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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 June 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 July 30, 2004. Common Stock, no par value, 22,230,782 shares outstanding




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EXPLANATORY NOTE The Company has included the restated consolidated balance sheet and
consolidated statement of changes in shareholders equity as of December 31,
2003, restated consolidated statements of operations and comprehensive income
for the three and six months ended June 30, 2003 and restated consolidated
statement of cash flows for the six months ended June 30, 2003 in this Form
10-Q. The restatement records in prior periods a portion of the revenue and
net income arising from profit commissions under two reinsurance contracts, one
of which originally had been recorded in the fourth quarter 2003 and the other
of which should have been recorded in previous periods. These profit
commissions were due to the Company from reinsurers under a quota share
reinsurance contract effective during the period April 1, 2003 through December
31, 2003 and an excess catastrophe reinsurance contract effective during the
period June 1, 2003 through May 31, 2004. The restatement is more fully
described in Part I herein under Item 2-Managements Discussion and Analysis
of Financial Condition and Results of Operations, and in Item 1 of Part I in
our consolidated unaudited financial statements and related notes, including,
without limitation, in Note 2 thereto. References herein to those fiscal
periods that have been restated are to the restated amounts. The
Company intends to file an amended Form 10-K/A for the fiscal year ended December 31,
2003 and an amended Form 10-Q/A for each of the fiscal quarters
ended June 30, 2003, September 30, 2003 and March 31, 2004 to reflect this
restatement. In addition, the Company is currently evaluating the impact of this restatement, if any, on its 2002 and 2001 consolidated financial statements. 2




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX For the Quarterly Period Ended June 30, 2004  
 Part I -
    Financial Information (unaudited)Item 1.
    Financial Statements:Consolidated Balance Sheets  June 30, 2004 and
December 31, 2003 (restated)
    
    4Consolidated Statements of Operations and Comprehensive
Income - For the three and six months ended June 30, 2004
and 2003 (restated)
    
    5Consolidated Statements of Changes in
Shareholders Equity - For
the six months ended June 30, 2004 and year ended
December 31, 2003 (restated)
    
    6Consolidated Statements of Cash Flows - For the six
months ended June 30, 2004 and 2003 (restated)
    
    7Notes to Consolidated Financial Statements
    
    8-19Item 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    20-31Item 3.
    Quantitative and Qualitative Disclosures About Market Risk
    
    32Item 4.
    Controls and Procedures
    
    33Part
II -
    Other InformationItem 1.
    Legal Proceedings
    
    34Item 2.
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    34Item 3.
    Defaults Upon Senior Securities
    
    34Item 4.
    Submission of Matters to a Vote of Security Holders
    
    35Item 5.
    Other Information
    
    35Item 6.
    Exhibits and Reports on Form 8-K
    
    36Signatures
    
    37WHOLE ACCOUNT NET QUOTA SHARE REINSURANCE CONTACT EFFECTIVE 1/1/04FLORIDA HURRICANE CATASTROPHE FUND AMENDED REINSURANCE CONTRACT 6/1/04CASULTY EXCESS OF LESS REINSURACE CONTRACT EFFECTIVE 1/1/04PROPERTY PER RISK 1ST & 2ND EXCESS REINSURANCE CONTRACT EFFECTIVE 1/1/04AMENDED & RESTATED EMPLOYMENT AGREEMENT WITH JAMES J. MAGUIRE EFFECTIVE 1/1/04CERTIFICATION OF CEO PURSUANT TO SECTION 302 SARBANES-OXLEY ACT 2002CERTIFICATION OF CFO PURSUANT TO SECTION 302 SARBANES-OXLEY ACT 2002CERTIFICATION OF CEO PURSUANT TO SECTION 906 SARBANES-OXLEY ACT 2002CERTIFICATION OF CFO PURSUANT TO SECTION 906 SARBANES-OXLEY ACT 2002
  3




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS 
 As ofJune 30,
    
    December 31,2004
    
    2003(Restated)ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $1,207,461 AND $1,066,523)
    
    $
    1,202,002
    
    
    $
    1,081,694EQUITY SECURITIES AT MARKET (COST $110,435
AND $79,813)
    
    
    123,392
    
    
    
    90,358TOTAL INVESTMENTS
    
    
    1,325,394
    
    
    
    1,172,052CASH AND CASH EQUIVALENTS
    
    
    95,205
    
    
    
    73,942ACCRUED INVESTMENT INCOME
    
    
    12,424
    
    
    
    11,008PREMIUMS RECEIVABLE
    
    
    181,787
    
    
    
    179,509PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
    
    
    286,573
    
    
    
    292,157DEFERRED INCOME TAXES
    
    
    26,654
    
    
    
    19,176DEFERRED ACQUISITION COSTS
    
    
    78,770
    
    
    
    56,288PROPERTY AND EQUIPMENT, NET
    
    
    18,563
    
    
    
    16,821GOODWILL
    
    
    25,724
    
    
    
    25,724OTHER ASSETS
    
    
    28,429
    
    
    
    25,293TOTAL ASSETS
    
    $
    2,079,523
    
    
    $
    1,871,970LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    726,771
    
    
    $
    627,086UNEARNED PREMIUMS
    
    
    455,468
    
    
    
    422,589TOTAL POLICY LIABILITIES AND ACCRUALS
    
    
    1,182,239
    
    
    
    1,049,675FUNDS HELD PAYABLE TO REINSURER
    
    
    118,388
    
    
    
    110,011LOANS PAYABLE
    
    
    44,185
    
    
    
    48,482PREMIUMS PAYABLE
    
    
    42,728
    
    
    
    35,044OTHER LIABILITIES
    
    
    95,672
    
    
    
    83,112TOTAL LIABILITIES
    
    
    1,483,212
    
    
    
    1,326,324COMMITMENTS 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, 22,230,782 AND
22,007,552 SHARES ISSUED AND OUTSTANDING
    
    
    291,340
    
    
    
    281,088NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (6,617
    )
    
    
    (5,444
    )ACCUMULATED OTHER COMPREHENSIVE INCOME
    
    
    4,874
    
    
    
    16,715RETAINED EARNINGS
    
    
    306,714
    
    
    
    253,287TOTAL SHAREHOLDERS EQUITY
    
    
    596,311
    
    
    
    545,646TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,079,523
    
    
    $
    1,871,970
 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 OPERATIONS AND
COMPREHENSIVE INCOME 
 For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(Restated)
    
    
    
    (Restated)REVENUE:NET EARNED PREMIUMS
    
    $
    189,563
    
    
    $
    123,349
    
    
    $
    360,985
    
    
    $
    271,711NET INVESTMENT INCOME
    
    
    10,800
    
    
    
    9,370
    
    
    
    20,773
    
    
    
    19,175NET REALIZED INVESTMENT GAIN (LOSS)
    
    
    (1,061
    )
    
    
    (650
    )
    
    
    717
    
    
    
    (1,783
    )OTHER INCOME
    
    
    829
    
    
    
    1,040
    
    
    
    2,211
    
    
    
    1,701TOTAL REVENUE
    
    
    200,131
    
    
    
    133,109
    
    
    
    384,686
    
    
    
    290,804LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    136,520
    
    
    
    124,293
    
    
    
    267,206
    
    
    
    227,378NET REINSURANCE RECOVERIES
    
    
    (29,203
    )
    
    
    (31,267
    )
    
    
    (63,646
    )
    
    
    (43,992
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    107,317
    
    
    
    93,026
    
    
    
    203,560
    
    
    
    183,386ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES
    
    
    51,272
    
    
    
    32,158
    
    
    
    98,626
    
    
    
    78,578OTHER OPERATING EXPENSES
    
    
    2,642
    
    
    
    1,632
    
    
    
    4,411
    
    
    
    3,306TOTAL LOSSES AND EXPENSES
    
    
    161,231
    
    
    
    126,816
    
    
    
    306,597
    
    
    
    265,270INCOME BEFORE INCOME TAXES
    
    
    38,900
    
    
    
    6,293
    
    
    
    78,089
    
    
    
    25,534INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    13,889
    
    
    
    7,889
    
    
    
    25,763
    
    
    
    15,653DEFERRED
    
    
    (1,656
    )
    
    
    (6,459
    )
    
    
    (1,101
    )
    
    
    (8,215
    )TOTAL INCOME TAX EXPENSE
    
    
    12,233
    
    
    
    1,430
    
    
    
    24,662
    
    
    
    7,438NET INCOME
    
    $
    26,667
    
    
    $
    4,863
    
    
    $
    53,427
    
    
    $
    18,096OTHER COMPREHENSIVE INCOME, NET OF TAX:HOLDING GAIN (LOSS) ARISING DURING
PERIOD
    
    $
    (18,943
    )
    
    $
    6,740
    
    
    $
    (11,375
    )
    
    $
    2,799RECLASSIFICATION ADJUSTMENT
    
    
    690
    
    
    
    423
    
    
    
    (466
    )
    
    
    1,159OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (18,253
    )
    
    
    7,163
    
    
    
    (11,841
    )
    
    
    3,958COMPREHENSIVE INCOME
    
    $
    8,414
    
    
    $
    12,026
    
    
    $
    41,586
    
    
    $
    22,054PER AVERAGE SHARE DATA:BASIC EARNINGS PER SHARE
    
    $
    1.21
    
    
    $
    0.22
    
    
    $
    2.42
    
    
    $
    0.83DILUTED EARNINGS PER SHARE
    
    $
    1.15
    
    
    $
    0.22
    
    
    $
    2.31
    
    
    $
    0.80WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    22,111,232
    
    
    
    21,860,396
    
    
    
    22,064,751
    
    
    
    21,862,819WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    1,081,954
    
    
    
    706,608
    
    
    
    1,107,482
    
    
    
    635,107WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    23,193,186
    
    
    
    22,567,004
    
    
    
    23,172,233
    
    
    
    22,497,926
 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 CHANGES
IN SHAREHOLDERS EQUITY 
 For the Six
    
    For the Year EndedMonths Ended
    
    December 31,June 30, 2004
    
    2003(Restated)COMMON 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
    
    
    197,230
    
    
    
    38,800BALANCE AT END OF PERIOD
    
    
    22,230,782
    
    
    
    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
    
    
    9,433
    
    
    
    1,291BALANCE AT END OF PERIOD
    
    
    291,340
    
    
    
    281,088NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (5,444
    )
    
    
    (6,407
    )NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
    
    
    (2,326
    )
    
    
    (1,065
    )COLLECTION OF NOTES RECEIVABLE
    
    
    1,153
    
    
    
    2,028BALANCE AT END OF PERIOD
    
    
    (6,617
    )
    
    
    (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
    
    
    (11,841
    )
    
    
    530BALANCE AT END OF PERIOD
    
    
    4,874
    
    
    
    16,715RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    253,287
    
    
    
    191,100NET INCOME
    
    
    53,427
    
    
    
    62,187BALANCE AT END OF PERIOD
    
    
    306,714
    
    
    
    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
    
    $
    596,311
    
    
    $
    545,646
 The accompanying notes are an integral part of the consolidated financial statements. 6




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS 
 For the Six Months Ended June 30,2004
    
    2003(Restated)CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    53,427
    
    
    $
    18,096ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT (GAIN) LOSS
    
    
    (717
    )
    
    
    1,783DEPRECIATION AND AMORTIZATION EXPENSE
    
    
    6,508
    
    
    
    3,822DEFERRED INCOME TAX BENEFIT
    
    
    (1,101
    )
    
    
    (8,215
    )CHANGE IN PREMIUMS RECEIVABLE
    
    
    (2,278
    )
    
    
    (14,879
    )CHANGE IN OTHER RECEIVABLES
    
    
    4,168
    
    
    
    (82,898
    )CHANGE IN INCOME TAXES PAYABLE
    
    
    1,196
    
    
    
    (6,011
    )CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    (22,482
    )
    
    
    15,353CHANGE IN OTHER ASSETS
    
    
    (4,498
    )
    
    
    (754
    )CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES
    
    
    99,685
    
    
    
    100,883CHANGE IN UNEARNED PREMIUMS
    
    
    32,879
    
    
    
    51,008CHANGE IN FUNDS HELD PAYABLE TO REINSURER
    
    
    8,377
    
    
    
    61,923CHANGE IN OTHER LIABILITIES
    
    
    7,736
    
    
    
    20,739TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS
    
    
    387
    
    
    
    58NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    183,287
    
    
    
    160,908CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES
    
    
    41,734
    
    
    
    16,412PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES
    
    
    83,854
    
    
    
    95,588PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES
    
    
    17,236
    
    
    
    8,125COST OF FIXED MATURITIES ACQUIRED
    
    
    (259,770
    )
    
    
    (243,980
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (45,395
    )
    
    
    (22,109
    )PURCHASE OF PROPERTY AND EQUIPMENT
    
    
    (4,078
    )
    
    
    (2,745
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (166,419
    )
    
    
    (148,709
    )CASH FLOWS FROM FINANCING ACTIVITIES:REPAYMENTS ON LOANS PAYABLE
    
    
    (43,435
    )
    
    
    (21,841
    )PROCEEDS FROM LOANS PAYABLE
    
    
    39,138
    
    
    
    30,839PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    432
    
    
    
    94PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE
    
    
    1,153
    
    
    
    952PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
    
    
    7,107
    
    
    
    41COST OF COMMON STOCK REPURCHASED
    
    
    
    
    
    
    (300
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    4,395
    
    
    
    9,785NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    21,263
    
    
    
    21,984CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    73,942
    
    
    
    42,002CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    95,205
    
    
    $
    63,986CASH PAID DURING THE PERIOD FOR:INCOME TAXES
    
    $
    26,435
    
    
    $
    21,212INTEREST
    
    $
    283
    
    
    $
    338NON-CASH TRANSACTIONS:ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE
    
    $
    2,326
    
    
    $
    (90
    )
 The accompanying notes are an integral part of the consolidated financial statements. 7




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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 June 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 and adjustments necessary to reflect the
restatement discussed in Note 2), necessary for a fair statement of the
information set forth therein. The results of operations for the six months
ended June 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 and to reflect the
effect of the restatement discussed in Note 2.These consolidated financial statements should be read in
conjunction with the financial
statements and notes included in the Companys Annual Report on
Form 10-K as
of and for the year ended December 31, 2003.2.
    
    Restatement of Financial StatementsThe Companys previously issued consolidated balance sheets as of June 30,
2003, September 30, 2003, December 31, 2003 and March 31, 2004 and
consolidated statements of operations and comprehensive income, changes in
shareholders equity and cash flows for the periods ended June 30, 2003,
September 30, 2003, December 31, 2003 and March 31, 2004, respectively, have
been restated to record a portion of the revenue and net income arising from
profit commissions under two reinsurance contracts. The revenue and
net income of one of the contracts had originally been fully recorded
in the fourth quarter 2003 although portions of such revenue and net
income should have been recorded in the quarters ended June 30,
2003, September 30, 2003 and March 31, 2004. Portions of
the revenue and net income for the other contract should have been
recorded in the quarters ended June 30, 2003, September 30,
2003, December 31, 2003 and March 31, 2004. These profit commissions were due
to the Company from reinsurers under a quota share reinsurance contract
effective during the period April 1, 2003 through December 31, 2003 and an
excess catastrophe reinsurance contract effective during the period June 1,
2003 through May 31, 2004.The decision to restate resulted from an analysis of the accounting effect
at the expiration of one of these reinsurance contracts. Based upon
the provisions of Emerging Issues Task Force No. 93-6,
Accounting for Multiple  Year Retrospectively
Rated Contracts by Ceding and Assuming Enterprises, the Company
determined that under generally acceptable accounting principles there was
an error in the prior period financial statements and it should have been
accruing a profit commission for each period since the inception of the
contracts based on the actual experience of the underlying business, i.e.,
net premiums earned less losses incurred. As a result, the Company
intends to file an amended Form 10-K/A for the fiscal year ended
December 31, 2003 and an amended
Form 10-Q/A for each of the fiscal quarters ended June 30,
2003, September 30, 2003 and March 31, 2004 to reflect this
restatement. In addition, the Company is currently evaluating the impact of
this restatement, if any, on its 2002 and 2001 consolidated financial statements. 8




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The effect of this restatement on the consolidated statements of operations
and comprehensive income for the three and six months ended June 30, 2003
and on the consolidated balance sheet as of December 31, 2003 is shown in
the tables below (in thousands, except per share amounts):Consolidated Statements of Operations and Comprehensive Income Data Three Months Ended June 30, 2003AsPreviously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedNet earned premiums
    
    $
    121,449
    
    
    $
    1,900
    
    
    $
    123,349Total revenue
    
    $
    131,209
    
    
    $
    1,900
    
    
    $
    133,109Income before income taxes
    
    $
    4,393
    
    

    $
    1,900
    
    
    $
    6,293Income tax expense: current
    
    $
    7,225
    
    
    $
    664
    
    
    $
    7,889Total income tax expense
    
    $
    766
    
    
    $
    664
    
    
    $
    1,430Net income
    
    $
    3,627
    
    
    $
    1,236
    
    
    $
    4,863Basic earnings per share
    
    $
    0.17
    
    
    $
    0.05
    
    
    $
    0.22Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.06
    
    
    $
    0.22
 Six Months Ended June 30, 2003AsPreviously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedNet earned premiums
    
    $
    269,811
    
    
    $
    1,900
    
    
    $
    271,711Total revenue
    
    $
    288,904
    
    
    $
    1,900
    
    
    $
    290,804Income before income taxes
    
    $
    23,634
    
    
    $
    1,900
    
    
    $
    25,534Income tax expense: current
    
    $
    14,989
    
    
    $
    664
    
    
    $
    15,653Total income tax expense
    
    $
    6,774
    
    
    $
    664
    
    
    $
    7,438Net income
    
    $
    16,860
    
    
    $
    1,236
    
    
    $
    18,096Basic earnings per share
    
    $
    0.77
    
    
    $
    0.06
    
    
    $
    0.83Diluted earnings per share
    
    $
    0.75
    
    
    $
    0.05
    
    
    $
    0.80
 Consolidated Balance Sheet Data As of December 31, 2003AsPreviously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedOther assets
    
    $
    22,354
    
    
    $
    2,939
    
    
    $
    25,293Total assets
    
    $
    1,869,031
    
    
    $
    2,939
    
    
    $
    1,871,970Other liabilities
    
    $
    82,083
    
    
    $
    1,029
    
    
    $
    83,112Total liabilities
    
    $
    1,325,295
    
    
    $
    1,029
    
    
    $
    1,326,324Retained earnings
    
    $
    251,377
    
    
    $
    1,910
    
    
    $
    253,287Total shareholders equity
    
    $
    543,736
    
    
    $
    1,910
    
    
    $
    545,646Total liabilities and shareholders equity
    
    $
    1,869,031
    
    
    $
    2,939
    
    
    $
    1,871,970
 9




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##### Table of Contents



The effect of this restatement on the consolidated statements of operations
and comprehensive income for the three months ended March 31, 2004 and on
the consolidated balance sheet as of March 31, 2004 is shown in the tables
below (in thousands, except per share amounts):Consolidated Statements of Operations and Comprehensive Income Data Three Months Ended March 31, 2004AsPreviously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedNet earned premiums
    
    $
    168,784
    
    
    $
    2,639
    
    
    $
    171,423Total revenue
    
    $
    181,917
    
    
    $
    2,639
    
    
    $
    184,556Income before income taxes
    
    $
    36,551
    
    
    $
    2,639
    
    
    $
    39,190Income tax expense: current
    
    $
    10,950
    
    
    $
    924
    
    
    $
    11,874Total income tax expense
    
    $
    11,505
    
    
    $
    924
    
    
    $
    12,429Net income
    
    $
    25,046
    
    
    $
    1,715
    
    
    $
    26,761Basic earnings per share
    
    $
    1.14
    
    
    $
    0.08
    
    
    $
    1.22Diluted earnings per share
    
    $
    1.08
    
    
    $
    0.07
    
    
    $
    1.15
  Consolidated Balance Sheet Data As of March 31, 2004AsPreviously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedOther assets
    
    $
    19,314
    
    
    $
    2,639
    
    
    $
    21,953Total assets
    
    $
    1,975,077
    
    
    $
    2,639
    
    
    $
    1,977,716Other liabilities
    
    $
    88,976
    
    
    $
    924
    
    
    $
    89,900Total liabilities
    
    $
    1,398,622
    
    
    $
    924
    
    
    $
    1,399,546Retained earnings
    
    $
    276,423
    
    
    $
    1,715
    
    
    $
    278,138Total shareholders equity
    
    $
    576,455
    
    
    $
    1,715
    
    
    $
    578,170Total liabilities and shareholders equity
    
    $
    1,975,077
    
    
    $
    2,639
    
    
    $
    1,977,716
  The Company intends to file an amended Form 10-K/A for the fiscal year ended
December 31, 2003 and an amended Form 10-Q/A for the fiscal
quarters ended June 30, 2003, September 30, 2003 and March 31, 2004 to
reflect this restatement. In addition, the Company is currently evaluating the
impact of this restatement, if any, on its 2002 and 2001 consolidated financial statements.3.
    
    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 six months ended June 30, 2004 and 2003, respectively: 10




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share data)
    
    
    
    (Restated)
    
    
    
    (Restated)Net Income As Reported
    
    $
    26,667
    
    
    $
    4,863
    
    
    $
    53,427
    
    
    $
    18,096Assumed Stock Compensation Cost
    
    
    (998
    )
    
    
    (716
    )
    
    
    (1,798
    )
    
    
    (1,404
    )Pro Forma Net Income
    
    $
    25,669
    
    
    $
    4,147
    
    
    $
    51,629
    
    
    $
    16,692Basic Earnings Per Share:As Reported
    
    $
    1.21
    
    
    $
    0.22
    
    
    $
    2.42
    
    
    $
    0.83Pro Forma
    
    $
    1.16
    
    
    $
    0.19
    
    
    $
    2.34
    
    
    $
    0.76Diluted Earnings Per Share:As Reported
    
    $
    1.15
    
    
    $
    0.22
    
    
    $
    2.31
    
    
    $
    0.80Pro Forma
    
    $
    1.11
    
    
    $
    0.19
    
    
    $
    2.23
    
    
    $
    0.74
  4.
    
    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
June 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
arose. This evaluation resulted in non-cash realized investment losses of
$0 million for the three months ended June 30, 2004 and 2003 and $0 million
and $0.9 million, respectively, for the six months ended June 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 six months ended June 30, 2004 and 2003 were $1.7 million and $1.6
million, respectively, and $2.6 million and $2.3 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 June 30, 2004 have continuously been in an
unrealized loss position. Included in the amounts displayed in the table
are $3.4 million of unrealized losses due to non-investment grade fixed
maturity securities having a fair value of $15.5 million. No issuer of
securities or industry represents more than 3.2% and 16.5%, respectively, of
the total estimated fair value, or 6.3% and 15.2%, respectively, of the
total gross unrealized loss included in the table below. As previously
discussed, there are certain risks and uncertainties inherent in the
Companys impairment methodology, such as the financial condition of
specific industry sectors and the resultant effect on underlying security
collateral values. Should the Company subsequently determine a decline in
the fair value below the cost basis to be other than temporary, the security
would be written down to its fair value and the difference would be included
in earnings as a realized loss for the period such determination was made. 11




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##### Table of Contents



Less Than 12 Months
    
    12 Months or More
    
    TotalsUnrealized
    
    
    
    
    
    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
    
    $
    59,014
    
    
    $
    505
    
    
    $
    581
    
    
    $
    27
    
    
    $
    59,595
    
    
    $
    532Obligations of States and
Political Subdivisions
    
    
    254,632
    
    
    
    6,045
    
    
    
    8,453
    
    
    
    462
    
    
    
    263,085
    
    
    
    6,507Corporate and Bank Debt Securities
    
    
    162,010
    
    
    
    3,659
    
    
    
    261
    
    
    
    3
    
    
    
    162,271
    
    
    
    3,662Asset Backed Securities
    
    
    36,331
    
    
    
    467
    
    
    
    10,890
    
    
    
    3,926
    
    
    
    47,221
    
    
    
    4,393Mortgage Pass-Through Securities
    
    
    113,065
    
    
    
    1,788
    
    
    
    
    
    
    
    
    
    
    
    113,065
    
    
    
    1,788Collateralized Mortgage Obligations
    
    
    23,472
    
    
    
    380
    
    
    
    5,048
    
    
    
    382
    
    
    
    28,520
    
    
    
    762Total Fixed Maturities
Available for Sale
    
    
    648,524
    
    
    
    12,844
    
    
    
    25,233
    
    
    
    4,800
    
    
    
    673,757
    
    
    
    17,644Equity Securities
    
    
    13,382
    
    
    
    2,593
    
    
    
    
    
    
    
    
    
    
    
    13,382
    
    
    
    2,593Total Investments
    
    $
    661,906
    
    
    $
    15,437
    
    
    $
    25,233
    
    
    $
    4,800
    
    
    $
    687,139
    
    
    $
    20,237
  Based upon the Companys impairment evaluation as of June 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 then temporary include,
but are not limited to, whether: the issuer is in financial distress;
the investment is secured; a significant credit rating action has
occurred; scheduled interest payments have been delayed or missed;
changes in laws and/or regulations have impacted an issuer or
industry; and an ability and intent to hold the security to
recovery.5.
    
    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 June 30,
2004 and December 31, 2003, the carrying value of the securities on deposit
totaled $14.9 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 $57.3 million and $59.1 million as of June 30, 2004
and December 31, 2003, respectively.6.
    
    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. No events
have occurred or circumstances have arisen subsequent to December 31, 2003
that would necessitate the Company to perform an interim impairment test.
Consequently no change in the carrying amount of goodwill has been recorded
for the six months ended June 30, 2004.7.
    
    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 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 12




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##### Table of Contents



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 June 30, 2004, the related
adjustments could have a material adverse impact on the Companys financial
condition, and results of operations.During the three months ended June 30, 2004, the Company increased the
estimated gross and net unpaid loss and loss adjustment expenses for
accident years 1996 through 2002 and decreased the estimated gross and net
unpaid loss and loss adjustment expenses for accident year 2003 by the following amounts: Gross Basis
    
    Net Basis($s in millions)
    
    increase (decrease)
    
    increase (decrease)Accident Year 2003
    
    $
    (20.3
    )
    
    $
    (17.7
    )Accident Year 2002
    
    
    7.8
    
    
    
    10.9Accident Years 2001-1996
    
    
    15.5
    
    
    
    11.6Total
    
    $
    3.0
    
    
    $
    4.8
  The increase in accident years 1996 through 2002 is principally attributable
to case reserve development above expectations primarily across various
professional liability products in the specialty lines segments and general
liability coverages in the commercial lines segment as noted in the table
below: ($s in millions)
    
    Gross Basis
    
    Net BasisProfessional
    
    General Liability
    
    Professional
    
    General LiabilityLiability Coverages
    
    Coverages
    
    Liability Coverages
    
    CoveragesAccident Year 2002
    
    $
    4.3
    
    
    $
    2.9
    
    
    $
    5.4
    
    
    $
    4.6Accident Year 2001-1996
    
    $
    7.1
    
    
    $
    1.8
    
    
    $
    3.4
    
    
    $
    4.5
  The decrease in accident year 2003 is principally attributable to better
than expected claims frequency primarily for: property coverages in both the
commercial and personal lines segments ($4.8 million gross, $6.8 million net
of reinsurance recoverables); various professional liability products in the
specialty lines segment ($4.7 million gross, $4.6 million net of reinsurance
recoverables); and general liability coverages in the commercial lines
segment ($7.1 million gross, $4.1 million net of reinsurance recoverables).The 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.During the three months ended June 30, 2003, the Company increased the
estimated gross and net loss for unreported claims incurred and related
claim adjustment expenses on residual value polices issued during the years
1998 through 2002 by $33.0 million to $59.8 million and $57.9 million,
respectively. As of March 31, 2003 the Company had estimated a total
liability for unpaid loss and loss adjustment expenses for these policies of
$47.4 million ($40.0 million net of reinsurance). The residual value
policies provide coverage guaranteeing the value of a leased automobile at
the lease termination, which can be up to five years from lease inception.
Adverse trends further deteriorated in both frequency and severity on leases
expiring in 2003. As part of the Companys monitoring and evaluation
process, a consulting firm was engaged during the second quarter of 2003 to
aid in evaluating the ultimate potential loss exposure under these policies.
Based upon the result of the subsequent evaluation by the Company and
changes in the Companys assumptions relating to future frequency and
severity of losses, the estimate for unpaid loss and loss adjustment
expenses was increased. The Company primarily attributes this deterioration
to the following factors that led to a softening of prices in the used car
market subsequent to the September 11, 2001 terrorist attacks: prolonged 0%
new car financing rates and other incentives which increased new car sales
and the volume of trade-ins, daily rental units being sold into the market
earlier and in greater numbers than expected further adding to the over
supply of used cars; and the overall general economic conditions. 13




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##### Table of Contents



As of June 30, 2003, approximately 61,000 leases were outstanding under the
Companys residual value policies and a 42% loss frequency and average loss
of approximately $2,300 per claim was projected with respect to these
leases. As of June 30, 2004, approximately 14,500 leases were outstanding
under the Companys residual value policies. The Company is projecting a
39% loss frequency and an average loss of approximately $2,400 per claim for
these outstanding leases.During the three months ended June 2003 the Company also decreased the gross
and net liability for unpaid loss and loss adjustment expenses for accident
year 2002, principally in the property line of its commercial package
products, by approximately $9.0 million due to better than expected loss
experience.8.
    
    Funds Held Payable To ReinsurerEffective 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 equal to the positive balance in the Funds Held
Payable to Reinsurer account. Activity for the Funds Held Payable to
Reinsurer is summarized as follows (in thousands): As of and For the
    
    As of and For theSix Months Ended
    
    Year EndedJune 30, 2004
    
    December 31, 2003Funds Held Payable to Reinsurer Balance at Beginning of
Period
    
    $
    110,011
    
    
    $
    Net Written Premiums Ceded
    
    
    41,300
    
    
    
    199,358Reinsurer Expense Allowance
    
    
    (1,450
    )
    
    
    (7,376
    )Provisional Commission
    
    
    (21,045
    )
    
    
    (73,933
    )Paid Loss and Loss Adjustment Expenses
    
    
    (12,484
    )
    
    
    (10,701
    )Interest Credit
    
    
    2,342
    
    
    
    2,318Other
    
    
    (286
    )
    
    
    345Subtotal Activity
    
    
    8,337
    
    
    
    110,011Funds Held Payable to Reinsurer Balance at End of Period
    
    $
    118,388
    
    
    $
    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 $3.1 million and $5.1 million for the three and six months ended
June 30, 2004, respectively. The profit commission reduces ceded written
and earned premiums.9.
    
    Loans PayableAs of June 30, 2004, the Company had aggregate borrowings of $44.2 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. 14




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##### Table of Contents



10.
    
    Earnings Per ShareEarnings 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 six months ended June 30, 2004 and
2003, respectively (in thousands, except per share data): As of and For the Three
    
    As of and For the SixMonths Ended June 30,
    
    Months Ended June 302004
    
    2003
    
    2004
    
    2003(Restated)
    
    
    
    (Restated)Weighted-Average Common Shares Outstanding
    
    
    22,111
    
    
    
    21,860
    
    
    
    22,065
    
    
    
    21,863Weighted-Average Potential Shares Issuable
    
    
    1,082
    
    
    
    707
    
    
    
    1,107
    
    
    
    635Weighted-Average Shares and Potential
Shares Issuable
    
    
    23,193
    
    
    
    22,567
    
    
    
    23,172
    
    
    
    22,498Net Income
    
    $
    26,667
    
    
    $
    4,863
    
    
    $
    53,427
    
    
    $
    18,096Basic Earnings per Share
    
    $
    1.21
    
    
    $
    0.22
    
    
    $
    2.42
    
    
    $
    0.83Diluted Earnings per Share
    
    $
    1.15
    
    
    $
    0.22
    
    
    $
    2.31
    
    
    $
    0.80
  11.
    
    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.12.
    
    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 8): 15




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##### Table of Contents



For the Three Months Ended
    
    For the Six Months EndedJune 30, 2004
    
    June 30, 2004(In thousands)
    
    Written
    
    Earned
    
    Written
    
    EarnedDirect Business
    
    $
    279,535
    
    
    $
    256,856
    
    
    $
    530,396
    
    
    $
    495,943Reinsurance Assumed
    
    
    847
    
    
    
    1,867
    
    
    
    2,423
    
    
    
    3,997Reinsurance Ceded
    
    
    56,184
    
    
    
    69,160
    
    
    
    106,042
    
    
    
    138,955Net Premiums
    
    $
    224,198
    
    
    $
    189,563
    
    
    $
    426,777
    
    
    $
    360,985
 For the Three Months Ended
    
    For the Six Months EndedJune 30, 2003 (Restated)
    
    June 30, 2003 (Restated)Written
    
    Earned
    
    Written
    
    EarnedDirect Business
    
    $
    209,379
    
    
    $
    179,387
    
    
    $
    401,691
    
    
    $
    351,698Reinsurance Assumed
    
    
    1,529
    
    
    
    809
    
    
    
    2,499
    
    
    
    1,484Reinsurance Ceded
    
    
    130,805
    
    
    
    56,847
    
    
    
    152,439
    
    
    
    81,471Net Premiums
    
    $
    80,103
    
    
    $
    123,349
    
    
    $
    251,751
    
    
    $
    271,711
  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 $1.9 million for the three months ended June 30, 2004 and 2003,
respectively, and $8.7 million and $1.9 million for the six months ended
June 30, 2004 and 2003, respectively. The profit commissions reduce ceded
written and earned premiums.13.
    
    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.14.
    
    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
six months ended June 30, 2004 and 2003 was $(10.2) million and $3.6
million, respectively and $(6.1) million and $1.5 million, respectively.
The related tax effect of Reclassification Adjustments for the three and six
months ended June 30, 2004 and 2003 was $0.4 million and $0.2 million,
respectively and $(0.3) million and $0.6 million, respectively.15.
    
    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 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. 16




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##### Table of Contents



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 six and
three months ended June 30, 2004 and 2003. Corporate information is
included to reconcile segment data to the consolidated financial statements
(in thousands): 17




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##### Table of Contents



Three Months Ended,Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalJune 30, 2004:Gross Written Premiums
    
    $
    198,615
    
    
    $
    46,438
    
    
    $
    35,329
    
    
    
    
    
    
    $
    280,382Net Written Premiums
    
    $
    165,024
    
    
    $
    38,143
    
    
    $
    21,031
    
    
    
    
    
    
    $
    224,198Revenue:Net Earned Premiums
    
    $
    146,634
    
    
    $
    31,603
    
    
    $
    11,326
    
    
    
    
    
    
    $
    189,563Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,800
    
    
    
    10,800Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,061
    )
    
    
    (1,061
    )Other Income
    
    
    
    
    
    
    
    
    
    
    660
    
    
    
    169
    
    
    
    829Total Revenue
    
    
    146,634
    
    
    
    31,603
    
    
    
    11,986
    
    
    
    9,908
    
    
    
    200,131Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    81,083
    
    
    
    21,699
    
    
    
    4,535
    
    
    
    
    
    
    
    107,317Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,272
    
    
    
    51,272Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    867
    
    
    
    1,775
    
    
    
    2,642Total Losses and Expenses
    
    
    81,083
    
    
    
    21,699
    
    
    
    5,402
    
    
    
    53,047
    
    

    
    161,231Income Before Income Taxes
    
    
    65,551
    
    
    
    9,904
    
    
    
    6,584
    
    
    
    (43,139
    )
    
    
    38,900Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,233
    
    
    
    12,233Net Income
    
    $
    65,551
    
    
    $
    9,904
    
    
    $
    6,584
    
    
    $
    (55,372
    )
    
    $
    26,667Total Assets
    
    
    
    
    
    
    
    
    
    $
    304,191
    
    
    $
    1,775,332
    
    
    $
    2,079,523June 30, 2003 (Restated):Gross Written Premiums
    
    $
    147,163
    
    
    $
    38,002
    
    
    $
    25,742
    
    
    
    
    
    
    $
    210,907Net Written Premiums
    
    $
    60,880
    
    
    $
    14,852
    
    
    $
    4,371
    
    
    
    
    
    
    $
    80,103Revenue:Net Earned Premiums
    
    $
    90,144
    
    
    $
    24,861
    
    
    $
    8,344
    
    
    
    
    
    
    $
    123,349Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,370
    
    
    
    9,370Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    (650
    )Other Income
    
    
    
    
    
    
    
    
    
    
    974
    
    
    
    66
    
    
    
    1,040Total Revenue
    
    
    90,144
    
    
    
    24,861
    
    
    
    9,318
    
    
    
    8,786
    
    
    
    133,109Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    75,142
    
    
    
    13,352
    
    
    
    4,532
    
    
    
    
    
    
    
    93,026Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,158
    
    
    
    32,158Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    733
    
    
    
    899
    
    
    
    1,632Total Losses and Expenses
    
    
    75,142
    
    
    
    13,352
    
    
    
    5,265
    
    
    
    33,057
    
    
    
    126,816Income Before Income Taxes
    
    
    15,002
    
    
    
    11,509
    
    
    
    4,053
    
    
    
    (24,271
    )
    
    
    6,293Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,430
    
    
    
    1,430Net Income
    
    $
    15,002
    
    
    $
    11,509
    
    
    $
    4,053
    
    
    $
    (25,701
    )
    
    $
    4,863Total Assets
    
    
    
    
    
    
    
    
    
    $
    251,054
    
    
    $
    1,386,609
    
    
    $
    1,637,663
 18




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##### Table of Contents



Six Months Ended,Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalJune 30, 2004:Gross Written Premiums
    
    $
    373,688
    
    
    $
    93,830
    
    
    $
    65,301
    
    
    
    
    
    
    $
    532,819Net Written Premiums
    
    $
    309,764
    
    
    $
    78,194
    
    
    $
    38,819
    
    
    
    
    
    
    $
    426,777Revenue:Net Earned Premiums
    
    $
    280,153
    
    
    $
    61,018
    
    
    $
    19,814
    
    
    
    
    
    
    $
    360,985Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,773
    
    
    
    20,773Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    717
    
    
    
    717Other Income
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    408
    
    
    
    2,211Total Revenue
    
    
    280,153
    
    
    
    61,018
    
    
    
    21,617
    
    
    
    21,898
    
    
    
    384,686Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    154,991
    
    
    
    39,754
    
    
    
    8,815
    
    
    
    
    
    
    
    203,560Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,626
    
    
    
    98,626Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,112
    
    
    
    3,299
    
    
    
    4,411Total Losses and Expenses
    
    
    154,991
    
    
    
    39,754
    
    
    
    9,927
    
    
    
    101,925
    
    
    
    306,597Income Before Income Taxes
    
    
    125,162
    
    
    
    21,264
    
    
    
    11,690
    
    
    
    (80,027
    )
    
    
    78,089Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,662
    
    
    
    24,662Net Income
    
    $
    125,162
    
    
    $
    21,264
    
    
    $
    11,690
    
    
    $
    (104,689
    )
    
    $
    53,427Total Assets
    
    
    
    
    
    
    
    
    
    $
    304,191
    
    
    $
    1,775,332
    
    
    $
    2,079,523June 30, 2003 (Restated):Gross Written Premiums
    
    $
    275,060
    
    
    $
    78,389
    
    
    $
    50,740
    
    
    
    
    
    
    $
    404,189Net Written Premiums
    
    $
    181,234
    
    
    $
    52,168
    
    
    $
    18,349
    
    
    
    
    
    
    $
    251,751Revenue:Net Earned Premiums
    
    $
    199,402
    
    
    $
    53,979
    
    
    $
    18,330
    
    
    
    
    
    
    $
    271,711Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,175
    
    
    
    19,175Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,783
    )
    
    
    (1,783
    )Other Income
    
    
    
    
    
    
    
    
    
    
    1,554
    
    
    
    147
    
    
    
    1,701Total Revenue
    
    
    199,402
    
    
    
    53,979
    
    
    
    19,884
    
    
    
    17,539
    
    
    
    290,804Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    141,080
    
    
    
    31,993
    
    
    
    10,313
    
    
    
    
    
    
    
    183,386Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,578
    
    
    
    78,578Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,058
    
    
    
    2,248
    
    
    
    3,306Total Losses and Expenses
    
    
    141,080
    
    
    
    31,993
    
    
    
    11,371
    
    
    
    80,826
    
    
    
    265,270Income Before Income Taxes
    
    
    58,322
    
    
    
    21,986
    
    
    
    8,513
    
    
    
    (63,287
    )
    
    
    25,534Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,438
    
    

    
    7,438Net Income
    
    $
    58,322
    
    
    $
    21,986
    
    
    $
    8,513
    
    
    $
    (70,725
    )
    
    $
    18,096Total Assets
    
    
    
    
    
    
    
    
    
    $
    251,054
    
    
    $
    1,386,609
    
    
    $
    1,637,663
 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 Restatement of Financial Statements The Companys previously issued financial statements for the quarters ended
June 30, 2003, September 30, 2003 and March 31, 2004 and for the year ended
December 31, 2003 have been restated to record a portion of the revenue and net
income arising from profit commissions under two reinsurance contracts, one of
which had originally been recorded in the fourth quarter 2003 and the other of
which should have been recorded in previous periods. These profit commissions
were due to the Company from reinsurers under a quota share reinsurance
contract effective during the period April 1, 2003 through December 31, 2003
and an excess catastrophe reinsurance contract effective during the period June
1, 2003 through May 31, 2004. See Note 2 of Notes to Consolidated Financial
Statements for more information. The impact of this restatement on the previously reported results of operations
for the three and six months ended June 30, 2003 was to increase net income by
$1.2 million ($0.06 diluted earnings per share) and $1.2 million ($0.05 diluted
earnings per share), respectively. The restatement also resulted in an
increase to net earned premium in the amount of $1.9 million for the three and
six months ended June 30, 2003, and an increase to the previously reported
retained earnings balance as of December 31, 2003 in the amount of $1.9
million. References herein to those fiscal periods that have been restated are
to the restated amounts. General Although the Companys financial performance is dependent upon its own specific
business characteristics, certain risk factors can affect the profitability 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 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)  
    
    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 For the fiscal year ended December 31, 2003. Investments The Companys investment objective is the realization of relatively high levels
of investment income while generating competitive after-tax total rates of
return within a prudent level of risk and within the constraints of maintaining
adequate securities in amount and duration to meet cash requirements of current
operations and long-term liabilities, as well as maintaining and improving the
Companys A.M. Best rating. The Company utilizes external independent
professional investment managers for its fixed maturity and equity investments.
These investments consist of diversified issuers and issues, and as of June
30, 2004, approximately 85.9% and 7.9% 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. During 2004 the Company continued to add to its tax-exempt fixed maturity
portfolio due to the perceived attractiveness of tax-exempt securities relative
to other taxable fixed maturity securities. As of June 30, 2004, on a cost
basis, investment grade tax-exempt fixed maturity securities totaled
$523.5 
million, or 37.2% of the total invested assets, compared to $476.1 million, or
39.2% as of the end of 2003. Asset backed, mortgage pass through, and collateralized mortgage obligation
securities, on a cost basis, amounted to $144.0 million, $181.4 million and
$42.0 million, respectively, as of June 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 investment is secured; a significant credit rating action has occurred;
scheduled interest payments have been delayed or missed; changes in laws
and/or regulations have impacted an issuer or industry; and an
ability and intent to hold the security to recovery. The amount of any
write down is included in earnings as a realized loss in the period the
impairment arose. This evaluation resulted in non-cash realized investment
losses of $0 million for the three months ended June 30, 2004 and 2003 and $0
million and $0.9 million, respectively, for the six months ended June 30, 2004
and 2003. The Company primarily attributes these other than temporary
declines in fair value to the uncertain economic climate, the overhang of
corporate governance issues, and the high profile bankruptcies occurring during
2002 into early 2003. 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 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) 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. This evaluation resulted in non-cash realized investment losses of $1.7
million and $1.6 million, respectively, and $2.6 million and $2.3 million,
respectively, for the three and six months ended June 30, 2004 and 2003,
respectively. These non-cash realized investment losses were primarily due to
investments in collateralized bond obligations as a result of non investment
grade default rates which remain higher than historic averages and due to
investments in other asset backed securities which experienced extension of
cash flows on the underlying collateral. The Companys fixed maturity portfolio amounted to $1,202.0 million and
$1,081.7 million, as of June 30, 2004 and December 31, 2003, respectively, of
which 98.7% and 98.6% of the portfolio as of June 30, 2004 and December 31,
2003, respectively, was comprised of investment grade securities. From the
fourth quarter of 2001 into early 2003 following the war in Iraq, U.S.
investment grade securities experienced varying price and ratings volatility,
having been affected by the uncertain economic climate, corporate governance
issues, and the subsequent stream of corporate scandals and high profile
bankruptcies. More recently certain sectors of the investment grade security
market have continued to lag despite a return to a more favorable economic
climate. However, the high quality of the Companys overall AA+ rated fixed
maturity portfolio has mitigated potential volatility. The Company had fixed
maturity investments with unrealized losses amounting to $17.6 million and
$10.6 million as of June 30, 2004 and December 31, 2003, respectively. Of
these amounts, interests in securitized assets had unrealized losses amounting
to $6.9 million and $9.2 million as of June 30, 2004 and December 31, 2003,
respectively. This increase in fixed maturity unrealized losses
can be largely attributed to a general increase in interest rates across the
yield curve between December 31, 2003 and June 30, 2004.
Management does not consider this an other then temporary impairment
given its ability and intent to hold 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 June 30, 2004 have continuously been in an unrealized loss position.
Included in the amounts displayed in the table are $3.4 million of unrealized
losses due to non-investment grade fixed maturity securities having a fair
value of $15.5 million. No issuer of securities or industry represents more
than 3.2% and 16.5%, respectively, of the total estimated fair value, or 6.3%
and 15.2%, respectively, of the total gross unrealized loss included in the
table below. As previously discussed, there are certain risks and
uncertainties inherent in the Companys impairment methodology, such as the
financial condition of specific industry sectors and the resultant effect on
underlying security collateral values. Should the Company subsequently
determine a decline in the fair value below the cost basis to be other than
temporary, the security would be written down to its fair value and the
difference would be included in earnings as a realized loss for the period such
determination was made. 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)

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
    
    $
    7.2
    
    
    $
    2.1
    
    
    $
    9.3
    
    
    $
    0.6
    
    
    $
    9.94  6 months
    
    
    2.9
    
    
    
    
    
    
    
    2.9
    
    
    
    0.5
    
    
    
    3.47  9 months
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    1.5
    
    
    
    1.710  12 months
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    
    
    
    
    0.413  18 months
    
    
    0.5
    
    
    
    0.4
    
    
    
    0.9
    
    
    
    
    
    
    
    0.919  24 months
    
    
    
    
    
    
    1.4
    
    
    
    1.4
    
    
    
    
    
    
    
    1.4> 24 months
    
    
    
    
    
    
    2.5
    
    
    
    2.5
    
    
    
    
    
    
    
    2.5Total Gross
Unrealized Losses
    
    $
    10.7
    
    
    $
    6.9
    
    
    $
    17.6
    
    
    $
    2.6
    
    
    $
    20.2Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    484.9
    
    
    $
    188.8
    
    
    $
    673.7
    
    
    $
    13.4
    
    
    $
    687.1
 Based upon the Companys
impairment evaluation as of June 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 then temporary include, but are not
limited to, whether: the issuer is in financial distress; the
investment is secured; a significant credit rating action has
occurred; scheduled interest payments have been delayed or missed;
changes in laws and/or regulations have impacted an issuer or
industry; and an ability and intent to hold the security to recovery. For the three months ended June 30, 2004 the Companys gross loss on the sale
of fixed maturity and equity securities amounted to $0.1 million and $0.3
million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $4.3 million and $2.4 million, respectively.
For the three months ended June 30, 2003 the Companys gross loss on the sale
of fixed maturity and equity securities amounted to $0.1 million and $0.2
million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $1.5 million and $2.0 million, respectively. For the six months ended June 30, 2004 the Companys gross loss on the sale of
fixed maturity and equity securities amounted to $0.3 million and $0.4 million,
respectively. The fair value of the fixed maturity and equity securities at
the time of sale was $7.1 million and $3.9 million, respectively. For the six
months ended June 30, 2003 the Companys gross loss on the sale of fixed
maturity and equity securities amounted to $0.1 million and $0.7 million,
respectively. The fair value of the fixed maturity and equity securities at
the time of sale was $1.5 million and $3.4 million, respectively. 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) The decision to sell these securities was based upon an assessment of economic
conditions. Results of Operations (Six Months ended June 30, 2004 vs. June 30, 2003) Premiums: Premium information for the six months ended June 30, 2004 vs.
June 30, 2003 for the Companys business segments is as follows (in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Gross Written Premiums
    
    $
    373.7
    
    
    $
    93.8
    
    
    $
    65.3
    
    
    $
    532.82003 Gross Written Premiums
    
    $
    275.1
    
    
    $
    78.4
    
    
    $
    50.7
    
    
    $
    404.2Percentage Increase
    
    
    35.8
    %
    
    
    19.6
    %
    
    
    28.8
    %
    
    
    31.8
    %2004 Gross Earned Premiums
    
    $
    370.3
    
    
    $
    80.8
    
    
    $
    48.8
    
    
    $
    499.92003 Gross Earned Premiums
    
    $
    246.1
    
    
    $
    65.1
    
    
    $
    42.0
    
    
    $
    353.2Percentage Increase
    
    
    50.5
    %
    
    
    24.1
    %
    
    
    16.2
    %
    
    
    41.5
    %
 The overall growth in gross written premiums is primarily attributable to the
following:  
    
    Further rating downgrades of certain major competitor property and
casualty insurance companies have led to their diminished presence in
the Companys commercial and specialty lines business segments and
continue to result in additional prospects and increased premium
writings, most notably for the Companys various commercial package and
non-profit D&O product lines.  
    
    The displacement of certain competitor property and casualty
insurance companies and their independent agency relationships
continues to result in new agency relationship opportunities for the
Company. These relationship opportunities have resulted in additional
policyholders and premium writings for the Companys commercial and
specialty lines segments.  
    
    Continued expansion of marketing efforts relating to commercial
lines and specialty lines products through the Companys field
organization and preferred agents.  
    
    In-force policy counts as of June 30, 2004 versus June 30, 2003
have increased 9.9%, 33.6% and 7.6% for the commercial lines, specialty
lines and personal lines segments, respectively, primarily as a result
of the factors discussed above.  
    
    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 $8.5 million for the six months ended
June 30, 2004.  
    
    Realized average rate increases on renewal business approximating
3.3%, 2.6%, and 11.5% 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 six months ended June 30, 2004 vs.
June 30, 2003 were (in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Net Written Premiums
    
    $
    309.8
    
    
    $
    78.2
    
    
    $
    38.8
    
    
    $
    426.82003 Net Written
Premiums (restated)
    
    $
    181.3
    
    
    $
    52.2
    
    
    $
    18.3
    
    
    $
    251.8Percentage Increase
    
    
    70.9
    %
    
    
    49.8
    %
    
    
    112.0
    %
    
    
    69.5
    %2004 Net Earned Premiums
    
    $
    280.2
    
    
    $
    61.0
    
    
    $
    19.8
    
    
    $
    361.02003 Net Earned Premiums
(restated)
    
    $
    199.4
    
    
    $
    54.0
    
    
    $
    18.3
    
    
    $
    271.7Percentage Increase
    
    
    40.5
    %
    
    
    13.0
    %
    
    
    8.2
    %
    
    
    32.9
    %
 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) 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. Under this agreement:  
    
    The Company ceded 22% of its unearned premium reserve at
April 1, 2003 which approximated $63.6 million. The cession of the
unearned premium reserve reduced net written premiums for the six
months ended June 30, 2003, which approximated the following by
segment: commercial lines ($44.2 million), specialty lines ($13.3
million), and personal lines ($6.1 million). Net written premiums
prior to the unearned premium reserve cession were $315.4 million and
by segment were: commercial lines ($225.5 million), specialty lines
($65.5 million) and personal lines ($24.4 million).  
    
    The Company ceded 22% of its net written premiums and loss and
loss adjustment expenses for policies effective April 1, 2003
through December 31, 2003 and 10% of its commercial and specialty
lines net written premiums and loss and loss adjustment expenses for
policies effective January 1, 2004 and thereafter. The Company
received a provisional commission of 33.0%, adjusted based upon the
ratio of losses incurred to premiums earned. Pursuant to this
reinsurance agreement the Company withholds the reinsurance premium,
reduced by the reinsurers expense allowance, and the Companys
ceding commission allowance in a Funds Held Payable to Reinsurer
account. This Funds Held Payable to Reinsurer account is also
reduced by ceded paid losses and loss adjustment expenses under this
agreement, and increased by an interest credit. During the six
months ended June 30, 2004 and 2003, the Company ceded $41.3 million
and $103.6 million of net written premiums, respectively, and $76.1
million and $34.3 million of net earned premiums, respectively. Net Investment IncomeNet investment income approximated $20.8 for the six
months ended June 30, 2004 and $19.2 million for the same period of 2003. Total
investments grew to $1,325.4 million at June 30, 2004 from $1,071.7 million at
June 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 increased to approximately 4.1 years at June 30,
2004, compared to 3.2 years at June 30, 2003, as a result of investing in
overall AAA rated intermediate to longer tax exempt fixed income securities,
due to their perceived relative value to taxable alternatives. The Companys
taxable equivalent book yield on its fixed income holdings approximated 4.7% at
June 30, 2004, compared to 4.8% at June 30, 2003. Net investment income was
reduced by $2.3 million and $0.5 million for the six months ended June 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 0.23% and
2.68% for the six months ended June 30, 2004 and 2003, respectively, and was
similar to the Lehman Brothers Intermediate Aggregate Bond Index (the Index)
total return of 0.25% and 3.18% 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 (Loss):Net realized investment gains
(losses) were $0.7 million for the six months ended June 30, 2004 and $(1.8)
million for the same period in 2003. The Company realized net investment gains
of $0.8 million and $2.5 million from the sale of fixed maturity and equity
securities, respectively, for the six
months ended June 30, 2004, and $2.6 million in non-cash realized
investment losses for fixed maturity investments as a result of the Companys
impairment evaluation. The Company realized net investment gains of $1.3 million and $0.1 million from
the sale of fixed maturity and equity securities, respectively, for the six
months ended June 30, 2003, and $2.3 million and $0.9 million in non- 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) 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 $2.2 million for the six months
ended June 30, 2004 and $1.7 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 Company is
seeking to increase brokering activities in its personal lines segment as it is
restricting new business and not renewing certain policies in designated areas
of Florida as a result of its property exposures in these areas and related
catastrophe loss considerations. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $20.2 million (11.0%) to $203.6 million for the six months
ended June 30, 2004 from $183.4 million for the same period of 2003 and the
loss ratio decreased to 56.4% in 2004 from 67.5% in 2003. This increase in net
loss and loss adjustment expenses was due to the 32.9% growth in net earned
premiums. The decrease in the loss ratio is primarily attributed to reserve actions taken
during the six months ended June 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 six months ended June 30, 2003 loss ratio from
58.7% to 67.5%. The decrease in the loss ratio is also attributed in part to
price increases realized on renewal business and offset in part by:  
    
    The Company increasing the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses during
the six months ended June 30, 2004 for accident years 1996 through
2002 by $22.7 million and $21.9 million, respectively, and decreasing
the estimated gross and net loss for unreported claims incurred and
related claim adjustment expenses for accident year 2003 by $20.7
million and $18.1 million, respectively.  
    
    The increase in accident years 1996 through 2002 is principally
attributable to case reserve development above expectations primarily
across various professional liability products in the specialty lines
segments ($11.6 million gross, $9.1 million net of reinsurance
recoverables) and general liability coverages in the commercial lines
segment ($4.5 million gross, $8.9 million net of reinsurance
recoverables).  
    
    The decrease in accident year 2003 is principally attributable to
better than expected claims frequency primarily for: property coverages
in both the commercial and personal lines segments ($5.1 million gross,
$7.0 million net of reinsurance recoverables); professional liability
products in the specialty lines segment ($4.7 million gross, $4.6
million net of reinsurance recoverables); and general liability
coverages in the commercial lines segment ($7.1 million gross, $4.2
million net of reinsurance recoverables). Additionally, during the six months ended June 30, 2004 and 2003, the Company
ceded $76.1 million and $34.3 million of net earned premium, respectively, and
$38.1 million and $19.0 million in net loss and loss adjustment expenses,
respectively, pursuant to the quota share reinsurance agreement (see Premiums). Acquisition Costs and Other Underwriting Expenses:Acquisition costs and
other underwriting expenses increased $20.0 million (25.4%) to $98.6 million
for the six months ended June 30, 2004 from $78.6 million for the same period
of 2003, and the expense ratio decreased to 27.3% in 2004 from 28.9% in 2003.
The increase was due primarily to the 32.9% growth in net earned premiums.
This increase was offset in part by, and 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 the quota share reinsurance agreement
(see Premiums). For the six months ended June 30, 2004 and 2003, the Company
ceded $76.1 million and $34.3 million, respectively, of net earned premium and
earned $32.5 million $13.3 million, respectively, in ceding commission. 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) Other Operating Expenses: Other operating expenses increased $1.1 million
to $4.4 million for the six months ended June 30, 2004 from $3.3 million for
the same period of 2003. The increase in the level of expenses is primarily
due to the growth of the business. Income Tax Expense:The Companys effective tax rate for the six months
ended June 30, 2004 and 2003 was 31.6% and 29.1%, 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. Results of Operations (Three Months ended June 30, 2004 vs. June 30, 2003) Premiums: Premium information for the three months ended June 30, 2004
vs. June 30, 2003 for the Companys business segments is as follows (in
millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Gross Written Premiums
    
    $
    198.7
    
    
    $
    46.4
    
    
    $
    35.3
    
    
    $
    280.42003 Gross Written Premiums
    
    $
    147.2
    
    
    $
    38.0
    
    
    $
    25.7
    
    
    $
    210.9Percentage Increase
    
    
    35.0
    %
    
    
    22.1
    %
    
    
    37.4
    %
    
    
    33.0
    %2004 Gross Earned Premiums
    
    $
    191.4
    
    
    $
    41.6
    
    
    $
    25.7
    
    
    $
    258.72003 Gross Earned Premiums
    
    $
    125.4
    
    
    $
    33.5
    
    
    $
    21.3
    
    
    $
    180.2Percentage Increase
    
    
    52.6
    %
    
    
    24.2
    %
    
    
    20.7
    %
    
    
    43.6
    %
 The overall growth in gross written premiums is primarily attributable to the
following:  
    
    Further rating downgrades of certain major competitor property and
casualty insurance companies have led to their diminished presence in
the Companys commercial and specialty lines business segments and
continue to result in additional prospects and increased premium
writings, most notably for the Companys various commercial package and
non-profit D&O product lines.  
    
    The displacement of certain competitor property and casualty
insurance companies and their independent agency relationships
continues to result in new agency relationship opportunities for the
Company. These relationship opportunities have resulted in additional
policyholders and premium writings for the Companys commercial and
specialty lines segments.  
    
    Continued expansion of marketing efforts relating to commercial
lines and specialty lines products through the Companys field
organization and preferred agents.  
    
    In-force policy counts as of June 30, 2004 versus June 30, 2003
have increased 9.9%, 33.6% and 7.6% for the commercial lines, specialty
lines and personal lines segments, respectively, primarily as a result
of the factors discussed above.  
    
    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 $6.1 million for the three months ended
June 30, 2004.  
    
    Realized weighted average rate increases on renewal business
approximating 2.3%, 3.1%, and 10.1% for the commercial, specialty and
personal lines segments, respectively. 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) The respective net written premium changes for commercial lines, specialty
lines and personal lines segments for the three months ended June 30, 2004 vs.
June 30, 2003 were (in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Net Written Premiums
    
    $
    165.1
    
    
    $
    38.1
    
    
    $
    21.0
    
    
    $
    224.22003 Net Written
Premiums (restated)
    
    $
    60.8
    
    
    $
    14.9
    
    
    $
    4.4
    
    
    $
    80.1Percentage Increase
    
    
    171.5
    %
    
    
    155.7
    %
    
    
    377.3
    %
    
    
    179.9
    %2004 Net Earned Premiums
    
    $
    146.7
    
    
    $
    31.6
    
    
    $
    11.3
    
    
    $
    189.62003 Net Earned Premiums
(restated)
    
    $
    90.1
    
    
    $
    24.9
    
    
    $
    8.3
    
    
    $
    123.3Percentage Increase
    
    
    62.8
    %
    
    
    26.9
    %
    
    
    36.1
    %
    
    
    53.8
    %
 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.  
    
    The Company ceded 22% of its unearned premium reserve at
April 1, 2003 which approximated $63.6 million. The cession of the
unearned premium reserve reduced net written premiums for the three
months ended June 30, 2003 which approximated the following by
segment: commercial lines ($44.2 million), specialty lines ($13.3
million), and personal lines ($6.1 million). Net written premiums
prior to the unearned premium reserve cession were $143.7 million and
by segment were: commercial lines ($105.0 million), specialty lines
($28.2 million) and personal lines ($10.5 million).
    
    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. The Company
receives a provisional commission of 33.0% adjusted based upon the
ratio of losses incurred to premiums earned. Pursuant to this
reinsurance agreement the Company withholds the reinsurance premium,
reduced by the reinsurers expense allowance, and the Companys
ceding commission allowance in a Funds Held Payable to Reinsurer
account. This Funds Held Payable to Reinsurer account is also
reduced by ceded paid losses and loss adjustment expenses under this
agreement, and increased by an interest credit. During the three
months ended June 30, 2004 and 2003, the Company ceded $21.5 million
and $103.6 million of net written premiums, respectively, and $35.8
million and $34.3 million of net earned premiums, respectively. Net Investment IncomeNet investment income approximated $10.8 million for
the three months ended June 30, 2004 and $9.4 million for the same period of
2003. Total investments grew to $1,325.4 million at June 30, 2004 from $1,071.7
million at June 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 increased to approximately 4.1 years at
June 30, 2004, compared to 3.2 years at June 30, 2003 as a result of investing
in overall AAA rated intermediate to longer tax exempt fixed income
securities due to their perceived relative value to taxable alternatives. The
Companys taxable equivalent book yield on its fixed income holdings
approximated 4.7% at June 30, 2004, compared to 4.8% at June 30, 2003. Net
investment income was reduced by $1.2 million and $0.5 million for the three
months ended June 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 (1.57)% and
1.69% for the three months ended June 30, 2004 and 2003, respectively, and was
similar to the Lehman Brothers Intermediate Aggregate Bond Index (the Index)
total return of (1.98)% and 1.89% for the same periods, respectively. The
Company expects some variation in its portfolios 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) 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 Loss:Net realized investment losses were $1.1
million for the three months ended June 30, 2004 and $0.7 million for the same
period in 2003. The Company realized net investment gains of $0.2 million and
$0.4 million from the sale of fixed maturity and equity securities,
respectively, for the three months ended June 30, 2004, and $1.7 million in
non-cash realized investment losses for fixed maturity investments as a result
of the Companys impairment evaluation. The Company realized net investment gains of $0.9 million and $0.1 million from
the sale of fixed maturity and equity securities, respectively, for the three
months ended June 30, 2003, and $1.7 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 $0.8 million for the three months
ended June 30, 2004 and $1.0 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 Company is
seeking to increase brokering activities in its personal lines segment as it is
restricting new business and not renewing certain policies in designated areas
of Florida as a result of its property exposures in these areas and related
catastrophe loss considerations. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $14.3 million (15.4%) to $107.3 million for the three months
ended June 30, 2004 from $93.0 million for the same period of 2003 and the loss
ratio decreased to 56.6% in 2004 from 75.4% in 2003. This increase in net loss
and loss adjustment expenses was due to the 53.8% growth in net earned
premiums. The decrease in the loss ratio is primarily attributed to reserve actions taken
during the three months ended June 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 three months ended June 30, 2003 loss ratio from
56.0% to 75.4%. The Companys loss ratio for the three months ended June 30,
2004 was adversely affected by the following items which was offset in part by
price increases realized on renewal business:  
    
    The Company increasing the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses during
the three months ended June 30, 2004 for accident years 1996 through
2002 by $23.3 million and $22.5 million, respectively, and decreasing
the estimated gross and net loss for unreported claims incurred and
related claim adjustment expenses for accident year 2003 by $20.3
million and $17.7 million, respectively.  
    
    The increase in accident years 1996 through 2002 is principally
attributable to case reserve development above expectations primarily
across various professional liability products in the specialty lines
segments ($11.4 million gross, $8.8 million net of reinsurance
recoverables) and general liability coverages in the commercial lines
segment ($4.7 million gross, $9.1 million net of reinsurance
recoverables).  
    
    The decrease in accident year 2003 is principally attributable to
better than expected claims frequency primarily for: property coverages
in both the commercial and personal lines segments ($4.8 million gross,
$6.8 million net of reinsurance recoverables); professional liability
products in the specialty lines segment ($4.7 million gross, $4.6
million net of reinsurance recoverables); and general liability
coverages in the commercial lines segment ($7.1 million gross, $4.1
million net of reinsurance recoverables). Acquisition Costs and Other Underwriting Expenses:Acquisition costs and
other underwriting expenses increased $19.1 million (59.3%) to $51.3 million
for the three months ended June 30, 2004 from $32.2 million for the same period
of 2003 and the expense ratio increased to 27.0% in 2004 from 26.1% in 2003.
The increase was 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) due primarily to the 53.8% 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. 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 the quota share reinsurance agreement
(see Premiums). For the three months ended June 30, 2004 and 2003 the Company
ceded $35.8 million and $34.3 million, respectively, of net earned premium and
earned $17.3 million and $13.3 million, respectively, in ceding commission. Other Operating Expenses: Other operating expenses increased $1.0 million
to $2.6 million for the three months ended June 30, 2004 from $1.6 million for
the same period of 2003. The increase in the level of expenses is primarily
due to the growth of the business. Income Tax Expense:The Companys effective tax rate for the three months
ended June 30, 2004 and 2003 was 31.4% and 22.7%, respectively. The effective
rates differed from the 35% statutory rate principally due to investments in
tax-exempt securities and the relative proportion of tax-exempt income to total
income before tax. Liquidity and Capital Resources For the six months ended June 30, 2004, the Companys investments
experienced unrealized investment depreciation of $11.8 million, net of the
related deferred tax benefit of $6.4 million. At June 30, 2004, the Company had
total investments with a carrying value of $1,325.4 million, of which 90.7%
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 9.3% of the Companys total investments
consisted primarily of publicly traded common stock securities. The Company produced net cash from operations of $183.3 million and $160.9
million, respectively, for the six months ended June 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 six months ended June 30, 2004 was primarily generated from
strong premium growth during the current year due to increases in the number of
policies written and price increases realized on renewal business. Net loss
and loss expense payments were $129.6 million and $96.4 million, respectively,
for the six months ended June 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 June 30, 2004
the insurance subsidiaries unused borrowing capacity was $142.0 million. The
remaining borrowing capacity will provide an immediately available line of
credit. Borrowings aggregated $44.2 million at June 30, 2004, bear interest at
adjusted LIBOR, mature twelve months or less from inception and are
collateralized by $57.3 million of the Companys fixed maturity securities.
The weighted-average interest rate on borrowings outstanding as of June 30,
2004 was 1.4%. The NAICs risk-based capital method is designed to measure the acceptable
amount of capital and surplus an insurer should have based on the inherent
specific risks of each insurer. The adequacy of a companys actual capital and
surplus is evaluated by a comparison to the risk-based capital results.
Insurers failing to meet minimum risk-based capital requirements may be subject
to scrutiny by the insurers domiciliary insurance department and 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) 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. JUNE 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
    
    $
    63,823
    
    
    $
    163,602
    
    
    $
    162,214
    
    

    $
    85,379
    
    
    $
    189,145
    
    
    $
    512,543
    
    
    $
    1,176,706
    
    
    $
    1,198,689Book Value
    
    $
    62,700
    
    
    $
    165,916
    
    
    $
    165,046
    
    
    $
    87,593
    
    
    $
    191,302
    
    
    $
    531,611
    
    
    $
    1,204,168
    
    
    
    Average Interest Rate
    
    
    4.07
    %
    
    
    3.53
    %
    
    
    3.37
    %
    
    
    4.27
    %
    
    
    4.38
    %
    
    
    4.09
    %
    
    
    3.97
    %
    
    
    3.87
    %PREFERRED:Principal Amount
    
    
    
    
    
    $
    1,000
    
    
    $
    3,000
    
    
    
    
    
    
    
    
    
    
    $
    2,125
    
    
    $
    6,125
    
    
    $
    6,380Book Value
    
    
    
    
    
    $
    1,040
    
    
    $
    3,168
    
    
    
    
    
    
    
    
    
    
    $
    2,113
    
    
    $
    6,321
    
    
    
    Average Interest Rate
    
    
    
    
    
    
    6.84
    %
    
    
    6.40
    %
    
    
    
    
    
    
    
    
    
    
    6.26
    %
    
    
    6.43
    %
    
    
    6.37
    %SHORT-TERM INVESTMENTS:Principal Amount
    
    $
    88,394
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    88,394
    
    
    $
    88,394Book Value
    
    $
    88,394
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    88,394
    
    
    
    Average Interest Rate
    
    
    1.30
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.30
    %
    
    
    1.30
    %LOANS PAYABLE:Principal Amount
    
    $
    22,483
    
    
    $
    21,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,185
    
    
    
    Average Interest Rate
    
    
    1.32
    %
    
    
    1.38
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.36
    %
    
    
    
 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, subject to the matters set forth in the following
paragraph. As a result of the Companys restatement of certain of its financial
statements, as referred to in Item 2  Restatement of Financial Statements of
this report, to include a portion of its revenue and net income in prior
periods arising from profit commissions under two reinsurance contracts, the
Company has determined that it should enhance its documentation and research as
to its understanding of appropriate accounting for reinsurance transactions. In
connection therewith, the Company will:  1.
    
    Form a new reinsurance contract subcommittee with senior members from
appropriate departments within the Company to review, discuss and make
appropriate conclusions with respect to the documentation requirements
and the accounting for the Companys reinsurance contracts;2.
    
    As promptly as practicable add an additional accounting professional
to its staff whose responsibility will be to spend substantially all of
his or her working time researching and documenting technical accounting
matters (including reinsurance matters), as well as supporting other
members of the Companys accounting staff and the reinsurance contract
subcommittee. The
Companys independent auditors, PricewaterhouseCoopers LLP, have
advised the Company that there is a material weakness in the
Companys internal controls over the accounting and reporting
for reinsurance contracts. The Company anticipates that its
implementation of the matters set forth in the immediately preceding
paragraph will correct the material weakness. (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. 33




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
  
 Item 1. Legal Proceedings  Not applicable. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities  The Companys purchases of its common stock during the second 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
    
    ProgramsApril 1  April 30
    
    
    1,500
    (2)
    
    $
    26.51
    
    
    
    
    
    
    
    $
    24,700,000
    (2)May 1  May 31
    
    
    250
    (2)
    
    $
    34.02
    
    
    
    
    
    
    
    $
    24,700,000
    (2)June 1  June 30
    
    
    600
    (2)
    
    $
    32.58
    
    
    
    
    
    
    
    $
    24,700,000
    (2)Total
    
    
    2,350
  (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. 34




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders  At the Companys annual meeting of shareholders held on April 29, 2004 the
following nominees were elected to the Board of Directors: Votes For
    
    Votes WithheldMichael J. Cascio
    
    
    17,054,499
    
    
    
    413,979Elizabeth H. Gemmill
    
    
    17,409,772
    
    
    
    58,706William J. Henrich, Jr.
    
    
    17,382,662
    
    
    
    85,816James J. Maguire
    
    
    17,351,772
    
    
    
    116,706James J. Maguire, Jr.
    
    
    17,351,772
    
    
    
    116,706Margaret M. Mattix
    
    
    17,054,499
    
    
    
    413,979Maureen H. McCullough
    
    
    17,408,772
    
    
    
    59,706Michael J. Morris
    
    
    16,997,499
    
    
    
    470,979Donald A. Pizer
    
    
    17,408,772
    
    
    
    59,706Dirk A. Stuurop
    
    
    17,408,772
    
    
    
    59,706Sean S. Sweeney
    
    
    17,351,772
    
    
    
    117,106J. Eustace Wolfington
    
    
    16,997,099
    
    
    
    471,379
  The following other matters were approved at the Annual Meeting: Broker NonVotes For
    
    Votes Against
    
    Abstentions
    
    VotesApproval of the
Amendment to the
Companys Employee
Stock Option Plan
(the Stock Option
Plan) to increase
the number of
shares of the
Companys common
stock for which
options may be
granted under the
Stock Option Plan
    
    
    11,922,890
    
    
    
    4,356,401
    
    
    
    33,341
    
    
    
    1,153,846
 Broker NonVotes For
    
    Votes Against
    
    Abstentions
    
    VotesApproval of the
Appointment of
PricewaterhouseCoopers LLP as
Independent
Registered Public Accounting Firm for the
Fiscal Year Ending
December 31, 2004
    
    
    17,409,734
    
    
    
    58,258
    
    
    
    486
 
 Item 5. Other information Not applicable. 35




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K  a.
    
    Exhibits: Exhibit No.
    
    Description10.1*
    
    Whole Account Net Quota Share Reinsurance Contract effective as of January
1, 2004 (Addendum No. 1)10.2*
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective
as of June 1, 200410.3*
    
    Casualty Excess of Loss Reinsurance Contract effective as of January 1, 200410.4*
    
    Property Per Risk 1st and 2nd Excess Reinsurance Contract effective as of
January 1, 2004 (Endorsement No. 1)10.5*
    
    Amended and Restated Employment Agreement with James J. Maguire effective
as of January 1,200431.1*
    
    Certification of the Companys chief executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2*
    
    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.  b.
    
    The Company did not file any report on Form 8-K during the
quarterly period ended June 30, 2004, but did furnish the following
report: Date of Report
    
    Item ReportedApril 23, 2004
    
    First Quarter Results March 31, 2004 and Regulation FD Disclosure
 36




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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 August 9, 2004
    
    
    
    James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive Officer(Principal Executive Officer)Date August 9, 2004
    
    
    
    Craig P. KellerCraig P. KellerExecutive Vice President, Secretary, Treasurerand Chief Financial Officer (Principal Financial
and Accounting Officer)
 37