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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q x Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2004 Commission File Number 0-22280 PHILADELPHIA CONSOLIDATED HOLDING CORP. 
  PENNSYLVANIA
    
    23-2202671(State of Incorporation)
    
    (IRS Employer Identification No.)
 One Bala Plaza, Suite 100
Bala Cynwyd, Pennsylvania 19004
(610) 617-7900 
 
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES x NO: o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES x NO: o Indicate the number of shares outstanding of each of the issuers classes of
common stock as of October 29, 2004. Common Stock, no par value, 22,242,062 shares outstanding




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
For the Quarterly Period Ended September 30, 2004  
 Part I - Financial Information (Unaudited)Item 1. Financial Statements:Consolidated Balance Sheets  September 30, 2004 and
December 31, 2003
    
    
    3Consolidated Statements of Operations and Comprehensive
Income - For the three and nine months ended September 30, 2004
and 2003
    
    
    4Consolidated Statements of Changes in Shareholders Equity - For
the nine months ended September 30, 2004 and year ended
December 31, 2003
    
    
    5Consolidated Statements of Cash Flows - For the nine
months ended September 30, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-17Item 2.Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18-31Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.Controls and Procedures
    
    
    33Part II - Other InformationItem 1.Legal Proceedings
    
    
    34Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3.Defaults Upon Senior Securities
    
    
    34Item 4.Submission of Matters to a Vote of Security Holders
    
    
    34Item 5.Other Information
    
    
    34Item 6.Exhibits
    
    
    35-39Signatures
    
    
    40GAP QUOTA SHARE REINSURANCE CONTRACTCASUALTY EXCESS OF LOSS REINSURANCE CONTRACTCASUALTY (CLASS) EXCESS OF LOSSCASUALTY SEMI-AUTOMATIC FACULTATIVE EXCESS OF LOSSCASUALTY AUTOMATIC FACULTATIVE CERTIFICATEFL HURRICANE FUND CONTRACT (LIBERTY AMERICAN)FL HURRICANE FUND CONTRACT (MOBILE USA)EXCESS CATASTROPHE REINSURANCE CONTRACTFL ONLY EXCESS CATASTROPHE REINSURANCE CONTRACT$50 MIL EXCESS OF $90 MIL FL ONLY EXCESS CONTRACTUNDERLYING EXCESS CATASTROPHE COVERAGEREINSTATEMENT PREMIUM PROTECTION CONTRACTUNDERLYING EXCESS CATASTROPHE AND REINSTATEMENT CONTRACT$50 MIL EXCESS OF $140 MIL FL ONLY EXCESS CONTRACT65% FL ONLY THIRD AND FOURTH EVENT CONTRACT35% FL ONLY THIRD AND FOURTH EVENT CONTRACTTHIRD CATASTROPHE CONTRACT PLACEMENT SLIPTHIRD CATASTROPHE CONTRACT$50 MIL EXCESS OF $140 MIL PLACEMENT SLIP$5 MIL EXCESS OF $190 MIL PLACEMENT SLIP$45.0 MIL EXCESS OF $195 MIL PLACEMENT SLIP$6.5 MIL EXCESS OF 3.5 MIL FIFTH EVENT PLACEMENT SLIPCEO CERTIFICATION PURSUANT TO SECTION 302CFO CERTIFICATION PURSUANT TO SECTION 302CEO CERTIFICATION PURSUANT TO SECTION 906CFO CERTIFICATION PURSUANT TO SECTION 906
 2




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS  As ofSeptember 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $1,234,040 AND $1,066,523)
    
    $
    1,251,297
    
    
    $
    1,081,694EQUITY SECURITIES AT MARKET (COST $114,382
AND $79,813)
    
    
    121,520
    
    
    
    90,358TOTAL INVESTMENTS
    
    
    1,372,817
    
    
    
    1,172,052CASH AND CASH EQUIVALENTS
    
    
    116,175
    
    
    
    73,942ACCRUED INVESTMENT INCOME
    
    
    13,496
    
    
    
    11,008PREMIUMS RECEIVABLE
    
    
    236,842
    
    
    
    179,509PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
    
    
    793,197
    
    
    
    292,157DEFERRED INCOME TAXES
    
    
    22,653
    
    
    
    18,147DEFERRED ACQUISITION COSTS
    
    
    90,159
    
    
    
    56,288PROPERTY AND EQUIPMENT, NET
    
    
    19,911
    
    
    
    16,821GOODWILL
    
    
    25,724
    
    
    
    25,724OTHER ASSETS
    
    
    69,671
    
    
    
    25,293TOTAL ASSETS
    
    $
    2,760,645
    
    
    $
    1,870,941LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    1,242,256
    
    
    $
    627,086UNEARNED PREMIUMS
    
    
    541,717
    
    
    
    422,589TOTAL POLICY LIABILITIES AND ACCRUALS
    
    
    1,783,973
    
    
    
    1,049,675FUNDS HELD PAYABLE TO REINSURER
    
    
    124,557
    
    
    
    110,011LOANS PAYABLE
    
    
    36,781
    
    
    
    48,482PREMIUMS PAYABLE
    
    
    77,905
    
    
    
    35,044OTHER LIABILITIES
    
    
    131,894
    
    
    
    82,083TOTAL LIABILITIES
    
    
    2,155,110
    
    
    
    1,325,295COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING
    
    
    
    
    
    
    COMMON STOCK, NO PAR VALUE,
100,000,000 SHARES AUTHORIZED, 22,231,432 AND
22,007,552 SHARES ISSUED AND OUTSTANDING
    
    
    291,390
    
    
    
    281,088NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (6,331
    )
    
    
    (5,444
    )ACCUMULATED OTHER COMPREHENSIVE INCOME
    
    
    15,857
    
    
    
    16,715RETAINED EARNINGS
    
    
    304,619
    
    
    
    253,287TOTAL SHAREHOLDERS EQUITY
    
    
    605,535
    
    
    
    545,646TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,760,645
    
    
    $
    1,870,941
 The accompanying notes are an integral part of the consolidated financial statements. 3




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME   For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003REVENUE:NET EARNED PREMIUMS
    
    $
    187,845
    
    
    $
    146,676
    
    
    $
    548,830
    
    
    $
    418,387NET INVESTMENT INCOME
    
    
    10,896
    
    
    
    9,173
    
    
    
    31,669
    
    
    
    28,348NET REALIZED INVESTMENT GAIN (LOSS)
    
    
    268
    
    
    
    474
    
    
    
    985
    
    
    
    (1,309
    )OTHER INCOME
    
    
    719
    
    
    
    1,988
    
    
    
    2,930
    
    
    
    3,689TOTAL REVENUE
    
    
    199,728
    
    
    
    158,311
    
    
    
    584,414
    
    
    
    449,115LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    760,267
    
    
    
    100,645
    
    
    
    1,027,473
    
    
    
    328,023NET REINSURANCE RECOVERIES
    
    
    (612,498
    )
    
    
    (21,240
    )
    
    
    (676,144
    )
    
    
    (65,232
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    147,769
    
    
    
    79,405
    
    
    
    351,329
    
    
    
    262,791ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES
    
    
    56,863
    
    
    
    41,542
    
    
    
    155,489
    
    
    
    120,120OTHER OPERATING EXPENSES
    
    
    1,674
    
    
    
    2,668
    
    
    
    6,085
    
    
    
    5,974TOTAL LOSSES AND EXPENSES
    
    
    206,306
    
    
    
    123,615
    
    
    
    512,903
    
    
    
    388,885INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (6,578
    )
    
    
    34,696
    
    
    
    71,511
    
    
    
    60,230INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    (1,541
    )
    
    
    10,403
    
    
    
    24,222
    
    
    
    25,392DEFERRED
    
    
    (2,942
    )
    
    
    718
    
    
    
    (4,043
    )
    
    
    (6,832
    )TOTAL INCOME TAX EXPENSE (BENEFIT)
    
    
    (4,483
    )
    
    
    11,121
    
    
    
    20,179
    
    
    
    18,560NET INCOME (LOSS)
    
    $
    (2,095
    )
    
    $
    23,575
    
    
    $
    51,332
    
    
    $
    41,670OTHER COMPREHENSIVE INCOME, NET OF TAX:HOLDING GAIN (LOSS) ARISING DURING
PERIOD
    
    $
    11,157
    
    
    $
    (1,568
    )
    
    $
    (218
    )
    
    $
    1,231RECLASSIFICATION ADJUSTMENT
    
    
    (174
    )
    
    
    (308
    )
    
    
    (640
    )
    
    
    851OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    10,983
    
    
    
    (1,876
    )
    
    
    (858
    )
    
    
    2,082COMPREHENSIVE INCOME
    
    $
    8,888
    
    
    $
    21,699
    
    
    $
    50,474
    
    
    $
    43,752PER AVERAGE SHARE DATA:BASIC EARNINGS (LOSS) PER SHARE
    
    $
    (0.09
    )
    
    $
    1.08
    
    
    $
    2.32
    
    
    $
    1.90DILUTED EARNINGS (LOSS) PER SHARE
    
    $
    (0.09
    )
    
    $
    1.04
    
    
    $
    2.21
    
    
    $
    1.85WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    22,230,729
    
    
    
    21,913,053
    
    
    
    22,120,481
    
    
    
    21,879,748WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    1,132,451
    
    
    
    787,627
    
    
    
    1,120,535
    
    
    
    681,716WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    23,363,180
    
    
    
    22,700,680
    
    
    
    23,241,016
    
    
    
    22,561,464
 The accompanying notes are an integral part of the consolidated financial statements. 4




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY  For the NineMonths EndedSeptember 30, 2004
    
    For the Year Ended(Unaudited)
    
    December 31, 2003COMMON SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    22,007,552
    
    
    
    21,868,877EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    26,000
    
    
    
    99,875ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET
    
    
    197,880
    
    
    
    38,800BALANCE AT END OF PERIOD
    
    
    22,231,432
    
    
    
    22,007,552TREASURY SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    
    
    
    
    SHARES REPURCHASED PURSUANT TO AUTHORIZATION
    
    
    
    
    
    
    10,000EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    
    
    
    
    (6,500
    )ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET
    
    
    
    
    
    
    (3,500
    )BALANCE AT END OF PERIOD
    
    
    
    
    
    
    COMMON STOCK:BALANCE AT BEGINNING OF YEAR
    
    $
    281,088
    
    
    $
    276,945EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    819
    
    
    
    2,852ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    9,483
    
    
    
    1,291BALANCE AT END OF PERIOD
    
    
    291,390
    
    
    
    281,088NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (5,444
    )
    
    
    (6,407
    )NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
    
    
    (2,307
    )
    
    
    (1,065
    )COLLECTION OF NOTES RECEIVABLE
    
    
    1,420
    
    
    
    2,028BALANCE AT END OF PERIOD
    
    
    (6,331
    )
    
    
    (5,444
    )ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES:BALANCE AT BEGINNING OF YEAR
    
    
    16,715
    
    
    
    16,185OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
    
    
    (858
    )
    
    
    530BALANCE AT END OF PERIOD
    
    
    15,857
    
    
    
    16,715RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    253,287
    
    
    
    191,100NET INCOME
    
    
    51,332
    
    
    
    62,187BALANCE AT END OF PERIOD
    
    
    304,619
    
    
    
    253,287COMMON STOCK HELD IN TREASURY:BALANCE AT BEGINNING OF YEAR
    
    
    
    
    
    
    EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    
    
    
    
    94COMMON SHARES REPURCHASED
    
    
    
    
    
    
    (300
    )ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    
    
    
    
    206BALANCE AT END OF PERIOD
    
    
    
    
    
    
    TOTAL SHAREHOLDERS EQUITY
    
    $
    605,535
    
    
    $
    545,646
 The accompanying notes are an integral part of the consolidated financial statements. 5




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS   For the Nine Months Ended September 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    51,332
    
    
    $
    41,670ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT (GAIN) LOSS
    
    
    (985
    )
    
    
    1,309DEPRECIATION AND AMORTIZATION EXPENSE
    
    
    9,374
    
    
    
    6,148DEFERRED INCOME TAX BENEFIT
    
    
    (4,043
    )
    
    
    (6,832
    )CHANGE IN PREMIUMS RECEIVABLE
    
    
    (57,333
    )
    
    
    (51,854
    )CHANGE IN PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES, NET OF FUNDS HELD
PAYABLE TO REINSURER
    
    
    (486,494
    )
    
    
    (33,389
    )CHANGE IN OTHER RECEIVABLES
    
    
    (2,488
    )
    
    
    (1,941
    )CHANGE IN INCOME TAXES PAYABLE
    
    
    (16,932
    )
    
    
    636CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    (33,871
    )
    
    
    7,111CHANGE IN OTHER ASSETS
    
    
    (15,681
    )
    
    
    (4,750
    )CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES
    
    
    615,170
    
    
    
    147,979CHANGE IN UNEARNED PREMIUMS
    
    
    119,128
    
    
    
    125,698CHANGE IN OTHER LIABILITIES
    
    
    80,125
    
    
    
    20,763TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS
    
    
    387
    
    
    
    495NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    257,689
    
    
    
    253,043CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES
    
    
    117,764
    
    
    
    71,674PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES
    
    
    136,319
    
    
    
    162,032PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES
    
    
    32,938
    
    
    
    10,936COST OF FIXED MATURITIES ACQUIRED
    
    
    (430,584
    )
    
    
    (419,264
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (63,338
    )
    
    
    (38,593
    )PURCHASE OF PROPERTY AND EQUIPMENT
    
    
    (5,882
    )
    
    
    (4,632
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (212,783
    )
    
    
    (217,847
    )CASH FLOWS FROM FINANCING ACTIVITIES:REPAYMENTS ON LOANS PAYABLE
    
    
    (57,615
    )
    
    
    (34,245
    )PROCEEDS FROM LOANS PAYABLE
    
    
    45,914
    
    
    
    44,882PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    432
    
    
    
    1,590PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE
    
    
    1,420
    
    
    
    1,364PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
    
    
    7,176
    
    
    
    402COST OF COMMON STOCK REPURCHASED
    
    
    
    
    
    
    (300
    )NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
    
    
    (2,673
    )
    
    
    13,693NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    42,233
    
    
    
    48,889CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    73,942
    
    
    
    42,002CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    116,175
    
    
    $
    90,891CASH PAID DURING THE PERIOD FOR:INCOME TAXES
    
    $
    41,442
    
    
    $
    23,635INTEREST
    
    $
    451
    
    
    $
    487NON-CASH TRANSACTIONS:ISSUANCE OF SHARES PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE
    
    $
    2,307
    
    
    $
    1,154
 The accompanying notes are an integral part of the consolidated financial statements. 6




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements
   1.
    
    Basis of PresentationThe consolidated financial statements for the quarterly period ended
September 30, 2004 are unaudited, but in the opinion of management have been
prepared on the same basis as the annual audited consolidated financial
statements and reflect all adjustments, consisting of normal recurring
adjustments and accruals, necessary for a fair statement of the information
set forth therein. The results of operations for the nine months ended
September 30, 2004 are not necessarily indicative of the operating results
to be expected for the full year or any other period. Certain prior years
amounts have been reclassified for comparative purposes.These consolidated financial statements should be read in conjunction with
the financial statements and notes included in the Companys Annual Reports
on Form 10-K and Form 10-K/A, Amendment No. 1 As of and For the Year Ended
December 31, 2003.2.
    
    Stock-Based CompensationStock-based compensation plans are accounted for under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no compensation
expense is recognized for fixed stock option grants and the Companys stock
purchase plans. The following table illustrates the effect on net income
and earnings per share as if the provisions of statement of Financial
Accounting Standards (SFAS) No. 123 (as amended by SFAS No. 148),
Accounting for Stock-Based Compensation, had been applied for the three
and nine months ended September 30, 2004 and 2003, respectively: (In thousands, except per share data) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net Income (Loss) As Reported
    
    $
    (2,095
    )
    
    $
    23,575
    
    
    $
    51,332
    
    
    $
    41,670Assumed Stock Compensation Cost
    
    
    (1,134
    )
    
    
    (785
    )
    
    
    (2,932
    )
    
    
    (2,206
    )Pro Forma Net Income (Loss)
    
    $
    (3,229
    )
    
    $
    22,790
    
    
    $
    48,400
    
    
    $
    39,464Basic Earnings (Loss) Per Share:As Reported
    
    $
    (0.09
    )
    
    $
    1.08
    
    
    $
    2.32
    
    
    $
    1.90Pro Forma
    
    $
    (0.15
    )
    
    $
    1.04
    
    
    $
    2.19
    
    
    $
    1.80Diluted Earnings (Loss) Per Share:As Reported
    
    $
    (0.09
    )
    
    $
    1.04
    
    
    $
    2.21
    
    
    $
    1.85Pro Forma
    
    $
    (0.14
    )
    
    $
    1.00
    
    
    $
    2.08
    
    
    $
    1.75
  3.
    
    InvestmentsThe carrying amounts for the Companys investments approximate their
estimated fair value. The Company measures the fair value of investments
based upon quoted market prices or by obtaining quotes from dealers. At
September 30, 2004, the Company held no derivative financial instruments or
other securities containing embedded derivatives.The Company performs various analytical procedures with respect to its
investments, including identifying any security whose fair value is below
its cost. Upon identification of such securities, a detailed review is
performed for such securities, excluding interests in securitized assets,
meeting predetermined thresholds to determine whether a decline in fair
value below a securitys cost basis is other than temporary. If the Company
determines a decline in value to be other than temporary, the cost basis of
the security is written down to its fair value with the amount of the write
down included in earnings as a realized loss in the period the impairment 7




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arose. This evaluation resulted in non-cash realized investment losses of
$1.0 million and $0 million, respectively, for the three months ended

September 30, 2004 and 2003 and $1.0 million and $0.9 million, respectively,
for the nine months ended September 30, 2004 and 2003.The Companys impairment evaluation and recognition for interests in
securitized assets is conducted in accordance with the guidance provided by
the Emerging Issues Task Force of the Financial Accounting Standards Board.
Under this guidance, impairment losses on securities must be recognized if
both the fair value of the security is less than its book value and the net
present value of expected future cash flows is less than the net present
value of expected future cash flows at the most recent (prior) estimation
date. If these criteria are met, an impairment charge, calculated as the
difference between the current book value of the security and its fair
value, is included in earnings as a realized loss in the period the
impairment arose. Non-cash realized investment losses recorded for the
three and nine months ended September 30, 2004 and 2003 were $4.7 million
and $0.4 million, respectively, and $7.3 million and $2.6 million,
respectively, as a result of the Companys impairment evaluation for
investments in securitized assets.The following table (in thousands) identifies the period of time securities
with an unrealized loss at September 30, 2004 have continuously been in an
unrealized loss position. Included in the amounts displayed in the table
are $0.1 million of unrealized losses due to non-investment grade fixed
maturity securities having a fair value of $11.8 million. No issuer of
securities or industry represents more than 4.9% and 17.1%, respectively, of
the total estimated fair value, or 10.4% and 11.6%, respectively, of the
total gross unrealized loss included in the table below. As previously
discussed, there are certain risks and uncertainties inherent in the
Companys impairment methodology, including, but not limited to, the
financial condition of specific industry sectors and the resultant effect on
any such underlying security collateral values and changes in accounting,
tax and/or regulatory requirements which may have an effect on either, or
both, the investor and/or issuer. Should the Company subsequently determine
a decline in the fair value below the cost basis to be other than temporary,
the security would be written down to its fair value and the difference
would be included in earnings as a realized loss for the period such
determination was made. Less Than 12 Months
    
    12 Months or More
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesFixed Maturities:Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    36,790
    
    
    $
    112
    
    
    $
    591
    
    
    $
    16
    
    
    $
    37,381
    
    
    $
    128Obligations of States and
Political Subdivisions
    
    
    86,424
    
    
    
    913
    
    
    
    8,754
    
    
    
    109
    
    
    
    95,178
    
    
    
    1,022Corporate and Bank Debt Securities
    
    
    137,780
    
    
    
    1,152
    
    
    
    1,444
    
    
    
    20
    
    
    
    139,224
    
    
    
    1,172Asset Backed Securities
    
    
    31,785
    
    
    
    171
    
    
    
    4,687
    
    
    
    153
    
    
    
    36,472
    
    
    
    324Mortgage Pass-Through Securities
    
    
    69,317
    
    
    
    123
    
    
    
    6,988
    
    
    
    261
    
    
    
    76,305
    
    
    
    384Collateralized Mortgage Obligations
    
    
    29,726
    
    
    
    195
    
    
    
    4,158
    
    
    
    191
    
    
    
    33,884
    
    
    
    386Total Fixed Maturities
Available for Sale
    
    
    391,822
    
    
    
    2,666
    
    
    
    26,622
    
    
    
    750
    
    
    
    418,444
    
    
    
    3,416Equity Securities
    
    
    28,612
    
    
    
    3,397
    
    
    
    
    
    
    
    
    
    
    
    28,612
    
    
    
    3,397Total Investments
    
    $
    420,434
    
    
    $
    6,063
    
    
    $
    26,622
    
    
    $
    750
    
    
    $
    447,056
    
    
    $
    6,813
  Based upon the Companys impairment evaluation as of September 30, 2004, it
was concluded that the remaining unrealized losses in the table above are
not other than temporary. The factors considered in reaching the conclusion
that a decline below cost is other than temporary include, but are not
limited to: whether the issuer is in financial distress; the performance of
the collateral underlying a secured investment; whether a significant credit
rating action has occurred; whether scheduled interest payments have been
delayed or missed; whether changes in laws and/or regulations have impacted
an issuer or industry; an assessment of the timing of a securitys recovery
to fair value; and an ability and intent to hold the security to recovery of
fair value. 8




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##### Table of Contents



4.
    
    Restricted AssetsThe Insurance Subsidiaries have investments, principally U.S. Treasury
securities and Obligations of States and Political Subdivisions, on deposit
with the various states in which they are licensed insurers. At September
30, 2004 and December 31, 2003, the carrying value of the securities on
deposit totaled $15.1 million and $15.5 million, respectively.Additionally, the Insurance Subsidiaries have investments, principally
Mortgage Pass-Through securities, which collateralize the borrowings from
the Federal Home Loan Bank of Pittsburgh, see Note 8. The carrying value of
these investments was $53.1 million and $59.1 million as of September 30,
2004 and December 31, 2003, respectively.5.
    
    GoodwillThe carrying amount of goodwill is subject, at a minimum, to an annual
impairment test to identify potential goodwill impairment and measure the
amount of a goodwill impairment loss to be recognized (if any). As a result
of the impairment analysis, no change in the carrying amount of goodwill was
recorded by the Company for the year ended December 31, 2003. The Company
performed an interim impairment test during the third quarter of 2004 due to
hurricane catastrophe losses incurred and associated accelerated reinsurance
premium expense and concluded that the carrying amount of goodwill was not
impaired. Consequently no change in the carrying amount of goodwill has
been recorded for the nine months ended September 30, 2004.6.
    
    Liability for Unpaid Loss and Loss Adjustment ExpensesThe liability for unpaid loss and loss adjustment expenses reflects the
Companys best estimate for future amounts needed to pay losses and related
settlement expenses with respect to insured events which have occurred. The
process of establishing the ultimate claims liability is necessarily a
complex and imprecise process, requiring the use of informed estimates and
judgments using data currently available. The liability includes an amount
determined on the basis of claim adjusters evaluations with respect to
insured events that have occurred and an amount for losses incurred that
have not been reported to the Company. In some cases significant periods of
time, up to several years or more, may elapse between the occurrence of an
insured loss and the reporting of such to the Company. The method for
determining the Companys liability for unpaid loss and loss adjustment
expenses includes, but is not limited to, reviewing past loss experience
and, industry data and considering other factors such as legal, social, and
economic developments. The methods of making such estimates and
establishing the resulting liabilities are regularly reviewed and updated
and any adjustments there from are made in the accounting period in which
the adjustment arose. If the Companys ultimate losses, net of reinsurance,
prove to differ substantially from the amounts recorded at September 30,
2004, the related adjustments could have a material impact on the Companys
financial condition, and results of operations.During the three months ended September 30, 2004, the Company increased the
estimated gross and net unpaid loss and loss adjustment expenses for
accident years 1997 through 2002 and decreased the estimated gross and net
unpaid loss and loss adjustment expenses for accident year 2003 by the
following amounts: (In millions) Gross Basis
    
    Net Basisincrease (decrease)
    
    increase (decrease)Accident Year 2003
    
    $
    (22.7
    )
    
    $
    (18.0
    )Accident Year 2002
    
    
    32.6
    
    
    
    30.5Accident Years 2001-1997
    
    
    13.7
    
    
    
    12.6Total
    
    $
    23.6
    
    
    $
    25.1
 9




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##### Table of Contents



The increase in accident years 1997 through 2002 is principally attributable
to continued case reserve development above expectations primarily across
various professional liability products in the specialty lines segment and
general liability and commercial automobile coverages in the commercial
lines segment, as noted in the table below. The decrease in accident year
2003 is principally attributable to continued better than expected claim
frequency primarily for general liability and commercial automobile
coverages in the commercial lines segment, as noted in the table below: (In millions) Gross Basisincrease (decrease)Professional
    
    General Liability
    
    Commercial AutoAccident Year
    
    Liability Coverages
    
    Coverages
    
    Coverages
    
    Other2003
    
    $
    7.7
    
    
    $
    (10.6
    )
    
    $
    (18.7
    )
    
    $
    (1.1
    )2002
    
    $
    16.9
    
    
    $
    7.1
    
    
    $
    7.7
    
    
    $
    0.91997  2001
    
    $
    10.9
    
    
    $
    2.4
    
    
    $
    0.3
    
    
    $
    0.1
 (In millions) Net Basisincrease (decrease)Professional
    
    General Liability
    
    Commercial AutoAccident Year
    
    Liability Coverages
    
    Coverages
    
    Coverages
    
    Other2003
    
    $
    6.4
    
    
    $
    (7.7
    )
    
    $
    (18.5
    )
    
    $
    1.82002
    
    $
    14.2
    
    
    $
    6.8
    
    
    $
    8.9
    
    
    $
    0.61997  2001
    
    $
    6.8
    
    
    $
    2.0
    
    
    $
    1.6
    
    
    $
    2.2
  The net decrease in estimated losses for accident year 2003 reduced the
losses ceded by the Company to a quota share reinsurance agreement and
resulted in the Company accruing an additional $2.9 million in ceding
commission and $1.0 million in profit commission under the treaty.Additionally, the Company decreased the 2004 accident year ultimate loss
ratio to recognize better than anticipated pricing and loss trends. This
decrease in the 2004 accident year loss ratio resulted in a release of $34.9
million and $27.2 million of 2004 gross and net accident year loss reserves,
respectively. This decrease primarily occurred across general liability,
commercial automobile and property coverages in the commercial lines
segment, as noted below: (In millions) Accident Year 2004increase (decrease)Professional
    
    General Liability
    
    Commercial AutoLiability Coverages
    
    Coverages
    
    Coverages
    
    OtherGross Basis
    
    $
    
    
    
    $
    (8.9
    )
    
    $
    (14.5
    )
    
    $
    (11.5
    )Net Basis
    
    $
    3.7
    
    
    $
    (9.6
    )
    
    $
    (12.8
    )
    
    $
    (8.5
    )
 10




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##### Table of Contents



During the three months ended September 30, 2004, the Company experienced
catastrophe losses attributable to Hurricanes Charley, Frances, Ivan and
Jeanne. These catastrophe losses, as noted in the table below, impacted
both the Companys personal and commercial lines segments. With some areas
having been affected multiple times, loss and loss adjustment expense
estimates are still evolving due, in part, to the difficulty in making any
precise estimate at this time of future remediation and repair costs. (In millions) Date of Event:
    
    8/13/04
    
    9/5/04
    
    9/15/04
    
    9/25/04Hurricane:
    
    Charley
    
    Frances
    
    Ivan
    
    Jeanne
    
    TotalGross Loss and Loss
Adjustment Expense
Estimates:Personal Lines Segment
    
    $
    205.2
    
    
    $
    118.2
    
    
    $
    14.0
    
    
    $
    267.4
    
    
    $
    604.8Commercial Lines Segment
    
    
    16.9
    
    
    
    9.2
    
    
    
    3.4
    
    
    
    11.3
    
    
    
    40.8Total
    
    $
    222.1
    
    
    $
    127.4
    
    
    $
    17.4
    
    
    $
    278.7
    
    
    $
    645.6
  Under the Companys catastrophe reinsurance programs in place for these
hurricanes, the Company had a $3.5 million pre-tax per occurrence loss
retention for its personal lines catastrophe losses and a $7.0 million
pre-tax per occurrence loss retention for its commercial lines catastrophe
losses. The Companys retention by hurricane is summarized in the table
below: (In millions) Hurricane:
    
    Charley
    
    Frances
    
    Ivan
    
    Jeanne
    
    TotalNet Loss and Loss
Adjustment Expense
Estimates:Personal Lines Segment
    
    $
    3.5
    
    
    $
    3.5
    
    
    $
    3.5
    
    
    $
    3.5
    
    
    $
    14.0Commercial Lines Segment
    
    
    7.0
    
    
    
    7.0
    
    
    
    3.4
    
    
    
    7.0
    
    
    
    24.4Total
    
    $
    10.5
    
    
    $
    10.5
    
    
    $
    6.9
    
    
    $
    10.5
    
    
    $
    38.4
 11




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##### Table of Contents



7.
    
    Funds Held Payable To Reinsurer  Effective April 1, 2003, the Company entered into a quota share reinsurance
agreement. Under this agreement, the Company ceded 22% of its net written
premiums and loss and loss adjustment expenses for substantially all of the
Companys lines of business on policies effective April 1, 2003 through
December 31, 2003, and 10% of its commercial and specialty lines net written
premiums and loss and loss adjustment expenses for policies effective
January 1, 2004 and thereafter. The Company receives a provisional
commission of 33.0% adjusted pro-rata based upon the ratio of losses
incurred to premiums earned. Pursuant to this reinsurance agreement the
Company withholds the reinsurance premium due the reinsurers reduced by the
reinsurers expense allowance, and the Companys ceding commission allowance
in a Funds Held Payable to Reinsurer account. This Funds Held Payable to
Reinsurer account is also reduced by ceded paid losses and loss adjustment
expenses under this agreement, and increased by an interest credit. In
addition, the agreement allows for a profit commission to be paid to the
Company upon commutation. Activity for the Funds Held Payable to Reinsurer
is summarized as follows (in thousands): As of and For the
    
    As of and For theNine Months Ended
    
    Year EndedSeptember 30, 2004
    
    December 31, 2003Funds Held Payable to Reinsurer Balance at Beginning of
Period
    
    $
    110,011
    
    
    $
    Net Written Premiums Ceded
    
    
    71,696
    
    
    
    199,358Reinsurer Expense Allowance
    
    
    (2,518
    )
    
    
    (7,376
    )Provisional Commission
    
    
    (39,001
    )
    
    
    (73,933
    )Paid Loss and Loss Adjustment Expenses
    
    
    (18,927
    )
    
    
    (10,701
    )Interest Credit
    
    
    3,582
    
    
    
    2,318Other
    
    
    (286
    )
    
    
    345Subtotal Activity
    
    
    14,546
    
    
    
    110,011Funds Held Payable to Reinsurer Balance at End of Period
    
    $
    124,557
    
    
    $
    110,011
  The Company has also accrued a profit commission receivable based upon the
experience of the underlying business ceded to this reinsurance agreement,
in the amounts of $4.0 million and $9.1 million for the three and nine
months ended September 30, 2004, respectively. The profit commission
reduces ceded written and earned premiums and increases net written and
earned premiums.8.
    
    Loans PayableAs of September 30, 2004, the Company had aggregate borrowings of $36.8
million from the Federal Home Loan Bank. These borrowings bear interest at
adjusted LIBOR and mature twelve months or less from inception. The
proceeds from these borrowings are invested in collateralized mortgage
obligation and asset backed securities to achieve a positive spread between
the rate of interest on these securities and the borrowing rates. 12




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##### Table of Contents



9.
    
    Earnings Per Share  Earnings per common share have been calculated by dividing net income for
the period by the weighted average number of common shares and common share
equivalents outstanding during the period. Following is the computation of
earnings per share for the three and nine months ended September 30, 2004
and 2003, respectively (in thousands, except per share data): As of and For the Three
    
    As of and For the NineMonths Ended September 30,
    
    Months Ended September 302004
    
    2003
    
    2004
    
    2003Weighted-Average Common Shares Outstanding
    
    
    22,231
    
    
    
    21,913
    
    
    
    22,120
    
    
    
    21,880Weighted-Average Potential Shares Issuable
    
    
    1,132
    
    
    
    788
    
    
    
    1,121
    
    
    
    681Weighted-Average Shares and Potential
Shares Issuable
    
    
    23,363
    
    
    
    22,701
    
    
    
    23,241
    
    
    
    22,561Net Income (Loss)
    
    $
    (2,095
    )
    
    $
    23,575
    
    
    $
    51,332
    
    
    $
    41,670Basic Earnings (Loss) per Share
    
    $
    (0.09
    )
    
    $
    1.08
    
    
    $
    2.32
    
    
    $
    1.90Diluted Earnings (Loss) per Share
    
    $
    (0.09
    )
    
    $
    1.04
    
    
    $
    2.21
    
    
    $
    1.85
  10.
    
    Income TaxesThe effective tax rate differs from the 35% marginal tax rate principally as
a result of tax-exempt interest income, the dividend received deduction and
other differences in the recognition of revenues and expenses for tax and
financial reporting purposes.11.
    
    ReinsuranceIn the normal course of business, the Company has entered into various
reinsurance contracts with unrelated reinsurers. The Company participates
in such agreements for the purpose of limiting loss exposure and
diversifying business. Reinsurance contracts do not relieve the Company
from its obligations to policyholders. The effect of reinsurance on
premiums written and earned is as follows (See Note 7): (In thousands) For the Three Months Ended
    
    For the Nine Months EndedSeptember 30, 2004
    
    September 30, 2004Written
    
    Earned
    
    Written
    
    EarnedDirect Business
    
    $
    366,229
    
    
    $
    279,422
    
    
    $
    896,625
    
    
    $
    775,365Reinsurance Assumed
    
    
    1,197
    
    
    
    1,756
    
    
    
    3,620
    
    
    
    5,753Reinsurance Ceded
    
    
    101,723
    
    
    
    93,333
    
    
    
    207,765
    
    
    
    232,288Net Premiums
    
    $
    265,703
    
    
    $
    187,845
    
    
    $
    692,480
    
    
    $
    548,830
 For the Three Months Ended
    
    For the Nine Months EndedSeptember 30, 2003
    
    September 30, 2003Written
    
    Earned
    
    Written
    
    EarnedDirect Business
    
    $
    283,112
    
    
    $
    210,013
    
    
    $
    684,810
    
    
    $
    561,718Reinsurance Assumed
    
    
    3,330
    
    
    
    1,738
    
    
    
    5,829
    
    
    
    3,222Reinsurance Ceded
    
    
    86,077
    
    
    
    65,075
    
    
    
    238,523
    
    
    
    146,553Net Premiums
    
    $
    200,365
    
    
    $
    146,676
    
    
    $
    452,116
    
    
    $
    418,387
 13




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##### Table of Contents



Certain of the Companys reinsurance contracts have provisions whereby the
Company is entitled to a return profit commission based on the ultimate
experience of the underlying business ceded to the contracts. Under the
terms of these contracts, the Company accrued profit commissions of $4.6
million and $4.0 million for the three months ended September 30, 2004 and
2003, respectively, and $13.3 million and $5.9 million for the nine months
ended September 30, 2004 and 2003, respectively. The profit commissions
reduce ceded written and earned premiums and increase net written and earned
premiums.During the three months ended September 30, 2004 the Company experienced
catastrophe losses attributable to Hurricanes Charley, Frances, Ivan and
Jeanne. Due to these multiple hurricane events, the Company purchased
additional catastrophe reinsurance coverages (which provide coverage from
the inception date of the coverage through May 31, 2005) to supplement its
original reinsurance programs. The estimated aggregate pre-tax cost of
these additional catastrophe reinsurance coverages is $18.8 million.
Additionally, these multiple hurricane events resulted in accelerating the
recognition of $27.7 million (pre-tax) catastrophe reinsurance premium
expense due to the utilization of certain of the catastrophe reinsurance
coverages. Of this $27.7 million, $13.0 million was attributable to the
additional reinsurance coverages referred to above. This increase in
reinsurance premium expense increased reinsurance ceded written and earned
premiums and reduced net written and earned premiums.Prior to Hurricane Charley, the Company had coverage in place under its 2004
catastrophe reinsurance programs which provided $338.5 million in excess of
a $3.5 million per occurrence retention for the Companys personal lines
catastrophe losses and $108.0 million in excess of a $7.0 million per
occurrence retention for its commercial lines catastrophe losses. As noted
above, due to the multiple hurricane events the Company purchased additional
reinsurance coverages to supplement the original catastrophe reinsurance
coverage which was utilized. Subsequent to Hurricanes Charley, Frances, and
Ivan and prior to Hurricane Jeanne, the Company had coverage in place under
its catastrophe reinsurance programs which provided approximately $285.0
million in excess of a $3.5 million per occurrence retention for its
personal lines catastrophe losses and $108.0 million in excess of a $7.0
million per occurrence retention for its commercial lines catastrophe
losses. Based upon the Companys hurricane catastrophe loss estimates, the
catastrophe reinsurance programs in place after Hurricane Jeanne provide
$337.0 million in excess of a $3.5 million per occurrence retention for the
Companys personal lines catastrophe losses and $105.0 million in excess of
a $10.0 million per occurrence retention for its commercial lines
catastrophe losses. These catastrophe reinsurance programs provide
catastrophe reinsurance coverage through May 31, 2005.12.
    
    Commitments and ContingenciesThe Company is subject to routine legal proceedings in connection with its
property and casualty insurance business. The Company is not involved in
any other pending or threatened legal or administrative proceedings which
management believes can reasonably be expected to have a material adverse
effect on the Companys financial condition or results of operations.13.
    
    Comprehensive IncomeComponents of comprehensive income, as detailed in the Consolidated
Statements of Operations and Comprehensive Income, are net of tax. The
related tax effect of Holding Gains (Losses) arising during the three and
nine months ended September 30, 2004 and 2003 was $6.0 million and $(0.8)
million, respectively and $(0.1) million and $0.7 million, respectively.
The related tax effect of Reclassification Adjustments for the three and
nine months ended September 30, 2004 and 2003 was $(0.1) million and $(0.2)
million, respectively and $(0.3) million and $0.5 million, respectively.14.
    
    Segment InformationThe Companys operations are classified into three reportable business
segments which are organized around its three underwriting divisions: The
Commercial Lines Underwriting Group, which has underwriting responsibility
for the Commercial Automobile and Commercial Property and Commercial
multi-peril package insurance products; The Specialty Lines Underwriting
Group, which has underwriting responsibility for the professional liability
insurance products; and The Personal Lines Group, which designs, markets and
underwrites personal property and casualty insurance products for the
Manufactured Housing and Homeowners 14




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##### Table of Contents



markets. Each business segments responsibilities include: pricing,
managing the risk selection process and monitoring the loss ratios by
product and insured. The reportable segments operate solely within the
United States and have not been aggregated.The segments follow the same accounting policies used for the Companys
consolidated financial statements, as described in the summary of
significant accounting policies. Management evaluates a segments
performance based upon premium production and the associated loss
experience, which includes paid losses, an amount determined on the basis of
claim adjusters evaluation with respect to insured events that have
occurred and an amount for losses incurred that have not been reported.
Investments and investment performance, including investment income and net
realized investment gain (loss), acquisition costs and other underwriting
expenses, including commissions, premium taxes and other acquisition costs,
and other operating expenses are managed at a corporate level by the
corporate accounting function in conjunction with other corporate
departments, and are included in Corporate.Following is a tabulation of business segment information for the nine and
three months ended September 30, 2004 and 2003. Corporate information is
included to reconcile segment data to the consolidated financial statements
(in thousands): 15




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##### Table of Contents



Nine Months Ended,Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalSeptember 30, 2004:Gross Written Premiums
    
    $
    662,691
    
    
    $
    143,188
    
    
    $
    94,367
    
    
    $
    
    
    
    $
    900,246Net Written Premiums
    
    $
    547,690
    
    
    $
    119,819
    
    
    $
    24,971
    
    
    $
    
    
    
    $
    692,480Revenue:Net Earned Premiums
    
    $
    445,910
    
    
    $
    96,808
    
    
    $
    6,112
    
    
    $
    
    
    
    $
    548,830Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,669
    
    
    
    31,669Net Realized Investment Gain
    
    
    
    
    
    
    - -
    
    
    
    - -
    
    
    
    985
    
    
    
    985Other Income
    
    
    
    
    
    
    
    
    
    
    2,179
    
    
    
    751
    
    
    
    2,930Total Revenue
    
    
    445,910
    
    
    
    96,808
    
    
    
    8,291
    
    
    
    33,405
    
    
    
    584,414Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    225,016
    
    
    
    92,033
    
    
    
    34,280
    
    
    
    
    
    
    
    351,329Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,489
    
    
    
    155,489Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,508
    
    
    
    4,577
    
    
    
    6,085Total Losses and Expenses
    
    
    225,016
    
    
    
    92,033
    
    
    
    35,788
    
    
    
    160,066
    
    
    
    512,903Income Before Income Taxes
    
    
    220,894
    
    
    
    4,775
    
    
    
    (27,497
    )
    
    
    (126,661
    )
    
    
    71,511Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,179
    
    
    
    20,179Net Income
    
    $
    220,894
    
    
    $
    4,775
    
    
    $
    (27,497
    )
    
    $
    (146,840
    )
    
    $
    51,332Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    788,607
    
    
    $
    1,972,038
    
    
    $
    2,760,645September 30, 2003:Gross Written Premiums
    
    $
    499,840
    
    
    $
    119,848
    
    
    $
    70,927
    
    
    $
    
    
    
    $
    690,615Net Written Premiums
    
    $
    344,809
    
    
    $
    82,620
    
    
    $
    24,687
    
    
    $
    
    
    
    $
    452,116Revenue:Net Earned Premiums
    
    $
    311,534
    
    
    $
    80,457
    
    
    $
    26,396
    
    
    $
    
    
    

    $
    418,387Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,348
    
    
    
    28,348Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,309
    )
    
    
    (1,309
    )Other Income
    
    
    
    
    
    
    
    
    
    
    3,361
    
    
    
    328
    
    
    
    3,689Total Revenue
    
    
    311,534
    
    
    
    80,457
    
    
    
    29,757
    
    
    
    27,367
    
    
    
    449,115Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    202,357
    
    
    
    45,941
    
    
    
    14,493
    
    
    
    
    
    
    
    262,791Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,120
    
    
    
    120,120Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    2,422
    
    
    
    3,552
    
    
    
    5,974Total Losses and Expenses
    
    
    202,357
    
    
    
    45,941
    
    
    
    16,915
    
    
    
    123,672
    
    
    
    388,885Income Before Income Taxes
    
    
    109,177
    
    
    
    34,516
    
    
    
    12,842
    
    
    
    (96,305
    )
    
    
    60,230Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,560
    
    
    
    18,560Net Income
    
    $
    109,177
    
    
    $
    34,516
    
    
    $
    12,842
    
    
    $
    (114,865
    )
    
    $
    41,670Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    283,625
    
    
    $
    1,558,902
    
    
    $
    1,842,527
 16




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##### Table of Contents



Three Months Ended,Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalSeptember 30, 2004:Gross Written Premiums
    
    $
    289,002
    
    
    $
    49,358
    
    
    $
    29,066
    
    
    $
    
    
    
    $
    367,426Net Written Premiums
    
    $
    237,925
    
    
    $
    41,626
    
    
    $
    (13,848
    )
    
    $
    
    
    
    $
    265,703Revenue:Net Earned Premiums
    
    $
    165,756
    
    
    $
    35,791
    
    
    $
    (13,702
    )
    
    $
    
    
    
    $
    187,845Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,896
    
    
    
    10,896Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    268Other Income
    
    
    
    
    
    
    
    
    
    
    376
    
    
    
    343
    
    
    
    719Total Revenue
    
    
    165,756
    
    
    
    35,791
    
    
    
    (13,326
    )
    
    
    11,507
    
    
    
    199,728Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    70,023
    
    
    
    52,280
    
    
    
    25,466
    
    
    
    
    
    
    
    147,769Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,863
    
    
    
    56,863Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    396
    
    
    
    1,278
    
    
    
    1,674Total Losses and Expenses
    
    
    70,023
    
    
    
    52,280
    
    
    
    25,862
    
    
    
    58,141
    
    
    
    206,306Loss Before Income Taxes
    
    
    95,733
    
    
    
    (16,489
    )
    
    
    (39,188
    )
    
    
    (46,634
    )
    
    
    (6,578
    )Total Income Tax Benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,483
    )
    
    
    (4,483
    )Net Loss
    
    $
    95,733
    
    
    $
    (16,489
    )
    
    $
    (39,188
    )
    
    $
    (42,151
    )
    
    $
    (2,095
    )Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    788,607
    
    
    $
    1,972,038
    
    
    $
    2,760,645September 30, 2003:Gross Written Premiums
    
    $
    224,781
    
    
    $
    41,459
    
    
    $
    20,186
    
    
    $
    
    
    
    $
    286,426Net Written Premiums
    
    $
    163,575
    
    
    $
    30,452
    
    
    $
    6,338
    
    
    $
    
    
    
    $
    200,365Revenue:Net Earned Premiums
    
    $
    112,131
    
    
    $
    26,478
    
    
    $
    8,067
    
    
    $
    
    
    
    $
    146,676Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,173
    
    
    
    9,173Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474
    
    
    
    474Other Income
    
    
    
    
    
    
    
    
    
    
    1,807
    
    
    
    181
    
    
    
    1,988Total Revenue
    
    
    112,131
    
    
    
    26,478
    
    
    
    9,874
    
    
    
    9,828
    
    
    
    158,311Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    61,277
    
    
    
    13,948
    
    
    
    4,180
    
    
    
    
    
    
    
    79,405Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,542
    
    
    
    41,542Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,364
    
    
    
    1,304
    
    
    
    2,668Total Losses and Expenses
    
    
    61,277
    
    
    
    13,948
    
    
    
    5,544
    
    
    
    42,846
    
    
    
    123,615Income Before Income Taxes
    
    
    50,854
    
    
    
    12,530
    
    
    
    4,330
    
    
    
    (33,018
    )
    
    
    34,696Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,121
    
    
    
    11,121Net Income
    
    $
    50,854
    
    
    $
    12,530
    
    
    $
    4,330
    
    
    $
    (44,139
    )
    
    $
    23,575Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    283,507
    
    
    $
    1,558,902
    
    
    $
    1,842,527
 17




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General Although the Companys financial performance is dependent upon its own specific
business characteristics, certain risk factors can affect the profitability
and/or the financial condition of the Company. These include, but are not
limited to:  
    
    Industry factors  Historically the financial performance of the
property and casualty insurance industry has tended to fluctuate in
cyclical patterns of soft markets followed by hard markets. The
Companys strategy is to focus on underwriting profits, and
accordingly the Companys marketing organization is being directed
into those niche businesses that exhibit the greatest potential for
underwriting profits.  
    
    Competition  The Company competes in the property and casualty
business with other domestic and international insurers having greater
financial and other resources than the Company.  
    
    Financial Strength Rating  If A.M. Best Company downgrades the rating
of the Companys subsidiaries, the Company may not be able to compete
as effectively with its commercial and specialty lines competitors.  
    
    Regulation  The Companys insurance subsidiaries are subject to a
substantial degree of regulatory oversight, which generally is
designed to protect the interests of policyholders, as opposed to
shareholders.  
    
    Litigation  Adverse rulings in any material litigation to which the
Company is a party could materially affect its financial position and
results of operations.  
    
    Inflation  Property and casualty insurance premiums are established
before the amount of losses and loss adjustment expenses, or the
extent to which inflation may affect such amounts is known.  
    
    Investment Risk  Substantial future increases in interest rates could
result in a decline in the market value of the Companys investment
portfolio and resulting losses and/or reduction in shareholders
equity.  
    
    Claims development and the process of estimating loss reserves 
Estimating the Companys ultimate liability for unpaid loss and loss
adjustment expenses is necessarily a complex and judgmental process,
inasmuch as the amounts of any ultimate liability of the Company with
respect to such claims are based on managements informed estimates
and judgments using data currently available.  
    
    Catastrophe Exposure  The Companys insurance subsidiaries issue
insurance policies which provide coverage for commercial and personal
property and casualty risks. It is possible that a catastrophic event
could greatly increase claims under the insurance policies the
insurance subsidiaries issue. Catastrophes may result from a variety
of events or conditions, including hurricanes, windstorms,
earthquakes, hail and other severe weather conditions and may include
terrorist events. It is possible that a catastrophic event could
adversely impact profitability.  
    
    Reinsurance  The adequacy of reinsurance coverage which may be
obtained by the Company and the ability and willingness of the
Companys reinsurers to pay. The above risk factors should be read in conjunction with the Certain Critical
Accounting Estimates and Judgments included in the Companys Annual Report on
Form 10-K and Form 10-K/A, Amendment No. 1 for the fiscal year ended December
31, 2003. 18




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) In October, 2004, the New York Attorney Generals office filed a complaint in
New York state court against Marsh & McClennan Companies, Inc. (Marsh), the
nations largest insurance broker. The complaint accuses Marsh of
participating in bid-rigging schemes and improper disclosure to its customers
of the fact that Marsh was receiving contingent commissions from insurers which
issued insurance policies to such customers. These commissions are based on
the volume and/or profitability of business placed by Marsh. The complaint
also asserted that a number of insurers engaged in bid rigging. Shortly after
this complaint was filed, Marsh and a number of the insurers named in the
complaint publicly announced that they would be terminating their contingent
commission arrangements. The Pennsylvania Insurance Commissioner has stated
that a national insurance commissioners group will be drafting a model law
requiring disclosure to customers of contingent commission arrangements. The Company has arrangements with approximately 56 agents and 78 brokers
(collectively Preferred Agents) under which the Company pays profit share
based on the profitability to the Company of business placed by these Preferred
Agents with the Company. Approximately 25% of the Companys gross written
premiums are produced through Preferred Agents with which the Company has
profit share arrangements. It is possible that the filing of the complaint
against Marsh and/or future legislation, regulations and/or case law could
affect these arrangements. The impact of such matters, if any, on the Company
is not able to be predicted at this time. Investments The Companys investment objective is the realization of relatively high levels
of after-tax net investment income while generating competitive after-tax total
rates of return within a prudent level of risk and within the constraints of
maintaining adequate securities in amount and duration to meet cash
requirements of current operations and long-term liabilities, as well as
maintaining and improving the Companys A.M. Best rating. The Company utilizes
external independent professional investment managers for its fixed maturity
and equity investments. These investments consist of diversified issuers and
issues, and as of September 30, 2004, approximately 85.7% and 8.0% of the total
invested assets (total investments plus cash equivalents) on a cost basis
consisted of investments in fixed maturity and equity securities, respectively,
versus 87.8% and 6.6%, respectively, at December 31, 2003. Asset backed, mortgage pass-through, and collateralized mortgage obligation
securities, on a cost basis, amounted to $117.0 million, $192.5 million and
$59.4 million, respectively, as of September 30, 2004 and $183.0 million,
$159.2 million and $53.8 million, respectively, as of December 31, 2003. The
asset backed, mortgage pass-through, and collateralized mortgage obligation
investments are amortizing securities possessing favorable prepayment risk
and/or extension profiles. The Company regularly performs various analytical procedures with respect to
its investments, including identifying any security whose fair value is below
its cost. Upon identification of such securities, a detailed review is
performed for all securities, except interests in securitized assets, meeting
predetermined thresholds to determine whether such decline is other than
temporary. If the Company determines a decline in value to be other than
temporary, based upon its detailed review, or if a decline in value for an
equity investment has persisted continuously for nine months, the cost basis of
the security is written down to its fair value. The factors considered in
reaching the conclusion that a decline below cost is other than temporary
include, but are not limited to: whether the issuer is in financial distress;
the performance of the collateral underlying a secured investment; whether a
significant credit rating action has occurred; whether scheduled interest
payments have been delayed or missed; whether changes in laws and/or
regulations have impacted an issuer or industry; an assessment of the timing of
a securitys recovery to fair value; and an ability and intent to hold the
security to recovery of fair value. The amount of any write down is included
in earnings as a realized loss in the period the impairment arose. This
evaluation resulted in non-cash realized investment losses of $1.0 million and
$0 million, respectively, for the three months ended September 30, 2004 and
2003 and $1.0 million and $0.9 million, respectively, for the nine months ended
September 30, 2004 and 2003. The Company attributes these other than
temporary declines in fair value primarily to issuer specific conditions. Additionally, the Company conducts its impairment evaluation and recognition
for interests in securitized assets in accordance with the guidance provided by
the Emerging Issues Task Force of the Financial Accounting Standards Board.
Under this guidance, impairment losses on securities must be recognized if both
the fair value of the security 19




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) is less than its book value and the net present value of expected future cash
flows is less than the net present value of expected future cash flows at the
most recent (prior) estimation date. If these criteria are met, an impairment
charge, calculated as the difference between the current book value of the
security and its fair value, is included in earnings as a realized loss in the
period the impairment arose. This evaluation resulted in non-cash realized
investment losses of $4.7 million and $0.4 million, respectively, and $7.3
million and $2.6 million, respectively, for the three and nine months ended
September 30, 2004 and 2003, respectively. These non-cash realized investment
losses were from investments primarily in collateralized bond obligations which
were impacted by recent years non investment grade default rates that were
higher than historic averages and from investments in other asset backed
securities which experienced extension of cash flows on the underlying
collateral. The Companys fixed maturity portfolio amounted to $1,251.3 million and
$1,081.7 million, as of September 30, 2004 and December 31, 2003, respectively,
of which 99.0% and 98.6% of the portfolio as of September 30, 2004 and December
31, 2003, respectively, was comprised of investment grade securities. The
Company had fixed maturity investments with unrealized losses amounting to $3.4
million and $10.6 million as of September 30, 2004 and December 31, 2003,
respectively. Of these amounts, interests in securitized assets had unrealized
losses amounting to $1.1 million and $9.2 million as of September 30, 2004 and
December 31, 2003, respectively. This decrease in fixed maturity unrealized
losses between December 31, 2003 and September 30, 2004 can be largely
attributed to the impairment losses on interests in securitized assets
recognized in the third quarter of 2004. The remaining unrealized losses are
attributable largely to market price changes due to interest rate increases
since the investments were purchased, and are not considered to be other than
temporary impairments, given the ability and intent to hold the securities to
recovery. As discussed above, the Companys impairment evaluation and
recognition for interests in securitized assets is conducted in accordance with
the guidance provided by the EITF. The following table identifies the period of time securities with an unrealized
loss at September 30, 2004 have continuously been in an unrealized loss
position. Included in the amounts displayed in the table are $0.1 million of
unrealized losses due to non-investment grade fixed maturity securities having
a fair value of $11.8 million. No issuer of securities or industry represents
more than 4.9% and 17.1%, respectively, of the total estimated fair value, or
10.4% and 11.6%, respectively, of the total gross unrealized loss included in
the table below. As previously discussed, there are certain risks and
uncertainties inherent in the Companys impairment methodology, including, but
not limited to, the financial condition of specific industry sectors and the
resultant effect on any such underlying security collateral values and changes
in accounting, tax, and/or regulatory requirements which may have an effect on
either, or both, the investor and/or the issuer. Should the Company
subsequently determine a decline in the fair value below the cost basis to be
other than temporary, the security would be written down to its fair value and
the difference would be included in earnings as a realized loss for the period
such determination was made. 20




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) Gross Unrealized Losses(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
    
    $
    0.3
    
    
    $
    0.1
    
    
    $
    0.4
    
    
    $
    2.2
    
    
    $
    2.64  6 months
    
    
    1.1
    
    
    
    0.3
    
    
    
    1.4
    
    
    
    0.7
    
    
    
    2.17  9 months
    
    
    0.6
    
    
    
    0.1
    
    
    
    0.7
    
    
    
    0.5
    
    
    
    1.210  12 months
    
    
    0.2
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.213  18 months
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    
    
    
    
    0.619  24 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    > 24 months
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Total Gross
Unrealized Losses
    
    $
    2.3
    
    
    $
    1.1
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    6.8Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    271.8
    
    
    $
    146.7
    
    
    $
    418.5
    
    
    $
    28.6
    
    
    $
    447.1
 Based upon the Companys impairment evaluation as of September 30, 2004, it was
concluded that the remaining unrealized losses in the table above are not other
than temporary. The factors considered in reaching the conclusion that a
decline below cost is other than temporary include, but are not limited to:
whether the issuer is in financial distress; the performance of the collateral
underlying a secured investment; whether a significant credit rating action has
occurred; whether scheduled interest payments have been delayed or missed;
whether changes in laws and/or regulations have impacted an issuer or industry;
an assessment of the timing of the securitys recovery to fair value; and an
ability and intent to hold the security to recovery of fair value. For the three months ended September 30, 2004 the Companys gross loss on the
sale of fixed maturity and equity securities amounted to $0.4 million and $0.3
million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $20.1 million and $0.9 million,
respectively. For the three months ended September 30, 2003 the Companys
gross loss on the sale of fixed maturity and equity securities amounted to $0.2
million and $0 million, respectively. The fair value of the fixed maturity and
equity securities at the time of sale was $13.0 million and $0.1 million,
respectively. For the nine months ended September 30, 2004 the Companys gross loss on the
sale of fixed maturity and equity securities amounted to $0.7 million and $0.7
million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $27.2 million and $4.8 million,
respectively. For the nine months ended September 30, 2003 the Companys gross
loss on the sale of fixed maturity and equity securities amounted to $0.3
million and $0.7 million, respectively. The fair value of the fixed maturity
and equity securities at the time of sale was $14.5 million and $3.5 million,
respectively. The decision to sell these securities was based upon an assessment of economic
conditions and ongoing portfolio management objectives of maximizing the
Companys after-tax net investment income. 21




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) Results of Operations (Nine Months ended September 30, 2004 vs. September 30,
2003) Premiums: Premium information for the nine months ended September 30,
2004 vs. September 30, 2003 for the Companys business segments is as follows
(in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Gross Written Premiums
    
    $
    662.7
    
    
    $
    143.2
    
    
    $
    94.4
    
    
    $
    900.32003 Gross Written Premiums
    
    $
    499.9
    
    
    $
    119.8
    
    
    $
    70.9
    
    
    $
    690.6Percentage Increase
    
    
    32.6
    %
    
    
    19.5
    %
    
    
    33.1
    %
    
    
    30.4
    %2004 Gross Earned Premiums
    
    $
    580.0
    
    
    $
    124.9
    
    
    $
    76.2
    
    
    $
    781.12003 Gross Earned Premiums
    
    $
    400.4
    
    
    $
    101.1
    
    
    $
    63.4
    
    
    $
    564.9Percentage Increase
    
    
    44.9
    %
    
    
    23.5
    %
    
    
    20.2
    %
    
    
    38.3
    %
 The overall growth in gross written premiums is primarily attributable to the
following:  
    
    Further rating downgrades of certain major competitor property and
casualty insurance companies have led to their diminished presence in
the Companys commercial and specialty lines business segments and
continue to result in additional prospects and increased premium
writings, most notably for the Companys various commercial package and
non-profit D&O product lines.  
    
    The displacement of certain competitor property and casualty
insurance companies and their independent agency relationships
continues to result in new agency relationship opportunities for the
Company. These relationship opportunities have resulted in additional
policyholders and premium writings for the Companys commercial and
specialty lines segments.  
    
    Continued expansion of marketing efforts relating to commercial
lines and specialty lines products through the Companys field
organization and preferred agents.  
    
    The insurance subsidiaries of Liberty American Insurance Group,
Inc. (a subsidiary of the Company) have recently commenced writing a
previously brokered homeowners product on a direct basis due to a
recent termination of a brokerage agreement. Gross written premiums
from this homeowners product approximated $14.7 million for the nine
months ended September 30, 2004.  
    
    In-force policy counts as of September 30, 2004 versus September
30, 2003 have increased 10.2%, 28.7% and 17.4% for the commercial
lines, specialty lines and personal lines segments, respectively,
primarily as a result of the factors discussed above.  
    
    Realized average rate increases on renewal business approximating
2.6%, 2.6%, and 8.3% for the commercial, specialty and personal lines
segments, respectively. The respective net written premium changes for commercial lines, specialty
lines and personal lines segments for the nine months ended September 30, 2004
vs. September 30, 2003 were (in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Net Written Premiums
    
    $
    547.7
    
    
    $
    119.8
    
    
    $
    25.0
    
    
    $
    692.52003 Net Written Premiums
    
    $
    344.8
    
    
    $
    82.6
    
    
    $
    24.7
    
    
    $
    452.1Percentage Increase
    
    
    58.8
    %
    
    
    45.0
    %
    
    
    1.2
    %
    
    
    53.2
    %2004 Net Earned Premiums
    
    $
    445.9
    
    
    $
    96.8
    
    
    $
    6.1
    
    
    $
    548.82003 Net Earned Premiums
    
    $
    311.5
    
    
    $
    80.5
    
    
    $
    26.4
    
    
    $
    418.4Percentage Increase
    
    
    43.1
    %
    
    
    20.3
    %
    
    
    -76.9
    %
    
    
    31.2
    %
 22




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) The differing percentage changes in net premiums versus gross premiums for the
commercial lines, specialty lines and personal lines segments during the
quarter results primarily from the following:  
    
    A change in the Companys reinsurance program whereby effective
April 1, 2003, the Company entered into a Quota Share reinsurance
agreement covering substantially all of the Companys lines of
business. Under this agreement:  
    
    The Company cedes 22% of its net written premiums and loss
and loss adjustment expenses for policies effective April 1, 2003
through December 31, 2003 and 10% of its commercial and specialty
lines net written premiums and loss and loss adjustment expenses for
policies effective January 1, 2004 and thereafter. During the nine
months ended September 30, 2004 and 2003, the Company ceded $71.7
million and $158.5 million of net written premiums, respectively,
and $106.9 million and $74.5 million of net earned premiums,
respectively.
    
    Of the $158.5 million of net written premiums ceded during
the nine months ended September 30, 2003, $63.6 million represents
22% of the Companys April 1, 2003 unearned premium reserve which
was ceded upon entering into the quota share agreement. This
cession of the unearned premium reserve reduced net written premiums
which approximated the following by segment: commercial lines
($44.2 million), specialty lines ($13.3 million), and personal lines
($6.1 million).  
    
    Certain of the Companys reinsurance contracts have provisions
whereby the Company is entitled to a return profit commission based on
the ultimate experience of the underlying business ceded to the
contracts. Under the terms of these contracts, the Company accrued
profit commissions of $ $13.3 million and $5.9 million for the nine
months ended September 30, 2004 and 2003, respectively. The profit
commissions reduce ceded written and earned premiums and increase net
written and earned premiums.  
    
    The Company experienced catastrophe losses attributable to
Hurricanes Charley, Frances, Ivan and Jeanne. Due to these multiple
hurricane events, the Company purchased additional catastrophe
reinsurance coverages (which provide coverage from the inception date
of the coverage through May 31, 2005) to supplement its original
reinsurance programs. The estimated aggregate pre-tax cost of these
additional catastrophe reinsurance coverages is $18.8 million.
Additionally, these multiple hurricane events resulted in accelerating
the recognition of $27.7 million (Commercial Lines Segment ($2.6
million), Personal Lines Segment ($25.1 million)) catastrophe
reinsurance premium expense due to the utilization of certain of the
catastrophe reinsurance coverages. Of this $27.7 million, $13.0
million was attributable to the additional reinsurance coverages
referred to above. This acceleration of reinsurance premium expense
increased reinsurance ceded written and earned premiums and reduced net
written and earned premiums. Net Investment IncomeNet investment income approximated $31.7 million for
the nine months ended September 30, 2004 and $28.3 million for the same period
of 2003. Total investments grew to $1,372.8 million at September 30, 2004 from
$1,161.0 million at September 30, 2003. The growth in investment income is due
to investing net cash flows provided from operating activities. The Companys
average duration of its fixed income portfolio approximated 4.0 years at
September 30, 2004 and September 30, 2003, respectively. The Companys taxable
equivalent book yield on its fixed income holdings approximated 4.6% at
September 30, 2004, compared to 5.0% at September 30, 2003. Net investment
income was reduced by $3.6 million and $1.3 million for the nine months ended
September 30, 2004 and 2003, respectively, due to the interest credit on the
Funds Held Account balance pursuant to the Companys quota share reinsurance
agreement (see Premiums). The total return, which includes the effects of both income and price
returns on securities, of the Companys fixed income portfolio was 3.14% and
3.27% for the nine months ended September 30, 2004 and 2003, respectively, and
was similar to the Lehman Brothers Intermediate Aggregate Bond Index (the
Index) total return of 2.95% and 3.37% for the same periods, respectively.
The Company expects some variation in its portfolios total 23




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) return compared to the index because of the differing sector, security and
duration composition of its portfolio compared to the index. Net Realized Investment Gain (Loss):Net realized investment gains
(losses) were $1.0 million for the nine months ended September 30, 2004 and
$(1.3) million for the same period in 2003. The Company realized net
investment gains of $2.8 million and $6.5 million from the sale of fixed
maturity and equity securities, respectively, for the nine months ended
September 30, 2004, and $6.1 million and $2.2 million in non-cash realized
investment losses for fixed maturity and equity securities, respectively, as a
result of the Companys impairment evaluation. The Company realized net investment gains of $1.5 million and $0.7 million from
the sale of fixed maturity and equity securities, respectively, for the nine
months ended September 30, 2003, and $2.6 million and $0.9 million in non-cash
realized investment losses for fixed maturity and equity securities,
respectively, as a result of the Companys impairment evaluation. Other Income: Other income approximated $2.9 million for the nine months
ended September 30, 2004 and $3.7 million for the same period of 2003. Other
income primarily consists of commissions earned on brokered personal lines
business, and to a lesser extent brokered commercial lines business. The
decrease in other income is due primarily to reduced commissions earned on
brokered personal lines business due to terminations of certain brokering
agreements. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $88.5 million (33.7%) to $351.3 million for the nine months
ended September 30, 2004 from $262.8 million for the same period of 2003 and
the loss ratio increased to 64.0% in 2004 from 62.8% in 2003. This increase in
net loss and loss adjustment expenses and/or loss ratio was primarily due to:  
    
    A 31.2% growth in net earned premiums  
    
    Multiple hurricane events wherein:  
    
    $38.4 million of hurricane catastrophe losses were incurred; and
    
    These multiple hurricane events resulted in accelerating the
recognition of $27.7 million of catastrophe reinsurance premium
expense, which reduced net earned premiums, due to the utilization
of certain of the catastrophe reinsurance coverages. The hurricane
losses and associated accelerated catastrophe reinsurance premium
expense contributed 11.0 percentage points to the combined ratio.  
    
    Reserve actions taken during the nine months ended September 30,
2004 wherein the estimated gross and net unpaid loss and loss
adjustment expenses for accident years 1996 through 2002 were increased
by $69.0 million and $65.0 million, respectively, due principally to
continued case reserve development above expectations primarily across
various professional liability products in the specialty lines segment
and general liability and commercial automobile liability coverages in
the commercial lines segment. These increases to the loss and loss adjustment expenses and/or loss ratio were offset in part by:  
    
    Reserve actions taken during the nine months ended September 30, 2004 wherein:  
    
    The estimated gross and net unpaid loss and loss adjustment
expenses for accident year 2003 were decreased by $43.4 million and
$36.1 million, respectively, due principally to continued better
than expected claim frequency primarily for general liability and
commercial automobile coverages in the commercial lines segment.
    
    The 2004 accident year ultimate loss ratio was decreased to
recognize better than anticipated pricing and loss trends. This
decrease in the 2004 accident year loss ratio resulted in a release
of $34.9 million and $27.2 million of 2004 gross and net accident
year reserves, respectively. 24




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)  
    
    Reserve actions taken during the nine months ended September 30,
2003 wherein the estimated gross and net liability for residual value
policies were increased by $33.0 million and the estimated gross and
net liability for accident year 2002 was decreased by approximately
$9.0 million, due to better than expected loss experience principally
in the property line of the commercial package products. These reserve
actions increased the nine months ended September 30, 2003 loss ratio
by 5.8 percentage points. Additionally, during the nine months ended September 30, 2004 and 2003, the
Company ceded $106.9 million and $74.5 million of net earned premium,
respectively, and $46.9 million and $40.3 million in net loss and loss
adjustment expenses, respectively, pursuant to a quota share reinsurance
agreement (see Premiums). Acquisition Costs and Other Underwriting Expenses:Acquisition costs and
other underwriting expenses increased $35.4 million (29.5%) to $155.5 million
for the nine months ended September 30, 2004 from $120.1 million for the same
period of 2003, and the expense ratio decreased to 28.3% in 2004 from 28.7% in
2003. This increase in acquisition costs and other underwriting expenses was
due primarily to the 31.2% growth in net earned premiums. The decrease in the
expense ratio is due primarily to an increase in ceding commissions earned and
an increase in the ceding commission percentage earned under a quota share
reinsurance agreement (see Premiums). This decrease was offset in part by the
accelerated recognition of $27.7 million in catastrophe reinsurance expense
which reduced net earned premiums. For the nine months ended September 30,
2004 and 2003, the Company ceded $106.9 million and $74.5 million,
respectively, of net earned premiums and earned $50.6 million and $29.6
million, respectively, in ceding commission under a quota share reinsurance
agreement. Other Operating Expenses: Other operating expenses increased $0.1 million
to $6.1 million for the nine months ended September 30, 2004 from $6.0 million
for the same period of 2003. The increase in the level of expenses is
primarily due to the growth of the business, offset in part by reduced
commissions paid on brokered personal lines business (see Other Income). Income Tax Expense:The Companys effective tax rate for the nine months
ended September 30, 2004 and 2003 was 28.2% and 30.8%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities and the relative proportion of tax-exempt
income to total income before tax. Results of Operations (Three Months ended September 30, 2004 vs. September 30,
2003) Premiums: Premium information for the three months ended September 30,
2004 vs. September 30, 2003 for the Companys business segments is as follows
(in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Gross Written Premiums
    
    $
    289.0
    
    
    $
    49.4
    
    
    $
    29.0
    
    
    $
    367.42003 Gross Written Premiums
    
    $
    224.8
    
    
    $
    41.4
    
    
    $
    20.2
    
    
    $
    286.4Percentage Increase
    
    
    28.6
    %
    
    
    19.3
    %
    
    
    43.6
    %
    
    
    28.3
    %2004 Gross Earned Premiums
    
    $
    209.7
    
    
    $
    44.0
    
    
    $
    27.5
    
    
    $
    281.22003 Gross Earned Premiums
    
    $
    154.4
    
    
    $
    36.0
    
    
    $
    21.4
    
    
    $
    211.8Percentage Increase
    
    
    35.8
    %
    
    
    22.2
    %
    
    
    28.5
    %
    
    
    32.8
    %
 The overall growth in gross written premiums is primarily attributable to the
following:  
    
    Further rating downgrades of certain major competitor property and
casualty insurance companies have led to their diminished presence in
the Companys commercial and specialty lines business segments and
continue to result in additional prospects and increased premium
writings, most notably for the Companys various commercial package and
non-profit D&O product lines.  
    
    The displacement of certain competitor property and casualty
insurance companies and their independent agency relationships
continues to result in new agency relationship opportunities for the
Company. These 25




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)  relationship opportunities have resulted in additional policyholders and
premium writings for the Companys commercial and specialty lines
segments.  
    
    Continued expansion of marketing efforts relating to commercial
lines and specialty lines products through the Companys field
organization and preferred agents.  
    
    The insurance subsidiaries of Liberty American Insurance Group,
Inc. (a subsidiary of the Company) have recently commenced writing a
previously brokered homeowners product on a direct basis due to a
recent termination of a brokering agreement. Gross written premiums
from this homeowners product approximated $6.2 million for the three
months ended September 30, 2004.  
    
    In-force policy counts as of September 30, 2004 versus September
30, 2003 have increased 10.2%, 28.7% and 17.4% for the commercial
lines, specialty lines and personal lines segments, respectively,
primarily as a result of the factors discussed above.  
    
    Realized weighted average rate increases on renewal business
approximating 2.6%, 2.6%, and 8.3% for the commercial, specialty and
personal lines segments, respectively. This growth was offset in part as a result of Liberty American Insurance Group,
Inc. suspending the acceptance of applications for new personal lines insurance
policies the day prior to Hurricane Charley making landfall in Florida to
restrict an increase in exposures during hurricane season. It is estimated
that gross written premiums were reduced by approximately $5.0 million due to
this restriction. The Company intends to resume underwriting new preferred
homeowners business during the latter part of the fourth quarter of 2004. The respective net written premium changes for commercial lines, specialty
lines and personal lines segments for the three months ended September 30, 2004
vs. September 30, 2003 were (in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Net Written Premiums
    
    $
    237.9
    
    
    $
    41.6
    
    
    $
    (13.8
    )
    
    $
    265.72003 Net Written Premiums
    
    $
    163.6
    
    
    $
    30.5
    
    
    $
    6.3
    
    
    $
    200.4Percentage Increase
    
    
    45.4
    %
    
    
    36.4
    %
    
    
    -319.0
    %
    
    
    32.6
    %2004 Net Earned Premiums
    
    $
    165.8
    
    
    $
    35.8
    
    
    $
    (13.8
    )
    
    $
    187.82003 Net Earned Premiums
    
    $
    112.1
    
    
    $
    26.5
    
    
    $
    8.1
    
    
    $
    146.7Percentage Increase
    
    
    47.9
    %
    
    
    35.1
    %
    
    
    -270.4
    %
    
    
    28.0
    %
 The differing percentage changes in net premiums versus gross premiums for the
commercial lines, specialty lines and personal lines segments during the
quarter results primarily from the following change in the Companys
reinsurance program:  
    
    Effective April 1, 2003, the Company entered into a Quota Share
reinsurance agreement covering substantially all of the Companys lines
of business. Pursuant to the Quota Share reinsurance agreement, the
Company cedes 22% of its net written premiums and loss and loss
adjustment expenses for policies effective April 1, 2003 through
December 31, 2003 and 10% of its commercial and specialty lines net
written premiums and loss and loss adjustment expenses for policies
effective January 1, 2004 and thereafter. During the three months
ended September 30, 2004 and 2003, the Company ceded $30.4 million and
$55.0 million of net written premiums, respectively, and $30.7 million
and $40.2 million of net earned premiums, respectively.  
    
    Certain of the Companys reinsurance contracts have provisions
whereby the Company is entitled to a return profit commission based on
the ultimate experience of the underlying business ceded to the
contracts. Under the terms of these contracts, the Company accrued
profit commissions of $4.6 million and $4.0 million for the three
months ended September 30, 2004 and 2003, respectively. The profit
commissions reduce ceded written and earned premiums and increase net
written and earned premiums. 26




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)  
    
    During the three months ended September 30, 2004 the Company
experienced catastrophe losses attributable to Hurricanes Charley,
Frances, Ivan and Jeanne. Due to these multiple hurricane events, the
Company purchased additional catastrophe reinsurance coverages (which
provide coverage from the inception date of the coverage through May
31, 2005) to supplement its original reinsurance programs. The
estimated aggregate pre-tax cost of these additional catastrophe
reinsurance coverages is $18.8 million. Additionally, these multiple
hurricane events resulted in accelerating the recognition of $27.7
million (Commercial lines Segment ($2.6 million), Personal Lines
Segment ($25.1 million)) of catastrophe reinsurance premium expense due
to the utilization of certain of the catastrophe reinsurance coverages.
Of this $27.7 million, $13.0 million was attributable to the
additional reinsurance coverages referred to above. This acceleration
of reinsurance premium expense increased reinsurance ceded written and
earned premiums and reduced net written and earned premiums. Net Investment IncomeNet investment income approximated $10.9 million for
the three months ended September 30, 2004 and $9.2 million for the same period
of 2003. Total investments grew to $1,372.8 million at September 30, 2004 from
$1,161.0 million at September 30, 2003. The growth in investment income is due
to investing net cash flows provided from operating activities. The Companys
average duration of its fixed income portfolio approximated 4.0 years at
September 30, 2004 and 2003, respectively. The Companys taxable equivalent
book yield on its fixed income holdings approximated 4.6% at September 30,
2004, compared to 5.0% at September 30, 2003. Net investment income was
reduced by $1.3 million and $0.8 million for the three months ended September
30, 2004 and 2003, respectively, due to the interest credit on the Funds Held
Account balance pursuant to the Companys quota share reinsurance agreement
(see Premiums). The total return, which includes the effects of both income and price
returns on securities, of the Companys fixed income portfolio was 2.91% and
0.58% for the three months ended September 30, 2004 and 2003, respectively, and
was similar to the Lehman Brothers Intermediate Aggregate Bond Index (the
Index) total return of 2.70% and 0.18% for the same periods, respectively.
The Company expects some variation in its portfolios total return compared to
the index because of the differing sector, security and duration composition of
its portfolio compared to the index. Net Realized Investment Gain:Net realized investment gains were $0.3
million for the three months ended September 30, 2004 and $0.5 million for the
same period in 2003. The Company realized net investment gains of $2.1 million
and $3.9 million from the sale of fixed maturity and equity securities,
respectively, for the three months ended September 30, 2004, and $3.5 million
and $2.2 million in non-cash realized investment losses for fixed maturity and
equity securities, respectively, as a result of the Companys impairment
evaluation. The Company realized net investment gains of $0.3 million and $0.6 million from
the sale of fixed maturity and equity securities, respectively, for the three
months ended September 30, 2003, and $0.4 million in non-cash realized
investment losses for fixed maturity investments as a result of the Companys
impairment evaluation. Other Income: Other income approximated $0.7 million for the three months
ended September 30, 2004 and $2.0 million for the same period of 2003. Other
income primarily consists of commissions earned on brokered personal lines
business, and to a lesser extent brokered commercial lines business. The
decrease in other income is due primarily to reduced commissions earned on
brokered personal lines business due to termination of certain brokering
agreements. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $68.4 million (86.1%) to $147.8 million for the three months
ended September 30, 2004 from $79.4 million for the same period of 2003 and the
loss ratio increased to 78.7% in 2004 from 54.1% in 2003. This increase in net
loss and loss adjustment expenses and/or loss ratio was primarily due to:  
    
    A 28.0% growth in net earned premiums  
    
    Multiple hurricane events wherein: 27




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)  
    
    $38.4 million of hurricane catastrophe losses were incurred; and
    
    The multiple hurricane events resulted in accelerating the
recognition of $27.7 million (pre-tax) catastrophe reinsurance
premium expense (which reduced net earned premiums) due to the
utilization of certain of the catastrophe reinsurance coverages.
The hurricane losses and associated accelerated catastrophe
reinsurance premium expense contributed 31.8 percentage points to
the combined ratio.  
    
    Reserve actions taken during the three months ended September 30,
2004 wherein the estimated gross and net unpaid loss and loss
adjustment expenses for accident years 1997 through 2002 were increased
by $46.3 million and $43.1 million, respectively, due principally to
continued case reserve development above expectations primarily across
various professional liability products in the specialty lines segment
and general liability and commercial automobile liability coverages in
the commercial lines segment. These increases to the loss and loss adjustment expenses and/or loss ratio were
offset in part by:  
    
    Reserve actions taken during the three months ended September 30,
2004 wherein:  
    
    The estimated gross and net unpaid loss and loss adjustment
expenses for accident year 2003 were decreased by $22.7 million and
$18.0 million, respectively, due principally to continued better
than expected claim frequency primarily for general liability and
commercial automobile coverages in the commercial lines segment.
    
    The 2004 accident year ultimate loss ratio was decreased to
recognize better than anticipated pricing and loss trends. This
decrease in the 2004 accident year loss ratio resulted in a release
of $34.9 million and $27.2 million of 2004 gross and net accident
year reserves, respectively. Additionally, during the three months ended September 30, 2004 and 2003, the
Company ceded $30.7 million and $40.2 million of net earned premium,
respectively, and $8.8 million and $21.3 million in net loss and loss
adjustment expenses, respectively, pursuant to a quota share reinsurance
agreement (see Premiums). Acquisition Costs and Other Underwriting Expenses:Acquisition costs and
other underwriting expenses increased $15.4 million (37.1%) to $56.9 million
for the three months ended September 30, 2004 from $41.5 million for the same
period of 2003 and the expense ratio increased to 30.2% in 2004 from 28.3% in
2003. The increase was due primarily to the 28.0% growth in net earned
premiums and, in part, due to: premium growth from the Companys commercial
automobile excess liability product which possesses higher acquisition costs
relative to the Companys other products; and the accelerated recognition of
$27.7 million in catastrophe reinsurance expenses which reduced net earned
premiums. This increase, and the increase in the expense ratio, was offset in
part by increased ceding commissions earned and an increase in the ceding
commission percentage earned under a quota share reinsurance agreement (see
Premiums). For the three months ended September 30, 2004 and 2003 the Company
ceded $30.7 million and $40.2 million, respectively, of net earned premium and
earned $18.1 million and $16.3 million, respectively, in ceding commission. Other Operating Expenses: Other operating expenses decreased $1.0 million
to $1.7 million for the three months ended September 30, 2004 from $2.7 million
for the same period of 2003. The decrease is due primarily to decreased
commissions paid on brokered personal lines business. (See Other Income) Income Tax Expense:The Companys effective tax rate for the three months
ended September 30, 2004 and 2003 was (68.2)% and 32.1%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities and the relative proportion of tax-exempt
income to total income before tax. 28




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) Liquidity and Capital Resources For the nine months ended September 30, 2004, the Companys investments
experienced unrealized investment depreciation of $0.9 million, net of the
related deferred tax benefit of $0.5 million. At September 30, 2004, the
Company had total investments with a carrying value of $1,372.8 million, of
which 91.1% consisted of investments in fixed maturity securities, including
U.S. treasury securities and obligations of U.S. government corporations and
agencies, obligations of states and political subdivisions, corporate debt
securities, collateralized mortgage, mortgage pass-through and asset backed
securities. The collateralized mortgage, mortgage pass-through, and asset
backed securities consist of amortized securities possessing favorable
pre-payment and/or extension risk profiles. The remaining 8.9% of the
Companys total investments consisted primarily of publicly traded common stock
securities. During the three months ended September 30, 2004, the Company experienced
catastrophe losses attributable to Hurricanes Charley, Frances, Ivan, and
Jeanne. The catastrophe losses primarily impacted the Companys personal lines
segment and, to a lesser extent, its commercial lines segment. The gross
catastrophe loss and loss adjustment expense estimates as a result of these
hurricanes is $604.8 million for the personal lines segment and $40.2 million
for the commercial lines segment. With some areas of Florida having been
affected multiple times due to the hurricanes, loss and loss adjustment expense
estimates are still evolving due, in part, to the difficulty in making any
precise estimates at this time of future remediation costs. Under the
Companys catastrophe reinsurance programs in place at the time of these
hurricane events, the Company had a $3.5 million pre-tax per occurrence loss
retention for its personal lines catastrophe losses and a $7.0 million pre-tax
per occurrence loss retention for its commercial lines catastrophe losses. The
Company estimates its net aggregate retention losses for the four hurricane
events is $38.4 million. The Companys catastrophe reinsurance program consists of its open market
(om) program which has been placed principally with large reinsurers that are
rated at least A (Excellent) by A.M. Best, a 15% quota share reinsurance
arrangement, and the Florida Hurricane Catastrophe Fund (FHCF). Certain of
the Companys reinsurers have agreed to be billed and make payments to the
Company based upon expected catastrophe claims payments to be made by the
Company in the near future. Although the Company believes that it will collect
all of its reinsurance recoverables, there can be no assurance as to this. The
Company believes it will have adequate liquidity to pay the estimated hurricane
catastrophe losses noted above. The Companys estimated total reinsurance
recoverables, reinsurance recoverables on paid, catastrophe reinsurance
billings and reinsurance collections with respect to its catastrophe
reinsurance programs as of September 30, 2004 for the above mentioned hurricane
events is summarized in the table below. 29




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) (In Millions) Hurricane:
    
    Charley
    
    Frances
    
    Ivan
    
    Jeanne
    
    TotalFHCF
    
    OM
    
    FHCF
    
    OM
    
    FHCF
    
    OM
    
    FHCF
    
    OM
    
    FHCF
    
    OMPersonal Lines Segment:Total Estimated Loss and
LAE Recoverables
    
    $
    134.5
    
    
    $
    67.2
    
    
    $
    32.0
    
    
    $
    82.7
    
    
    $
    2.0
    
    
    $
    8.5
    
    
    $
    2.9
    
    
    $
    261.1
    
    
    $
    171.4
    
    

    $
    419.5Recoverable on
Catastrophe Loss and LAE
Paid
    
    $
    88.0
    
    
    $
    52.5
    
    
    
    
    
    
    $
    13.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    88.0
    
    
    $
    66.3Catastrophe Loss and LAE
Billed to Reinsurers
    
    $
    65.6
    
    
    $
    59.8
    
    
    
    
    
    
    $
    16.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    65.6
    
    
    $
    76.3Catastrophe Loss and LAE
Collected from
Reinsurers
    
    $
    23.9
    
    
    $
    58.5
    
    
    
    
    
    
    $
    11.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23.9
    
    
    $
    69.9Commercial Lines Segment:Total Estimated Loss and
LAE Recoverables
    
    
    
    
    
    $
    9.9
    
    
    
    
    
    
    $
    2.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4.3
    
    
    
    
    
    
    $
    16.3Recoverable on
Catastrophe Loss and LAE
Paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Catastrophe Loss and LAE
Billed to Reinsurers
    
    
    
    
    
    $
    7.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7.9Catastrophe Loss and LAE
Collected from
Reinsurers
    
    
    
    
    
    $
    4.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4.6
 The Company produced net cash from operations of $257.7 million and $253.0
million, respectively, for the nine months ended September 30, 2004 and 2003.
Sources of operating funds consist primarily of net premiums written and
investment income. Funds are used primarily to pay claims and operating
expenses and for the purchase of investments. The source of cash from
operations for the nine months ended September 30, 2004 was primarily generated
from strong premium growth during the current year due to increases in the
number of policies written and, to a lesser extent, price increases realized on
renewal business. Net loss and loss expense payments were $201.6 million and
$148.7 million, respectively, for the nine months ended September 30, 2004 and
2003. Management believes that the Company has adequate liquidity to pay all
claims and meet all other cash needs. Two of the Companys insurance subsidiaries are members of the Federal
Home Loan Bank of Pittsburgh (FHLB). A primary advantage of FHLB membership
is the ability of members to access credit products from a reliable capital
markets provider. The availability of any one members access to credit is
based upon its FHLB eligible collateral. The insurance subsidiaries have
utilized a portion of their borrowing capacity to purchase a diversified
portfolio in investment grade floating rate securities. These purchases were
funded by floating rate FHLB borrowings to achieve a positive spread between
the rate of interest on these securities and borrowing rates. At September 30,
2004 the insurance subsidiaries unused borrowing capacity was $194.2 million.
The remaining borrowing capacity will provide an immediately available line of
credit. Borrowings aggregated $36.8 million at September 30, 2004, bear
interest at adjusted LIBOR, mature twelve months or less from inception and are
collateralized by $53.1 million of the Companys fixed maturity securities.
The weighted-average interest rate on borrowings outstanding as of September
30, 2004 was 1.93%. The NAICs risk-based capital method is designed to measure the acceptable
amount of capital and surplus an insurer should have based on the inherent
specific risks of each insurer. The adequacy of a companys actual 30




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) capital and surplus is evaluated by a comparison to the risk-based capital
results. Insurers failing to meet minimum risk-based capital requirements may
be subject to scrutiny by the insurers domiciliary insurance department and
ultimately rehabilitation or liquidation. Based on the standards currently
adopted, the Companys insurance subsidiaries capital and surplus is in excess
of the prescribed risk-based capital requirements. Forward-Looking Information Certain information included in this report and other statements or
materials published or to be published by the Company are not historical facts
but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new and
existing products, expectations for market segment and growth, and similar
matters. In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the Company provides the following
cautionary remarks regarding important factors which, among others, could cause
the Companys actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Companys
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, results of the Companys business, and
the other matters referred to above include, but are not limited to: (i)
changes in the business environment in which the Company operates, including
inflation and interest rates; (ii) changes in taxes, governmental laws, and
regulations; (iii) competitive product and pricing activity; (iv) difficulties
of managing growth profitably; (v) claims development and the adequacy of our
liability for unpaid loss and loss adjustment; (vi) severity of natural
disasters and other catastrophe losses; (vii) adequacy of reinsurance coverage
which may be obtained by the Company; (viii) ability and willingness of our
reinsurers to pay; and (ix) future terrorist attacks. 31




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 The Companys financial instruments are subject to the market risk of
potential losses from adverse changes in market rates and prices. The primary
market risks to the Company are equity price risk associated with investments
in equity securities and interest rate risk associated with investments in
fixed maturities. The Company has established, among other criteria, duration,
asset quality and asset allocation guidelines for managing its investment
portfolio market risk exposure. The Companys investments are held for
purposes other than trading and consist of diversified issuers and issues. The table below provides information about the Companys financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. The information is presented
in U.S. dollar equivalents. SEPTEMBER 30, 2004EXPECTED MATURITY DATES
    
    TOTAL(In thousands, except average interest rate)
    
    FAIR2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TOTAL
    
    VALUEFIXED MATURITIES
AVAILABLE FOR SALE:Principal Amount
    
    $
    31,451
    
    
    $
    148,818
    
    
    $
    160,436
    
    
    $
    99,261
    
    
    $
    149,964
    
    
    $
    613,730
    
    
    $
    1,203,660
    
    
    $
    1,248,014Book Value
    
    $
    30,244
    
    
    $
    150,567
    
    
    $
    162,676
    
    
    $
    101,220
    
    
    $
    152,183
    
    
    $
    633,856
    
    
    $
    1,230,746Average Interest Rate
    
    
    3.16
    %
    
    
    3.44
    %
    
    
    3.40
    %
    
    
    3.99
    %
    
    
    4.26
    %
    
    
    4.08
    %
    
    
    3.90
    %
    
    
    3.56
    %PREFERRED:Principal Amount
    
    
    
    
    
    $
    1,000
    
    
    $
    3,000
    
    
    
    
    
    
    
    
    
    
    $
    2,125
    
    
    $
    6,125
    
    
    $
    6,341Book Value
    
    
    
    
    
    $
    1,040
    
    
    $
    3,168
    
    
    
    
    
    
    
    
    
    
    $
    2,113
    
    
    $
    6,321
    
    
    
    Average Interest Rate
    
    
    
    
    
    
    6.84
    %
    
    
    6.40
    %
    
    
    
    
    
    
    
    
    
    
    6.26
    %
    
    
    6.43
    %
    
    
    6.41
    %SHORT-TERM INVESTMENTS:Principal Amount
    
    $
    91,002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    91,002
    
    
    $
    91,002Book Value
    
    $
    91,002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    91,002
    
    
    
    Average Interest Rate
    
    
    1.79
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.79
    %
    
    
    1.79
    %LOANS PAYABLE:Principal Amount
    
    $
    15,543
    
    
    $
    21,238
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    36,781
    
    
    
    Average Interest Rate
    
    
    1.94
    %
    
    
    1.92
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.93
    %
    
    
    
 32




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Item 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures. The Companys
disclosure controls and procedures, as that term is defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended (the Exchange Act), are
designed with the objective of providing reasonable assurance that information
required to be disclosed in the Companys reports filed or submitted under the
Exchange Act, such as this report, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission (the SEC). In designing and evaluating
the Companys disclosure controls and procedures, management recognizes that
any disclosure controls and procedures, no matter how well designed and
operated, can provide only reasonable, rather than absolute, assurance of
achieving the desired control objectives. An evaluation was performed by management, with the participation of the
Companys chief executive officer (CEO) and chief financial officer (CFO),
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the CEO and CFO have concluded that, as of the end of
such period, the Companys disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed in the
reports that the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SECs rules and forms. (b) Changes in Internal Controls. There has been no change in the
Companys internal control over financial reporting during the Companys most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting
except that: During the most recent fiscal quarter, the Company formed a
reinsurance contract subcommittee to review, discuss and make appropriate
conclusions with respect to the documentation requirements and the accounting
for the Companys reinsurance contracts. This reinsurance contract
subcommittee is comprised of a senior member from each of the Companys
accounting, claims, actuarial and underwriting departments. A reinsurance
manager recently joined the Company, whose responsibilities include acting as
chairperson of the reinsurance contract subcommittee. 33




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
  
 Item 1. Legal Proceedings  Not applicable. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  The Companys purchases of its common stock during the third quarter of
2004 are shown in the following table: (c) Total
    
    (d)Number of
    
    ApproximateShares
    
    Dollar Value ofPurchased as
    
    Shares ThatPart of
    
    May Yet BePublicly
    
    Purchased(a) Total Number
    
    (b) Average
    
    Announced
    
    Under theof Shares
    
    Price Paid per
    
    Plans or
    
    Plans orPeriod
    
    Purchased
    
    Share
    
    Programs
    
    ProgramsJuly 1  July 31
    
    
    600
    (1)
    
    $
    25.35
    
    
    
    
    
    
    
    $
    24,700,000
    (2)August 1  August 31
    
    
    75
    (1)
    
    $
    47.41
    
    
    
    
    
    
    
    $
    24,700,000
    (2)September 1  September 30
    
    
    
    (1)
    
    $
    
    
    
    
    
    
    
    
    $
    24,700,000
    (2)Total
    
    
    675
  (1)
    
    Such shares were issued under the Companys Employee Stock
Purchase Plan and were repurchased by the Company upon the Employees
termination.(2)
    
    The Companys total stock purchase authorization which was
publicly announced in August 1998, amounts to $55.0 million, of which
$30.3 million has been utilized. 
 Item 3. Defaults Upon Senior Securities  Not applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders  Not applicable. 
 Item 5. Other information  Not applicable. 34




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##### Table of Contents



Item 6. Exhibits  Exhibits: Exhibit No.
    
    Description10.1*
    
    Gap Quota Share Reinsurance Contract effective as of April 1, 200410.2*
    
    Casualty Excess of Loss Reinsurance contract effective January 1,
2004 (Preliminary Agreement). The participating reinsurers are
ACE Tempest Re USA Inc., Allied World Assurance Company, American
Re-Insurance Company and Liberty Mutual Insurance10.3*
    
    Casualty (Clash) Excess of Loss effective January 1, 200410.4*
    
    Casualty Semi-Automatic Facultative Excess of Loss reinsurance
binder with Berkley Insurance Company effective April 1, 200410.5*
    
    Casualty Automatic Facultative certificate with B F Re
Underwriters, LLC effective June 1, 2004. RE Philadelphia
Insurance Companies certificate number 423004P110.6*
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract
effective June 1, 2004 (Liberty American Insurance Company)10.7*
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract
effective June 1, 2004 (Mobile USA Insurance Company)
 35




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##### Table of Contents



Exhibit No.
    
    Description10.8*
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2004
(Preliminary Agreement).The participating reinsurers on the $10.0 million excess of $10.0
million in coverage are ACE Tempest Reinsurance LTD., AXIS
Specialty Limited (Bermuda), Everest Reinsurance Company, GE
Frankona Ruckversicherungs AG, Folksamerica Reinsurance Company,
Munchener Ruckversicherungs  Gesellschaft, PXRE Reinsurance,
Renaissance Reinsurance Limited (Bermuda), Swiss Reinsurance
America, Swiss Re Underwriting Agency Inc., XL Re Limited
(Bermuda), Aspen Insurance UK LTD., Syndicate #0033, Syndicate
#0623, Syndicate #2623 and Syndicate # 2003 at varying levels of
participation.The participating reinsurers on the $20.0 million excess of $20
million in coverage are American Re Broker Market, AXIS Specialty
Limited (Bermuda), Everest Reinsurance Company, Folksamerica
Reinsurance Company, GE Frankona Ruckversicherungs , General
Reinsurance Corporation, Munchener Ruckversicherungs -
Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Renaissance
Reinsurance Limited (Bermuda), Swiss Reinsurance America, Swiss
Re Underwriting Agency Inc., Transatlantic Reinsurance Co., Aspen
Insurance UK LTD., Syndicate #0033, Syndicate #0623, Syndicate
#2623, and Syndicate # 2003 and XL Re Limited at varying levels
of participation.The participating reinsurers on the $25.0 million excess of $40.0
million in coverage are American Re Broker Market, Everest
Reinsurance Company, Folksamerica Reinsurance Company, GE
Frankona Ruckversicherungs , General Reinsurance Corporation,
Hannover Re (Bermuda) Ltd., Munchener Ruckversicherungs -
Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Swiss
Reinsurance America, Transatlantic Reinsurance Co., Aspen
Insurance UK LTD., Syndicate #0033 and Syndicate # 2003 and XL Re
Limited at varying levels of participation.The participating reinsurers on the $50.0 million excess of $65.0
million in coverage are American Re Broker Market, Folksamerica
Reinsurance Company, GE Frankona Ruckversicherungs , Hannover Re
(Bermuda) Ltd., Munchener Ruckversicherungs  Gesellschaft, PXRE
Reinsurance, Swiss Reinsurance America, Swiss Re Underwriting
Agency Inc., Tokio Millennium Re LTD, Transatlantic Reinsurance
Co., Aspen Insurance UK LTD., Syndicate #0033 and Syndicate #
2003 and XL Re Limited at varying levels of participation.
 36




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##### Table of Contents



Exhibit No.
    
    Description10.9*
    
    Florida Only Excess Catastrophe Reinsurance Contract effective
June 1, 2004 (Preliminary Agreement).
The participating reinsurers on the $13.0 million excess of $7.0
million in coverage are Montpelier Reinsurance Ltd, Munchener
Ruckversicherungs  Gesellschaft, Platinum Underwriters Re, PXRE
Reinsurance, Sirius International Insurance Corp., Swiss
Reinsurance America, Aspen Insurance UK LTD., Syndicate #2623,
Syndicate #0566, Syndicate #0623, Syndicate #0780, Syndicate
#0958, Syndicate #2001, Syndicate #2010 and Syndicate #2791 at
varying levels of participation.The participating reinsurers on the $15.0 million excess of $20
million in coverage are American Re Broker Market, General
Reinsurance Corporation, Montpelier Reinsurance Ltd , Munchener
Ruckversicherungs  Gesellschaft, Platinum Underwriters Re, PXRE
Reinsurance, Sirius International Insurance Corp., Swiss
Reinsurance America, Aspen Insurance UK LTD., Syndicate #2623,
Syndicate #0566, Syndicate #0623, Syndicate #0780, Syndicate
#0958, Syndicate #2001, Syndicate #2010, Syndicate #2488 and
Syndicate #2791 at varying levels of participation.The participating reinsurers on the $15.0 million excess of $35.0
million layer in coverage are American Re Broker Market, General
Reinsurance Corporation, Hannover Re (Bermuda) Ltd, Montpelier
Reinsurance Ltd, Munchener Ruckversicherungs  Gesellschaft,
Platinum Underwriters Re, PXRE Reinsurance, Sirius International
Insurance Corp., Swiss Re Underwriting Agency Inc., Aspen
Insurance UK LTD., Syndicate #2623, Syndicate #0033, Syndicate
#0566, Syndicate #0623, Syndicate #0780, Syndicate #2001 and
Syndicate #2010 at varying levels of participation.The participating reinsurers on the $40.0 million excess of $50.0
million in coverage are American Re Broker Market, Hannover Re
(Bermuda) Ltd., Montpelier Reinsurance Ltd., Munchener
Ruckversicherungs  Gesellschaft, Platinum Underwriters Re,
Sirius International Insurance Corp., Tokio Millennium Re LTD,
Syndicate #0033, Syndicate #0566, Syndicate #0780, Syndicate
#2001 Syndicate #2010, Syndicate #2488 and Syndicate #2791 at
varying levels of participation.10.10*
    
    $50 million excess of $90 million Florida Only Excess Catastrophe
Reinsurance Contract effective June 1, 2004 (Preliminary
Agreement). The participating reinsurers are AXA Re, Hannover Re
(Bermuda), Montpelier Reinsurance Ltd., Munchener
Ruckversicherungs  Gesellschaft, Sirius International Insurance
Corp., Swiss Re Underwriting Agency Inc., Tokio Millennium Re
LTD, Syndicate #0033 and Syndicate #2791 at varying levels of
participation.10.11*
    
    Underlying Excess Catastrophe Coverage effective July 1, 2004
(Preliminary Agreement). The participating reinsurers are AXA Re,
Everest Reinsurance Company, Transatlantic Reinsurance Company,
Syndicate #0033, Syndicate #0623, Syndicate #2623 and Syndicate #
2020 at varying levels of participation.10.12*
    
    Reinstatement Premium Protection Reinsurance Contract effective
July 1, 2004 (Preliminary Agreement). The participating reinsurer
is AXIS Specialty Limited.10.13*
    
    Underlying Excess Catastrophe and Reinstatement Premium
Protection Reinsurance Contract effective July 1, 2004
(Preliminary Agreement). The participating reinsurer is Swiss Re
Underwriting Agency Inc.
 37




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##### Table of Contents



Exhibit No.
    
    Description10.14*
    
    $50 million excess of $140 million Florida Only Catastrophe
Excess Reinsurance Contract placement slip effective September 1,
2004. The participating reinsurers are Hannover Re (Bermuda)
Ltd., Sirius International Insurance Corporation and Tokio
Millennium Re LTD at varying levels of participation, in total
equaling 50% of $50 million excess of $140 million Florida Only
Catastrophe Excess Reinsurance coverage.10.15*
    
    65% Florida Only Third and Fourth Catastrophe Event Reinsurance
Contract (Preliminary Agreement) effective September 1, 2004. The participating reinsurers
are ACE Tempest Reinsurance Ltd, AXIS Specialty Limited,
Syndicate #2791, Sirius International Insurance Corporation at
varying levels of participation, in total equaling 65% of Florida
Only Third and Fourth Event Catastrophe Reinsurance coverage.10.16*
    
    35% Florida Only Third and Fourth Catastrophe Event Reinsurance
Contract (Preliminary Agreement) effective September 2, 2004. The participating reinsurers
are Renaissance Reinsurance Ltd and DaVinci Reinsurance Ltd at
varying levels of participation, in total equaling 35% of Florida
Only Third and Fourth Event Catastrophe Reinsurance coverage.10.17*
    
    Third Catastrophe Event Reinsurance Contract placement slip
effective September 3, 2004. The participating reinsurers are
Syndicate #0623, Syndicate #2623, Syndicate #0033, Syndicate
#0958, Syndicate #2791 and Catlin Ins. Co. Ltd at varying levels
of participation, in total equaling 50% of Third Event
Catastrophe Reinsurance coverage.10.18*
    
    Third Catastrophe Event Reinsurance Contract effective September
3, 2004 (Preliminary Agreement). The participating reinsurers
are Renaissance Reinsurance Ltd and DaVinci Reinsurance Ltd, at
varying levels of participation, in total equaling 50% of Third
Event Catastrophe Reinsurance coverage.10.19*
    
    $50 million excess of $140 million Florida Only Catastrophe
Excess Reinsurance Contract placement slip effective September 3,
2004. The participating reinsurer is Swiss
Re Underwriting Agency Inc. equaling 50% of $50 million excess of
$140 million Florida Only Catastrophe Excess Reinsurance
coverage.10.20*
    
    $5 million excess of $190 million Florida Only Catastrophe Excess
Reinsurance Contract placement slip effective September 10, 2004.
The participating reinsurer is Hannover Re (Bermuda) Ltd.10.21*
    
    $45.0 million excess of $195 million Florida Only Catastrophe
Excess Reinsurance Contract placement slip effective September
10, 2004. The participating reinsurers are American Re Broker
Market, ACE Tempest Reinsurance LTD., AXIS Specialty Limited,
Catlin Insurance Company LTD., Montpelier Reinsurance Ltd.,
Partner Re, Syndicate #0033, Syndicate #2003, Syndicate #2020,
Syndicate #2791, Syndicate #2987 and Sirius International
Insurance Corporation at varying levels of participation.10.22*
    
    $6.5 million excess of $3.5 million Florida Only Fifth Event
Catastrophe Reinsurance placement slip effective September 24,
2004. The participating reinsurers are Syndicate #0557, Syndicate
#0510, Syndicate #0570, Syndicate #2147, Syndicate #0780,
Syndicate #2003, Syndicate #2010, Syndicate #4444, Syndicate
#2987, Syndicate #0033, Syndicate #0958, Syndicate #2791,
Syndicate #2001 and Syndicate #2020 at varying levels of
participation.31.1*
    
    Certification of the Companys chief executive officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
 38




---



##### Table of Contents



Exhibit No.
    
    Description31.2*
    
    Certification of the Companys chief financial officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    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 200232.2*
    
    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
 * Filed herewith. 39




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. PHILADELPHIA CONSOLIDATED HOLDING CORP.RegistrantDate November 8, 2004
    
    
    
    James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive Officer(Principal Executive Officer)Date November 8, 2004
    
    
    
    Craig P. KellerCraig P. KellerExecutive Vice President, Secretary, Treasurerand Chief Financial Officer (PrincipalFinancial and Accounting Officer)
 40