o þ
  þ o
 o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
   DOCUMENTS INCORPORATED BY REFERENCE
 (1)
    
    Portions of the definitive Proxy Statement for Registrants 2008 Annual Meeting of
Shareholders are incorporated by reference in Part III.




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##### 



INDEX
For the Annual Period Ended December 31, 2007
 PagePart IItem 1. Business
    
    3Item 1A. Risk Factors
    
    21Item 1B. Unresolved Staff Comments
    
    25Item 2. Properties
    
    26Item 3. Legal Proceedings
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    26Part IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    27Item 6. Selected Financial Data
    
    28Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    29-58Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    59Item 8. Financial Statements and Supplementary Data
    
    60-92Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    93Item 9A. Controls and Procedures
    
    93Item 9B. Other Information
    
    93Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    94Item 11. Executive Compensation
    
    94Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
    
    94Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    94Item 14. Principal Accountant Fees and Services
    
    94Part IVItem 15. Exhibits and Financial Statement Schedules
    
    95-101Signatures
    
    102List of Subsidiaries of the RegistrantConsent of Independent Registered Public Accounting FirmCertification of the Company's chief executive officer pursuant to Section 302Certification of the Company's chief financial officer pursuant to Section 302Certification of the Company's chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906Certification of the Company's chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
  2




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##### Table of Contents



(i)
    
    Philadelphia Insurance refers to Philadelphia Consolidated Holding Corp.,(ii)
    
    The Company, we, us, and our 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), Liberty American Select Insurance Company
(LASIC) and Liberty American Insurance Company (LAIC), collectively;(iv)
    
    MIA refers to Maguire Insurance Agency, Inc., a captive underwriting manager;(v)
    
    LAIS refers to Liberty American Insurance Services, 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.
   
    
    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. This includes direct
policyholder prospecting, utilizing an extensive network of independent producers,
including a subset of this network, known as preferred agents, with whom we have
established special distribution arrangements, a subset known as Firemark producers,
wholesalers and the Internet.
    
    Seeking to create value-added coverage and service features not found in typical
property and casualty policies. We believe this differentiates and enhances the
marketability and appeal of our products relative to our competitors.
  
    
    Consistent prospecting efforts by marketing personnel in conjunction with long-term
relationships formed by our Marketing Regional Vice Presidents;
    
    Continued expansion of marketing efforts through our field organization and preferred
agents;
    
    Better brand recognition through our Firemark producer program; and
    
    The introduction of a number of new niche product offerings.
    3




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##### Table of Contents




    
    The Commercial Lines Underwriting Group, which has underwriting responsibility for
the commercial multi-peril package, commercial automobile, specialty property and inland
marine, and antique/collector car insurance products;
    
    The Specialty Lines Underwriting Group, which has underwriting responsibility for the
professional and management liability insurance products; and
    
    The Personal Lines Underwriting Group, which has underwriting responsibility for
personal property insurance products for the homeowners and manufactured housing market in
Florida, and the National Flood Insurance Program for both personal and commercial
policyholders.
  4




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##### Table of Contents



For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Dollars
    
    
    Percentage
    
    
    Dollars
    
    
    Percentage
    
    
    Dollars
    
    
    Percentage(dollars in thousands)Commercial Lines
    
    $
    1,388,181
    
    
    
    82.0
    %
    
    $
    1,169,468
    
    
    
    78.3
    %
    
    $
    960,344
    
    
    
    75.9
    %Specialty Lines
    
    
    245,220
    
    
    
    14.5
    
    
    
    227,567
    
    
    
    15.2
    
    
    
    205,306
    
    
    
    16.2Personal Lines
    
    
    58,822
    
    
    
    3.5
    
    
    
    96,213
    
    
    
    6.5
    
    
    
    99,265
    
    
    
    7.9Total
    
    $
    1,692,223
    
    
    
    100.0
    %
    
    $
    1,493,248
    
    
    
    100.0
    %
    
    $
    1,264,915
    
    
    
    100.0
    %
 Commercial Lines:
 Commercial Package:
 
    
    non-profit organizations;
    
    social service agencies;
    
    condominium and homeowners associations;
    
    private, vocational and specialty schools;
    
    mental health facilities;
    
    day care facilities;
    
    religious organizations;
    
    health and fitness clubs and studios;
    
    sports leagues and camps;
    
    hotels and motels;
    
    golf and country clubs;
    
    retail shopping centers, business parks and medical facilities;
    
    professional and amateur sports associations and teams;
    
    entertainment parks/centers;
    
    campground and recreational vehicle park operators; and
    
    public entities.
  Commercial Automobile and Commercial Excess:
 
    
    rental car companies;
    
    leasing companies;
    
    banks; and
    
    credit unions.
 Specialty Property & Inland Marine
 
    
    nursing homes;
    
    hospitals; and
    
    commercial real estate developers.
 Antique/Collector Car Program:
 5




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##### Table of Contents



Specialty Lines:
   
    
    accountants; and
    
    miscellaneous professionals (preferred classes include among others: computer
technology, management and marketing consultants, and claims adjusters).
  
    
    non-profit organizations; and
    
    private companies.
 Personal Lines
     State
    
    Direct Earned Premiums
    
    
    Percent of TotalCalifornia
    
    $
    211,793
    
    
    
    13.2
    %Florida
    
    
    176,382
    
    
    
    11.0New York
    
    
    173,014
    
    
    
    10.8Texas
    
    
    99,211
    
    
    
    6.2Pennsylvania
    
    
    86,579
    
    
    
    5.4New Jersey
    
    
    73,876
    
    
    
    4.6Massachusetts
    
    
    69,814
    
    
    
    4.4Illinois
    
    
    46,864
    
    
    
    2.9Ohio
    
    
    41,651
    
    
    
    2.6Michigan
    
    
    34,867
    
    
    
    2.2Connecticut
    
    
    32,873
    
    
    
    2.1Minnesota
    
    
    32,050
    
    
    
    2.0Missouri
    
    
    32,253
    
    
    
    2.0All other states with less than 2% of total
    
    
    489,053
    
    
    
    30.6Total Direct Earned Premiums
    
    $
    1,600,280
    
    
    
    100.0
    %
 6




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##### Table of Contents




    
    Commercial Lines,
    
    Specialty Lines, and
    
    Personal Lines.
         7




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##### Table of Contents



Casualty Excess of Loss Agreements
   Property Excess of Loss Agreements
  
    
    First Excess Layer ($2.5 million in excess of $2.5 million)  the reinsurers loss
limit on each loss occurrence in this layer is limited to $5.0 million. However,
reinstatements in this layer are unlimited and free.
    
    Second Excess Layer ($5.0 million in excess of $5.0 million)  the reinsurers
loss limit on each loss occurrence in this layer is limited to $10.0 million. However,
this layer provides three free reinstatements. The aggregate loss limit for all loss
occurrences in this layer is $20.0 million.
    
    Third Excess Layer ($5.0 million in excess of $10.0 million)  the reinsurers
loss limit on each loss occurrence in this layer is limited to $10.0 million. However,
this layer provides one free reinstatement and one paid reinstatement. The aggregate loss
limit for all loss occurrences in this layer is $15.0 million.
    Terrorism Coverage
  8




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##### Table of Contents



Property Catastrophe Agreements
        9




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##### Table of Contents



UnsecuredReinsuranceReinsurer
    
    Receivables
    
    
    % of Total
    
    
    A.M. Best RatingGeneral Reinsurance Corporation
    
    $
    40,552
    
    
    
    25.9
    %
    
    
    A++National Flood Insurance Program
    
    
    24,561
    
    
    
    15.7
    %
    
    Not Rated  Voluntary PoolLiberty Mutual Insurance Company
    
    
    20,298
    
    
    
    13.0
    %
    
    
    AMunich Reinsurance America, Inc.
    
    
    14,976
    
    
    
    9.6
    %
    
    
    AACE Property & Casualty Insurance Company
    
    
    12,194
    
    
    
    7.8
    %
    
    
    A+Finial Reinsurance Company (formerly
Converium Reinsurance (NA) Inc.)
    
    
    11,342
    
    
    
    7.2
    %
    
    
    B+Swiss Reinsurance America Corporation
    
    
    7,456
    
    
    
    4.8
    %
    
    
    A+Everest Reinsurance Company
    
    
    4,749
    
    
    
    3.0
    %
    
    
    A+Travelers Indemnity Company
    
    
    4,746
    
    
    
    3.0
    %
    
    
    A+Employers Reinsurance Corporation
    
    
    3,825
    
    
    
    2.4
    %
    
    
    A+All Other Reinsurers
    
    
    12,013
    
    
    
    7.6
    %
    
    
    Total Unsecured Reinsurance Receivables
    
    $
    156,712
    (1)
    
    
    100.0
    %
 
 (1)
    
    This amount differs by $123.4 million from the reinsurance receivables of $280.1 million
reported in our consolidated financial statements as of December 31, 2007 because the
reinsurance receivables in the table above have been reduced by the collateral that we are
holding from our reinsurers.      10




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##### Table of Contents




    
    profitability;
    
    underwriting risk;
    
    marketing and distribution;
    
    availability of reinsurance coverage;
    
    long-term viability; and
    
    consistency with the Companys culture and philosophy.
          11




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
    
    known and anticipated legal developments,
    
    changes in societal attitudes,
    
    inflation and economic conditions, and
    
    pricing environment.
   As of and For the Years Ended December 31,(In Thousands)
    
    2007
    
    
    2006
    
    
    2005Unpaid loss and loss adjustment expenses at beginning of year
    
    $
    1,283,238
    
    
    $
    1,245,763
    
    
    $
    996,667Less: reinsurance receivables
    
    
    187,809
    
    
    
    304,768
    
    
    
    324,948Net unpaid loss and loss adjustment expenses at beginning of year
    
    
    1,095,429
    
    
    
    940,995
    
    
    
    671,719Provision for losses and loss adjustment expenses for current year claims
    
    
    704,734
    
    
    
    559,647
    
    
    
    533,906Decrease in estimated ultimate losses and loss adjustment expenses for
prior year claims
    
    
    (85,781
    )
    
    
    (91,435
    )
    
    
    (29,900
    )Total incurred losses and loss adjustment expenses
    
    
    618,953
    
    
    
    468,212
    
    
    
    504,006Loss and loss adjustment expense payments for claims attributable to:Current year
    
    
    180,798
    
    
    
    118,845
    
    
    
    110,496Prior years (1)(2)
    
    
    271,669
    
    
    
    194,933
    
    
    
    124,234Total payments
    
    
    452,467
    
    
    
    313,778
    
    
    
    234,730Net unpaid loss and loss adjustment expenses at end of year
    
    
    1,261,915
    
    
    
    1,095,429
    
    
    
    940,995Plus: reinsurance receivables
    
    
    170,018
    
    
    
    187,809
    
    
    
    304,768Unpaid loss and loss adjustment expenses at end of year
    
    $
    1,431,933
    
    
    $
    1,283,238
    
    
    $
    1,245,763
 
 (1)
    
    During the year ended December 31, 2005, net loss and loss adjustment expense payments for
claims attributable to prior years reflect a ceded paid loss and loss adjustment expense
payment of $64.3 million due to the commutation of our 2003 Whole Account Net Quota Share
Reinsurance Agreement.(2)
    
    During the year ended December 31, 2006, net loss and loss adjustment expense payments for
claims attributable to prior years reflect a ceded paid loss and loss adjustment expense
payment of $31.9 million due to the commutation of our 2004 Whole Account Net Quota Share
Reinsurance Agreement.  (In Millions)
 Net Loss and Loss Adjustment Expensesincrease (decrease)Professional/Management
    
    
    Rental/LeasingCommercial
    
    
    Liability
    
    
    AutoAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Coverages
    
    
    Other
    
    
    Total2006
    
    $
    (10.6
    )
    
    $
    (10.8
    )
    
    $
    (0.8
    )
    
    $
    (0.5
    )
    
    $
    (22.7
    )2005
    
    $
    (8.4
    )
    
    $
    (15.1
    )
    
    $
    (1.3
    )
    
    $
    (0.2
    )
    
    $
    (25.0
    )2004
    
    $
    (6.0
    )
    
    $
    (10.1
    )
    
    $
    (3.1
    )
    
    $
    0.1
    
    
    $
    (19.1
    )2003 & Prior
    
    $
    (6.0
    )
    
    $
    (10.8
    )
    
    $
    (3.1
    )
    
    $
    0.9
    
    
    $
    (19.0
    )Total
    
    $
    (31.0
    )
    
    $
    (46.8
    )
    
    $
    (8.3
    )
    
    $
    0.3
    
    
    $
    (85.8
    )
 12




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##### Table of Contents




    
    For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
 
    
    Commercial property, professional liability, and commercial automobile coverages due to
better than expected case incurred loss development, primarily as a result of both claim
frequency and severity emergence being less than anticipated, and
    
    Management liability coverages due to better than expected case incurred loss development
primarily as a result of claim severity emergence being less than anticipated.
 
    
    For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
 
    
    Professional liability, management liability, and commercial property coverages due to
better than expected case incurred loss development primarily as a result of claim severity
being less than anticipated.
    
    General liability and commercial automobile coverages due to better than expected case
incurred loss development, primarily as a result of both claim frequency and severity
emergence being less than anticipated.
 
    
    For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
 
    
    Professional liability, commercial general liability, rental leasing and management
liability coverages due to better than expected case incurred loss development primarily as
a result of claim severity emergence being less than anticipated.
 
    
    For accident year 2003 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for:
 
    
    Professional liability, management liability and commercial general liability coverages
due to better than expected case incurred loss development primarily as a result of claim
severity emergence being less than anticipated.
  (In Millions)
 Net Loss and Loss Adjustment Expensesincrease (decrease)Professional/Management
    
    
    Rental/LeasingCommercial
    
    
    Liability
    
    
    AutoAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Coverages
    
    
    Other
    
    
    Total2005
    
    $
    (52.0
    )
    
    $
    (5.0
    )
    
    $
    (1.0
    )
    
    $
    (1.2
    )
    
    $
    (59.2
    )2004
    
    $
    (11.6
    )
    
    $
    1.9
    
    
    $
    (2.8
    )
    
    $
    (0.1
    )
    
    $
    (12.6
    )2003
    
    $
    (0.3
    )
    
    $
    (6.8
    )
    
    $
    (3.7
    )
    
    $
    (0.2
    )
    
    $
    (11.0
    )2002 & Prior
    
    $
    (1.0
    )
    
    $
    (1.6
    )
    
    $
    (6.3
    )
    
    $
    0.3
    
    
    $
    (8.6
    )Total
    
    $
    (64.9
    )
    
    $
    (11.5
    )
    
    $
    (13.8
    )
    
    $
    (1.2
    )
    
    $
    (91.4
    )
    13




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##### Table of Contents



(In Millions)
 Net Loss and Loss Adjustment Expensesincrease (decrease)Professional/ManagementCommercial
    
    
    Liability
    
    
    Rental/LeasingAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2004
    
    $
    (12.7
    )
    
    $
    (7.6
    )
    
    $
    (4.3
    )
    
    $
    0.4
    
    
    $
    (24.2
    )2003
    
    $
    3.5
    
    
    $
    (2.4
    )
    
    $
    (0.5
    )
    
    $
    1.0
    
    
    $
    1.62002
    
    $
    (0.6
    )
    
    $
    (2.0
    )
    
    $
    (3.4
    )
    
    $
    (1.0
    )
    
    $
    (7.0
    )2001 & Prior
    
    $
    1.9
    
    
    $
    (0.7
    )
    
    $
    (0.9
    )
    
    $
    (0.6
    )
    
    $
    (0.3
    )Total
    
    $
    (7.9
    )
    
    $
    (12.7
    )
    
    $
    (9.1
    )
    
    $
    (0.2
    )
    
    $
    (29.9
    )
     14




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##### Table of Contents



AS OF AND FOR THE YEARS ENDED DECEMBER 31,(Dollars in Thousands)1997
    
    1998
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007Unpaid Loss and
Loss Adjustment
Expenses, As Stated
    
    $
    122,430
    
    
    $
    153,383
    
    
    $
    188,063
    
    
    $
    237,494
    
    
    $
    302,733
    
    
    $
    445,548
    
    
    $
    627,086
    
    
    $
    996,667
    
    
    $
    1,245,763
    
    
    $
    1,283,238
    
    
    $
    1,431,933Cumulative Paid as
of:1 year later
    
    
    31,676
    
    
    
    83,259
    
    
    
    78,070
    
    
    
    95,608
    
    
    
    148,506
    
    
    
    204,592
    
    
    
    231,904
    
    
    
    313,902
    
    
    
    336,139
    
    
    
    338,0552 years later
    
    
    81,535
    
    
    
    127,253
    
    
    
    143,464
    
    
    
    192,234
    
    
    
    282,410
    
    
    
    365,666
    
    
    
    365,358
    
    
    
    490,114
    
    
    
    564,4143 years later
    
    
    107,578
    
    
    
    167,333
    
    
    
    198,749
    
    
    
    286,593
    
    
    
    377,088
    
    
    
    444,438
    
    
    
    459,889
    
    
    
    640,6054 years later
    
    
    126,985
    
    
    
    193,217
    
    
    
    265,721
    
    
    
    336,425
    
    
    
    423,654
    
    
    
    496,893
    
    
    
    519,5185 years later
    
    
    137,242
    
    
    
    217,086
    
    
    
    291,539
    
    
    
    362,553
    
    
    
    447,229
    
    
    
    527,1826 years later
    
    
    144,819
    
    
    
    226,813
    
    
    
    303,934
    
    
    
    372,035
    
    
    
    457,7527 years later
    
    
    149,473
    
    
    
    229,394
    
    
    
    309,192
    
    
    
    377,0708 years later
    
    
    150,210
    
    
    
    230,933
    
    
    
    312,4249 years later
    
    
    150,401
    
    
    
    231,78710 years later
    
    
    151,124Unpaid Loss and
Loss Adjustment
Expenses
re-estimated as of
End of Year:1 year later
    
    
    119,261
    
    
    
    187,267
    
    
    
    201,642
    
    
    
    270,006
    
    
    
    371,857
    
    
    
    497,326
    
    
    
    674,337
    
    
    
    988,850
    
    
    
    1,133,177
    
    
    
    1,188,1502 years later
    
    
    134,295
    
    
    
    191,005
    
    
    
    226,388
    
    
    
    325,523
    
    
    
    442,608
    
    
    
    582,076
    
    
    
    707,322
    
    
    
    954,239
    
    
    
    1,075,6773 years later
    
    
    138,761
    
    
    
    202,481
    
    
    
    273,985
    
    
    
    374,738
    
    
    
    482,006
    
    
    
    608,257
    
    
    
    678,716
    
    
    
    923,0584 years later
    
    
    144,620
    
    
    
    220,496
    
    
    
    310,086
    
    
    
    388,064
    
    
    
    489,014
    
    
    
    584,446
    
    
    
    658,1285 years later
    
    
    149,721
    
    
    
    233,859
    
    
    
    315,682
    
    
    
    390,385
    
    
    
    481,272
    
    
    
    577,0906 years later
    
    
    151,242
    
    
    
    234,214
    
    
    
    317,229
    
    
    
    386,427
    
    
    
    475,3837 years later
    
    
    151,748
    
    
    
    233,729
    
    
    
    316,180
    
    
    
    383,7618 years later
    
    
    151,042
    
    
    
    232,829
    
    
    
    316,1899 years later
    
    
    151,224
    
    
    
    232,96910 years later
    
    
    151,837Cumulative
Redundancy
(Deficiency):Dollars
    
    $
    (29,407
    )
    
    $
    (79,586
    )
    
    $
    (128,126
    )
    
    $
    (146,267
    )
    
    $
    (172,650
    )
    
    $
    (131,542
    )
    
    $
    (31,042
    )
    
    $
    73,609
    
    
    $
    170,086
    
    
    $
    95,088Percentage
    
    
    (24.0
    )%
    
    
    (51.9
    )%
    
    
    (68.1
    )%
    
    
    (61.6
    )%
    
    
    (57.0
    )%
    
    
    (29.5
    %)
    
    
    (5.0
    %)
    
    
    7.4
    %
    
    
    13.7
    %
    
    
    7.4
    %
 
 (1)
    
    Unpaid loss and loss adjustment expenses for 1998, as stated, have been adjusted to include
$2,233 unpaid loss and loss adjustment expenses for LASIC as of acquisition date.   15




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##### Table of Contents



Statutory Combined Ratio:
   For the Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Loss Ratio
    
    
    44.9
    %
    
    
    39.8
    %
    
    
    51.8
    %
    
    
    61.5
    %
    
    
    63.1
    %Expense Ratio
    
    
    29.4
    %
    
    
    28.5
    %
    
    
    26.3
    %
    
    
    27.2
    %
    
    
    27.2
    %Combined Ratio
    
    
    74.3
    %
    
    
    68.3
    %
    
    
    78.1
    %
    
    
    88.7
    %
    
    
    90.3
    %Industry Statutory
Combined Ratio,
after
Policyholders
Dividends (1)
    
    
    95.6
    %
    
    
    93.3
    %
    
    
    100.8
    %
    
    
    98.5
    %
    
    
    100.2
    %
 
 (1)
    
    Source: A.M. Best Company Review/Preview January 2008. 2007 industry data is estimated. Premium-to-Surplus Ratio:
   As of and For the Years Ended December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(Dollars in Thousands)Net Written Premiums
    
    $
    1,460,000
    
    
    $
    1,283,170
    
    
    $
    1,107,460
    
    
    $
    919,152
    
    
    $
    601,253Policyholders Surplus
    
    $
    1,298,786
    
    
    $
    1,007,546
    
    
    $
    691,038
    
    
    $
    503,657
    
    
    $
    415,900Premium to Surplus Ratio
    
    
    1.1 to 1.0
    
    
    
    1.3 to 1.0
    
    
    
    1.6 to 1.0
    
    
    
    1.8 to 1.0
    
    
    
    1.5 to 1.0
   
    
    Maintaining an appropriate level of liquidity to satisfy the cash requirements of
current operating and longer term obligations;
    
    Adjusting investment risk to offset or complement insurance risk based upon total
risk tolerance; and
    
    Meeting insurance regulatory requirements with respect to investments under
applicable insurance laws.
   16




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##### Table of Contents



Estimated
    
    
    
    
    
    
    % ofMarket
    
    
    Carrying
    
    
    CarryingAmortized Cost
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in Thousands)Fixed Maturities:U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
    
    $
    15,867
    
    
    $
    16,129
    
    
    $
    16,129
    
    
    
    0.5
    %Obligations of States and Political Subdivisions
    
    
    1,380,755
    
    
    
    1,389,070
    
    
    
    1,389,070
    
    
    
    46.1Corporate and Bank Debt Securities
    
    
    109,784
    
    
    
    110,659
    
    
    
    110,659
    
    
    
    3.7Asset Backed Securities
    
    
    199,313
    
    
    
    200,651
    
    
    
    200,651
    
    
    
    6.7Mortgage Pass-Through Securities
    
    
    604,261
    
    
    
    611,025
    
    
    
    611,025
    
    
    
    20.2Collateralized Mortgage Obligations
    
    
    329,491
    
    
    
    331,663
    
    
    
    331,663
    
    
    
    11.0Total Fixed Maturities
    
    
    2,639,471
    
    
    
    2,659,197
    
    
    
    2,659,197
    
    
    
    88.2
    %Equity Securities
    
    
    322,877
    
    
    
    356,026
    
    
    
    356,026
    
    
    
    11.8Total Investments
    
    $
    2,962,348
    
    
    $
    3,015,223
    
    
    $
    3,015,223
    
    
    
    100.0
    %
   Estimated MarketAmortized Cost
    
    
    Value(Dollars in Thousands)Due in one year or less
    
    $
    49,212
    
    
    $
    49,138Due after one year through five years
    
    
    392,412
    
    
    
    394,931Due after five years through ten years
    
    
    360,945
    
    
    
    366,177Due after ten years
    
    
    703,837
    
    
    
    705,611Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities
    
    
    1,133,065
    
    
    
    1,143,340Total
    
    $
    2,639,471
    
    
    $
    2,659,197
   General:
 
    
    issuance, renewal, suspension and revocation of licenses to engage in the insurance business;
    
    standards of solvency, including risk-based capital measurements;
    
    restrictions on the nature, quality and concentration of investments;
    
    restrictions on the types of terms that we can include in the insurance policies we offer;
    
    certain required methods of accounting;
    
    maintenance of reserves for unearned premiums, losses and other purposes; and
 17




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##### Table of Contents




    
    potential assessments for the provision of funds necessary for the settlement of covered
claims under certain insurance policies provided by: impaired, insolvent or failed insurance
companies; and state insurance facilities.
  Regulation of Insurance Holding Companies:
 
    
    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.
   
    
    recommending the selection of independent certified public accountants;
    
    reviewing the insurers financial condition,
    
    reviewing 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.
 Certain Requirements of Florida Insurers:
 Dividend Restrictions:
 18




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##### Table of Contents



The National Association of Insurance Commissioners:
  Capital and Surplus Requirements:
 Risk-Based Capital:
 Insurance Guaranty Funds:
 Shared Markets:
 Mold Contamination:
 Certain Legislative Initiatives and Developments:
 
    
    programs in which state-sponsored entities provide property insurance in
catastrophe-prone areas; and
 19




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##### Table of Contents




    
    Florida legislation enacted in January 2007 which, among other things, included the
following major changes with regard to the Florida Hurricane Catastrophe Fund (the FHCF)
and Citizens Property Insurance Company (Citizens).
 
    
    FHCF: The law allows participating insurers to select options to expand their FHCF
coverage beyond the mandatory coverage levels for the 2007 through 2009 contract years by
selecting one or more of twelve $1 billion optional layers of coverage. The pricing for
the 12 optional coverage layers above the FHCF mandatory coverage will vary, but was
approximately a 2% rate-on-line for the 2007 contract. Insurers may also purchase
additional reinsurance coverage below the industry retention by selecting among three
alternative industry retention levels of $3 billion, $4 billion or $5 billion. For the
2007 contract, pricing for coverage at the three alternative industry retention levels
ranged from a 75% rate-on-line to an 85% rate-on-line. Each participating insurers share
of the industry retention will be determined by its share of FHCF reimbursement premiums.
Also, the legislation provides that the State Board of Administration may make available
an additional $4 billion of capacity. The legislation required every residential property
insurer to make a rate filing with the FOIR which reflected the savings or reduction in
loss exposure to the insurer due to the expanded FHCF coverage. Such reduced rates were
applied to policies issued on or after June 1, 2007.
    
    Citizens Property Insurance Company (Citizens): The new legislation enacted many
changes to the manner in which Citizens (the facility created by the State of Florida to
provide insurance to property owners unable to obtain coverage in the private insurance
market) conducts business. Citizens is no longer required to charge rates sufficient to
purchase reinsurance to cover specified levels of probable maximum loss or to establish
rates that are non-competitive with the private sector. The Citizens rate increase that
took effect on January 1, 2007 was rescinded and further rate changes were prohibited
during 2007. The legislation also provides that if a new applicant to Citizens is
offered coverage from an insurer at the insurers approved rate, then that policyholder
is not eligible for a Citizens policy, unless the insurers premium is more than 15%
greater than the premium for comparable coverage provided by Citizens.
  
    
    The federal Terrorism Risk Insurance Act of 2002, as amended by the Terrorism Risk
Insurance Program Reauthorization Act of 2007 (collectively the Act) established a
temporary federal program that provides for a system of shared public and private
compensation for insured commercial property and casualty losses resulting from certified
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 85% of covered
losses up to $100 billion cap. However, the government will provide funding only if
aggregate industry losses exceed $100 million. Each insurance company is subject to a
deductible based upon twenty percent (20%) of the previous years direct earned premium.
New policyholders have the option to accept or reject the coverage. Property and casualty
insurers, including us, are required to offer this coverage at each subsequent renewal even
if the policyholder elected to reject this coverage in the previous policy period. The
Program became effective upon enactment and runs through December 31, 2014.
    20




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##### Table of Contents



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




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##### Table of Contents



Because we are heavily regulated by the states in which we operate, we may be limited in the way we
operate.
  
    
    issuance, renewal, suspension and revocation of licenses to engage in the insurance
business;
    
    standards of solvency, including risk-based capital measurements;
    
    restrictions on the nature, quality and concentration of investments;
    
    restrictions on the premium rates we charge;
    
    restrictions on the terms and conditions that we can include in the insurance policies we
offer;
    
    certain required methods of accounting;
    
    reserves for unearned premiums, losses and other purposes; and
    
    potential assessments for the provision of funds necessary for the settlement of covered
claims under certain insurance policies provided by impaired, insolvent or failed insurance
companies.
  We are subject to possible assessments from state insurance facilities and state guaranty funds.
   22




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##### Table of Contents



Provisions of the Pennsylvania business corporation law, our articles of incorporation and the
insurance laws of Pennsylvania, Florida and other states may discourage takeover attempts.
    If our insurance company subsidiaries are unable to pay dividends or make loans to us due to
government regulations that apply to insurance companies or for any other reason, we may not be
able to continue our normal business operations.
  
    
    Philadelphia Indemnity Insurance Company;
    
    Philadelphia Insurance Company;
    
    Maguire Insurance Agency, Inc.;
    
    PCHC Investment Corp., an investment holding company;
    
    Liberty American Insurance Group, Inc., an insurance holding company;
    
    Liberty American Select Insurance Company;
    
    Liberty American Insurance Company;
    
    Liberty American Insurance Services, Inc.; and
    
    Liberty American Premium Finance Company.
  23




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##### Table of Contents



If A.M. Best downgrades the ratings of our Philadelphia Indemnity Insurance Company and
Philadelphia Insurance Company subsidiaries, we will not be able to compete as effectively with our
competitors and our ability to sell insurance policies could decline, reducing our sales and
earnings.
  
    
    we would not be able to compete as effectively with our competitors; and
    
    our ability to sell insurance policies could decline.
  If our reserves for losses and loss adjustment expenses are not adequate, we would have to increase
our reserves, which would result in reductions in net income and policyholders surplus and could
result in a downgrading of the ratings of our insurance company subsidiaries.
  
    
    the amounts of claims settlements;
    
    the number and severity of catastrophes, such as hurricanes;
    
    legislative and judicial activity; and
    
    changes in inflation and economic conditions.
  24




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##### Table of Contents



If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear
increased risks or reduce the level of our underwriting commitments.
  We cannot guarantee that our reinsurers will pay on a timely basis, if at all, and, as a result, we
could experience losses.
  We have a large shareholder whose interests may diverge from those of our other shareholders.
  The outcome of industry-wide investigations into finite risk reinsurance products could adversely
affect our business and results of operations.
   Because our investment portfolio is made up of primarily fixed income securities, our investment
income could fluctuate as a result of fluctuations in interest rates and spreads to U.S. Treasury
Securities.
  
   25




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##### Table of Contents



26




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##### Table of Contents



2007
    
    2006Quarter
    
    High
    
    Low
    
    High
    
    LowFirst
    
    
    48.000
    
    
    
    42.250
    
    
    
    36.810
    
    
    
    31.530Second
    
    
    46.940
    
    
    
    39.900
    
    
    
    34.260
    
    
    
    29.820Third
    
    
    42.470
    
    
    
    30.300
    
    
    
    40.090
    
    
    
    30.420Fourth
    
    
    46.720
    
    
    
    36.640
    
    
    
    45.990
    
    
    
    38.410
     (c) Total Number ofShares Purchased as
    
    (d) Approximate Dollar(a) Total Number
    
    
    
    
    
    Part of Publicly
    
    Value of Shares That Mayof Shares
    
    (b) Average Price
    
    Announced Plans or
    
    Yet Be Purchased UnderPeriod
    
    Purchased (1)
    
    Paid per Share
    
    Programs
    
    the Plans or Programs (2)October 1  October 31
    
    
    400
    
    
    $
    29.08
    
    
    
    
    
    
    $
    45,000,000November 1  November 30
    
    
    2,346
    
    
    $
    36.03
    
    
    
    
    
    
    $
    45,000,000December 1  December 31
    
    
    430
    
    
    $
    37.30
    
    
    
    
    
    
    $
    45,000,000
 
 (1)
    
    Such shares were originally issued under the Companys Employee Stock Purchase Plan and
Amended and Restated Employees Stock Incentive and Performance Based Compensation Plan, and
were subsequently repurchased by the Company upon the employees termination.(2)
    
    The Companys total stock purchase authorization, which was publicly announced in August 1998
and subsequently increased, amounts to $75.3 million, of which $30.3 million has been
utilized. 27




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##### Table of Contents



As of and For the Years Ended December 31,(Dollars In Thousands, Except Share and Per Share Data)2007
    
    2006
    
    2005
    
    2004
    
    2003Operations and Comprehensive Income Statement Data:Gross Written Premiums
    
    $
    1,692,223
    
    
    $
    1,493,248
    
    
    $
    1,264,915
    
    
    $
    1,171,317
    
    
    $
    905,993Gross Earned Premiums
    
    
    1,604,097
    
    
    
    1,365,358
    
    
    
    1,165,296
    
    
    
    1,062,057
    
    
    
    789,498Net Written Premiums
    
    
    1,459,633
    
    
    
    1,282,864
    
    
    
    1,110,771
    
    
    
    914,532
    
    
    
    602,300Net Earned Premiums
    
    
    1,379,243
    
    
    
    1,169,302
    
    
    
    976,647
    
    
    
    770,248
    
    
    
    574,518Net Investment Income
    
    
    117,224
    
    
    
    91,699
    
    
    
    63,709
    
    
    
    43,490
    
    
    
    38,806Net Realized Investment Gain (Loss)
    
    
    29,566
    
    
    
    (9,861
    )
    
    
    9,609
    
    
    
    761
    
    
    
    794Other Income
    
    
    3,561
    
    
    
    2,630
    
    
    
    1,464
    
    
    
    4,357
    
    
    
    5,519Total Revenue
    
    
    1,529,594
    
    
    
    1,253,770
    
    
    
    1,051,429
    
    
    
    818,856
    
    
    
    619,637Net Loss and Loss Adjustment Expenses
    
    
    618,953
    
    
    
    468,212
    
    
    
    504,006
    
    
    
    476,115
    
    
    
    359,177Acquisition Costs and Other Underwriting Expenses
    
    
    413,103
    
    
    
    338,267
    
    
    
    263,759
    
    
    
    214,369
    
    
    
    162,912Other Operating Expenses
    
    
    12,241
    
    
    
    12,637
    
    
    
    17,124
    
    
    
    9,439
    
    
    
    7,822Goodwill Impairment Loss (1)
    
    
    
    
    
    
    
    
    
    
    25,724
    
    
    
    
    
    
    
    Total Losses and Expenses
    
    
    1,044,297
    
    
    
    819,116
    
    
    
    810,613
    
    
    
    699,923
    
    
    
    529,911Income Before Income Taxes
    
    
    485,297
    
    
    
    434,654
    
    
    
    240,816
    
    
    
    118,933
    
    
    
    89,726Total Income Tax Expense
    
    
    158,484
    
    
    
    145,805
    
    
    
    84,128
    
    
    
    35,250
    
    
    
    27,539Net Income
    
    $
    326,813
    
    
    $
    288,849
    
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187Weighted-Average Common Shares Outstanding
    
    
    70,381,631
    
    
    
    69,795,947
    
    
    
    68,551,572
    
    
    
    66,464,460
    
    
    
    65,726,364Weighted-Average Share Equivalents Outstanding
    
    
    3,845,044
    
    
    
    3,674,121
    
    
    
    4,533,807
    
    
    
    3,456,099
    
    
    
    2,254,800Weighted-Average Shares and Share Equivalents Outstanding
    
    
    74,266,675
    
    
    
    73,470,068
    
    
    
    73,085,379
    
    
    
    69,920,559
    
    
    
    67,981,164Basic Earnings Per Share
    
    $
    4.64
    
    
    $
    4.14
    
    
    $
    2.29
    
    
    $
    1.26
    
    
    $
    0.95Diluted Earnings Per Share
    
    $
    4.40
    
    
    $
    3.93
    
    
    $
    2.14
    
    
    $
    1.20
    
    
    $
    0.91Cash Dividends Per Share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Year End Financial Position:Total Investments and Cash and Cash Equivalents
    
    $
    3,121,565
    
    
    $
    2,542,313
    
    
    $
    2,009,370
    
    
    $
    1,623,647
    
    
    $
    1,245,994Total Assets
    
    
    4,099,938
    
    
    
    3,438,537
    
    
    
    2,927,826
    
    
    
    2,485,656
    
    
    
    1,870,941Unpaid Loss and Loss Adjustment Expenses
    
    
    1,431,933
    
    
    
    1,283,238
    
    
    
    1,245,763
    
    
    
    996,667
    
    
    
    627,086Total Shareholders Equity
    
    
    1,547,473
    
    
    
    1,167,267
    
    
    
    816,496
    
    
    
    644,157
    
    
    
    545,646Common Shares Outstanding
    
    
    72,087,287
    
    
    
    70,848,482
    
    
    
    69,266,016
    
    
    
    66,821,751
    
    
    
    66,022,656Insurance Operating Ratios (Statutory Basis):Net Loss and Loss Adjustment Expenses to Net Earned Premiums
    
    
    44.9
    %
    
    
    39.8
    %
    
    
    51.8
    %
    
    
    61.6
    %
    
    
    63.1
    %Underwriting Expenses to Net Written Premiums
    
    
    29.4
    %
    
    
    28.5
    %
    
    
    26.3
    %
    
    
    27.1
    %
    
    
    27.2
    %Combined Ratio
    
    
    74.3
    %
    
    
    68.3
    %
    
    
    78.1
    %
    
    
    88.7
    %
    
    
    90.3
    %A.M. Best Rating (2)
    
    
    A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+(Superior)
    
    (Superior)
    
    (Superior)
    
    (Superior)
    
    (Superior)
 
 (1)
    
    During the fourth quarter of 2005, the Company recorded a $25.7 million impairment charge
related to the write-down of goodwill arising from the acquisition of the Companys personal
lines segment. This loss, which was the same on a pre-tax and after-tax basis, was a result of
the Companys annual evaluation of the carrying value of goodwill. The write-down was
determined by comparing the fair value of the Companys personal lines segment and the implied
value of the goodwill with the carrying amounts on the balance sheet. The write-down resulted
from changes in business assumptions primarily due to the following: the unprecedented
hurricane activity and associated catastrophe losses experienced in 2004 and 2005; the
uncertainty of 2006 catastrophe reinsurance renewal rates; the decision to change the personal
lines segment business model to discontinue writing the mobile homeowners business and target
new construction homeowners business; and the disruption in the Florida marketplace.(2)
    
    As of September 30, 2004, the Companys four insurance subsidiaries were rated A+ (Superior)
by A.M. Best Company. Effective October 1, 2004, the Companys four insurance subsidiaries
entered into a new intercompany reinsurance pooling arrangement. Two of the insurance
subsidiaries, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company,
entered into an intercompany reinsurance pooling arrangement which included substantially all
the Companys commercial and specialty lines business. The Companys two other insurance
subsidiaries, Liberty American Select Insurance Company and Liberty American Insurance
Company, also entered into an intercompany reinsurance pooling arrangement which substantially
included all the Companys personal lines segment business. As a result of this arrangement,
A.M. Best
Company assigned an A- (Excellent) rating to these two companies. The rating of Philadelphia
Indemnity Insurance Company and Philadelphia Insurance Company remained at A+. 28




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FORWARD-LOOKING INFORMATION
  (i)
    
    Changes in the business environment in which we operate, 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;(viii)
    
    Ability and willingness of our reinsurers to pay;(ix)
    
    Future terrorist attacks; and(x)
    
    The outcome of the Securities and Exchange Commissions industry-wide investigation
relating to the use of non-traditional insurance products, including finite risk
reinsurance arrangements.
  GENERAL
 Overview
  
    
    The Commercial Lines Underwriting Group has underwriting responsibility for the commercial
multi-peril package, commercial automobile, specialty property and inland marine and the
antique/collector car insurance products;
    
    The Specialty Lines Underwriting Group, has underwriting responsibility for the professional
and management liability insurance products; and
    
    The Personal Lines Group, which has underwriting responsibility for personal property
insurance products for the homeowners and manufactured housing markets in Florida, and the National
Flood Insurance Program for both Personal and Commercial policyholders.
    29




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##### Table of Contents



Commercial
    
    Specialty
    
    Personal($s in millions)
    
    Lines
    
    Lines
    
    Lines
    
    Total2007 Gross Written Premium
    
    $
    1,388.2
    
    
    $
    245.2
    
    
    $
    58.8
    
    
    $
    1,692.22006 Gross Written Premium
    
    $
    1,169.4
    
    
    $
    227.6
    
    
    $
    96.2
    
    
    $
    1,493.2Percentage Increase (Decrease)
    
    
    18.7
    %
    
    
    7.7
    %
    
    
    (38.9
    )%
    
    
    13.3
    %
    Commercial
    
    Specialty
    
    Personal
    
    WeightedLines
    
    Lines
    
    Lines
    
    Average2007 calendar year net loss and loss adjustment expense ratio
    
    
    45.8
    %
    
    
    37.9
    %
    
    
    60.7
    %
    
    
    44.9
    %2007 accident year net loss and loss adjustment expense ratio
    
    
    49.1
    %
    
    
    62.1
    %
    
    
    68.1
    %
    
    
    51.1
    %
  
    
    number of policies written,
    
    renewal retention ratios,
    
    new business production,
    
    pricing,
    
    risk selection, and
    
    loss and loss adjustment expense ratios.
  
    
    level of expenses,
    
    investment performance,
    
    return on equity,
    
    cash flow, and
    
    capital leverage.
 30




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For the years ended December 31,(In millions)
    
    2007
    
    2006
    
    2005Total Revenue
    
    $
    1,529.6
    
    
    $
    1,253.8
    
    
    $
    1,051.4Total Losses and Expenses
    
    $
    1,044.3
    
    
    $
    819.1
    
    
    $
    810.6Net Income
    
    $
    326.8
    
    
    $
    288.8
    
    
    $
    156.7
  
    
    Investments:
 
    
    Fair values
   
    
    cash flows,
    
    collateral performance including delinquencies, default, and recoveries; and
    
    any market clearing activity and/or liquidity circumstances in the security or other
benchmark securities that may have occurred since the prior month-end pricing period.
     31




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##### Table of Contents




    
    Other than temporary impairments
    
    
    Liability for Unpaid Loss and Loss Adjustment Expenses:
   
    
    our growth,
    
    changes in our operations, and
    
    legal, social, and economic developments.
   32




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##### Table of Contents



Gross Loss and Loss Adjustment Expense Reservesby Line of Business(In Thousands)
    
    As of December 31, 2007Case
    
    
    IBNR
    
    
    TotalCommercial Lines Segment:General Liability
    
    $
    258,261
    
    
    $
    400,601
    
    
    $
    658,862Auto
    
    
    97,862
    
    
    
    89,991
    
    
    
    187,853Property
    
    
    118,073
    
    
    
    14,690
    
    
    
    132,763Rental/Leasing  Supplemental Liability
    
    
    7,121
    
    
    
    6,537
    
    
    
    13,658Rental/Leasing  Other
    
    
    8,812
    
    
    
    19,032
    
    
    
    27,844Program Umbrella
    
    
    22,951
    
    
    
    13,237
    
    
    
    36,188Other
    
    
    6,148
    
    
    
    5,311
    
    
    
    11,459519,228
    
    
    
    549,399
    
    
    
    1,068,627Specialty Lines Segment:Professional Liability Errors & Omissions
    
    
    50,422
    
    
    
    90,220
    
    
    
    140,642Management Liability Directors & Officers
    
    
    60,373
    
    
    
    108,478
    
    
    
    168,851Professional Liability Excess
    
    
    19,108
    
    
    
    19,832
    
    
    
    38,940129,903
    
    
    
    218,530
    
    
    
    348,433Personal Lines Segment:
    
    
    4,460
    
    
    
    10,413
    
    
    
    14,873Total
    
    $
    653,591
    
    
    $
    778,342
    
    
    $
    1,431,933
  
    
    Ultimate losses are determinable by extrapolation of claim emergence and settlement
patterns observed in the past (via loss development factor selection) that can
reasonably be expected to persist into the future.This assumption implies that historical claim reporting, handling, and settlement
patterns are predictive of future activity and can thus be utilized to forecast ultimate
liabilities on unpaid claims. Since the many factors that influence claim activity can
change over time and are often difficult to isolate or quantify, the rate at which claims
arose in the past and the costs to settle them may not always be representative of what
will occur in the future. Key objectives in developing estimates of ultimate losses are
to identify aberrations and systemic changes occurring within historical experience and
to adjust for them so that the future can be projected on a more reliable basis. Various
diagnostic tools are employed, (e.g., ratios of claims paid-to-claims incurred and
analyses of average claim costs by age of development), and close communication is
maintained among our actuarial, claims and underwriting departments to continually
monitor and assess the validity of this assumption.In general, this assumption is considered fully valid across our lines of business for
older, more mature accident years. Most claims in these years have been reported, fully
adjusted and settled, and any remaining unpaid claims are not anticipated to result in
incurred loss activity at levels significant enough to cause material deviation in
ultimate losses as projected by generally accepted actuarial methods that rely upon this
assumption.Loss reserve indications from generally accepted actuarial methods that rely upon this
assumption are utilized where this assumption is considered fully valid. Where this
assumption is considered to have less than full validity, those indications receive
partial or no weight.
 
    
    Ultimate loss ratios (ultimate losses divided by earned premiums) in the current and
most recent accident years can be projected from ultimate loss ratios of prior years
after adjusting for factors such as trends and pricing changes, to the extent that those
factors can be quantified.
 33




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This assumption implies consistency in the loss ratio, after adjusting for inflationary
factors and other trends that may be affecting losses and/or premiums. Generally
accepted actuarial methods employing this expected loss ratio assumption are used to
supplement loss reserve indications from standard loss development methods where the
validity of the first assumption discussed is incomplete. While this assumption is also
subject to validity constraints, it is generally considered to have higher reliability
than the first assumption discussed for the current and more recently completed accident
years, as changes in rates and pricing can be monitored and loss trends can be derived or
inferred from both internal and external sources.
  
    
    Historical paid loss development methods:These methods use historical loss payments over discrete periods of time to estimate
future losses. Historical paid loss development methods assume that the ratio of losses
paid in one period to losses paid in an earlier period will remain constant. These
methods assume that factors which have affected paid losses in the past, such as claim
settlement patterns, inflation, or the effects of litigation, will remain constant in the
future. Because historical paid loss development methods do not use case reserves to
estimate ultimate losses, they can be more reliable than the other methods that use
incurred losses in situations where there are significant changes in how case reserves
are established by claims adjusters. However, historical paid loss development methods
are more leveraged (meaning that small changes in payments have a larger impact on
estimates of ultimate losses) than actuarial methods that use incurred losses, because
cumulative loss payments can take much longer to converge on the expected ultimate losses
than cumulative incurred amounts. In addition, and for similar reasons, historical paid
loss development methods are often slow to react to situations when new or different
factors arise than those that have affected paid losses in the past.
    
    Historical incurred loss development methods:These methods, like historical paid loss development methods, assume that the ratio of
losses in one period to losses in an earlier period will remain constant in the future.
However, these methods use incurred losses (i.e., the sum of cumulative historical loss
payments plus outstanding case reserves) over discrete periods of time to estimate future
losses. Historical incurred loss development methods can be preferable to historical
paid loss development methods because they explicitly take into account open cases and
the claims adjusters evaluations of the cost to settle all known claims. However,
historical incurred loss development methods assume that case reserving practices are
consistently applied over time. Therefore, when there have been significant changes in
how case reserves are established or material changes in the underlying loss exposures
and/or circumstances which may lead to a claim being reported, using incurred loss data
to project ultimate losses can be less reliable than other methods.
    
    Expected loss ratio methods:These methods are based on the assumption that ultimate losses vary proportionately with
premiums. Expected loss ratios are typically developed based upon the information used
in pricing, such as rate changes and trends affecting the frequency and/or severity of
claims, and are multiplied by the total amount of premiums earned during a given accident
period to calculate ultimate losses incurred during that same period. Expected loss
ratio methods are useful for estimating ultimate losses in the early years of long-tailed
lines of business, when little or no paid or incurred loss information is available, and
in new or growing lines of business where historical information may lack predictive
accuracy or otherwise not be representative of current loss exposures. Where expected
loss ratio methods are employed, one or more of several traditional and accepted
actuarial estimation methods are used to select expected loss ratios, including: loss
ratios from mature years adjusted for trends in pricing and claim costs; permissible loss
ratios underlying current rate levels; and projections of industry loss ratios in similar
lines.
 34




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##### Table of Contents




    
    Adjusted historical paid and incurred loss development methods:These methods take traditional historical paid and incurred loss development methods and
adjust them for the estimated impact of recent changes, such as inflation, changes in
coverage and/or demographics of the line of business, the speed of claim payments, or the
adequacy of case reserves. During periods of significant change, adjusted historical
paid and incurred loss development methods are often more reliable methods of predicting
ultimate losses provided the actuaries can reasonably quantify the impact of each change.
    
    Frequency/Severity Methods:These methods combine estimates of ultimate claim counts and estimates of per claim
ultimate loss severities to yield estimates of ultimate losses. Ultimate claim counts
(frequency) are typically estimated using expected ratios of claims to a selected base
(e.g., exposures or policy counts), with the expected ratios being based on historically
observed experience. Adjustments for trends affecting claim occurrence or affecting the
value of the base are also typically made. Ultimate loss severity estimates are
typically based on historically observed per claim average losses and are adjusted for
trends affecting the size of claims, most notably inflation. The Company has mainly used
this method in the case of its residual value product.
     35




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##### Table of Contents



th th
  Expected Loss RatiosIncrease/(Decrease)
    
    
    Low
    
    
    No Change
    
    
    HighLoss
    
    
    Low
    
    
    $
    (119.6
    )(a)
    
    
    $
    (55.1
    )
    
    
    $
    9.4Development
    
    
    No Change
    
    
    $
    (66.0
    )
    
    
    $
    0.0
    
    
    
    $
    65.0Factors
    
    
    High
    
    
    $
    (32.0
    )
    
    
    $
    34.2
    
    
    
    $
    100.4
    (b)
 
 (a)
    
    This decrease in our actuarially determined reserve estimate would increase our net
income and financial position by $68.5 million, which reflects the impact of reinsurance
and federal income taxes. This change would not have a material impact on our liquidity.(b)
    
    This increase in our actuarially determined reserve estimate would decrease our net
income and financial position by $57.5 million, which reflects the impact of reinsurance
and federal income taxes. This change would not have a material impact on our liquidity.  Loss
Development FactorsAccident
    
    
    Loss
    
    

Loss
AdjustmentExpense
    
    

Expected
LossRatiosYears (a)
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High(b)1998  2004
    
    
    
    (0.5
    )%
    
    
    
    0.1
    %
    
    
    
    (0.8
    )%
    
    
    
    1.0
    %
    
    
    
    (2.7
    )%
    
    
    
    2.7
    %2005  2007
    
    
    
    (1.8
    )%
    
    
    
    1.5
    %
    
    
    
    (0.9
    )%
    
    
    
    3.6
    %
    
    
    
    (3.5
    )%
    
    
    
    3.5
    %
 
 (a)
    
    Adjustments were not made to accident years aged beyond 10 years (i.e. 1997 and
prior).
 36




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##### Table of Contents



(b)
    
    The High end of the reasonably likely range of changes in expected loss ratios was
judgmentally raised to reflect that the historical period over which the expected loss
ratios were analyzed is widely recognized in the insurance industry as covering the hard
market (i.e. most favorable pricing and coverage terms from the insurers perspective)
portion of the current insurance cycle. 
    
    Reinsurance Receivables:
  
    
    principally contract with large reinsurers that are rated at least A (Excellent) by A.M.
Best Company;
    
    obtain collateral for balances due from reinsurers that are not approved by the
Pennsylvania and/or Florida Insurance Departments due to their foreign domiciliary status;
and
    
    seek to collect the obligations of our reinsurers on a timely basis through the regular
monitoring of reinsurance receivables.
  
    
    Liability for Preferred Agent Profit Sharing:
  
    
    Share-based Compensation Expense:
   
    
    Share-based payment awards granted prior to, but not yet vested, as of December
31, 2006 based on the grant date fair value estimated in accordance with the pro
forma provisions of SFAS 123, and
 37




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##### Table of Contents




    
    Compensation expense for the share-based payment awards granted subsequent to
December 31, 2006 based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R).
          38




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Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2007 Gross Written Premiums
    
    $
    1,388.2
    
    
    $
    245.2
    
    
    $
    58.8
    
    
    $
    1,692.22006 Gross Written Premiums
    
    $
    1,169.4
    
    
    $
    227.6
    
    
    $
    96.2
    
    
    $
    1,493.2Percentage Increase (Decrease)
    
    
    18.7
    %
    
    
    7.7
    %
    
    
    (38.9
    )%
    
    
    13.3
    %2007 Gross Earned Premiums
    
    $
    1,290.0
    
    
    $
    234.1
    
    
    $
    80.0
    
    
    $
    1,604.12006 Gross Earned Premiums
    
    $
    1,046.8
    
    
    $
    217.5
    
    
    $
    101.1
    
    
    $
    1,365.4Percentage Increase (Decrease)
    
    
    23.2
    %
    
    
    7.6
    %
    
    
    (20.9
    )%
    
    
    17.5
    %
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships formed
by our marketing Regional Vice Presidents continue to result in additional prospects and
increased premium writings in existing product offerings, most notably for our condominium and
homeowners associations, non-profit, specialty schools, and golf and country clubs products in
the commercial package product grouping as well as the inland marine product in the specialty
property product grouping. These product offerings accounted for approximately $123.3 million
of the $218.8 million total Commercial Lines segment gross written premiums increase.
 
    
    The introduction of several new niche product offerings, most notably the antique/collector
vehicle commercial auto product, as well as the health and wellness business owner,
professional sports and entertainment, religious organizations, camp operators and affordable
housing products in the commercial package product grouping. These new product offerings
accounted for approximately $84.6 million of the $218.8 million total Commercial Lines segment
gross written premiums increase.
 
    
    An increase in our marketing personnel, as well as an increase in the number of our preferred
agents.
 
    
    Our Firemark producer program, which promotes our product offerings and underwriting
philosophy in selected producers offices.
 
    
    As a result of the factors noted above:
 
    
    The commercial lines segment in-force policy counts increased by 130.6% for the year
ended December 31, 2007. The introduction of the antique/collector vehicle program
accounted for 67.4% of the 130.6% total policy count increase for the period. The other
factors discussed above accounted for the remaining 32.6% increase in the policy counts for
the period.
    
    The specialty lines segment in-force policy counts increased by 26.2% for the year ended
December 31, 2007.
 
    
    A $3.0 million increase in gross written premium by the personal lines segment for the
National Flood Insurance Program (NFIP) for the year ended December 31, 2007, compared to
2006. Gross written premiums for the NFIP accounted for 59.2% and 33.1% of the total personal
lines segment gross written premiums for the years ended December 31, 2007 and 2006,
respectively.
  
    
    Restriction of personal lines business production which consisted of non-renewing all
homeowners and rental dwelling policies providing windstorm coverage which expired between
June 15, 2007 and December 31, 2007. This restriction was imposed to reduce our exposure to
catastrophe wind losses.In addition, on January 4, 2008, we provided the Florida Office of Insurance Regulation (FOIR)
with the required statutory notification of our intention to non-renew all of our Florida
personal lines policies, other than policies issued pursuant to the NFIP, beginning with policies
expiring on or about July 15, 2008. In February 2008, we received preliminary notification from
the FOIR
 39




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##### Table of Contents



that they have no objection to our intention to non-renew the noted policies. We currently
expect the non-renewal process to be completed by July 15, 2009. As of December 31, 2007, there
were approximately 4,100 in-force policies with an aggregate in-force premium of approximately
$3.2 million which expire between July 15, 2008 and December 31, 2008, which we will not renew
during 2008.
 
    
    A decrease in the lawyers professional liability gross written premium of $11.6 million to
$0.2 million for the year ended December 31, 2007 as a result of non-renewing policies due to
unacceptable underwriting results.
 
    
    An increase in price competition during the twelve months ended December 31, 2007,
particularly with respect to the following:
 
    
    Large commercial property-driven accounts located in non-coastal areas of the country;
    
    Commercial package business with annual premiums in excess of $100,000; and
    
    Professional liability accounts at all premium levels.
 
    
    Realized average rate decreases on renewal business approximating 3.6% and 1.8% during 2007
for the commercial lines and specialty lines segments, respectively.
   Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2007 Net Written Premiums
    
    $
    1,266.5
    
    
    $
    200.5
    
    
    $
    (7.4
    )
    
    $
    1,459.62006 Net Written Premiums
    
    $
    1,080.2
    
    
    $
    181.4
    
    
    $
    21.3
    
    
    $
    1,282.9Percentage Increase (Decrease)
    
    
    17.2
    %
    
    
    10.5
    %
    
    
    (134.7
    )%
    
    
    13.8
    %2007 Net Earned Premiums
    
    $
    1,174.8
    
    
    $
    189.0
    
    
    $
    15.4
    
    
    $
    1,379.22006 Net Earned Premiums
    
    $
    966.3
    
    
    $
    174.0
    
    
    $
    29.0
    
    
    $
    1,169.3Percentage Increase (Decrease)
    
    
    21.6
    %
    
    
    8.6
    %
    
    
    (46.9
    )%
    
    
    18.0
    %
  
    
    For our commercial lines segment, we experienced rate decreases on our annual January 1, 2007
renewal of our casualty excess of loss and property excess of loss reinsurance agreements
compared to the rates on our January 1, 2006 renewals of these agreements.
 
    
    For our commercial lines segment, our property catastrophe costs were higher for the year
ended December 31, 2007 compared to December 31, 2006. For our June 1, 2007 commercial lines
segment property catastrophe reinsurance renewal, we experienced lower reinsurance rates,
purchased increased catastrophe limits due to higher exposures primarily in the Northeast part
of the country, and maintained the same catastrophe loss retention compared to our June 1,
2006 renewal.
 
    
    For our personal lines segment, our property catastrophe costs were lower for the year ended
December 31, 2007 compared to December 31, 2006. For our June 1, 2007 personal lines segment
property catastrophe reinsurance renewal, we experienced lower reinsurance rates, reduced our
catastrophe loss retention, and purchased decreased catastrophe coverage limits due to lower
exposures, compared to our June 1, 2006 renewal.
 
    
    Certain of our reinsurance contracts have reinstatement or additional premium provisions
under which we must pay reinstatement or additional reinsurance premiums to reinstate coverage
provisions upon utilization of initial reinsurance coverage. During the
 40




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##### Table of Contents



years ended December 31, 2007 and 2006, we accrued $5.0 million ($2.1 million for the commercial
lines segment and $2.9 million for the specialty lines segment) and $5.3 million ($2.2 million
for the commercial lines segment and $3.1 million for the specialty lines segment) respectively,
of reinstatement or additional reinsurance premium under our casualty excess of loss reinsurance
treaties, as a result of changes in ultimate loss estimates. The reinstatement premium increased
ceded written and earned premiums and reduced net written and earned premiums.
 
    
    Effective for the two-year period beginning March 1, 2007, we purchased Terrorism Catastrophe
Excess of Loss reinsurance coverage for our commercial lines segment which provides, on an
annual basis, in the aggregate, $50.0 million of coverage for losses arising from acts of
terrorism incurred in excess of $10.0 million, after all applicable inuring reinsurance
coverages. The agreements providing this coverage allows one reinstatement on an annual basis
at the same cost as the initial coverage. We did not purchase similar reinsurance coverage in
the prior year.
 Net Investment Income:
  
    
    The portfolio duration target was increased;
    
    The percentage of the fixed maturity portfolio allocated to municipal security
investments was increased; and
    
    The percentage of the investment portfolio allocated to common stock investments was
increased.
   Net Realized Investment Gain (Loss):
   Other Income
 41




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##### Table of Contents



Net Loss and Loss Adjustment Expenses:
  
    
    The growth in net earned premiums; and
 
    
    Net reserve actions taken during the year ended December 31, 2007 decreased net estimated
unpaid loss and loss adjustment expenses for accident years 2006 and prior by $85.8 million,
as compared to net reserve actions taken during the year ended December 31, 2006 which
decreased estimated net unpaid loss and loss adjustment expenses for accident years 2005 and
prior by $91.4 million. Decreases in the estimated net unpaid loss and loss adjustment
expenses for prior accident years during the year ended December 31, 2007 were as follows:
 Net Basis Decrease(In millions)Accident Year 2006
    
    $
    22.8Accident Year 2005
    
    
    25.0Accident Year 2004
    
    
    19.1Accident Years 2003 and prior
    
    
    18.9Total Decrease
    
    $
    85.8
 
    
    For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for:
 
    
    Commercial property, professional liability, and commercial automobile coverages
due to better than expected case incurred loss development, primarily as a result of both
claim frequency and severity emergence being less than anticipated, and
    
    Management liability coverages due to better than expected case incurred loss
development primarily as a result of claim severity emergence being less than
anticipated.
 
    
    For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
 
    
    Professional liability, management liability and commercial property coverages due
to better than expected case incurred loss development primarily as a result of claim
severity being less than anticipated.
 
    
    General liability and commercial automobile coverages due to better than expected
case incurred loss development, primarily as a result of both claim frequency and
severity emergence being less than anticipated.
 
    
    For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
 
    
    Professional liability, commercial general liability, rental leasing and management
liability coverages due to better than expected case incurred loss development primarily
as a result of claim severity emergence being less than anticipated.
 
    
    For accident year 2003 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for:
 
    
    Professional liability, management liability, and commercial general liability coverages
due to better than expected case incurred loss development primarily as a result of claim
severity emergence being less than anticipated.
 
    
    An increase in the current accident year net ultimate loss and loss adjustment expense
ratio for the year ended December 31, 2007 compared to 2006. During the year ended December
31, 2007, a net ultimate loss and loss adjustment expense ratio of
 42




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##### Table of Contents



51.1% was estimated for the 2007 accident year. During the year ended December 31, 2006, a
net ultimate loss and loss adjustment expense ratio of 47.6% was estimated for the 2006
accident year. The increase in the 2007 accident year loss and loss adjustment expense ration
is principally attributable to:
 
    
    A $7.5 million net loss and loss adjustment expense estimate which we recognized
for the October 2007 California wildfires during 2007. We incurred no such catastrophe
losses during 2006.
 
    
    An increase in the net ultimate loss and loss adjustment expense ratio for property
business in the commercial lines segment due primarily to weather related losses, and a
higher frequency of large fire losses during 2007 compared to 2006; and
 
    
    Realized average rate decreases on renewal business approximating 3.6% and 1.8% for
the commercial and specialty lines segments, respectively, for 2007 compared to 2006.
  Acquisition Costs and Other Underwriting Expenses:
  
    
    A $3.0 million change in the net reduction to expenses related to assessments from
Citizens Property Insurance Corporation (Citizens). During 2007, we recognized a net
reduction to expense of $0.4 million related to the Citizens assessments, compared to a net
reduction to expense of $3.4 million related to Citizens assessments during 2006. The
expense reduction during 2007 is attributable to recoupments recognized from our
policyholders.
 
    
    A $1.6 million increase in amortization expense of intangible assets for the renewal
rights of insurance policies which we purchased during 2007 and 2006.
  Income Tax Expense:
 
 Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Gross Written Premiums
    
    $
    1,169.4
    
    
    $
    227.6
    
    
    $
    96.2
    
    
    $
    1,493.22005 Gross Written Premiums
    
    $
    960.3
    
    
    $
    205.3
    
    
    $
    99.3
    
    
    $
    1,264.9Percentage Increase (Decrease)
    
    
    21.8
    %
    
    
    10.9
    %
    
    
    (3.1
    )%
    
    
    18.0
    %2006 Gross Earned Premiums
    
    $
    1,046.8
    
    
    $
    217.5
    
    
    $
    101.1
    
    
    $
    1,365.42005 Gross Earned Premiums
    
    $
    873.8
    
    
    $
    194.3
    
    
    $
    97.2
    
    
    $
    1,165.3Percentage Increase (Decrease)
    
    
    19.8
    %
    
    
    11.9
    %
    
    
    4.0
    %
    
    
    17.2
    %
 43




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##### Table of Contents




    
    Prospecting efforts by marketing personnel in conjunction with long term relationships formed
by our marketing Regional Vice Presidents continue to result in additional prospects and
increased premium writings in existing product offerings, most notably for our non-profit,
condominium association and sports leagues commercial package product lines. These product
offerings accounted for approximately $105.3 million of the $209.1 million total Commercial
Lines segment gross written premiums increase.
 
    
    The introduction of several new niche product offerings, most notably religious
organizations, professional sports and entertainment commercial package products and the
antique/collector vehicle product. These new product offerings accounted for approximately
$37.5 million of the $209.1 million total Commercial Lines segment gross written premiums
increase.
 
    
    Continued expansion of marketing efforts relating to Commercial Lines and Specialty Lines
products through our field organization and preferred agents.
 
    
    An increase to in-force policy counts as of December 31, 2006 versus December 31, 2005 of
57.3% for the Commercial Lines segment. The introduction of the antique/collector vehicle
program accounted for 22.3% of the 57.3% total policy count increase. The other factors
discussed above accounted for the remaining 35.0% increase in the policy counts.
 
    
    An increase to in-force policy counts as of December 31, 2006 versus December 31, 2005 of
15.7% for the Specialty Lines segment, primarily as a result of the factors discussed above.
 
    
    Realized average rate increases on renewal business approximating 0.9%, and 26.3% for the
Commercial and Personal Lines segments, respectively.
  
    
    A decrease in mobile homeowners gross written premium of $13.7 million from Libertys
continuing shift in product mix as a result of reducing mobile homeowners product policies and
increasing homeowners product policies. This $13.7 million decrease was offset in part by a
$4.9 million increase in homeowners gross written premium.
 
    
    A decrease in Libertys renewal retention percentage to 65.1% in the fourth quarter of 2006,
as compared to its year-to-date renewal retention for the nine months ending September 30,
2006 of 90.9%. This decrease in renewal retention is primarily attributed to Libertys
implementation of rate increases effective September 1, 2006, relating to higher reinsurance
costs. These rate increases are subject to reduction pending Florida Office of Insurance
Regulation final approval.
 
    
    Restricting new personal lines business production of Liberty due to the significant increase
in catastrophe reinsurance rates and restricted availability of reinsurance catastrophe
coverage experienced at the June 1, 2006 catastrophe reinsurance renewal.
 
    
    A decrease in the lawyers professional liability gross written premium of $7.1 million as a
result of non-renewing policies due to unacceptable underwriting results. Total 2006 gross
written premium for the lawyers professional liability product was $11.8 million. We will
continue to non-renew our remaining lawyers professional liability business in 2007.
 
    
    A decrease in in-force policy counts for the personal lines segment of 27.2%, resulting from
a decrease to the in-force counts for the mobile homeowners product and the homeowners product
of 76.6% and 19.0%, respectively, due to the factors noted above.
 
    
    Realized average rate decreases on renewal business approximating 0.5% for the specialty
lines segment.
  44




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##### Table of Contents



Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Net Written Premiums
    
    $
    1,080.2
    
    
    $
    181.4
    
    
    $
    21.3
    
    
    $
    1,282.92005 Net Written Premiums
    
    $
    904.7
    
    
    $
    159.1
    
    
    $
    47.0
    
    
    $
    1,110.8Percentage Increase (Decrease)
    
    
    19.4
    %
    
    
    14.0
    %
    
    
    (54.7
    )%
    
    
    15.5
    %2006 Net Earned Premiums
    
    $
    966.3
    
    
    $
    174.0
    
    
    $
    29.0
    
    
    $
    1,169.32005 Net Earned Premiums
    
    $
    778.4
    
    
    $
    151.7
    
    
    $
    46.5
    
    
    $
    976.6Percentage Increase (Decrease)
    
    
    24.1
    %
    
    
    14.7
    %
    
    
    (37.6
    )%
    
    
    19.7
    %
  
    
    Our decision to terminate our net liability cession under our quota share reinsurance
agreement whereby we had ceded 10% of our commercial and specialty lines net written and
earned premiums and loss and loss adjustment expenses for policies commencing during 2004.
Pursuant to the agreement, during the year ended December 31, 2005, we ceded $43.7 million
($36.5 million for the commercial lines segment, $7.1 million for the specialty lines segment,
and $0.1 million for the personal lines segment) of net earned premiums, which represented the
unearned premium reserves as of December 31, 2004 on policies commencing during 2004. No
earned premiums were ceded pursuant to this agreement during 2006 due to our decision to
terminate the agreement on a run-off basis effective December 31, 2004.
 
    
    Certain of our reinsurance contracts have reinstatement or additional premium provisions
under which we must pay reinstatement or additional reinsurance premiums to reinstate coverage
provisions upon utilization of initial reinsurance coverage. During the years ended December
31, 2006 and 2005, we accrued $5.3 million ($2.2 million for the commercial lines segment and
$3.1 million for the specialty lines segment) and $3.7 million ($1.6 million for the
commercial lines segment and $2.1 million for the specialty lines segment) respectively, of
reinstatement or additional reinsurance premium under our casualty excess of loss reinsurance
treaties, as a result of changes in ultimate loss estimates. The reinstatement premium
increased ceded written and earned premiums and reduced net written and earned premiums.
 
    
    During the year ended December 31, 2005, we experienced catastrophe losses attributable to
Hurricanes Dennis, Katrina, Rita and Wilma. These multiple hurricane events resulted in the
recognition of reinstatement and accelerated catastrophe reinsurance premium expense of $3.9
million ($0.6 million for the Commercial Lines Segment and $3.3 million for the Personal Lines
Segment) during the year ended December 31, 2005 due to the utilization of certain of our
catastrophe reinsurance coverages. This recognition of reinstatement and accelerated
reinsurance premium expense increased reinsurance ceded written and earned premiums and
reduced net written and earned premiums. We experienced no such catastrophe losses during
2006.
 
    
    We also experienced our higher property catastrophe reinsurance costs, increased catastrophe loss
retentions, and decreased catastrophe coverage limits for our June 1, 2006 reinsurance renewal
compared to the June 1, 2005 renewal as a result of the hardening property catastrophe
reinsurance market.
 Net Investment Income:
 
    
    The portfolio duration target was increased;
 
    
    The percentage of the fixed maturity portfolio allocated to municipal security
investments was increased; and
 
    
    The percentage of the investment portfolio allocated to common stock investments was
increased.
 45




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##### Table of Contents



Net Realized Investment Gain (Loss):
  Other Income
 Net Loss and Loss Adjustment Expenses:
  
    
    Net reserve actions taken during the year ended December 31, 2006, wherein the net estimated
unpaid loss and loss adjustment expenses for accident years 2005 and prior were decreased by
$91.4 million, as compared to net reserve actions taken during the year ended December 31,
2005 wherein the estimated net unpaid loss and loss adjustment expenses for accident years
2004 and prior were decreased by $29.9 million. Decreases in the estimated net unpaid loss
and loss adjustment expenses for prior accident years during the year ended December 31, 2006
were as follows:
 Net Basis Decrease(In millions)Accident Year 2005
    
    $
    59.2Accident Year 2004
    
    
    12.6Accident Year 2003
    
    
    11.0Accident Years 2002 and prior
    
    
    8.6Total Decrease
    
    $
    91.4
 
    
    For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for commercial coverages due to better than
expected case incurred loss development. The incurred frequency emergence on general
liability coverages, and the incurred severity emergence on property and auto coverages,
were less than anticipated.
 46




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##### Table of Contents




    
    For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for commercial coverages due to better than
expected case incurred loss development. The incurred frequency emergence on general
liability coverages, and the incurred severity emergence on auto coverages, were less than
anticipated.
    
    For accident year 2003, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for professional liability coverages and
rental/leasing auto coverages due to better than expected case incurred loss development.
The incurred severity emergence on professional liability E&O and D&O coverages, and the
incurred frequency emergence on rental/leasing auto coverages, were less than anticipated.
    
    For accident years 2002 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower estimates for rental/leasing auto coverages
due to better than expected case incurred loss development. The incurred frequency
emergence on rental/leasing auto coverages, and the incurred severity emergence on rental
supplemental liability coverages, were less than anticipated.
  
    
    A reduction in the current accident year net ultimate loss and loss adjustment expense ratio,
excluding catastrophe losses, for the year ended December 31, 2006 compared to 2005. During
the year ended December 31, 2006, a net ultimate loss and loss adjustment expense ratio,
excluding catastrophe losses, of 47.6% was estimated for the 2006 accident year. During the
year ended December 31, 2005, a net ultimate loss and loss adjustment expense ratio, excluding
catastrophe losses, of 51.7% was estimated for the 2005 accident year.
 
    
    A $24.7 million reduction in hurricane catastrophe losses incurred. During the year ended
December 31, 2005, we incurred $24.7 million of net loss and loss adjustment expenses related
to Hurricanes Dennis, Katrina, Rita and Wilma. We incurred no such catastrophe losses during
the year ended December 31, 2006.
  
    
    The growth in net earned premiums.
 
    
    An $18.3 million reduction in ceded loss and loss adjustment expenses pursuant to a 10% quota
share agreement (See Premiums). Ceded loss and loss adjustment expenses pursuant to this quota
share agreement for the year ended December 31, 2005 were $18.3 million; however, due to our
decision to terminate this agreement on a run-off basis effective December 31, 2004, there
were no losses ceded to this agreement during 2006.
 Acquisition Costs and Other Underwriting Expenses:
 
    
    The growth in net earned premiums.
 
    
    $7.2 million of share-based compensation expense allocated to underwriting and acquisition
expenses which was recognized under SFAS 123(R), which we adopted on January 1, 2006.
 47




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##### Table of Contents




    
    A $21.3 million decrease in ceding commission earned pursuant to our quota share agreements
(See Premiums). During the year ended December 31, 2006, we earned no ceding commissions
related to quota share agreements, as compared to $21.3 million of ceding commissions earned
during 2005. There were no ceded earned premiums pursuant to these quota share agreements for
the year ended December 31, 2006 as compared to $43.7 million for 2005 due to our decision to
terminate its 10% quota share agreement on a run-off basis effective December 31, 2004.
  (In Millions)
    
    For the Year EndedDecember 31, 2006Reduction to expense related to assessment on 2004
Premiums
    
    $
    1.6Reduction to expense related to assessment on 2005
Premiums
    
    
    1.8Total
    
    $
    3.4
    Other Operating Expenses
 Income Tax Expense:
 Investments
   48




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Securities with an Unrealized Loss as of December 31, 2007:
  
    
    The industry concentration as a percentage of total estimated fair value represents
investments in a geographically diversified pool of investment grade Municipal securities
issued by states, political subdivisions, and public authorities under general obligation
and/or special district/purpose issuing authority. The unrealized losses on these securities
are generally attributable to spread widening. The primary factor underlying the spread
widening is the increasing market risk aversion to issues surrounding the monoline financial
guarantors, given the monolines significant participation in the Municipal sector through
their financial guarantee insurance.
 
    
    The industry concentration as a percentage of the total gross unrealized loss primarily
represents investments in equity securities issued by companies in the Diversified Financial
Services industry. The unrealized losses on these securities are generally attributable to the
recent correction in the Financial Services industry primarily caused by the deterioration of
credit conditions in the marketplace during the third and fourth quarters of 2007. As of
December 31, 2007, these equity securities were evaluated for other than temporary impairment
in accordance with the Companys impairment policy and the Company concluded that these
securities were not other than temporarily impaired.
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##### Table of Contents



Gross Unrealized Losses as of December 31, 2007(in millions)Fixed MaturitiesAvailable for SaleExcluding InterestsContinuous time in
    
    in Securitized
    
    
    Interests in
    
    
    Fixed MaturitiesUnrealized loss position
    
    Assets
    
    
    Securitized Assets
    
    
    Available for Sale
    
    
    Equity Securities
    
    
    Total Investments0  3 months
    
    $
    0.2
    
    
    $
    0.7
    
    
    $
    0.9
    
    
    $
    8.1
    
    
    $
    9.0>3  6 months
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    6.5
    
    
    
    6.6>6  9 months
    
    
    0.8
    
    
    
    
    
    
    
    0.8
    
    
    
    7.6
    
    
    
    8.4>9  12 months
    
    
    1.3
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.3>12  18 months
    
    
    0.2
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2>18  24 months
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1> 24 months
    
    
    1.4
    
    
    
    2.2
    
    
    
    3.6
    
    
    
    
    
    
    
    3.6Total Gross Unrealized Losses
    
    $
    4.0
    
    
    $
    3.0
    
    
    $
    7.0
    
    
    $
    22.2
    
    
    $
    29.2Estimated fair value of
securities with a gross
unrealized loss
    
    $
    570.4
    
    
    $
    357.6
    
    
    $
    928.0
    
    
    $
    118.1
    
    
    $
    1,046.1
  
 
 
  
 
 
 50




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Structured Securities Portfolio:
  
    
    $610.0 million of U.S. government agency backed Mortgage Pass-Through Securities;
 
    
    $233.8 million of U.S. government agency backed Collateralized Mortgage Obligations;
 
    
    $76.3 million of non-U.S. government agency Collateralized Mortgage Obligations backed by
pools of prime loans (generally consists of loans made to the highest credit quality borrowers
with Fair Isaac Corporation (FICO) scores generally greater than 720);
 
    
    $21.6 million of structured securities backed by pools of ALT A loans (loans with low
documentation and borrowers with FICO scores in the approximated range of 650 to the low
700s); and
 
    
    $6.0 million of structured securities backed by pools of sub-prime loans (loans with low
documentation, higher combined loan-to-value ratios and borrowers with FICO scores capped at
approximately 650).
  
    
    first to pay or among the first cash flow tranches of their respective transactions;
    
    have a weighted average life of 2.4 years;
    
    are spread across multiple vintages (origination year of underlying collateral pool), and
    
    have not experienced any ratings downgrades or surveillance issues as of December 31, 2007.
    Municipal Bond Portfolio:
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##### Table of Contents



Weighted AverageMarket Value of Insured
    
    
    
    
    
    
    Underlying Rating ofMunicipal Bonds
    
    
    Percentage of Municipal
    
    
    Insured MunicipalMonoline Insurer
    
    (in Thousands)
    
    
    Bond Portfolio
    
    
    BondsFinancial Security Assurance, Inc.
    
    $
    285,933
    
    
    
    20.6
    %
    
    AA-MBIA, Inc.
    
    
    263,039
    
    
    
    18.9
    
    
    AA-FGIC Corporation.
    
    
    162,569
    
    
    
    11.7
    
    
    AA-AMBAC Financial Group, Inc.
    
    
    149,542
    
    
    
    10.8
    
    
    AA-XL Capital, LTD.
    
    
    4,658
    
    
    
    0.3
    
    
    AA-Total
    
    $
    865,741
    
    
    
    62.3
    %
    
    AA-
  Securities with an Unrealized Loss as of December 31, 2006:
  Gross Unrealized Losses as of December 31, 2006(in millions)Fixed MaturitiesContinuous
    
    Available for Sale
    
    
    
    
    
    
    Totaltime in unrealized
    
    Excluding Interests
    
    
    Interests in
    
    
    Fixed Maturitiesloss position
    
    in Securitized Assets
    
    
    Securitized Assets
    
    
    Available for Sale
    
    
    Equity Securities
    
    
    Total Investments0  3 months
    
    $
    0.8
    
    
    $
    1.2
    
    
    $
    2.0
    
    
    $
    1.1
    
    
    $
    3.14  6 months
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.77  9 months
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    0.9
    
    
    
    1.010  12 months
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    
    
    
    
    0.313  18 months
    
    
    2.1
    
    
    
    4.6
    
    
    
    6.7
    
    
    
    
    
    
    
    6.719  24 months
    
    
    2.6
    
    
    
    1.5
    
    
    
    4.1
    
    
    
    
    
    
    
    4.1> 24 months
    
    
    3.1
    
    
    
    1.7
    
    
    
    4.8
    
    
    
    
    
    
    
    4.8Total Gross
Unrealized Losses
    
    $
    8.8
    
    
    $
    9.3
    
    
    $
    18.1
    
    
    $
    2.6
    
    
    $
    20.7Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    624.9
    
    
    $
    543.8
    
    
    $
    1,168.7
    
    
    $
    37.4
    
    
    $
    1,206.1
  52




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53




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##### Table of Contents



Gross Realized Losses:
   Market Risk of Financial Instruments:
   Estimated(Dollars in Thousands)
    
    
    
    
    
    Hypothetical
    
    Fair Value after
    
    Hypothetical PercentageChange in
    
    Hypothetical
    
    Increase (Decrease) inInterest
    
    Changes inEstimated
    
    Rates (bp=basis
    
    Interest
    
    
    
    
    
    ShareholdersFair Value
    
    points)
    
    Rates
    
    Fair Value
    
    EquityDecember 31, 2007InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    2,659,197
    
    
    200 bp decrease
    
    $
    2,909,489
    
    
    
    9.4
    %
    
    
    10.5
    %100 bp decrease
    
    $
    2,788,220
    
    
    
    4.8
    %
    
    
    5.4
    %50 bp decrease
    
    $
    2,724,762
    
    
    
    2.5
    %
    
    
    2.7
    %50 bp increase
    
    $
    2,592,046
    
    
    
    (2.5
    )%
    
    
    (2.8
    )%100 bp increase
    
    $
    2,523,607
    
    
    
    (5.1
    )%
    
    
    (5.7
    )%200 bp increase
    
    $
    2,386,092
    
    
    
    (10.3
    )%
    
    
    (11.5
    )%December 31, 2006InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    2,129,609
    
    
    200 bp decrease
    
    $
    2,313,272
    
    
    
    8.6
    %
    
    
    10.2
    %100 bp decrease
    
    $
    2,226,770
    
    
    
    4.6
    %
    
    
    5.4
    %50 bp decrease
    
    $
    2,178,954
    
    
    
    2.3
    %
    
    
    2.8
    %50 bp increase
    
    $
    2,079,335
    
    
    
    (2.4
    )%
    
    
    (2.8
    )%100 bp increase
    
    $
    2,029,023
    
    
    
    (4.7
    )%
    
    
    (5.6
    )%200 bp increase
    
    $
    1,930,808
    
    
    
    (9.3
    )%
    
    
    (11.1
    )%
   54




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55




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##### Table of Contents



Minimum Risk-
    
    ActualInsurance
    
    Based Capital
    
    StatutorySubsidiary
    
    Requirement
    
    SurplusPIIC
    
    
    266.5
    
    
    
    1,169.0PIC
    
    
    13.8
    
    
    
    79.0LASIC
    
    
    1.5
    
    
    
    24.4LAIC
    
    
    0.9
    
    
    
    26.3
   Payments Due by Period(in thousands)Contractual Obligations
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsGross Loss and Loss Adjustment Expense Reserves (1)
    
    $
    1,431,933
    
    
    $
    341,932
    
    
    $
    597,359
    
    
    $
    346,384
    
    
    
    $146,258Reinsurance Premiums Payable Under Terms of Reinsurance Contracts (2)
    
    
    109,286
    
    
    
    109,286
    
    
    
    
    
    
    
    
    
    
    
    Deferred Commission Liability
    
    
    68,786
    
    
    
    68,786
    
    
    
    
    
    
    
    
    
    
    
    Preferred Agent Profit Sharing
    
    
    33,703
    
    
    
    6,979
    
    
    
    20,135
    
    
    
    5,911
    
    
    
    678Operating Leases
    
    
    29,199
    
    
    
    6,217
    
    
    
    15,179
    
    
    
    7,280
    
    
    
    523Other Long-Term Contractual Commitments (3)
    
    
    17,297
    
    
    
    12,165
    
    
    
    4,751
    
    
    
    282
    
    
    
    99Total (4) (5)
    
    $
    1,690,204
    
    
    $
    545,365
    
    
    $
    637,424
    
    
    $
    359,857
    
    
    
    $147,558
 
 (1)
    
    Although there is typically no minimum contractual commitment with insurance contracts, the
cash flows displayed in the table above represent our best estimate as to amount and timing of
such.(2)
    
    Represents payments based on estimated subject earned premiums under certain reinsurance
contracts.(3)
    
    Represents open commitments under certain limited partnership agreements, information
technology development agreements, corporate sponsorship, renewal rights acquisitions and
Profit Sharing and Savings Incentive Plan arrangements.(4)
    
    As of December 31, 2007, we have recorded a $2.0 million liability for a bonus amount due to
our founder and Chairman under the terms of his employment agreement. This payment is due to
be paid six months after the date of the termination of his employment. Since his date of
termination is uncertain, this liability has been excluded from the above table.(5)
    
    As of December 31, 2007, we have recorded a $0.2 million liability for uncertain tax
positions in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). Due to the uncertain nature
of the timing of future cash flows relating to the liability and the inability to make a
reasonably 56




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reliable estimate of the period of settlement of the liability with the related
taxing authority, the liability has been excluded from the above table.    
    
    In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No.
155 Accounting for Certain Hybrid Financial Instruments (SFAS No. 155). Subsequently,
SFAS No. 155 was modified. Under current generally accepted accounting principles, an entity
that holds a financial instrument with an embedded derivative, subject to certain scope
exceptions, must bifurcate the financial instrument, resulting in the host and the embedded
derivative being accounted for separately. SFAS No. 155 permits, but does not require,
entities to account for financial instruments with an embedded derivative at fair value thus
negating the need to bifurcate the instrument between its host and the embedded derivative.
SFAS No. 155 is effective as of the beginning of the first annual reporting period that begins
after September 15, 2006. We adopted SFAS No. 155 on January 1, 2007. The adoption of SFAS
No. 155 did not have a material effect on our financial condition or results of operations.
 
    
    In July 2006, the FASB released Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48, which is effective for fiscal years beginning
after December 15, 2006, also provides guidance on derecognition, classification, interest and
penalties, accounting for interim periods, disclosure and transition. We adopted FIN 48 on
January 1, 2007. The adoption of FIN 48 did not have a material effect on our financial
condition or results of operations. See Note 10 of the Consolidated Financial Statements for
additional information regarding the adoption of FIN 48.
  
    
    In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No.
157), which clarifies that the term fair value is intended to represent a market-based
measure, not an entity-specific measure, and gives the highest priority to quoted prices in
active markets (Level 1 inputs) in determining fair value. SFAS No. 157 requires disclosures
about (1) the extent to which companies measure assets and liabilities at fair value, (2) the
methods and assumptions used to measure fair value, and (3) the effect of fair value
measurements on earnings. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. We are currently in the process of evaluating the impact of SFAS No. 157; however,
we anticipate that SFAS No. 157 will primarily impact the fair value measurement and
disclosures of our investments in equity securities and fixed maturities available for sale.
Our initial assessment is as follows:
 
    
    The fair value of our investments in government securities and equity securities is
primarily measured using a market based valuation methodology primarily using quoted
market prices in active markets (Level 1 inputs per SFAS 157).
    
    The fair value of our investments in the remainder of our fixed maturities available
for sale is primarily measured using a market based valuation methodology using primarily
vendor pricing (Level 2 inputs per SFAS No. 157).
  
    
    In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, (SFAS No. 159) which permits all entities the option to
elect, at specified election dates, to measure eligible financial instruments at fair value.
An entity must report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date, and recognize upfront costs and
fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to
fiscal years beginning after November 15, 2007, with early adoption
 57




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##### Table of Contents



permitted for an entity
that has also elected to apply the provisions of SFAS No. 157. An entity is prohibited from
retrospectively applying SFAS No. 159, unless it chooses early adoption. SFAS No. 159 also
applies to eligible items existing as of November 15, 2007 (or early adoption date). We are
currently in the process of evaluating the impact of SFAS No. 159; however we do not currently
anticipate electing the fair value option for any of our eligible financial instruments.
 
    
    In December 2007, the FASB issued Statement No. 141R, Business Combinations (SFAS No.
141R), which revises the accounting for business combination transactions previously
accounted for under SFAS No. 141, Business Combinations (SFAS No. 141), and broadens the
scope of transactions which should be accounted for under this standard. SFAS No. 141R
retains the fundamental requirements of SFAS No. 141 in that the acquisition method of
accounting is still used, and an acquirer must be identified in all business combinations.
SFAS No. 141R applies prospectively to business combinations which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or after December 15,
2008. An entity is prohibited from applying SFAS No. 141R prior to that date. We are
currently in the process of evaluating the impact of SFAS No. 141R.
 
    
    In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements.  an amendment of ARB No. 51 (SFAS No. 160), which
establishes accounting and reporting standards for the non-controlling interests in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 requires that the
ownership interests and the net income of the non-controlling interest be equally identified
from that of the parent on the face of the financial statements. SFAS No. 160 also provides
consistent accounting principles for changes in a parent controlling ownership interest in a
subsidiary, and that any retained non-controlling financial interests in a deconsolidated
subsidiary be measured at fair value. SFAS No. 160 applies to fiscal years beginning on or
after December 15, 2008, and is applied prospectively, except for presentation and disclosure
requirements, which are applied retrospectively for all periods presented. We are currently
in the process of evaluating the impact of SFAS No. 160.
 58




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Estimated(Dollars in Thousands)
    
    
    
    
    
    Hypothetical
    
    Fair Value after
    
    Hypothetical PercentageChange in
    
    Hypothetical
    
    Increase (Decrease) inInterest
    
    Changes inEstimated
    
    Rates (bp=basis
    
    Interest
    
    
    
    
    
    Shareholders'Fair Value
    
    points)
    
    Rates
    
    Fair Value
    
    EquityDecember 31, 2007InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    2,659,197
    
    
    200 bp decrease
    
    $
    2,909,489
    
    
    
    9.4
    %
    
    
    10.5
    %100 bp decrease
    
    $
    2,788,220
    
    
    
    4.8
    %
    
    
    5.4
    %50 bp decrease
    
    $
    2,724,762
    
    
    
    2.5
    %
    
    
    2.7
    %50 bp increase
    
    $
    2,592,046
    
    
    
    (2.5
    )%
    
    
    (2.8
    )%100 bp increase
    
    $
    2,523,607
    
    
    
    (5.1
    )%
    
    
    (5.7
    )%200 bp increase
    
    $
    2,386,092
    
    
    
    (10.3
    )%
    
    
    (11.5
    )%December 31, 2006InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    2,129,609
    
    
    200 bp decrease
    
    $
    2,313,272
    
    
    
    8.6
    %
    
    
    10.2
    %100 bp decrease
    
    $
    2,226,770
    
    
    
    4.6
    %
    
    
    5.4
    %50 bp decrease
    
    $
    2,178,954
    
    
    
    2.3
    %
    
    
    2.8
    %50 bp increase
    
    $
    2,079,335
    
    
    
    (2.4
    )%
    
    
    (2.8
    )%100 bp increase
    
    $
    2,029,023
    
    
    
    (4.7
    )%
    
    
    (5.6
    )%200 bp increase
    
    $
    1,930,808
    
    
    
    (9.3
    )%
    
    
    (11.1
    )%
 59




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##### Table of Contents



Financial Statements
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    61Consolidated Balance Sheets  As of December 31, 2007 and 2006
    
    
    62Consolidated Statements of Operations and Comprehensive Income  For the Years Ended December 31, 2007, 2006 and 2005
    
    
    63Consolidated Statements of Changes in Shareholders Equity  For the Years Ended December 31, 2007, 2006 and 2005
    
    
    64Consolidated Statements of Cash Flows  For the Years Ended December 31, 2007, 2006 and 2005
    
    
    65Notes to Consolidated Financial Statements
    
    
    66-92Financial Statement Schedules:
 ScheduleI
    
    Summary of Investments 
    
    S-1Other Than Investments in Related Parties As of December 31, 2007II
    
    Condensed Financial Information of Registrant As of December 31,
2007 and 2006 and For Each of the Three Years in the Period
Ended December 31, 2007
    
    S-2S-4III
    
    Supplementary Insurance Information As of and For the Years
Ended December 31, 2007, 2006 and 2005
    
    S-5IV
    
    Reinsurance For the Years ended December 31, 2007, 2006 and 2005
    
    S-6VI
    
    Supplementary Information Concerning Property-Casualty Insurance
Operations As of and For the Years Ended December 31, 2007, 2006
and 2005
    
    S-7
 60




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Internal Control  Integrated Framework
    
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
 As of December 31,2007
    
    
    2006ASSETSInvestments:Fixed Maturities Available for Sale at Market (Amortized Cost $2,639,471 and $2,136,231)
    
    $
    2,659,197
    
    
    $
    2,129,609Equity Securities at Market (Cost $322,877 and $259,184)
    
    
    356,026
    
    
    
    304,033Total Investments
    
    
    3,015,223
    
    
    
    2,433,642Cash and Cash Equivalents
    
    
    106,342
    
    
    
    108,671Accrued Investment Income
    
    
    24,964
    
    
    
    20,083Premiums Receivable
    
    
    378,217
    
    
    
    346,836Prepaid Reinsurance Premiums and Reinsurance Receivables
    
    
    280,110
    
    
    
    272,798Deferred Income Taxes
    
    
    42,855
    
    
    
    26,657Deferred Acquisition Costs
    
    
    184,446
    
    
    
    158,805Property and Equipment, Net
    
    
    26,330
    
    
    
    26,999Other Assets
    
    
    41,451
    
    
    
    44,046Total Assets
    
    $
    4,099,938
    
    
    $
    3,438,537LIABILITIES and SHAREHOLDERS EQUITYPolicy Liabilities and Accruals:Unpaid Loss and Loss Adjustment Expenses
    
    $
    1,431,933
    
    
    $
    1,283,238Unearned Premiums
    
    
    847,485
    
    
    
    759,358Total Policy Liabilities and Accruals
    
    
    2,279,418
    
    
    
    2,042,596Premiums Payable
    
    
    97,674
    
    
    
    66,827Other Liabilities
    
    
    175,373
    
    
    
    161,847Total Liabilities
    
    
    2,552,465
    
    
    
    2,271,270Commitments 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, 72,087,287 and 70,848,482
Shares Issued and Outstanding
    
    
    423,379
    
    
    
    376,986Notes Receivable from Shareholders
    
    
    (19,595
    )
    
    
    (17,074
    )Accumulated Other Comprehensive Income
    
    
    34,369
    
    
    
    24,848Retained Earnings
    
    
    1,109,320
    
    
    
    782,507Total Shareholders Equity
    
    
    1,547,473
    
    
    
    1,167,267Total Liabilities and Shareholders Equity
    
    $
    4,099,938
    
    
    $
    3,438,537
 The accompanying notes are an integral part of the consolidated financial statements.
 62




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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 31,2007
    
    
    2006
    
    
    2005Revenue:Net Earned Premiums
    
    $
    1,379,243
    
    
    $
    1,169,302
    
    
    $
    976,647Net Investment Income
    
    
    117,224
    
    
    
    91,699
    
    
    
    63,709Net Realized Investment Gain (Loss)
    
    
    29,566
    
    
    
    (9,861
    )
    
    
    9,609Other Income
    
    
    3,561
    
    
    
    2,630
    
    
    
    1,464Total Revenue
    
    
    1,529,594
    
    
    
    1,253,770
    
    
    
    1,051,429Losses and Expenses:Loss and Loss Adjustment Expenses
    
    
    678,759
    
    
    
    497,288
    
    
    
    711,706Net Reinsurance Recoveries
    
    
    (59,806
    )
    
    
    (29,076
    )
    
    
    (207,700
    )Net Loss and Loss Adjustment Expenses
    
    
    618,953
    
    
    
    468,212
    
    
    
    504,006Acquisition Costs and Other Underwriting Expenses
    
    
    413,103
    
    
    
    338,267
    
    
    
    263,759Other Operating Expenses
    
    
    12,241
    
    
    
    12,637
    
    
    
    17,124Goodwill Impairment Loss
    
    
    
    
    
    
    
    
    
    
    25,724Total Losses and Expenses
    
    
    1,044,297
    
    
    
    819,116
    
    
    
    810,613Income Before Income Taxes
    
    
    485,297
    
    
    
    434,654
    
    
    
    240,816Income Tax Expense (Benefit):Current
    
    
    179,808
    
    
    
    155,404
    
    
    
    89,510Deferred
    
    
    (21,324
    )
    
    
    (9,599
    )
    
    
    (5,382
    )Total Income Tax Expense
    
    
    158,484
    
    
    
    145,805
    
    
    
    84,128Net Income
    
    $
    326,813
    
    
    $
    288,849
    
    
    $
    156,688Other Comprehensive Income (Loss), Net of Tax:Holding Gain (Loss) Arising during Year
    
    $
    28,739
    
    
    $
    21,140
    
    
    $
    (16,252
    )Reclassification Adjustment
    
    
    (19,218
    )
    
    
    6,410
    
    
    
    (6,246
    )Other Comprehensive Income (Loss)
    
    
    9,521
    
    
    
    27,550
    
    
    
    (22,498
    )Comprehensive Income
    
    $
    336,334
    
    
    $
    316,399
    
    
    $
    134,190Per Average Share Data:Net Income  Basic
    
    $
    4.64
    
    
    $
    4.14
    
    
    $
    2.29Net Income  Diluted
    
    $
    4.40
    
    
    $
    3.93
    
    
    $
    2.14Weighted-Average Common Shares Outstanding
    
    
    70,381,631
    
    
    
    69,795,947
    
    
    
    68,551,572Weighted-Average Share Equivalents Outstanding
    
    
    3,845,044
    
    
    
    3,674,121
    
    
    
    4,533,807Weighted-Average Shares and Share Equivalents Outstanding
    
    
    74,226,675
    
    
    
    73,470,068
    
    
    
    73,085,379
 The accompanying notes are an integral part of the consolidated financial statements.
 63




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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 31,2007
    
    
    2006
    
    
    2005Common Shares:Balance at Beginning of Year
    
    
    70,848,482
    
    
    
    69,266,016
    
    
    
    66,821,751Issuance of Shares Pursuant to Stock Purchase Plans, net
    
    
    491,416
    
    
    
    613,320
    
    
    
    1,589,406Issuance of Shares Pursuant to Stock based Compensation Plans
    
    
    747,389
    
    
    
    969,146
    
    
    
    854,859Balance at End of Year
    
    
    72,087,287
    
    
    
    70,848,482
    
    
    
    69,266,016Common Stock:Balance at Beginning of Year
    
    $
    376,986
    
    
    $
    332,757
    
    
    $
    292,856Issuance of Shares Pursuant to Stock Purchase Plans
    
    
    16,448
    
    
    
    19,521
    
    
    
    27,817Effects of Issuance of Shares Pursuant to Stock based Compensation Plans
    
    
    29,155
    
    
    
    24,301
    
    
    
    11,939Other
    
    
    790
    
    
    
    407
    
    
    
    145Balance at End of Year
    
    
    423,379
    
    
    
    376,986
    
    
    
    332,757Notes Receivable from Shareholders:Balance at Beginning of Year
    
    
    (17,074
    )
    
    
    (7,217
    )
    
    
    (5,465
    )Notes Receivable Issued Pursuant to Employee Stock Purchase Plans
    
    
    (8,466
    )
    
    
    (12,391
    )
    
    
    (4,095
    )Collection of Notes Receivable
    
    
    5,945
    
    
    
    2,534
    
    
    
    2,343Balance at End of Year
    
    
    (19,595
    )
    
    
    (17,074
    )
    
    
    (7,217
    )Accumulated Other Comprehensive Income (Loss), Net of Deferred Income Taxes:Balance at Beginning of Year
    
    
    24,848
    
    
    
    (2,702
    )
    
    
    19,796Other Comprehensive Income (Loss), Net of Taxes
    
    
    9,521
    
    
    
    27,550
    
    
    
    (22,498
    )Balance at End of Year
    
    
    34,369
    
    
    
    24,848
    
    
    
    (2,702
    )Retained Earnings:Balance at Beginning of Year
    
    
    782,507
    
    
    
    493,658
    
    
    
    336,970Net Income
    
    
    326,813
    
    
    
    288,849
    
    
    
    156,688Balance at End of Year
    
    
    1,109,320
    
    
    
    782,507
    
    
    
    493,658Total Shareholders Equity
    
    $
    1,547,473
    
    
    $
    1,167,267
    
    
    $
    816,496
 The accompanying notes are an integral part of the consolidated financial statements.
 64




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Cash Flows from Operating Activities:Net Income
    
    $
    326,813
    
    
    $
    288,849
    
    
    $
    156,688Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:Net Realized Investment (Gain) Loss
    
    
    (29,566
    )
    
    
    9,861
    
    
    
    (9,609
    )Amortization of Investment Premiums, Net of Discount
    
    
    6,131
    
    
    
    8,773
    
    
    
    11,707Amortization of Intangible Assets
    
    
    2,948
    
    
    
    802
    
    
    
    Depreciation
    
    
    8,105
    
    
    
    7,159
    
    
    
    4,798Deferred Income Tax Benefit
    
    
    (21,324
    )
    
    
    (9,599
    )
    
    
    (5,382
    )Change in Premiums Receivable
    
    
    (31,381
    )
    
    
    (60,058
    )
    
    
    (57,276
    )Change in Prepaid Reinsurance Premiums and Reinsurance Receivables, Net of Funds
Held Payable to Reinsurer
    
    
    (7,312
    )
    
    
    84,229
    
    
    
    (58,296
    )Change in Accrued Investment Income
    
    
    (4,881
    )
    
    
    (1,988
    )
    
    
    (4,620
    )Change in Deferred Acquisition Costs
    
    
    (25,641
    )
    
    
    (29,319
    )
    
    
    (37,839
    )Goodwill Impairment Loss
    
    
    
    
    
    
    
    
    
    
    25,724Change in Income Taxes Payable
    
    
    1,432
    
    
    
    8,555
    
    
    
    13,202Change in Other Assets
    
    
    10,963
    
    
    
    3,105
    
    
    
    (909
    )Change in Unpaid Loss and Loss Adjustment Expenses
    
    
    148,695
    
    
    
    37,475
    
    
    
    249,096Change in Unearned Premiums
    
    
    88,127
    
    
    
    127,890
    
    
    
    99,619Change in Other Liabilities
    
    
    50,933
    
    
    
    27,231
    
    
    
    36,338Fair Value of Stock Based Compensation
    
    
    16,001
    
    
    
    12,511
    
    
    
    551Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    
    
    
    
    
    
    
    
    6,952Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    (5,925
    )
    
    
    (8,646
    )
    
    
    Net Cash Provided by Operating Activities
    
    
    534,118
    
    
    
    506,830
    
    
    
    430,744Cash Flows from Investing Activities:Proceeds from Sales of Investments in Fixed Maturities
    
    
    203,409
    
    
    
    320,878
    
    
    
    185,576Proceeds from Maturity of Investments in Fixed Maturities
    
    
    257,562
    
    
    
    274,722
    
    
    
    200,615Proceeds from Sales of Investments in Equity Securities
    
    
    237,176
    
    
    
    93,587
    
    
    
    160,158Cost of Fixed Maturities Acquired
    
    
    (969,946
    )
    
    
    (972,532
    )
    
    
    (883,560
    )Cost of Equity Securities Acquired
    
    
    (270,964
    )
    
    
    (196,096
    )
    
    
    (201,333
    )Settlement of Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    (3,148
    )Purchase of Property and Equipment, Net
    
    
    (7,436
    )
    
    
    (10,272
    )
    
    
    (7,403
    )Purchase of Intangibles
    
    
    (12,726
    )
    
    
    (3,162
    )
    
    
    Net Cash Used for Investing Activities
    
    
    (562,925
    )
    
    
    (492,875
    )
    
    
    (549,095
    )Cash Flows from Financing Activities:Proceeds from Loans Payable
    
    
    
    
    
    
    
    
    
    
    11,381Repayments on Loans Payable
    
    
    
    
    
    
    
    
    
    
    (44,787
    )Proceeds from Exercise of Employee Stock Options
    
    
    6,621
    
    
    
    6,697
    
    
    
    4,582Proceeds from Collection of Shareholder Notes Receivable
    
    
    5,951
    
    
    
    2,534
    
    
    
    2,343Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    7,981
    
    
    
    7,130
    
    
    
    23,721Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    5,925
    
    
    
    8,646
    
    
    
    Cost of Shares Withheld to Satisfy Minimum Required Tax Withholding Obligation Arising
Upon Exchange of Options
    
    
    
    
    
    
    (4,676
    )
    
    
    Net Cash Provided (Used) by Financing Activities
    
    
    26,478
    
    
    
    20,331
    
    
    
    (2,760
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (2,329
    )
    
    
    34,286
    
    
    
    (121,111
    )Cash and Cash Equivalents at Beginning of Year
    
    
    108,671
    
    
    
    74,385
    
    
    
    195,496Cash and Cash Equivalents at End of Year
    
    $
    106,342
    
    
    $
    108,671
    
    
    $
    74,385Cash Paid During the Year for:Income Taxes
    
    $
    177,073
    
    
    $
    146,899
    
    
    $
    73,903Interest
    
    
    
    
    
    
    
    
    
    
    165Non-Cash Transactions:Issuance of Shares Pursuant to Employee Stock Purchase Plans in Exchange for Notes
Receivable
    
    $
    8,466
    
    
    $
    12,391
    
    
    $
    4,095
 The accompanying notes are an integral part of the consolidated financial statements.
 65




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##### Table of Contents



Philadelphia Consolidated Holding Corp. and Subsidiaries
 
 Notes to Consolidated Financial Statements
   
    
    Four property and casualty insurance companies, Philadelphia Indemnity Insurance Company
(PIIC) and Philadelphia Insurance Company (PIC), which are domiciled in Pennsylvania; and
Liberty American Select Insurance Company (LASIC) 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, Liberty American Insurance Services, Inc.;
    
    A premium finance company, Liberty American Premium Finance Company; and
    
    An investment subsidiary, PCHC Investment Corp.
  Principles of Consolidation and Basis of Presentation
  (a) Investments
     66




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##### Table of Contents



(b) Cash Equivalents
  (c) Deferred Acquisition Costs
  67




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##### Table of Contents



(d) Property and Equipment
  (e) Other Intangible Assets
  (f) Liability for Unpaid Loss and Loss Adjustment Expenses
  (g) Premiums
  (h) Reinsurance Ceded
   68




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##### Table of Contents



(i) Assessments
  (j) Stock Based Compensation Plans
   (k) Liability for Preferred Agent Profit Sharing
  (l) Income Taxes
  (m) Earnings Per Share
  (n) Comprehensive Income
  69




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##### Table of Contents



(o) Recently Adopted Accounting Pronouncements
 
    
    In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No.
155 Accounting for Certain Hybrid Financial Instruments (SFAS No. 155). Subsequently,
SFAS No. 155 was modified. Under current generally accepted accounting principles, an entity
that holds a financial instrument with an embedded derivative, subject to certain scope
exceptions, must bifurcate the financial instrument, resulting in the host and the embedded
derivative being accounted for separately. SFAS No. 155 permits, but does not require,
entities to account for financial instruments with an embedded derivative at fair value thus
negating the need to bifurcate the instrument between its host and the embedded derivative.
SFAS No. 155 is effective as of the beginning of the first annual reporting period that begins
after September 15, 2006. The Company adopted SFAS No. 155 on January 1, 2007. The adoption
of SFAS No. 155 did not have a material effect on the financial condition or results of
operations of the Company.
 
    
    In July 2006, the FASB released Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48, which is effective for fiscal years beginning
after December 15, 2006, also provides guidance on derecognition, classification, interest and
penalties, accounting for interim periods, disclosure and transition. The Company adopted FIN
48 on January 1, 2007. The adoption of FIN 48 did not have a material effect on the financial
condition or results of operations of the Company. See Note 10 of the Consolidated Financial
Statements for additional information regarding the adoption of FIN 48.
 (p) New Accounting Pronouncements
 
    
    In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No.
157), which clarifies that the term fair value is intended to represent a market-based
measure, not an entity-specific measure, and gives the highest priority to quoted prices in
active markets (Level 1 inputs) in determining fair value. SFAS No. 157 requires disclosures
about (1) the extent to which companies measure assets and liabilities at fair value, (2) the
methods and assumptions used to measure fair value, and (3) the effect of fair value
measurements on earnings. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. The Company is currently in the process of evaluating the impact of SFAS No. 157;
however, it anticipates that SFAS No. 157 will primarily impact the fair value measurement and
disclosures of its investments in equity securities and fixed maturities available for sale.
The Companys initial assessment is as follows:
 
    
    The fair value of its investments in government securities and equity securities is
primarily measured using a market based valuation methodology primarily using quoted
market prices in active markets (Level 1 inputs per SFAS 157).
    
    The fair value of its investments in the remainder of its fixed maturities available
for sale is primarily measured using a market based valuation methodology using primarily
matrix pricing (Level 2 inputs per SFAS No. 157) and in certain cases, valuation models
using its own inputs (Level 3 inputs per SFAS 157)..
 The Company does not currently anticipate that the adoption of SFAS No. 157 will have a material
effect on its financial position or the results of its operations.
    
    In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, (SFAS No. 159) which permits all entities the option to
elect, at specified election dates, to measure eligible financial instruments at fair value.
An entity must report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date, and recognize upfront costs and
fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to
fiscal years beginning after November 15, 2007, with early adoption permitted for an entity
that has also elected to apply the provisions of SFAS No. 157. An entity is prohibited from
retrospectively applying SFAS No. 159, unless it chooses early adoption. SFAS No. 159 also
applies to eligible items existing as of November 15, 2007 (or early adoption date). The
Company is currently in the process of evaluating the impact of SFAS No. 159; however it does
not currently anticipate electing the fair value option for any of its eligible financial
instruments.
    
    In December 2007, the FASB issued Statement No. 141R, Business Combinations (SFAS No.
141R), which revises the accounting for business combination transactions previously
accounted for under SFAS No. 141, Business Combinations (SFAS No. 141), and broadens the
scope of transactions which should be accounted for under this standard. SFAS No. 141R
retains the fundamental requirements of SFAS No. 141 in that the acquisition method of
accounting is still used, and an acquirer
 70




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must be identified in all business combinations. SFAS No. 141R applies prospectively to
business combinations which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. An entity is prohibited from
applying SFAS No. 141R prior to that date. The Company is currently in the process of evaluating
the impact of SFAS No. 141R.
    
    In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements.  an amendment of ARB No. 51 (SFAS No. 160), which
establishes accounting and reporting standards for the non-controlling interests in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 requires that the
ownership interests and the net income of the non-controlling interest be equally identified
from that of the parent on the face of the financial statements. SFAS No. 160 also provides
consistent accounting principles for changes in a parent controlling ownership interest in a
subsidiary, and that any retained non-controlling financial interests in a deconsolidated
subsidiary be measured at fair value. SFAS No. 160 applies to fiscal years beginning on or
after December 15, 2008, and is applied prospectively, except for presentation and disclosure
requirements, which are applied retrospectively for all periods presented. The Company is
currently in the process of evaluating the impact of SFAS No. 160.
  Accounting Principles
 
    
    Under SAP, investments in debt securities are carried at amortized cost, while under GAAP,
investments in debt securities classified as Available for Sale are carried at fair value.
 
    
    Under SAP, policy acquisition costs, such as commissions, premium taxes, fees, and other
costs of underwriting policies are charged to current operations as incurred, while under
GAAP, such costs are deferred and amortized on a pro-rata basis over the same period in which
the related premiums are earned.
 
    
    Under SAP, certain assets, designated as Non-admitted Assets (such as prepaid expenses) are
charged against surplus.
 
    
    Under SAP, net deferred income tax assets are admitted following the application of certain
criteria, with the resulting admitted deferred tax amount being credited directly to
policyholder surplus.
 
    
    Under SAP, premiums receivable are considered non-admitted if determined to be uncollected
based upon aging criteria as defined in SAP.
 
    
    Under SAP, the costs and related policyholder surcharge receivables for guaranty funds and
other assessments are recorded based on managements estimate of the ultimate liability and
related ultimate policyholder surcharge receivable, while under GAAP, such costs are accrued
when the liability is probable and reasonably estimatable, and the related policyholder
surcharge receivable is accrued as the related premium is written.
 
    
    Under SAP, unpaid losses and loss adjustment expenses and unearned premiums are reported net
of the effects of reinsurance transactions, under GAAP, unpaid loss and loss adjustment
expenses and unearned premiums are reported gross of reinsurance.
 Financial Information
 Dividend Restrictions
 Risk-Based Capital
 71




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##### Table of Contents



Minimum Risk-Based
    
    Actual StatutoryInsurance Subsidiary
    
    Capital Requirement
    
    SurplusPIIC
    
    
    266.5
    
    
    
    1,169.0PIC
    
    
    13.8
    
    
    
    79.0LASIC
    
    
    1.5
    
    
    
    24.4LAIC
    
    
    0.9
    
    
    
    26.3
   Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    MarketCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Value (2)December 31, 2007:Fixed Maturities:Available for SaleU.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
    
    $
    15,867
    
    
    $
    283
    
    
    $
    21
    
    
    $
    16,129Obligations of States and Political Subdivisions
    
    
    1,380,755
    
    
    
    11,698
    
    
    
    3,383
    
    
    
    1,389,070Corporate and Bank Debt Securities
    
    
    109,784
    
    
    
    1,478
    
    
    
    603
    
    
    
    110,659Asset Backed Securities
    
    
    199,313
    
    
    
    1,557
    
    
    
    219
    
    
    
    200,651Mortgage Pass-Through Securities
    
    
    604,261
    
    
    
    8,623
    
    
    
    1,859
    
    
    
    611,025Collateralized Mortgage Obligations
    
    
    329,491
    
    
    
    3,133
    
    
    
    961
    
    
    
    331,663Total Fixed Maturities Available for Sale
    
    
    2,639,471
    
    
    
    26,772
    
    
    
    7,046
    
    
    
    2,659,197Equity Securities
    
    
    322,877
    
    
    
    55,308
    
    
    
    22,159
    
    
    
    356,026Total Investments
    
    $
    2,962,348
    
    
    $
    82,080
    
    
    $
    29,205
    
    
    $
    3,015,223December 31, 2006:Fixed Maturities:Available for SaleU.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
    
    $
    20,156
    
    
    $
    13
    
    
    $
    245
    
    
    $
    19,924Obligations of States and Political Subdivisions
    
    
    1,050,279
    
    
    
    7,685
    
    
    
    5,851
    
    
    
    1,052,113Corporate and Bank Debt Securities
    
    
    145,114
    
    
    
    474
    
    
    
    2,693
    
    
    
    142,895Asset Backed Securities
    
    
    202,102
    
    
    
    1,111
    
    
    
    567
    
    
    
    202,646Mortgage Pass-Through Securities
    
    
    425,518
    
    
    
    1,214
    
    
    
    5,947
    
    
    
    420,785Collateralized Mortgage Obligations
    
    
    293,062
    
    
    
    971
    
    
    
    2,787
    
    
    
    291,246Total Fixed Maturities Available for Sale
    
    
    2,136,231
    
    
    
    11,468
    
    
    
    18,090
    
    
    
    2,129,609Equity Securities
    
    
    259,184
    
    
    
    47,475
    
    
    
    2,626
    
    
    
    304,033Total Investments
    
    $
    2,395,415
    
    
    $
    58,943
    
    
    $
    20,716
    
    
    $
    2,433,642
 
 (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 are based on quoted market prices or quotes from third party
broker-dealers. 72




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##### Table of Contents



(In Thousands)
    
    Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2007:
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesFixed Maturities:Available for Sale:U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
    
    $
    
    
    
    $
    
    
    
    $
    5,670
    
    
    $
    21
    
    
    $
    5,670
    
    
    $
    21Obligations of States and Political Subdivisions
    
    
    294,719
    
    
    
    2,377
    
    
    
    203,427
    
    
    
    1,006
    
    
    
    498,146
    
    
    
    3,383Corporate and Bank Debt Securities
    
    
    7,835
    
    
    
    33
    
    
    
    58,709
    
    
    
    570
    
    
    
    66,544
    
    
    
    603Asset Backed Securities
    
    
    50,574
    
    
    
    138
    
    
    
    13,989
    
    
    
    81
    
    
    
    64,563
    
    
    
    219Mortgage Pass-Through Securities
    
    
    68,691
    
    
    
    366
    
    
    
    128,382
    
    
    
    1,493
    
    
    
    197,073
    
    
    
    1,859Collateralized Mortgage Obligations
    
    
    30,731
    
    
    
    236
    
    
    
    65,252
    
    
    
    725
    
    
    
    95,983
    
    
    
    961Total Fixed Maturities Available for Sale
    
    
    452,550
    
    
    
    3,150
    
    
    
    475,429
    
    
    
    3,896
    
    
    
    927,979
    
    
    
    7,046Equity Securities
    
    
    118,095
    
    
    
    22,159
    
    
    
    
    
    
    
    
    
    
    
    118,095
    
    
    
    22,159Total Investments
    
    $
    570,645
    
    
    $
    25,309
    
    
    $
    475,429
    
    
    $
    3,896
    
    
    $
    1,046,074
    
    
    $
    29,205
           73




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##### Table of Contents




    
    $610.0 million of U.S. government agency backed Mortgage Pass-Through Securities;
 
    
    $233.8 million of U.S. government agency backed Collateralized Mortgage Obligations;
 
    
    $76.3 million of non-U.S. government agency Collateralized Mortgage Obligations backed by
pools of prime loans (generally consists of loans made to the highest credit quality borrowers
with Fair Isaac Corporation (FICO) scores generally greater than 720);
 
    
    $21.6 million of structured securities backed by pools of ALT A loans (loans with low
documentation and borrowers with FICO scores in the approximate range of 650 to the low
700s); and
 
    
    $6.0 million of structured securities backed by pools of sub-prime loans (loans with low
documentation, higher combined loan-to-value ratios and borrowers with FICO scores capped at
approximately 650).
  
    
    first to pay or among the first cash flow tranches of their respective transactions:,
    
    have a weighted average life of 2.4 years;
    
    are spread across multiple vintages (origination year of underlying collateral pool); and
    
    have not experienced any ratings downgrades or surveillance issues as of December 31, 2007.
    74




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##### Table of Contents



Market Value of Insured
    
    
    
    
    
    
    Weighted AverageMunicipal Bonds
    
    
    Percentage of Municipal
    
    
    Underlying Rating ofMonoline Insurer
    
    (in Thousands)
    
    
    Bond Portfolio
    
    
    Insured Municipal BondsFinancial Security Assurance, Inc.
    
    $
    285,933
    
    
    
    20.6
    %
    
    AA-MBIA, Inc.
    
    
    263,039
    
    
    
    18.9
    
    
    AA-FGIC Corporation.
    
    
    162,569
    
    
    
    1.7
    
    
    AA-AMBAC Financial Group, Inc.
    
    
    149,542
    
    
    
    10.8
    
    
    AA-XL Capital, LTD.
    
    
    4,658
    
    
    
    0.3
    
    
    AA-Total
    
    $
    865,741
    
    
    
    62.3
    %
    
    AA-
      EstimatedAmortized
    
    
    Market(In Thousands)
    
    Cost (1)
    
    
    Value (2)Due in One Year or Less
    
    $
    49,212
    
    
    $
    49,138Due After One Year Through Five Years
    
    
    392,412
    
    
    
    394,931Due After Five Years through Ten Years
    
    
    360,945
    
    
    
    366,177Due After Ten Years
    
    
    703,837
    
    
    
    705,611Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities
    
    
    1,133,065
    
    
    
    1,143,340$
    2,639,471
    
    
    $
    2,659,197
 
 (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.  75




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##### Table of Contents



2007
    
    
    2006
    
    
    2005Fixed Maturities
    
    $
    108,532
    
    
    $
    82,833
    
    
    $
    61,550Equity Securities
    
    
    5,408
    
    
    
    4,381
    
    
    
    2,585Cash and Cash Equivalents
    
    
    7,761
    
    
    
    8,168
    
    
    
    3,943Total Investment Income
    
    
    121,701
    
    
    
    95,382
    
    
    
    68,078Funds Held Interest Credit
    
    
    
    
    
    
    
    
    
    
    (1,486
    )Investment Expense
    
    
    (4,477
    )
    
    
    (3,683
    )
    
    
    (2,883
    )Net Investment Income
    
    $
    117,224
    
    
    $
    91,699
    
    
    $
    63,709
   2007
    
    
    2006
    
    
    2005Fixed MaturitiesGross Realized Gains
    
    $
    1,061
    
    
    $
    243
    
    
    $
    4,454Gross Realized Losses
    
    
    (902
    )
    
    
    (6,316
    )
    
    
    (931
    )Net Fixed Maturities Gain (Loss)
    
    
    159
    
    
    
    (6,073
    )
    
    
    3,523Equity SecuritiesGross Realized Gains
    
    
    41,785
    
    
    
    7,348
    
    
    
    17,040Gross Realized Losses
    
    
    (12,378
    )
    
    
    (11,136
    )
    
    
    (7,806
    )Net Equity Securities Gain (Loss)
    
    
    29,407
    
    
    
    (3,788
    )
    
    
    9,234Cash Flow Hedge Realized Loss
    
    
    
    
    
    
    
    
    
    
    (3,148
    )Total Net Realized Investment Gain/(Loss)
    
    $
    29,566
    
    
    $
    (9,861
    )
    
    $
    9,609
        76




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##### Table of Contents



As of December 31,
    
    
    Estimated Useful2007
    
    
    2006
    
    
    LivesComputer Software
    
    $
    26,852
    
    
    $
    25,988
    
    
    5 YearsComputer Hardware and Telephone Equipment
    
    
    19,832
    
    
    
    16,688
    
    
    3   5 YearsFurniture, Fixtures and Automobiles
    
    
    10,909
    
    
    
    9,324
    
    
    5 YearsLand and Building
    
    
    3,640
    
    
    
    3,635
    
    
    40 YearsLeasehold Improvements
    
    
    6,538
    
    
    
    4,963
    
    
    2  12 Years67,771
    
    
    
    60,598Accumulated Depreciation and Amortization
    
    
    (41,441
    )
    
    
    (33,599
    )Property and Equipment, Net
    
    $
    26,330
    
    
    $
    26,999
      Net loss and loss adjustment expenses:
    
    As of and For the Years Ended December 31,(In Thousands)
    
    2007
    
    
    2006
    
    
    2005Unpaid loss and loss adjustment expenses at beginning of year
    
    $
    1,283,238
    
    
    $
    1,245,763
    
    
    $
    996,667Less: reinsurance receivables
    
    
    187,809
    
    
    
    304,768
    
    
    
    324,948Net unpaid loss and loss adjustment expenses at beginning of year
    
    
    1,095,429
    
    
    
    940,995
    
    
    
    671,719Provision for losses and loss adjustment expenses for current year claims
    
    
    704,734
    
    
    
    559,647
    
    
    
    533,906Decrease in estimated ultimate losses and loss adjustment expenses for
prior year claims
    
    
    (85,781
    )
    
    
    (91,435
    )
    
    
    (29,900
    )Total incurred losses and loss adjustment expenses
    
    
    618,953
    
    
    
    468,212
    
    
    
    504,006Loss and loss adjustment expense payments for claims attributable to:Current year
    
    
    180,798
    
    
    
    118,845
    
    
    
    110,496Prior years (1)(2)
    
    
    271,669
    
    
    
    194,933
    
    
    
    124,234Total payments
    
    
    452,467
    
    
    
    313,778
    
    
    
    234,730Net unpaid loss and loss adjustment expenses at end of year
    
    
    1,261,915
    
    
    
    1,095,429
    
    
    
    940,995Plus: reinsurance receivables
    
    
    170,018
    
    
    
    187,809
    
    
    
    304,768Unpaid loss and loss adjustment expenses at end of year
    
    $
    1,431,933
    
    
    $
    1,283,238
    
    
    $
    1,245,763
 77




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##### Table of Contents



(1)
    
    During the year ended December 31, 2005, net loss and loss adjustment expense payments for
claims attributable to prior years are lower by $64.3 million due to the Companys commutation
of its 2003 Whole Account Net Quota Share Reinsurance Agreement.(2)
    
    During the year ended December 31, 2006, net loss and loss adjustment expense payments for
claims attributable to prior years are lower by $31.9 million due to the Companys commutation
of its 2004 Whole Account Net Quota Share Reinsurance Agreement.  (In millions)
    
    Net Loss and Loss Adjustment Expensesincrease (decrease)Professional/ManagementCommercial
    
    
    Liability
    
    
    Rental/LeasingAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2006
    
    $
    (10.6
    )
    
    $
    (10.8
    )
    
    $
    (0.8
    )
    
    $
    (0.5
    )
    
    $
    (22.7
    )2005
    
    $
    (8.4
    )
    
    $
    (15.1
    )
    
    $
    (1.3
    )
    
    $
    (0.2
    )
    
    $
    (25.0
    )2004
    
    $
    (6.0
    )
    
    $
    (10.1
    )
    
    $
    (3.1
    )
    
    $
    0.1
    
    
    $
    (19.1
    )2003 & Prior
    
    $
    (6.0
    )
    
    $
    (10.8
    )
    
    $
    (3.1
    )
    
    $
    0.9
    
    
    $
    (19.0
    )Total
    
    $
    (31.0
    )
    
    $
    (46.8
    )
    
    $
    (8.3
    )
    
    $
    0.3
    
    
    $
    (85.8
    )
  
    
    For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for:
 
    
    Commercial property, professional liability, and commercial automobile coverages due to
better than expected case incurred loss development, primarily as a result of both claim
frequency and severity emergence being less than anticipated, and
    
    Management liability coverages due to better than expected case incurred loss development
primarily as a result of claim severity emergence being less than anticipated.
 
    
    For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
 
    
    Professional liability and management liability coverages due to better than expected
case incurred loss development primarily as a result of claim severity being less than
anticipated.
    
    General liability and commercial automobile and commercial property coverages due to
better than expected case incurred loss development, primarily as a result of both claim
frequency and severity emergence being less than anticipated.
 
    
    For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
 
    
    Professional liability, commercial general liability, rental leasing and management
liability coverages due to better than expected case incurred loss development primarily as
a result of claim severity emergence being less than anticipated.
 
    
    For accident year 2003 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for:
 
    
    Professional liability and management liability coverages due to better than expected
case incurred loss development primarily as a result of claim severity emergence being less
than anticipated.
    
    Commercial general liability coverages due to better than expected case incurred loss
development primarily as a result of both claim frequency and severity emergence being less
than anticipated.
 78




---



##### Table of Contents



(In Millions)
    
    Net Loss and Loss Adjustment Expensesincrease (decrease)Professional/ManagementCommercial
    
    
    Liability
    
    
    Rental/LeasingAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2005
    
    $
    (52.0
    )
    
    $
    (5.0
    )
    
    $
    (1.0
    )
    
    $
    (1.2
    )
    
    $
    (59.2
    )2004
    
    $
    (11.6
    )
    
    $
    1.9
    
    
    $
    (2.8
    )
    
    $
    (0.1
    )
    
    $
    (12.6
    )2003
    
    $
    (0.3
    )
    
    $
    (6.8
    )
    
    $
    (3.7
    )
    
    $
    (0.2
    )
    
    $
    (11.0
    )2002 & Prior
    
    $
    (1.0
    )
    
    $
    (1.6
    )
    
    $
    (6.3
    )
    
    $
    0.3
    
    
    $
    (8.6
    )Total
    
    $
    (64.9
    )
    
    $
    (11.5
    )
    
    $
    (13.8
    )
    
    $
    (1.2
    )
    
    $
    (91.4
    )
       (In millions)
    
    Net Loss and Loss Adjustment Expensesincrease (decrease)Professional/ManagementCommercial
    
    
    Liability
    
    
    Rental/LeasingAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2004
    
    $
    (12.7
    )
    
    $
    (7.6
    )
    
    $
    (4.3
    )
    
    $
    0.4
    
    
    $
    (24.2
    )2003
    
    $
    3.5
    
    
    $
    (2.4
    )
    
    $
    (0.5
    )
    
    $
    1.0
    
    
    $
    1.62002
    
    $
    (0.6
    )
    
    $
    (2.0
    )
    
    $
    (3.4
    )
    
    $
    (1.0
    )
    
    $
    (7.0
    )2001 & Prior
    
    $
    1.9
    
    
    $
    (0.7
    )
    
    $
    (0.9
    )
    
    $
    (0.6
    )
    
    $
    (0.3
    )Total
    
    $
    (7.9
    )
    
    $
    (12.7
    )
    
    $
    (9.1
    )
    
    $
    (0.2
    )
    
    $
    (29.9
    )
   79




---



##### Table of Contents



As of December 31,2007
    
    
    2006Deferred Income Tax Assets:Unearned Premium
    
    $
    53,683
    
    
    $
    48,159Loss Reserve Discounting
    
    
    42,044
    
    
    
    39,548State Insurance Related Assessments
    
    
    4,791
    
    
    
    4,509Fair Value of Equity Based Compensation
    
    
    7,674
    
    
    
    3,125Deferred Compensation
    
    
    4,634
    
    
    
    2,645Net Realized Investment Losses
    
    
    2,837
    
    
    
    1,544Deferred Compensation Liability For Preferred Agent Profit Sharing
    
    
    11,796
    
    
    
    Other Assets
    
    
    979
    
    
    
    330Total Deferred Income Tax Assets
    
    
    128,438
    
    
    
    99,860Deferred Income Tax Liabilities:Deferred Acquisition Costs
    
    
    64,556
    
    
    
    55,582Unrealized Appreciation of Securities
    
    
    18,506
    
    
    
    13,380Property and Equipment Basis
    
    
    1,357
    
    
    
    2,495Net Investment Income
    
    
    781
    
    
    
    869Other Liabilities
    
    
    383
    
    
    
    877Total Deferred Income Tax Liabilities
    
    
    85,583
    
    
    
    73,203Net Deferred Income Tax Asset
    
    $
    42,855
    
    
    $
    26,657
   AmountBalance as of January 1, 2007
    
    $
    175Additions for Tax Positions Related to the Current Year
    
    
    Additions for Tax Positions Related to Prior Years
    
    
    6,641Reductions for Tax Positions Related to Prior Years
    
    
    Settlements with Taxing Authorities
    
    
    (6,641
    )Balance as of December 31, 2007
    
    $
    175
 80




---



##### Table of Contents



Amount of Tax
    
    
    PercentFor the year ended December 31, 2007:Federal Tax at Statutory Rate
    
    $
    170,297
    
    
    
    35
    %Nontaxable Municipal Bond Interest and Dividends Received Exclusion
    
    
    (14,460
    )
    
    
    (3
    )State Income Tax Expense
    
    
    2,086
    
    
    
    1Other, Net
    
    
    561
    
    
    
    Income Tax Expense
    
    $
    158,484
    
    
    
    33
    %For the year ended December 31, 2006:Federal Tax at Statutory Rate
    
    $
    152,129
    
    
    
    35
    %Nontaxable Municipal Bond Interest and Dividends Received Exclusion
    
    
    (10,444
    )
    
    
    (2
    )State Income Tax Expense
    
    
    2,290
    
    
    
    1Other, Net
    
    
    1,830
    
    
    
    Income Tax Expense
    
    $
    145,805
    
    
    
    34
    %For the year ended December 31, 2005:Federal Tax at Statutory Rate
    
    $
    84,286
    
    
    
    35
    %Non-deductible Goodwill Impairment Loss
    
    
    9,003
    
    
    
    4Nontaxable Municipal Bond Interest and Dividends Received Exclusion
    
    
    (8,616
    )
    
    
    (4
    )Other, Net
    
    
    (545
    )
    
    
    Income Tax Expense
    
    $
    84,128
    
    
    
    35
    %
    81




---



##### Table of Contents



As of and For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Weighted-Average Common Shares Outstanding
    
    
    70,382
    
    
    
    69,796
    
    
    
    68,551Weighted-Average Share Equivalents Outstanding
    
    
    3,845
    
    
    
    3,674
    
    
    
    4,534Weighted-Average Shares and Share Equivalents Outstanding
    
    
    74,227
    
    
    
    73,470
    
    
    
    73,085Net Income
    
    $
    326,813
    
    
    $
    288,849
    
    
    $
    156,688Basic Earnings Per Share
    
    $
    4.64
    
    
    $
    4.14
    
    
    $
    2.29Diluted Earnings Per Share
    
    $
    4.40
    
    
    $
    3.93
    
    
    $
    2.14
  Hypothetical
    
    Expiration DateSARS Outstanding as of December 31, 2007
    
    Option Price
    
    of SAR407,446
    
    $
    47.52
    
    
    February 21, 201725,000
    
    $
    43.44
    
    
    March 19, 2017661
    
    $
    42.41
    
    
    May 1, 2017
      82




---



##### Table of Contents



As of and For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Exercise Price
    
    
    
    
    
    
    Exercise Price
    
    
    
    
    
    
    Exercise PriceOptions
    
    
    Per Option(1)
    
    
    Options
    
    
    Per Option(1)
    
    
    Options
    
    
    Per Option(1)Outstanding at beginning of year
    
    
    7,039,098
    
    
    $
    14.45
    
    
    
    8,483,991
    
    
    $
    13.54
    
    
    
    7,931,100
    
    
    $
    10.86Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    1,485,000
    
    
    $
    23.34Exercised
    
    
    (611,268
    )
    
    $
    10.83
    
    
    
    (1,076,643
    )
    
    $
    6.22
    
    
    
    (854,859
    )
    
    $
    5.36Canceled
    
    
    (21,750
    )
    
    $
    18.67
    
    
    
    (368,250
    )
    
    $
    17.61
    
    
    
    (77,250
    )
    
    $
    17.58Outstanding at end of year
    
    
    6,406,080
    
    
    $
    14.78
    
    
    
    7,039,098
    
    
    $
    14.45
    
    
    
    8,483,991
    
    
    $
    13.54Exercisable at end of year
    
    
    2,428,830
    
    
    $
    9.77
    
    
    
    1,746,348
    
    
    $
    8.31
    
    
    
    1,474,491
    
    
    $
    6.18Weighted-average fair value of
options granted during the year
(2)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    9.40
  
 (1)
    
    Weighted Average.(2)
    
    The Company uses the Black-Scholes pricing model to calculate the fair value of the
options awarded as of the date of grant.   As of and for the Year Ended
    
    
    As of and for the Year EndedDecember 31, 2007
    
    
    December 31, 2006SARS
    
    
    SARSOutstanding at beginning of period
    
    
    949,000
    
    
    
    Granted
    
    
    436,607
    
    
    
    949,000Exercised
    
    
    
    
    
    
    Canceled
    
    
    (4,500
    )
    
    
    Outstanding at end of period
    
    
    1,381,107
    
    
    
    949,000Weighted-average fair value of
SARS granted during the period
(1)
    
    $
    19.59
    
    
    $
    14.45
 
 (1)
    
    The Company uses the Black-Scholes pricing model to calculate the fair value of the
SARS awarded as of the date of grant.  83




---



##### Table of Contents



As of and for the Year EndedDecember 31, 2007
    
    
    December 31, 2006Weighted Average
    
    
    
    
    
    
    Weighted AverageRestricted Stock
    
    
    Grant Date Fair
    
    
    Restricted Stock
    
    
    Grant Date FairShares
    
    
    Value
    
    
    Shares
    
    
    ValueUnvested at beginning of period
    
    
    178,459
    
    
    $
    29.53
    
    
    
    141,465
    
    
    $
    27.75Granted
    
    
    146,884
    
    
    $
    47.21
    
    
    
    47,080
    
    
    $
    34.57Vested
    
    
    (50
    )
    
    $
    47.52
    
    
    
    
    
    
    $
    Forfeited
    
    
    (10,743
    )
    
    $
    36.15
    
    
    
    (10,086
    )
    
    $
    28.17Unvested at end of period
    
    
    314,550
    
    
    $
    37.56
    
    
    
    178,459
    
    
    $
    29.53
   For the Year Ended December 31,2007
    
    2006
    
    2005Expected Stock Volatility
    
    
    29.1% - 32.4
    %
    
    
    33.4% - 35.5
    %
    
    
    33.9
    %Weighted Average Expected Stock Volatility
    
    
    33.1
    %
    
    
    33.9
    %
    
    
    33.9
    %Risk-Free Interest Rate
    
    
    4.5% - 4.7
    %
    
    
    4.4% - 4.8
    %
    
    
    3.8% - 4.3
    %Weighted Average Risk-Free Interest Rate
    
    
    4.6
    %
    
    
    4.6
    %
    
    
    3.8
    %Expected Life (Years)
    
    
    6.0  9.0
    
    
    
    6.0  9.0
    
    
    
    6.0Weighted Average Expected Life (Years)
    
    
    6.5
    
    
    
    6.5
    
    
    
    6.0Expected Dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    84




---



##### Table of Contents




    
    Share-based payment awards granted prior to, but not yet vested as of December 31, 2006
based on the grant date fair value estimated in accordance with the pro forma provisions of
SFAS 123, and
    
    Compensation expense for the share-based payment awards granted subsequent to December
31, 2006 based on the grant date fair value estimated in accordance with the provisions of
SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to
attribute the value of share-based compensation to expense using the straight-line method,
which was previously used for its pro forma information required under SFAS 123.
Share-based compensation expense related to stock options and SARS was $9.9 million and
$7.3 million, before income taxes for the years ended December 31, 2007 and 2006,
respectively.
  85




---



##### Table of Contents



For the Year Ended
    
    
    For the Year EndedDecember 31, 2007
    
    
    December 31, 2006Stock-based compensation expense
    
    $
    15,507
    
    
    $
    10,028Tax benefit
    
    
    (5,427
    )
    
    
    (3,510
    )Net decrease in net income
    
    $
    10,080
    
    
    $
    6,518Stock-based compensation cost capitalized (gross
of amortization) as deferred acquisition costs
    
    $
    5,361
    
    
    $
    4,634Effect on:Cash flows from operating activities
    
    $
    783
    
    
    $
    1,531Cash flows from financing activities
    
    $
    5,925
    
    
    $
    8,646Effect on:Net earnings per share  Basic
    
    $
    0.10
    
    
    $
    0.09Net earnings per share  Diluted
    
    $
    0.01
    
    
    $
    0.01
    86




---



##### Table of Contents



Written
    
    
    EarnedFor the Year Ended December 31, 2007:Direct Business
    
    $
    1,688,743
    
    
    $
    1,600,280Reinsurance Assumed
    
    
    3,480
    
    
    
    3,817Reinsurance Ceded
    
    
    232,590
    
    
    
    224,854Net Premiums
    
    $
    1,459,633
    
    
    $
    1,379,243Reinsurance Assumed as a Percentage of Net
    
    
    0.2
    %
    
    
    0.3
    %For the Year Ended December 31, 2006:Direct Business
    
    $
    1,488,839
    
    
    $
    1,361,057Reinsurance Assumed
    
    
    4,409
    
    
    
    4,301Reinsurance Ceded
    
    
    210,384
    
    
    
    196,056Net Premiums
    
    $
    1,282,864
    
    
    $
    1,169,302Reinsurance Assumed as a Percentage of Net
    
    
    0.3
    %
    
    
    0.4
    %For the Year Ended December 31, 2005:Direct Business
    
    $
    1,260,693
    
    
    $
    1,161,284Reinsurance Assumed
    
    
    4,222
    
    
    
    4,012Reinsurance Ceded
    
    
    154,144
    
    
    
    188,649Net Premiums
    
    $
    1,110,771
    
    
    $
    976,647Reinsurance Assumed as a Percentage of Net
    
    
    0.4
    %
    
    
    0.4
    %
     87




---



##### Table of Contents



Operating Leases:
   Year Ending December 31:2008
    
    $
    5,9732009
    
    
    5,5952010
    
    
    4,9592011
    
    
    4,6252012 and Thereafter
    
    
    7,803Total Minimum Payments Required
    
    $
    28,955
 Open Commitments:
  Credit Agreement:
   State Insurance Guaranty Funds:
  State Insurance Facility Assessments:
   88




---



##### Table of Contents



Florida Hurricane Catastrophe Fund:
    Three
Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2007 (1)
    
    

2007 (1)
    
    

2007 (1)
    
    

2007 (1)Net Earned Premiums
    
    $
    318,718
    
    
    $
    337,315
    
    
    $
    359,149
    
    
    $
    364,061Net Investment Income
    
    $
    26,973
    
    
    
    28,522
    
    
    $
    30,199
    
    
    $
    31,530Net Realized Investment Gain (Loss)
    
    $
    1,757
    
    
    $
    28,064
    
    
    $
    2,817
    
    
    $
    (3,072
    )Net Loss and Loss Adjustment Expenses
    
    $
    150,505
    
    
    $
    148,589
    
    
    $
    144,805
    
    
    $
    175,054Acquisition Costs and Other Underwriting Expenses
    
    $
    96,904
    
    
    $
    101,746
    
    
    $
    101,252
    
    
    $
    113,201Net Income
    
    $
    65,980
    
    
    $
    94,401
    
    
    $
    96,244
    
    
    $
    70,188Basic Earnings Per Share
    
    $
    0.94
    
    
    $
    1.34
    
    
    $
    1.37
    
    
    $
    0.99Diluted Earnings Per Share
    
    $
    0.89
    
    
    $
    1.27
    
    
    $
    1.30
    
    
    $
    0.94Weighted-Average Common Shares Outstanding
    
    
    70,148,787
    
    
    
    70,361,554
    
    
    
    70,457,765
    
    
    
    70,553,136Weighted-Average Share Equivalents Outstanding
    
    
    4,054,030
    
    
    
    3,835,617
    
    
    
    3,599,654
    
    
    
    3,858,124Weighted-Average Shares and Share Equivalents Outstanding
    
    
    74,202,817
    
    
    
    74,197,171
    
    
    
    74,057,419
    
    
    
    74,411,260
 89




---



##### Table of Contents



Three
Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2006 (2)
    
    

2006 (2)
    
    

2006 (2)
    
    

2006 (2)Net Earned Premiums
    
    $
    276,546
    
    
    $
    288,794
    
    
    $
    296,366
    
    
    $
    307,596Net Investment Income
    
    $
    20,062
    
    
    
    21,677
    
    
    $
    23,833
    
    
    $
    26,127Net Realized Investment Loss
    
    $
    (394
    )
    
    $
    (2,412
    )
    
    $
    (6,976
    )
    
    $
    (79
    )Net Loss and Loss Adjustment Expenses
    
    $
    143,665
    
    
    $
    108,755
    
    
    $
    84,706
    
    
    $
    131,086Acquisition Costs and Other Underwriting Expenses
    
    $
    77,017
    
    
    $
    85,337
    
    
    $
    89,052
    
    
    $
    86,861Net Income
    
    $
    50,321
    
    
    $
    74,857
    
    
    $
    89,890
    
    
    $
    73,781Basic Earnings Per Share
    
    $
    0.73
    
    
    $
    1.07
    
    
    $
    1.28
    
    
    $
    1.05Diluted Earnings Per Share
    
    $
    0.70
    
    
    $
    1.03
    
    
    $
    1.22
    
    
    $
    1.00Weighted-Average Common Shares Outstanding
    
    
    69,377,774
    
    
    
    69,775,336
    
    
    
    69,991,728
    
    
    
    70,029,636Weighted-Average Share Equivalents Outstanding
    
    
    2,982,230
    
    
    
    2,721,730
    
    
    
    3,488,999
    
    
    
    3,887,446Weighted-Average Shares and Share Equivalents Outstanding
    
    
    72,360,004
    
    
    
    72,497,066
    
    
    
    73,480,727
    
    
    
    73,917,082
 
 (1)
    
    Net Realized Investment Gain (Loss) for the three months ended March 31, 2007, June 30, 2007,
September 30, 2007 and December 31, 2007 includes non-cash realized losses of $2.5 million,
$0.1 million, $1.1 million, and $4.2 million, respectively, as a result of impairment
evaluations.(2)
    
    Net Realized Investment Loss for the three months ended March 31, 2006, June 30, 2006,
September 30, 2006 and December 31, 2006 includes non-cash realized losses of $0.7 million,
$0.6 million, $5.7 million, and $1.8 million, respectively, as a result of impairment
evaluations.   
    
    The Commercial Lines Underwriting Group which has underwriting responsibility for the
commercial multi-peril package, commercial automobile, specialty property and inland marine,
and antique/collector car insurance products;
    
    The Specialty Lines Underwriting Group which has underwriting responsibility for professional
and management liability products; and
    
    The Personal Lines Group which has underwriting responsibilities for personal property
insurance products for homeowners and manufactured housing markets in Florida, and the
National Flood Insurance Program for bother personal and commercial policy holders.
    90




---



##### Table of Contents



Commercial
    
    
    Specialty
    
    
    PersonalLines
    
    
    Lines
    
    
    Lines
    
    
    Corporate
    
    
    Total2007:Gross Written Premiums
    
    $
    1,388,181
    
    
    $
    245,220
    
    
    $
    58,822
    
    
    $
    
    
    
    $
    1,692,223Net Written Premiums
    
    $
    1,266,547
    
    
    $
    200,515
    
    
    $
    (7,429
    )
    
    $
    
    
    
    $
    1,459,633Revenue:Net Earned Premiums
    
    $
    1,174,779
    
    
    $
    188,985
    
    
    $
    15,479
    
    
    $
    
    
    
    $
    1,379,243Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117,224
    
    
    
    117,224Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,566
    
    
    
    29,566Other Income
    
    
    
    
    
    
    
    
    
    
    2,363
    
    
    
    1,198
    
    
    
    3,561Total Revenue
    
    
    1,174,779
    
    
    
    188,985
    
    
    
    17,842
    
    
    
    147,988
    
    
    
    1,529,594Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    537,999
    
    
    
    71,561
    
    
    
    9,393
    
    
    
    
    
    
    
    618,953Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    413,103
    
    
    
    413,103Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,407
    
    
    
    10,834
    
    
    
    12,241Total Losses and Expenses
    
    
    537,999
    
    
    
    71,561
    
    
    
    10,800
    
    
    
    423,937
    
    
    
    1,044,297Income Before Income Taxes
    
    
    636,780
    
    
    
    117,424
    
    
    
    7,042
    
    
    
    (275,949
    )
    
    
    485,297Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158,484
    
    
    
    158,484Net Income
    
    $
    636,780
    
    
    $
    117,424
    
    
    $
    7,042
    
    
    $
    (434,433
    )
    
    $
    326,813Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    89,063
    
    
    $
    4,010,875
    
    
    $
    4,099,9382006:Gross Written Premiums
    
    $
    1,169,468
    
    
    $
    227,567
    
    
    $
    96,213
    
    
    $
    
    
    
    $
    1,493,248Net Written Premiums
    
    $
    1,080,248
    
    
    $
    181,358
    
    
    $
    21,258
    
    
    $
    
    
    
    $
    1,282,864Revenue:Net Earned Premiums
    
    $
    966,281
    
    
    $
    173,974
    
    
    $
    29,047
    
    
    $
    
    
    
    $
    1,169,302Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,699
    
    
    
    91,699Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,861
    )
    
    
    (9,861
    )Other Income
    
    
    
    
    
    
    
    
    
    
    2,031
    
    
    
    599
    
    
    
    2,630Total Revenue
    
    
    966,281
    
    
    
    173,974
    
    
    
    31,078
    
    
    
    82,437
    
    
    
    1,253,770Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    343,575
    
    
    
    109,462
    
    
    
    15,175
    
    
    
    
    
    
    
    468,212Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    338,267
    
    
    
    338,267Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,407
    
    
    
    11,230
    
    
    
    12,637Total Losses and Expenses
    
    
    343,575
    
    
    
    109,462
    
    
    
    16,582
    
    
    
    349,497
    
    
    
    819,116Income Before Income Taxes
    
    
    622,706
    
    
    
    64,512
    
    
    
    14,496
    
    
    
    (267,060
    )
    
    
    434,654Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,805
    
    
    
    145,805Net Income
    
    $
    622,706
    
    
    $
    64,512
    
    
    $
    14,496
    
    
    $
    (412,865
    )
    
    $
    288,849Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    133,182
    
    
    $
    3,305,355
    
    
    $
    3,438,5372005:Gross Written Premiums
    
    $
    960,344
    
    
    $
    205,306
    
    
    $
    99,265
    
    
    $
    
    
    
    $
    1,264,915Net Written Premiums
    
    $
    904,707
    
    
    $
    159,112
    
    
    $
    46,952
    
    
    $
    
    
    
    $
    1,110,771Revenue:Net Earned Premiums
    
    $
    778,407
    
    
    $
    151,678
    
    
    $
    46,562
    
    
    $
    
    
    
    $
    976,647Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,709
    
    
    
    63,709Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,609
    
    
    
    9,609Other Income
    
    
    
    
    
    
    
    
    
    
    943
    
    
    
    521
    
    
    
    1,464Total Revenue
    
    
    778,407
    
    
    
    151,678
    
    
    
    47,505
    
    
    
    73,839
    
    
    
    1,051,429Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    375,590
    
    
    
    93,824
    
    
    
    34,592
    
    
    
    
    
    
    
    504,006Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263,759
    
    
    
    263,759Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    16,754
    
    
    
    17,124Goodwill Impairment Loss
    
    
    
    
    
    
    
    
    
    
    25,724
    
    
    
    
    
    
    
    25,724Total Losses and Expenses
    
    
    375,590
    
    
    
    93,824
    
    
    
    60,686
    
    
    
    280,513
    
    
    
    810,613Income Before Income Taxes
    
    
    402,817
    
    
    
    57,854
    
    
    
    (13,181
    )
    
    
    (206,674
    )
    
    
    240,816Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,128
    
    
    
    84,128Net Income
    
    $
    402,817
    
    
    $
    57,854
    
    
    $
    (13,181
    )
    
    $
    (290,802
    )
    
    $
    156,688Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    227,122
    
    
    $
    2,700,704
    
    
    $
    2,927,826
 91




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##### Table of Contents



2007
    
    
    2006
    
    
    2005Commercial Lines Net Earned PremiumsCommercial Package
    
    $
    1,069,843
    
    
    $
    892,633
    
    
    $
    699,514Specialty Property
    
    
    59,628
    
    
    
    45,060
    
    
    
    38,048Commercial Auto
    
    
    21,801
    
    
    
    22,733
    
    
    
    23,574Antique/Collector Auto
    
    
    19,904
    
    
    
    814
    
    
    
    All Other
    
    
    3,603
    
    
    
    5,041
    
    
    
    17,271Total Commercial Lines
    
    
    1,174,779
    
    
    
    966,281
    
    
    
    778,407Specialty Lines Net Earned PremiumsManagement Liability
    
    
    104,254
    
    
    
    79,392
    
    
    
    61,170Professional Liability
    
    
    84,731
    
    
    
    94,582
    
    
    
    90,508Total Specialty Lines
    
    
    188,985
    
    
    
    173,974
    
    
    
    151,678Personal Lines Net Earned PremiumsHomeowners and Manufactured Housing
    
    
    15,479
    
    
    
    29,047
    
    
    
    46,562National Flood Insurance Program
    
    
    
    
    
    
    
    
    
    
    Total Personal Lines Net Earned Premiums
    
    
    15,479
    
    
    
    29,047
    
    
    
    46,562Other Income
    
    
    2,363
    
    
    
    2,031
    
    
    
    943Total Personal Lines
    
    
    17,842
    
    
    
    31,078
    
    
    
    47,505CorporateNet Investment Income
    
    
    117,224
    
    
    
    91,699
    
    
    
    63,709Net Realized Investment Gain (Loss)
    
    
    29,566
    
    
    
    (9,861
    )
    
    
    9,609Other Income
    
    
    1,198
    
    
    
    599
    
    
    
    521Total Corporate
    
    
    147,988
    
    
    
    82,437
    
    
    
    73,839Total Revenue
    
    $
    1,529,594
    
    
    $
    1,253,770
    
    
    $
    1,051,429
    92




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##### Table of Contents



(a)
    
    Evaluation of Disclosure Controls and Procedures. Our 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 our 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 our disclosure controls and procedures, our 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 our management, with the participation of our chief executive
officer (CEO) and chief financial officer (CFO), of the effectiveness of the design and
operation of the our disclosure controls and procedures as of the end of the period covered by
this report. Based on this evaluation, our CEO and CFO have concluded that, as of the end of such
period, our disclosure controls and procedures are effective to provide reasonable assurance that
information required to be disclosed in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the SECs
rules and forms and made known to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosures.(b)
    
    Changes in Internal Controls. There has been no change in our internal control over financial
reporting during our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.(c)
    
    Managements Report on Internal Control Over Financial ReportingOur 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 our management, including the
principal executive officer and principal financial officer, we have conducted an evaluation of
the effectiveness of our 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, we have concluded that the internal control over financial
reporting was effective as of December 31, 2007. Our managements assessment of the
effectiveness of internal control over financial reporting as of December 31, 2007 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.
 
   93




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##### Table of Contents



(a)
    
    The information required by this Item is incorporated by reference to information included in
the Proxy Statement under the captions Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan Information.
 
   
   94




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##### Table of Contents



Exhibit No.
    
    
    
    Description3.1
    
    A
    
    Articles of Incorporation of Philadelphia Insurance, as amended.3.1.1
    
    A
    
    Amendment to Articles of Incorporation of Philadelphia Insurance.3.1.2
    
    G
    
    Amendment to Articles of
Incorporation of Philadelphia Insurance.3.2
    
    P
    
    By-Laws of Philadelphia Consolidated Holding Corp. (as Amended through April 29, 2005).10.1
    
    A
    
    General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington Insurance
Company, as amended to date, together with related Quota Share Reinsurance Agreements, as amended to
date.10.2
    
    A (1)
    
    Wheelways Salary Savings Plus Plan Summary Plan Description.10.3
    
    A
    
    Key Man Life Insurance Policies on James J. Maguire.10.4
    
    A
    
    Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date.10.5
    
    A
    
    Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to
date.10.6
    
    C (1)
    
    Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996.10.7
    
    C (1)
    
    Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996.10.8
    
    B (1)
    
    Employee Stock Purchase Plan.10.9
    
    B (1)
    
    Cash Bonus Plan.10.10
    
    B (1)
    
    Executive Deferred Compensation Plan.10.11
    
    D (1)
    
    Directors Stock Purchase Plan.10.12
    
    F
    
    Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc.10.13
    
    G(1)
    
    Philadelphia Insurance Companies Non Qualified Employee Stock Purchase Plan  incorporated by
reference to Exhibit 4 to Registration Statement on Form S-8 (file no. 333-91216) filed with the
Securities and Exchange Commission on June 26, 2002.10.14
    
    G (1)
    
    Philadelphia Insurance Companies Key Employee Deferred Compensation Plan  incorporated by reference
to Exhibit 4.1 to Registration Statement on Form S-8 (file no. 333-90534) filed with the Securities
and Exchange Commission on June 14, 2002.10.15
    
    H (1)
    
    Employment Agreement with James J. Maguire effective June 1, 2002.10.16
    
    I
    
    AQS, Inc. Software License Agreement, dated October 1, 2002.
 95




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##### Table of Contents



Exhibit No.
    
    
    
    Description10.17
    
    K
    
    Quota Share Reinsurance Contract with Swiss Reinsurance America Corporation effective May 15, 2003 covering
policies within the Custom Harvest Program.10.18
    
    K
    
    Excess of Loss Agreement of Reinsurance No. 9034 with General Reinsurance Corporation effective January 1,
2003.10.19
    
    K
    
    Addendum No. 3 to the Casualty Excess of Loss Reinsurance Agreement No. TC988A, B with Swiss Reinsurance
American Corporation effective January 1, 2003.10.20
    
    K
    
    Property Excess of Loss Agreement of Reinsurance No. TP1600E with Swiss Reinsurance America Corporation
effective January 1, 2003.10.21
    
    K
    
    Casualty Excess of Loss Reinsurance Contract with American Re-Insurance Company, Converium Reinsurance
(North America) Inc., Endurance Specialty Insurance Limited, Liberty Mutual Insurance Company effective
January 1, 2003.10.22
    
    L
    
    Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd.
effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015555 and Philadelphia
Indemnity Insurance Company Master Policy PHUB015555-01.10.23
    
    L
    
    Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd.
effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015557 and Philadelphia
Indemnity Insurance Company Master Policy PHUB015557-01.10.24
    
    M
    
    Whole Account Net Quota Share Reinsurance Contract effective as of January 1, 2004 (Addendum No. 1).10.25
    
    M
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective as of June 1, 2004.10.26
    
    M
    
    Casualty Excess of Loss Reinsurance Contract effective as of January 1, 2004.10.27
    
    M
    
    Property Per Risk 1st and 2nd Excess Reinsurance Contract effective as of January 1, 2004 (Endorsement No.
1).10.28
    
    M(1)
    
    Amended and Restated Employment Agreement with James J. Maguire effective as of January 1, 2004.10.29
    
    N
    
    Gap Quota Share Reinsurance Contract effective as of April 1, 2004.10.30
    
    N
    
    Casualty (Clash) Excess of Loss effective January 1, 2004.10.31
    
    N
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Liberty American
Insurance Company).10.32
    
    N
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Mobile USA
Insurance Company).10.33
    
    O
    
    Reinstatement Premium Protection Reinsurance Contract effective July 1, 2004.10.34
    
    O
    
    Underlying Excess Catastrophe and Reinstatement Premium Protection Reinsurance Contract effective July 1,
2004.10.35
    
    O
    
    35% Florida Only Third and Fourth Catastrophe Event Reinsurance Contract effective September 2, 2004.10.36
    
    O
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective September
3, 2004.10.37
    
    P
    
    Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.10.38
    
    P
    
    $50 million excess of $90 million Florida Only Excess Catastrophe Reinsurance Contract effective June 1,
2004 with the Subscribing Reinsurers.
 96




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##### Table of Contents



Exhibit No.
    
    
    
    Description10.39
    
    P
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective
September 1, 2004 with the Subscribing Reinsurers.10.40
    
    P
    
    $5 million excess of $190 million Florida Only Catastrophe Excess Reinsurance Contract effective
September 10, 2004 with the Subscribing Reinsurers.10.41
    
    P
    
    Underlying Excess Catastrophe Reinsurance Contract effective July 1, 2004 with the Subscribing Reinsurers.10.42
    
    P
    
    Casualty Excess of Loss Contract effective January 1, 2005 with Swiss Reinsurance America Corporation.10.43
    
    P
    
    Addendum Number 2 to the Property Excess of Loss Contract effective January 1, 2005 with Swiss
Reinsurance America Corporation.10.44
    
    P
    
    Endorsement No. 2 to the Property Per Risk 1st and 2nd Excess Reinsurance Contract
effective January 1, 2005 with General Reinsurance Corporation.10.45
    
    Q
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.10.46
    
    Q
    
    65% Florida Only Third and Fourth Event Excess Catastrophe Reinsurance Contract effective September 1,
2004 with the Subscribing Reinsurers.10.47
    
    Q
    
    $45 million excess of $195 million Florida Only Catastrophe Reinsurance Contract effective September 10,
2004 with the Subscribing Reinsurers.10.48
    
    Q
    
    $6.5 million excess of $3.5 million Florida Only Fifth Event Catastrophe Reinsurance Contract effective
September 24, 2004 with the Subscribing Reinsurers.10.49
    
    Q
    
    $50 million excess of $240 million Florida Only Catastrophe Reinsurance Contract effective October 1,
2004 with the Subscribing Reinsurers.10.50
    
    Q
    
    $40 million excess of $50 million Florida Only Third Event Catastrophe Reinsurance Contract effective
October 1, 2004 with the Subscribing Reinsurers.10.51
    
    Q
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective October
1, 2004 with the Subscribing Reinsurers.10.52
    
    Q
    
    Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Liberty American
Insurance Company).10.53
    
    Q
    
    Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Mobile USA Insurance
Company).10.54
    
    Q
    
    Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing Reinsurers
for 50% share.10.55
    
    Q
    
    Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing Reinsurers
for 50% share.10.56
    
    Q (1)
    
    Amendment and Restatement of the Companys Employees Stock Incentive and Performance Based Compensation
Plan.10.57
    
    Q (1)
    
    Form of Stock Option Award Agreement.10.58
    
    Q (1)
    
    Form of Restricted Stock Award Agreement.10.59
    
    R
    
    Casualty Excess of Loss Reinsurance Contract and Endorsement No. 1 effective January 1, 2005. The
participating reinsurers are Ace Property & Casualty Insurance Company, Allied World Assurance Company,
Ltd., Liberty Mutual Insurance Company, Max Re Ltd.
 97




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##### Table of Contents



Exhibit No.
    
    
    
    Description10.60
    
    R
    
    Florida Only Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005. The
participating reinsurers are ACE Tempest Reinsurance LTD, Aspen Insurance UK LTD, AXIS Specialty Limited,
Hannover Re (Bermuda) Ltd., Rosemont Reinsurance LTD, Syndicate #0958 and Syndicate #2001 at varying
levels of participation.10.61
    
    R
    
    Professional Liability Insurance Quota Share Contract effective July 1, 2005 with Cumis Insurance Society,
Inc.10.62
    
    S
    
    Lease Agreement dated as of March 1, 2006 between Bala Plaza Property, Inc., and Philadelphia Consolidated
Holding Corp.10.63
    
    T
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2005.10.64
    
    T
    
    Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2005.10.65
    
    T
    
    Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005.10.66
    
    T
    
    2004 Whole Account Net Quota Share Reinsurance Commutation and Release Agreement effective January 1, 2006
with Federal Insurance Company, through Chubb Re, Inc.10.67
    
    T
    
    2004 Whole Account Net Quota Share Reinsurance Commutation and Release Agreement effective January 1, 2006
with Swiss Reinsurance America Corporation.10.68
    
    T
    
    Casualty Excess of Loss Reinsurance Agreement effective January 1, 2006  80% Placement via Willis Re Inc.10.69
    
    T
    
    Property Third and Fourth Excess of Loss Reinsurance Agreement effective January 1, 2006  50% Placement
via Willis Re Inc.10.70
    
    U
    
    Credit Agreement dated as of June 30, 2006.10.71
    
    V
    
    Casualty (Clash) Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation effective
January 1, 2006.10.72
    
    V
    
    Addendum No. 3 to the 3rd and 4th Property Excess of Loss Reinsurance Agreement with Swiss Reinsurance
America Corporation  50% Placement  effective January 1, 2006.10.73
    
    V
    
    Casualty Excess of Loss Reinsurance Contract effective January 1, 2006  20% Placement with Employers
Reinsurance Corporation.10.74
    
    V
    
    Endorsement No. 4 to the Property Per Risk 1st and 2nd Excess of Loss and Terrorism Reinsurance Contract
with General Reinsurance Corporation effective January 1, 2006.10.75
    
    V
    
    Commutation and Release Agreement with Trenwick America Reinsurance Corporation.10.76
    
    V
    
    $6,150,000 Excess $10,000,000 Catastrophe Reinsurance Contract with Aspen Insurance Limited effective June
1, 2006.10.77
    
    V
    
    First Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers effective
June 1, 2006 (Liberty American and Liberty American Select Insurance Companies).10.78
    
    V
    
    Second and Third Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers
effective June 1, 2006 (Liberty American and Liberty American Select Insurance Companies).10.79
    
    V
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendum No. 1 effective June 1, 2006
(Liberty American Insurance Company).10.80
    
    V
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendums No. 1 and No. 2 effective June 1,
2006 (Liberty American Select Insurance Company).
 98




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##### Table of Contents



Exhibit No.
    
    
    
    Description10.81
    
    W(1)
    
    Form of Performance Share Award Agreement.10.82
    
    W(1)
    
    James J. Maguire, Jr. Employment Agreement.10.83
    
    W(1)
    
    Sean S. Sweeney Employment Agreement.10.84
    
    W(1)
    
    Craig P. Keller Employment Agreement.10.85
    
    W(1)
    
    Christopher J. Maguire Employment Agreement.10.86
    
    W(1)
    
    Form of Stock Appreciation Right Award Agreement.10.87
    
    X(1)
    
    James J. Maguire, Jr. 2006 Grant of Stock Appreciation Rights.10.88
    
    X(1)
    
    Sean S. Sweeney 2006 Grant of Stock Appreciation Rights.10.89
    
    X(1)
    
    Craig P. Keller 2006 Grant of Stock Appreciation Rights.10.90
    
    X(1)
    
    Christopher J. Maguire 2006 Grant of Stock Appreciation Rights.10.91
    
    X
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2006.10.92
    
    Y
    
    Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2006.10.93
    
    Y
    
    Casualty Excess of Loss Reinsurance Contract effective January 1, 2007.10.94
    
    Y
    
    Endorsement No. 6 to the Property Per Risk Excess of Loss Reinsurance Agreement effective January 1, 2007
- First through Third Excess Covers.10.95
    
    Y
    
    Property Fourth Per Risk Excess of Loss Reinsurance Agreement effective January 1, 2007  25% Placement
via Willis Re Inc.10.96
    
    Z
    
    The Philadelphia Insurance Companies 2007 Cash Bonus Plan effective as of January 1, 2007.10.97
    
    Z
    
    Philadelphia Insurance Companies Non Qualified Employee Stock Purchase Plan (amended and restated,
effective as of January 1, 2007, with Performance-Based Compensation Provisions).10.98
    
    AA
    
    Amendment to Credit Agreement dated June 30, 2006 with Bank of America and Wachovia Bank, National
Association.10.99
    
    BB
    
    Casualty (Clash) Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation effective
January 1, 2007.10.100
    
    BB
    
    Property Per Risk Excess of Loss Agreement of Reinsurance No. 9034  07 with General Reinsurance
Corporation effective January 1, 2007 and Termination of Endorsement No. 6 to the Property Per Risk Excess
of Loss Reinsurance Agreement No. 9034.10.101
    
    BB
    
    Interest and Liabilities Agreement to the Property Fourth Per Risk Excess of Loss Reinsurance Agreement
with Swiss Reinsurance America Corporation effective January 1, 2007.10.102
    
    BB
    
    Terrorism Catastrophe Excess of Loss Reinsurance Contract  80% Share with Underwriters At Lloyds
effective March 1, 2007.10.103
    
    BB
    
    Terrorism Catastrophe Excess of Loss Reinsurance Contract  20% Share with Validus Reinsurance, LTD.
effective March 1, 2007.10.104
    
    BB
    
    Excess Catastrophe Reinsurance Contract with Subscribing Reinsurers effective June 1, 2007.
 99




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##### Table of Contents



Exhibit No.
    
    
    
    Description10.105
    
    BB
    
    Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers effective June 1, 2007.10.106
    
    BB
    
    Florida Only Excess Catastrophe Reinsurance Contract with Subscribing Reinsurers effective June 1, 2007 -
Liberty American and Liberty American Select Insurance Companies.10.107
    
    BB
    
    First and Second Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers
effective June 1, 2007  Liberty American and Liberty American Select Insurance Companies.10.108
    
    BB
    
    Third Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers effective
June 1, 2007  Liberty American and Liberty American Select Insurance Companies.10.109
    
    BB
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendums No. 1 through No. 4 effective June
1, 2007  Liberty American Select Insurance Company.10.110
    
    BB
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendums No. 1 through No. 4 effective June
1, 2007  Liberty American Insurance Company.14
    
    CC
    
    Companys Code of Conduct21
    
    DD
    
    List of Subsidiaries of the Registrant.23
    
    DD
    
    Consent of Independent Registered
Public Accounting Firm.24
    
    A
    
    Power of Attorney.31.1
    
    DD
    
    Certification of the Companys chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    DD
    
    Certification of the Companys chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1
    
    DD
    
    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
    
    DD
    
    Certification of the Companys chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 A
    
    Incorporated by reference to the Exhibit filed with the Registrants Form S-1 Registration Statement under the
Securities Act of 1933 (Registration No. 33-56958).B
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1996 and incorporated by reference.C
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated by reference.D
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997
and incorporated by reference.E
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.F
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999.G
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002
and incorporated by reference.H
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2002 and incorporated by reference.I
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2002.J
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003
and incorporated by reference. 100




---



##### Table of Contents



K
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2003 and incorporated by reference.L
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and
incorporated by reference.M
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004
and incorporated by reference.N
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2004 and incorporated by reference.O
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2004 and
incorporated by reference.P
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005
and incorporated by reference.Q
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005
and incorporated by reference.R
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and
incorporated by reference.S
    
    Filed as an Exhibit to the Companys Form 8-K dated March 21, 2006 and incorporated by reference.T
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006
and incorporated by reference.U
    
    Filed as an Exhibit to the Companys Form 8-K dated July 6, 2006 and incorporated by reference.V
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2006 and incorporated by reference.W
    
    Filed as an Exhibit to the Companys Form 8-K dated February 22, 2007 and incorporated by reference.X
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and
incorporated by reference.Y
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007
and incorporated by reference.Z
    
    Filed as an Exhibit to the Companys Form 8-K dated May 3, 2007 and incorporated by reference.AA
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007
and incorporated by reference.BB
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2007 and incorporated by reference.CC
    
    Filed as an Exhibit to the Companys Form 8-K dated
February 28, 2008 and incorporated by reference.DD
    
    Filed herewith.(1)
    
    Compensatory Plan or Arrangement, or Management Contract. 101




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##### Table of Contents



Philadelphia Consolidated Holding Corp.By:
    James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive OfficerFebruary 27, 2008  Signature
    
    Title
    
    DateJames J. Maguire, Jr.

James J. Maguire, Jr.
    
    President & Chief Executive Officer,
(Principal Executive Officer)
    
    February 27, 2008Craig P. Keller

Craig P. Keller
    
    Executive Vice President, Secretary,
Treasurer, and Chief Financial Officer
(Principal Financial and Accounting
Officer)
    
    February 27, 2008James J. Maguire

James J. Maguire
    
    Chairman of the Board of
Directors
    
    February 27, 2008Sean S. Sweeney

Sean S. Sweeney
    
    Executive Vice President, Director
    
    February 27, 2008Aminta Hawkins Breaux

Aminta Hawkins Breaux
    
    Director
    
    February 27, 2008Michael J. Cascio

Michael J. Cascio
    
    Director
    
    February 27, 2008Elizabeth H. Gemmill

Elizabeth H. Gemmill
    
    Director
    
    February 27, 2008Paul R. Hertel, Jr.

Paul R. Hertel, Jr.
    
    Director
    
    February 27, 2008Michael J. Morris

Michael J. Morris
    
    Director
    
    February 27, 2008Shaun F. OMalley

Shaun F. OMalley
    
    Director
    
    February 27, 2008Donald A. Pizer

Donald A. Pizer
    
    Director
    
    February 27, 2008Ronald R. Rock

Ronald R. Rock
    
    Director
    
    February 27, 2008
 102




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##### Table of Contents



COLUMN C
    
    
    COLUMN DEstimated
    
    
    Amount at whichCOLUMN A
    
    COLUMN B
    
    
    Market
    
    
    shown in theType of Investment
    
    Cost *
    
    
    Value
    
    
    Balance SheetFixed Maturities:Bonds:United States Government and Government Agencies and Authorities
    
    $
    620,127
    
    
    $
    627,154
    
    
    $
    627,154States, Municipalities and Political Subdivisions
    
    
    1,380,755
    
    
    
    1,389,070
    
    
    
    1,389,070Public Utilities
    
    
    10,723
    
    
    
    10,618
    
    
    
    10,618All Other Corporate Bonds
    
    
    627,866
    
    
    
    632,355
    
    
    
    632,355Total Fixed Maturities
    
    
    2,639,471
    
    
    
    2,659,197
    
    
    
    2,659,197Equity Securities:Common Stocks:Public Utilities
    
    
    8,379
    
    
    
    11,839
    
    
    
    11,839Banks, Trust and Insurance Companies
    
    
    28,459
    
    
    
    28,864
    
    
    
    28,864Industrial, Miscellaneous and all other
    
    
    286,039
    
    
    
    315,323
    
    
    
    315,323Total Equity Securities
    
    
    322,877
    
    
    
    356,026
    
    
    
    356,026Total Investments
    
    $
    2,962,348
    
    
    $
    3,015,223
    
    
    $
    3,015,223
 
 *
    
    Original cost of equity securities; original cost of fixed maturities adjusted for
amortization of premiums and accretion of discounts. All amounts are shown net of
impairment losses.  S-1




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##### Table of Contents



As of December 31,2007
    
    
    2006ASSETSCash and Cash Equivalents
    
    $
    868
    
    
    $
    188Equity in and Advances to Unconsolidated Subsidiaries (a)
    
    
    1,546,146
    
    
    
    1,168,524Income Taxes Recoverable
    
    
    874
    
    
    
    Other Assets
    
    
    23
    
    
    
    Total Assets
    
    $
    1,547,911
    
    
    $
    1,168,712LIABILITIES AND SHAREHOLDERS EQUITYOther Liabilities
    
    $
    438
    
    
    $
    1,445Total Liabilities
    
    
    438
    
    
    
    1,445Commitments 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, 72,087,287 and 70,848,482
Shares Issued and Outstanding
    
    
    423,379
    
    
    
    376,986Notes Receivable from Shareholders
    
    
    (19,595
    )
    
    
    (17,074
    )Accumulated Other Comprehensive Income
    
    
    34,369
    
    
    
    24,848Retained Earnings
    
    
    1,109,320
    
    
    
    782,5071,547,473
    
    
    
    1,167,267Total Liabilities and Shareholders Equity
    
    $
    1,547,911
    
    
    $
    1,168,712
 
 (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements.  S-2




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##### Table of Contents



For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Revenue:Dividends from Subsidiaries (a)
    
    $
    39,903
    
    
    $
    7,645
    
    
    $
    35,797Net Investment Income
    
    
    23
    
    
    
    
    
    
    
    Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    (3,148
    )Total Revenue
    
    
    39,926
    
    
    
    7,645
    
    
    
    32,649Other Expenses
    
    
    3,229
    
    
    
    3,511
    
    
    
    3,385Total Expenses
    
    
    3,229
    
    
    
    3,511
    
    
    
    3,385Income, Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries
    
    
    36,697
    
    
    
    4,134
    
    
    
    29,264Income Tax Benefit
    
    
    (1,122
    )
    
    
    (884
    )
    
    
    (2,287
    )Income, Before Equity in Earnings of Unconsolidated Subsidiaries
    
    
    37,819
    
    
    
    5,018
    
    
    
    31,551Equity in Earnings of Unconsolidated Subsidiaries
    
    
    288,994
    
    
    
    283,831
    
    
    
    125,137Net Income
    
    $
    326,813
    
    
    $
    288,849
    
    
    $
    156,688
 
 (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements.  S-3




---



##### Table of Contents



)
 For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Cash Flows From Operating Activities:Net Income
    
    $
    326,813
    
    
    $
    288,849
    
    
    $
    156,688Adjustments to Reconcile Net Income to Net Cash Provided by Operating ActivitiesEquity in Earnings of Unconsolidated Subsidiaries
    
    
    (288,994
    )
    
    
    (283,831
    )
    
    
    (125,137
    )Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    3,148Change in Other Liabilities
    
    
    (397
    )
    
    
    744
    
    
    
    218Change in Other Assets
    
    
    (23
    )
    
    
    
    
    
    
    Change in Income Taxes Recoverable
    
    
    5,834
    
    
    
    11,442
    
    
    
    (2,147
    )Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    
    
    
    
    
    
    
    
    6,952Fair Value of Stock Based Compensation
    
    
    16,001
    
    
    
    12,511
    
    
    
    Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based
Compensation Plans
    
    
    (5,925
    )
    
    
    (8,646
    )
    
    
    Net Cash Provided by Operating Activities
    
    
    53,309
    
    
    
    21,069
    
    
    
    39,722Cash Flows Used by Investing Activities:Net Transfers to Subsidiaries (a)
    
    
    (79,107
    )
    
    
    (41,408
    )
    
    
    (67,141
    )Settlement of Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    (3,148
    )Net Cash Used by Investing Activities
    
    
    (79,107
    )
    
    
    (41,408
    )
    
    
    (70,289
    )Cash Flows From Financing Activities:Proceeds from Exercise of Employee Stock Options
    
    
    6,621
    
    
    
    6,697
    
    
    
    4,582Proceeds from Collection of Notes Receivable
    
    
    5,951
    
    
    
    2,534
    
    
    
    2,343Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    7,981
    
    
    
    7,130
    
    
    
    23,721Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation
Plans
    
    
    5,925
    
    
    
    8,646
    
    
    
    Cost of Shares Withheld to Satisfy Minimum Required Tax Withholding Obligation
Arising Upon Exchange of Options
    
    
    
    
    
    
    (4,676
    )
    
    
    Net Cash Provided by Financing Activities
    
    
    26,478
    
    
    
    20,331
    
    
    
    30,646Net Increase (Decrease) in Cash and Equivalents
    
    
    680
    
    
    
    (8
    )
    
    
    79Cash and Cash Equivalents at Beginning of Year
    
    
    188
    
    
    
    196
    
    
    
    117Cash and Cash Equivalents at End of Year
    
    $
    868
    
    
    $
    188
    
    
    $
    196Cash Dividends Received From Unconsolidated Subsidiaries
    
    $
    39,903
    
    
    $
    7,645
    
    
    $
    35,797Non-Cash Transactions:Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for
Notes Receivable
    
    $
    8,466
    
    
    $
    12,391
    
    
    $
    4,095
 
 (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements.  S-4




---



##### Table of Contents



COLUMN CFuture Policy
    
    
    
    
    
    
    COLUMN E
    
    
    
    
    
    
    
    
    
    
    COLUMN H
    
    
    COLUMN ICOLUMN B
    
    
    Benefits,
    
    
    
    
    
    
    Other Policy
    
    
    
    
    
    
    
    
    
    
    Benefits,
    
    
    Amortization ofDeferred Policy
    
    
    Losses, Claims
    
    
    COLUMN D
    
    
    Claims and
    
    
    COLUMN F
    
    
    COLUMN G
    
    
    Claims, Losses,
    
    
    Deferred Policy
    
    
    COLUMN J
    
    
    COLUMN KCOLUMN A
    
    Acquisition
    
    
    and Loss
    
    
    Unearned
    
    
    Benefits
    
    
    Premium
    
    
    Net Investment
    
    
    and Settlement
    
    
    Acquisition
    
    
    Other Operating
    
    
    PremiumsSegment
    
    Costs
    
    
    Expenses
    
    
    Premiums
    
    
    Payable
    
    
    Revenue
    
    
    Income
    
    
    Expenses
    
    
    Costs
    
    
    Expenses
    
    
    Written2007:Commercial Lines
    
    $
    
    
    
    $
    1,068,549
    
    
    $
    701,996
    
    
    
    
    
    
    $
    1,174,779
    
    
    $
    
    
    
    $
    537,999
    
    
    $
    
    
    
    $
    
    
    
    $
    1,266,547Specialty Lines
    
    
    
    
    
    
    348,511
    
    
    
    118,601
    
    
    
    
    
    
    
    188,985
    
    
    
    
    
    
    
    71,561
    
    
    
    
    
    
    
    
    
    
    
    200,515Personal Lines
    
    
    
    
    
    
    14,873
    
    
    
    26,888
    
    
    
    
    
    
    
    15,479
    
    
    
    
    
    
    
    9,393
    
    
    
    
    
    
    
    
    
    
    
    (7,429
    )Corporate
    
    
    184,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117,224
    
    
    
    
    
    
    
    345,181
    
    
    
    67,922
    
    
    
    Total
    
    $
    184,446
    
    
    $
    1,431,933
    
    
    $
    847,485
    
    
    
    
    
    
    $
    1,379,243
    
    
    $
    117,224
    
    
    $
    618,953
    
    
    $
    345,181
    
    
    $
    67,922
    
    
    $
    1,459,6332006:Commercial Lines
    
    $
    
    
    
    $
    904,521
    
    
    $
    603,822
    
    
    
    
    
    
    $
    966,281
    
    
    $
    
    
    
    $
    343,575
    
    
    $
    
    
    
    $
    
    
    
    $
    1,080,248Specialty Lines
    
    
    
    
    
    
    355,275
    
    
    
    107,504
    
    
    
    
    
    
    
    173,974
    
    
    
    
    
    
    
    109,462
    
    
    
    
    
    
    
    
    
    
    
    181,358Personal Lines
    
    
    
    
    
    
    23,442
    
    
    
    48,032
    
    
    
    
    
    
    
    29,047
    
    
    
    
    
    
    
    15,175
    
    
    
    
    
    
    
    
    
    
    
    21,258Corporate
    
    
    158,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,699
    
    
    
    
    
    
    
    283,692
    
    
    
    54,575
    
    
    
    Total
    
    $
    158,805
    
    
    $
    1,283,238
    
    
    $
    759,358
    
    
    
    
    
    
    $
    1,169,302
    
    
    $
    91,699
    
    
    $
    468,212
    
    
    $
    283,692
    
    
    $
    54,575
    
    
    $
    1,282,8642005:Commercial Lines
    
    $
    
    
    
    $
    859,209
    
    
    $
    481,568
    
    
    
    
    
    
    $
    778,407
    
    
    $
    
    
    
    $
    375,590
    
    
    $
    
    
    
    $
    
    
    
    $
    904,707Specialty Lines
    
    
    
    
    
    
    306,765
    
    
    
    97,028
    
    
    
    
    
    
    
    151,678
    
    
    
    
    
    
    
    93,824
    
    
    
    
    
    
    
    
    
    
    
    159,112Personal Lines
    
    
    
    
    
    
    79,789
    
    
    
    52,872
    
    
    
    
    
    
    
    46,562
    
    
    
    
    
    
    
    34,592
    
    
    
    
    
    
    
    
    
    
    
    46,952Corporate
    
    
    129,486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,709
    
    
    
    
    
    
    
    208,914
    
    
    
    54,845
    
    
    
    Total
    
    $
    129,486
    
    
    $
    1,245,763
    
    
    $
    631,468
    
    
    
    
    
    
    $
    976,647
    
    
    $
    63,709
    
    
    $
    504,006
    
    
    $
    208,914
    
    
    $
    54,845
    
    
    $
    1,110,771
 S-5




---



##### Table of Contents



COLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN E
    
    COLUMN FCeded to
    
    Assumed
    
    
    
    
    
    Percentage ofGross
    
    Other
    
    from Other
    
    
    
    
    
    AmountAmount
    
    Companies
    
    Companies
    
    Net Amount
    
    Assumed to Net2007Property and Casualty Insurance
    
    $
    1,600,280
    
    
    $
    224,854
    
    
    $
    3,817
    
    
    $
    1,379,243
    
    
    
    0.3
    %2006Property and Casualty Insurance
    
    $
    1,361,057
    
    
    $
    196,056
    
    
    $
    4,301
    
    
    $
    1,169,302
    
    
    
    0.4
    %2005Property and Casualty Insurance
    
    $
    1,161,284
    
    
    $
    188,649
    
    
    $
    4,012
    
    
    $
    976,647
    
    
    
    0.4
    %
 S-6




---



##### Table of Contents



Claims and ClaimsAdjustment ExpensesIncurred Related toPaid ClaimsReserve for Unpaid
    
    Discount if
    
    
    
    
    
    Net
    
    Net
    
    (1)
    
    (2)
    
    Amortization of
    
    and ClaimAffiliation with
    
    Deferred Policy
    
    Claims and Claim
    
    Any deducted
    
    Unearned
    
    Earned
    
    Investment
    
    Current
    
    Prior
    
    deferred policy
    
    Adjustment
    
    Net WrittenRegistrant
    
    Acquisition Costs
    
    Adjustment Expenses
    
    in Column C
    
    Premiums
    
    Premiums
    
    Income
    
    Year
    
    Year
    
    acquisition costs
    
    Expenses
    
    PremiumsCOLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN E
    
    COLUMN F
    
    COLUMN G
    
    COLUMN H
    
    COLUMN I
    
    COLUMN J
    
    COLUMN KConsolidated
Property 
Casualty EntitiesDecember 31, 2007
    
    $
    184,446
    
    
    $
    1,431,933
    
    
    $
    0
    
    
    $
    847,485
    
    
    $
    1,379,243
    
    
    $
    117,224
    
    
    $
    704,734
    
    
    $
    (85,781
    )
    
    $
    345,181
    
    
    $
    452,467
    
    
    $
    1,459,633December 31, 2006
    
    $
    158,805
    
    
    $
    1,283,238
    
    
    $
    0
    
    
    $
    759,358
    
    
    $
    1,169,302
    
    
    $
    91,699
    
    
    $
    559,647
    
    
    $
    (91,435
    )
    
    $
    283,692
    
    
    $
    313,778
    
    
    $
    1,282,864December 31, 2005
    
    $
    129,486
    
    
    $
    1,245,763
    
    
    $
    0
    
    
    $
    631,468
    
    
    $
    976,647
    
    
    $
    63,709
    
    
    $
    533,906
    
    
    $
    (29,900
    )
    
    $
    208,914
    
    
    $
    234,730
    
    
    $
    1,110,771
 S-7