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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the Quarterly Period Ended September 30, 2005
 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
 
  þ o
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INDEX
For the Quarterly Period Ended September 30, 2005
 Part I  Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations and Comprehensive Income  For the three and nine months ended September 30, 2005 and 2004
    
    
    4Consolidated Statements of Changes in Shareholders Equity  For the nine months ended September 30, 2005 and year ended December 31, 2004
    
    
    5Consolidated Statements of Cash Flows  For the nine months ended September 30, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-18Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19-34Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    36Part II  Other InformationItem 1. Legal Proceedings
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    38Signatures
    
    
    39Certification of the Company's Chief Executive OfficerCertification of the Company's Chief Financial OfficerCertification of the Company's Chief Executive Officer, pursuant to Section 906Certification of the Company's Chief Financial Officer, pursuant to Section 906
 2




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 As of,September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET (AMORTIZED COST
$1,681,276 AND $1,287,094)
    
    $
    1,670,815
    
    
    $
    1,299,704EQUITY SECURITIES AT MARKET (COST $151,857 AND $110,601)
    
    
    162,283
    
    
    
    128,447TOTAL INVESTMENTS
    
    
    1,833,098
    
    
    
    1,428,151CASH AND CASH EQUIVALENTS
    
    
    71,388
    
    
    
    195,496ACCRUED INVESTMENT INCOME
    
    
    17,248
    
    
    
    13,475PREMIUMS RECEIVABLE
    
    
    279,367
    
    
    
    229,502PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES
    
    
    296,422
    
    
    
    429,850DEFERRED INCOME TAXES
    
    
    34,737
    
    
    
    14,396DEFERRED ACQUISITION COSTS
    
    
    127,600
    
    
    
    91,647PROPERTY AND EQUIPMENT, NET
    
    
    23,296
    
    
    
    21,281GOODWILL
    
    
    25,724
    
    
    
    25,724OTHER ASSETS
    
    
    35,668
    
    
    
    36,134TOTAL ASSETS
    
    $
    2,744,548
    
    
    $
    2,485,656LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    1,121,377
    
    
    $
    996,667UNEARNED PREMIUMS
    
    
    629,649
    
    
    
    531,849TOTAL POLICY LIABILITIES AND ACCRUALS
    
    
    1,751,026
    
    
    
    1,528,516FUNDS HELD PAYABLE TO REINSURER
    
    
    41,778
    
    
    
    131,119LOANS PAYABLE
    
    
    
    
    
    
    33,406PREMIUMS PAYABLE
    
    
    52,891
    
    
    
    48,111OTHER LIABILITIES
    
    
    111,787
    
    
    
    100,347TOTAL LIABILITIES
    
    
    1,957,482
    
    
    
    1,841,499COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED, NONE ISSUED
AND OUTSTANDING
    
    
    
    
    
    
    COMMON STOCK, NO PAR VALUE,
100,000,000 SHARES AUTHORIZED,
23,054,869 AND 22,273,917 SHARES ISSUED
AND OUTSTANDING
    
    
    334,269
    
    
    
    292,856NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (8,253
    )
    
    
    (5,465
    )RESTRICTED STOCK DEFERRED COMPENSATION COST
    
    
    (3,698
    )
    
    
    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (23
    )
    
    
    19,796RETAINED EARNINGS
    
    
    464,771
    
    
    
    336,970TOTAL SHAREHOLDERS EQUITY
    
    
    787,066
    
    
    
    644,157TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,744,548
    
    
    $
    2,485,656
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUE:NET EARNED PREMIUMS
    
    $
    244,770
    
    
    $
    187,845
    
    
    $
    714,661
    
    
    $
    548,830NET INVESTMENT INCOME
    
    
    16,979
    
    
    
    10,896
    
    
    
    45,843
    
    
    
    31,669NET REALIZED INVESTMENT GAIN
    
    
    1,097
    
    
    
    268
    
    
    
    12,191
    
    
    
    985OTHER INCOME
    
    
    600
    
    
    
    719
    
    
    
    1,380
    
    
    
    2,930TOTAL REVENUE
    
    
    263,446
    
    
    
    199,728
    
    
    
    774,075
    
    
    
    584,414LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    162,254
    
    
    
    760,267
    
    
    
    459,111
    
    
    
    1,027,473NET REINSURANCE RECOVERIES
    
    
    (20,395
    )
    
    
    (612,498
    )
    
    
    (74,979
    )
    
    
    (676,144
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    141,859
    
    
    
    147,769
    
    
    
    384,132
    
    
    
    351,329ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES
    
    
    67,542
    
    
    
    56,863
    
    
    
    189,316
    
    
    
    155,489OTHER OPERATING EXPENSES
    
    
    5,142
    
    
    
    1,674
    
    
    
    15,091
    
    
    
    6,085TOTAL LOSSES AND EXPENSES
    
    
    214,543
    
    
    
    206,306
    
    
    
    588,539
    
    
    
    512,903INCOME (LOSS) BEFORE INCOME TAXES
    
    
    48,903
    
    
    
    (6,578
    )
    
    
    185,536
    
    
    
    71,511INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    13,544
    
    
    
    (1,541
    )
    
    
    67,404
    
    
    
    24,222DEFERRED
    
    
    269
    
    
    
    (2,942
    )
    
    
    (9,669
    )
    
    
    (4,043
    )TOTAL INCOME TAX EXPENSE (BENEFIT)
    
    
    13,813
    
    
    
    (4,483
    )
    
    
    57,735
    
    
    
    20,179NET INCOME (LOSS)
    
    $
    35,090
    
    
    $
    (2,095
    )
    
    $
    127,801
    
    
    $
    51,332OTHER COMPREHENSIVE INCOME, NET OF
TAX:HOLDING GAIN (LOSS) ARISING
DURING PERIOD
    
    $
    (8,619
    )
    
    $
    11,157
    
    
    $
    (11,895
    )
    
    $
    (218
    )RECLASSIFICATION ADJUSTMENT
    
    
    (713
    )
    
    
    (174
    )
    
    
    (7,924
    )
    
    
    (640
    )OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (9,332
    )
    
    
    10,983
    
    
    
    (19,819
    )
    
    
    (858
    )COMPREHENSIVE INCOME
    
    $
    25,758
    
    
    $
    8,888
    
    
    $
    107,982
    
    
    $
    50,474PER AVERAGE SHARE DATA:BASIC EARNINGS (LOSS) PER SHARE
    
    $
    1.53
    
    
    $
    (0.09
    )
    
    $
    5.61
    
    
    $
    2.32DILUTED EARNINGS (LOSS) PER SHARE
    
    $
    1.43
    
    
    $
    (0.09
    )
    
    $
    5.27
    
    
    $
    2.21WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    23,002,804
    
    
    
    22,230,729
    
    
    
    22,795,492
    
    
    
    22,120,481WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    1,456,038
    
    
    
    1,132,451
    
    
    
    1,460,359
    
    
    
    1,120,535WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    24,458,842
    
    
    
    23,363,180
    
    
    
    24,255,851
    
    
    
    23,241,016
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
 For the NineMonths EndedSeptember 30, 2005
    
    
    For the Year Ended(Unaudited)
    
    
    December 31, 2004COMMON SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    22,273,917
    
    
    
    22,007,552ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
    
    
    290,758
    
    
    
    67,250ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET
    
    
    490,194
    
    
    
    199,115BALANCE AT END OF PERIOD
    
    
    23,054,869
    
    
    
    22,273,917COMMON STOCK:BALANCE AT BEGINNING OF YEAR
    
    $
    292,856
    
    
    $
    281,088ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
    
    
    13,077
    
    
    
    2,183ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    28,259
    
    
    
    9,585OTHER
    
    
    77
    
    
    
    BALANCE AT END OF PERIOD
    
    
    334,269
    
    
    
    292,856NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (5,465
    )
    
    
    (5,444
    )NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
    
    
    (4,555
    )
    
    
    (2,326
    )COLLECTION OF NOTES RECEIVABLE
    
    
    1,767
    
    
    
    2,305BALANCE AT END OF PERIOD
    
    
    (8,253
    )
    
    
    (5,465
    )RESTRICTED STOCK DEFERRED COMPENSATION COST:BALANCE AT BEGINNING OF YEAR
    
    
    
    
    
    
    DEFERRED COMPENSATION COST PURSUANT TO
ISSUANCE OF RESTRICTED STOCK
    
    
    (3,919
    )
    
    
    AMORTIZATION OF DEFERRED COMPENSATION COST
    
    
    221
    
    
    
    BALANCE AT END OF PERIOD
    
    
    (3,698
    )
    
    
    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:BALANCE AT BEGINNING OF YEAR
    
    
    19,796
    
    
    
    16,715OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
    
    
    (19,819
    )
    
    
    3,081BALANCE AT END OF PERIOD
    
    
    (23
    )
    
    
    19,796RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    336,970
    
    
    
    253,287NET INCOME
    
    
    127,801
    
    
    
    83,683BALANCE AT END OF PERIOD
    
    
    464,771
    
    
    
    336,970TOTAL SHAREHOLDERS EQUITY
    
    $
    787,066
    
    
    $
    644,157
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    127,801
    
    
    $
    51,332ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT GAIN
    
    
    (12,191
    )
    
    
    (985
    )DEPRECIATION AND AMORTIZATION EXPENSE
    
    
    12,527
    
    
    
    9,374DEFERRED INCOME TAX BENEFIT
    
    
    (9,669
    )
    
    
    (4,043
    )CHANGE IN PREMIUMS RECEIVABLE
    
    
    (49,865
    )
    
    
    (57,333
    )CHANGE IN PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES, NET OF FUNDS HELD
PAYABLE TO REINSURER
    
    
    44,087
    
    
    
    (486,494
    )CHANGE IN OTHER RECEIVABLES
    
    
    (3,773
    )
    
    
    (2,488
    )CHANGE IN INCOME TAXES RECOVERABLE
    
    
    (2,718
    )
    
    
    (16,932
    )CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    (35,953
    )
    
    
    (33,871
    )CHANGE IN OTHER ASSETS
    
    
    5,551
    
    
    
    (15,681
    )CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES
    
    
    124,710
    
    
    
    615,170CHANGE IN UNEARNED PREMIUMS
    
    
    97,800
    
    
    
    119,128CHANGE IN OTHER LIABILITIES
    
    
    14,202
    
    
    
    80,125TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS
    
    
    5,352
    
    
    
    387NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    317,861
    
    
    
    257,689CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES
    
    
    147,466
    
    
    
    117,764PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES
    
    
    147,169
    
    
    
    136,319PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES
    
    
    135,646
    
    
    
    32,938COST OF FIXED MATURITIES ACQUIRED
    
    
    (694,353
    )
    
    
    (430,584
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (165,170
    )
    
    
    (63,338
    )SETTLEMENT OF CASH FLOW HEDGE
    
    
    (3,148
    )
    
    
    PURCHASE OF PROPERTY AND EQUIPMENT
    
    
    (5,451
    )
    
    
    (5,882
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (437,841
    )
    
    
    (212,783
    )CASH FLOWS FROM FINANCING ACTIVITIES:REPAYMENTS ON LOANS PAYABLE
    
    
    (44,787
    )
    
    
    (57,615
    )PROCEEDS FROM LOANS PAYABLE
    
    
    11,381
    
    
    
    45,914PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    3,808
    
    
    
    432PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE
    
    
    1,767
    
    
    
    1,420PROCEEDS FROM SHARES ISSUED PURSUANT TO STOCK
PURCHASE PLANS
    
    
    23,703
    
    
    
    7,176NET CASH USED BY FINANCING ACTIVITIES
    
    
    (4,128
    )
    
    
    (2,673
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (124,108
    )
    
    
    42,233CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    195,496
    
    
    
    73,942CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    71,388
    
    
    $
    116,175CASH PAID DURING THE PERIOD FOR:INCOME TAXES
    
    $
    64,770
    
    
    $
    41,442INTEREST
    
    $
    165
    
    
    $
    451NON-CASH TRANSACTIONS:ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK
PURCHASE PLAN IN EXCHANGE FOR NOTES RECEIVABLE
    
    $
    4,555
    
    
    $
    2,307
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 1.
    
    Basis of PresentationThe consolidated financial statements for the quarterly period ended September 30, 2005 are
unaudited, but in the opinion of management have been prepared on the same basis as the annual
audited consolidated financial statements and reflect all adjustments, consisting of normal
recurring adjustments and accruals, necessary for a fair statement of the information set forth
therein. The results of operations for the nine months ended September 30, 2005 are not
necessarily indicative of the operating results to be expected for the full year or any other
period. Certain prior years amounts have been reclassified for comparative purposes.These consolidated financial statements should be read in conjunction with the financial
statements and notes included in the Companys Annual Report on Form 10-K as of and for the year
ended December 31, 2004.2.
    
    Stock-Based CompensationStock-based compensation plans are accounted for under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, no compensation expense is recognized for fixed stock option grants and the
Companys stock purchase plans. The following table illustrates the effect on net income and
earnings per share as if the provisions of statement of Financial Accounting Standards (SFAS)
No. 123 (as amended by SFAS No. 148), Accounting for Stock-Based Compensation, had been
applied for the three and nine months ended September 30, 2005 and 2004, respectively:
 (In thousands, except per share data)
    
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Income (Loss) As Reported
    
    $
    35,090
    
    
    $
    (2,095
    )
    
    $
    127,801
    
    
    $
    51,332Assumed Stock Compensation Cost
    
    
    (1,550
    )
    
    
    (1,134
    )
    
    
    (4,577
    )
    
    
    (2,932
    )Pro Forma Net Income (Loss)
    
    $
    33,540
    
    
    $
    (3,229
    )
    
    $
    123,224
    
    
    $
    48,400Basic Earnings (Loss) Per Share:As Reported
    
    $
    1.53
    
    
    $
    (0.09
    )
    
    $
    5.61
    
    
    $
    2.32Pro Forma
    
    $
    1.46
    
    
    $
    (0.15
    )
    
    $
    5.41
    
    
    $
    2.19Diluted Earnings (Loss) Per Share:As Reported
    
    $
    1.43
    
    
    $
    (0.09
    )
    
    $
    5.27
    
    
    $
    2.21Pro Forma
    
    $
    1.37
    
    
    $
    (0.14
    )
    
    $
    5.08
    
    
    $
    2.08
 3.
    
    InvestmentsThe carrying amount for the Companys investments approximates their estimated fair value. The
Company measures the fair value of investments based upon quoted market prices or by obtaining
quotes from third party broker-dealers. Material assumptions and factors utilized by such
broker-dealers in pricing these securities include: future cash flows, constant default rates,
recovery rates and any market clearing activity that may have occurred since the prior month-end
pricing period.For mortgage and asset-backed securities (structured securities) of high credit quality,
changes in expected cash flows are recognized using the retrospective method. For structured
securities where the possibility of credit loss is other than remote, changes in expected cash
flows are recognized on the prospective method over the remaining life of the securities. Cash
flow assumptions for structured securities are obtained from broker dealer survey values or
internal estimates consistent with the current interest rate and economic environments.
 7




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These assumptions represent the Companys best estimate of the amount and timing of estimated
principal and interest cash flows based on current information and events that a market
participant would use in determining the current fair value of the security.The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security whose fair value is below its cost. Upon identification of
such securities, a detailed review is performed for such securities, excluding interests in
securitized assets, meeting predetermined thresholds to determine whether a decline in fair
value below a securitys cost basis is other than temporary. If the Company determines a
decline in value to be other than temporary, the cost basis of the security is written down to
its fair value with the amount of the write down included in earnings as a realized loss in the
period the impairment arose. This evaluation resulted in non-cash realized investment losses of
$0.1 million and $1.0 million, respectively, for the three months ended September 30, 2005 and
2004, and $0.3 million and $1.0 million, respectively, for the nine months ended September 30,
2005 and 2004.The Companys impairment evaluation and recognition for interests in securitized assets is
conducted in accordance with the guidance provided by the Emerging Issues Task Force of the
Financial Accounting Standards Board. Under this guidance, impairment losses on securities must
be recognized if both the fair value of the security is less than its book value and the net
present value of expected future cash flows is less than the net present value of expected
future cash flows at the most recent (prior) estimation date. If these criteria are met, an
impairment charge, calculated as the difference between the current book value of the security
and its fair value, is included in earnings as a realized loss in the period the impairment
arose. Non-cash realized investment losses recorded for the three and nine months ended
September 30, 2005 and 2004 were $0 million and $4.7 million, respectively, and $0 million and
$7.3 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 September 30, 2005 have continuously been in an unrealized loss position. None of the
amounts displayed in the table are unrealized losses due to non-investment grade fixed maturity
securities. No issuer of securities or industry represents more than 1.6% and 20.2%,
respectively, of the total estimated fair value, or 1.7% and 16.7%, respectively, of the total
gross unrealized loss included in the table below. 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 any such underlying security collateral values.
Should the Company subsequently determine a decline in the fair value below the cost basis to be
other than temporary, the security would be written down to its fair value and the difference
would be included in earnings as a realized loss for the period such determination was made.
 Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFixed Maturities:
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedAvailable for Sale
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    48,959
    
    
    $
    616
    
    
    $
    33,114
    
    
    $
    264
    
    
    $
    82,073
    
    
    $
    880Obligations of States and
Political Subdivisions
    
    
    442,538
    
    
    
    4,877
    
    
    
    41,519
    
    
    
    884
    
    
    
    484,057
    
    
    
    5,761Corporate and Bank Debt Securities
    
    
    133,001
    
    
    
    2,685
    
    
    
    78,168
    
    
    
    2,326
    
    
    
    211,169
    
    
    
    5,011Asset Backed Securities
    
    
    62,081
    
    
    
    506
    
    
    
    20,942
    
    
    
    570
    
    
    
    83,023
    
    
    
    1,076Mortgage Pass-Through Securities
    
    
    260,616
    
    
    
    3,242
    
    
    
    10,409
    
    
    
    418
    
    
    
    271,025
    
    
    
    3,660Collateralized Mortgage Obligations
    
    
    145,414
    
    
    
    1,545
    
    
    
    15,647
    
    
    
    401
    
    
    
    161,061
    
    
    
    1,946Total Fixed Maturities
Available for Sale
    
    $
    1,092,609
    
    
    $
    13,471
    
    
    $
    199,799
    
    
    $
    4,863
    
    
    $
    1,292,408
    
    
    $
    18,334Equity Securities
    
    
    46,477
    
    
    
    3,585
    
    
    
    
    
    
    
    
    
    
    
    46,477
    
    
    
    3,585Total Investments
    
    $
    1,139,086
    
    
    $
    17,056
    
    
    $
    199,799
    
    
    $
    4,863
    
    
    $
    1,338,885
    
    
    $
    21,919
 8




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##### Table of Contents



Based upon the Companys impairment evaluation as of September 30, 2005, it was concluded that
the remaining unrealized losses in the table above are not other than temporary.4.
    
    Restricted AssetsThe Insurance Subsidiaries have investments, principally U.S. Treasury securities and
Obligations of States and Political Subdivisions, on deposit with the various states in which
they are licensed insurers. At September 30, 2005 and December 31, 2004, the carrying value of
the securities on deposit totaled $14.6 million and $15.3 million, respectively.Additionally, the Companys insurance subsidiaries had investments, principally Mortgage
Pass-Through securities, which collateralized the borrowings from the Federal Home Loan Bank of
Pittsburgh, see Note 9. The carrying value of these investments was $0 million and $46.8
million as of September 30, 2005 and December 31, 2004, respectively.Certain of the Companys insurance subsidiaries are required to hold a certain minimum amount of
Federal Home Loan Bank of Pittsburgh common stock as a requirement of membership in the Federal
Home Loan Bank of Pittsburgh. The required minimum amount of common stock is based on the amount
of outstanding borrowings plus the unused maximum borrowing capacity, as defined by the Federal
Home Loan Bank of Pittsburgh. The carrying value of Federal Home Loan Bank of Pittsburgh common
stock was $0.3 million and $1.8 million as of September 30, 2005 and December 31, 2004,
respectively.5.
    
    Derivative InstrumentsStatement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), as amended, requires that derivatives be recorded on the
balance sheet as either assets or liabilities measured at fair value. Changes in the fair value
of derivatives are recorded either through current earnings or as other comprehensive income,
depending on the type of hedge transaction. Gains and losses on the derivative instrument
reported in other comprehensive income are reclassified into earnings in the periods in which
earnings are impacted by the variability of the cash flow of the hedged item. The ineffective
portion of all hedge transactions is recognized in current period earnings.During the first quarter of 2005, the Company was considering the issuance of a debt offering.
To manage potential interest rate risk and mitigate the impact of fluctuations in interest rates
prior to any issuance, a cash flow hedge derivative instrument was purchased. Cash flow hedges
are hedges that use simple derivatives to offset the variability of expected future cash flows.
The cash flow hedge purchased was for a notional amount of $125 million, had an interest rate of
4.557% based on the Then-Current 10-Year Treasury interest rate, and a final settlement date of
May 6, 2005. At the time of purchase, the cash flow hedge was anticipated to be highly
effective in offsetting the changes in the expected future interest rate payments on the
proposed debt offering attributable to fluctuations in the Treasury benchmark interest rate.Subsequent to the purchase of the cash flow hedge the Company decided against the issuance of a
debt offering. As a result, the cash flow hedge became an ineffective hedge and the change in
fair value of the hedge was reported as a component of earnings immediately. The cash flow hedge
settled on May 9, 2005. For the nine months ended September 30, 2005 the Company has recorded
the change in fair value of $3.5 million as a reduction to net realized investment gain. The
Company does not hold any other derivative instruments.6.
    
    GoodwillThe Company performs an annual impairment analysis to identify potential goodwill impairment and
measure the amount of a goodwill impairment loss to be recognized (if any). This annual test is
performed at December 31 of each year or more frequently if events or circumstance change that
require the Company to perform the impairment analysis on an interim basis.
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##### Table of Contents



Goodwill impairment testing requires the evaluation of the fair value of each reporting unit to
its carrying value, including the goodwill, and an impairment charge is recorded if the carrying
amount of the reporting unit exceeds its estimated fair value. No change in the carrying amount
of goodwill, which arose from the purchase of Liberty American Insurance Group, Inc., was
recorded by the Company for the nine months ended September 30, 2005.7.
    
    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. The process of establishing the ultimate claims liability is necessarily a complex
imprecise process, requiring the use of informed estimates and judgments using data currently
available. The liability includes an amount determined on the basis of claim adjusters
evaluations with respect to insured events that have occurred and an amount for losses incurred
that have not been reported to the Company. In some cases significant periods of time, up to
several years or more, may elapse between the occurrence of an insured loss and the reporting of
such to the Company. Estimates for unpaid loss and loss adjustment expenses are based upon
managements assessment of known facts and circumstances, review of past loss experience and
settlement patterns and consideration of other factors such as legal, social, and economic
developments. These adjustments are reviewed regularly and any adjustments there from are made
in the accounting period in which the adjustment arose. If the Companys ultimate losses, net of
reinsurance, prove to differ substantially from the amounts recorded at September 30, 2005, the
related adjustments could have a material adverse impact on the Companys financial condition,
and results of operations.During the three months ended September 30, 2005, the Company: decreased the estimated net
unpaid loss and loss adjustment expenses for accident years 2004 and 2002 and prior and
increased the estimated net unpaid loss and loss adjustment expenses for accident year 2003, by
the following amounts:
 (In millions)
    
    Net Basisincrease (decrease)Accident Year 2004
    
    $
    (8.2
    )Accident Year 2003
    
    
    2.1Accident Year 2002
    
    
    (1.1
    )Accident Years 2001 and prior
    
    
    (0.1
    )Total
    
    $
    (7.3
    )
 For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for commercial package policies as a result of
better than expected claim frequency and professional liability policies due to better than
expected case incurred loss development.For accident year 2003, the increase in estimated net unpaid loss and loss adjustment expenses
was principally due to higher loss estimates for professional liability excess polices due to
higher than expected claim severity.For accident year 2002, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to better than expected case incurred loss development across most
commercial and specialty lines of business.During the three months ended September 30, 2005, the Company experienced catastrophe losses
attributable to Hurricanes Dennis, Katrina and Rita. These catastrophe losses, as noted in the
table below, impacted both the Companys personal and commercial lines segments. Loss and loss
adjustment expense estimates are still evolving.
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##### Table of Contents



Date of Event:
    
    7/10/05
    
    
    8/25/05 &
    
    
    9/24/058/29/05Hurricane:
    
    Dennis
    
    
    Katrina
    
    
    Rita
    
    
    TotalGross Loss and Loss
Adjustment ExpenseEstimates:Personal Lines Segment
    
    $
    4.5
    
    
    $
    2.5
    
    
    $
    
    
    
    $
    7.0Commercial Lines Segment
    
    
    
    
    
    
    10.0
    
    
    
    10.0
    
    
    
    20.0Total
    
    $
    4.5
    
    
    $
    12.5
    
    
    $
    10.0
    
    
    $
    27.0
 Under the Companys catastrophe reinsurance programs in place for these hurricanes, the Company
had a $3.5 million and a $5.0 million pre-tax per occurrence loss retention for its personal and
commercial lines catastrophe losses, respectively. Subsequent to Hurricane Rita, the Company
estimates that it has a $3.5 million and $10.0 million pre-tax per occurrence loss retention for
its personal and commercial lines catastrophe losses, respectively. The Companys retained
catastrophe losses by hurricane is summarized in the table below:
  Date of Event:
    
    7/10/05
    
    
    8/25/05 &8/29/05
    
    
    9/24/05Hurricane:
    
    Dennis
    
    
    Katrina
    
    
    Rita
    
    
    TotalNet Loss and Loss
Adjustment ExpenseEstimates:Personal Lines Segment
    
    $
    3.5
    
    
    $
    2.5
    
    
    $
    
    
    
    $
    6.0Commercial Lines Segment
    
    
    
    
    
    
    6.0
    
    
    
    5.0
    
    
    
    11.0Total
    
    $
    3.5
    
    
    $
    8.5
    
    
    $
    5.0
    
    
    $
    17.0
 Under the terms of the Companys commercial lines catastrophe reinsurance program, the August
25, 2005 and the August 29, 2005 landfalls made by Hurricane Katrina are treated as separate
loss occurrences. As a result, the Company estimates it has retained a $5.0 million loss for
the August 25, 2005 landfall and a $1.0 million loss for the August 29, 2005 landfall.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 incepting during 2004. 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. Effective January 1,
2005, the Company entered into a Reinsurance Commutation and Release Agreement with respect to
the 2003 Whole Account Net Quota Share Reinsurance contract. As a result of this commutation,
the Funds Held Payable to Reinsurer liability was reduced by approximately $77.9 million, offset
by an increase to net Unpaid Loss and Loss Adjustment Expenses of $64.3 million, an increase to
net Unearned Premiums of $0.2 million and a reduction to the profit commission receivable by
approximately $13.4 million. No gain or loss was realized as a result of this commutation.
 11




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##### Table of Contents



Activity for the Funds Held Payable to Reinsurer is summarized as follows (in thousands):
 As of and For the
    
    
    As of and For theNine Months Ended
    
    
    Year EndedSeptember 30, 2005
    
    
    December 31, 2004Funds Held Payable to Reinsurer
Balance at Beginning of Period
    
    $
    131,119
    
    
    $
    110,011Net Written Premiums Ceded
    
    
    (298
    )
    
    
    94,474Reinsurer Expense Allowance
    
    
    10
    
    
    
    (3,318
    )Provisional Commission
    
    
    (5,304
    )
    
    
    (48,971
    )Paid Loss and Loss Adjustment Expenses
    
    
    (7,099
    )
    
    
    (25,585
    )Interest Credit
    
    
    1,256
    
    
    
    4,853Commutation
    
    
    (77,906
    )
    
    
    Other
    
    
    
    
    
    
    (345
    )Subtotal Activity
    
    
    (89,341
    )
    
    
    21,108Funds Held Payable to Reinsurer
Balance at End of Period
    
    $
    41,778
    
    
    $
    131,119
 The Companys profit commission receivable based upon the experience of the underlying business
ceded to this reinsurance agreement was $6.2 million and $16.7 million as of September 30, 2005
and December 31, 2004, respectively.9.
    
    Loans PayableAs of September 30, 2005 and December 31, 2004, the Company had aggregate borrowings of $0
million and $33.4 million, respectively, from the Federal Home Loan Bank of Pittsburgh. Any
outstanding borrowings bear interest at adjusted LIBOR and mature twelve months or less from
inception. The proceeds from any outstanding borrowings are invested in asset backed and
collateralized mortgage obligation securities to achieve a positive spread between the rate of
interest on these securities and the borrowing rates. Due to declining spreads, the Company
prepaid all outstanding Federal Home Loan Bank loans during the first quarter of 2005.10.
    
    Shareholders EquityThe Company has established stock purchase plans including an Employee Stock Purchase Plan and a
Non-Qualified Employee Stock Purchase Plan. Shares may be purchased under each of these plans
by eligible employees during designated one-month offering periods established by the
Compensation Committee of the Board of Directors at a purchase price of the lesser of 85% of the
fair market value of the shares on the first business day of the offering period or the date the
            shares are purchased. The Company issued 72,602 and 421,200 shares under the Employee Stock
Purchase Plan and the Non-Qualified Employee Stock Purchase Plan, respectively, during the nine
months ended September 30, 2005.Also, during the nine months ended September 30, 2005, the Company issued restricted stock
awards totaling 47,305 shares to certain employees.
 
 12




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##### Table of Contents



11.
    
    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 nine months ended
September 30, 2005 and 2004, respectively (in thousands, except per share data):
 As of and For the Three
    
    
    As of and For the NineMonths Ended September 30,
    
    
    Months Ended September 302005
    
    
    2004
    
    
    2005
    
    
    2004Weighted-Average Common Shares Outstanding
    
    
    23,003
    
    
    
    22,231
    
    
    
    22,796
    
    
    
    22,120Weighted-Average Potential Shares Issuable
    
    
    1,456
    
    
    
    1,132
    
    
    
    1,460
    
    
    
    1,121Weighted-Average Shares and Potential
Shares Issuable
    
    
    24,459
    
    
    
    23,363
    
    
    
    24,256
    
    
    
    23,241Net Income (Loss)
    
    $
    35,090
    
    
    $
    (2,095
    )
    
    $
    127,801
    
    
    $
    51,332Basic Earnings (Loss) per Share
    
    $
    1.53
    
    
    $
    (0.09
    )
    
    $
    5.61
    
    
    $
    2.32Diluted Earnings (Loss) per Share
    
    $
    1.43
    
    
    $
    (0.09
    )
    
    $
    5.27
    
    
    $
    2.21
 12.
    
    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.13.
    
    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, managing capacity constraints 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:
 (In thousands)For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect Business
    
    $
    387,392
    
    
    $
    291,049
    
    
    $
    954,837
    
    
    $
    857,215Reinsurance Assumed
    
    
    1,129
    
    
    
    907
    
    
    
    3,135
    
    
    
    2,956Reinsurance Ceded
    
    
    48,152
    
    
    
    47,186
    
    
    
    113,467
    
    
    
    145,510Net Premiums
    
    $
    340,369
    
    
    $
    244,770
    
    
    $
    844,505
    
    
    $
    714,661
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30, 2004
    
    
    September 30, 2004Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect Business
    
    $
    366,229
    
    
    $
    279,422
    
    
    $
    896,625
    
    
    $
    775,365Reinsurance Assumed
    
    
    1,197
    
    
    
    1,756
    
    
    
    3,620
    
    
    
    5,753Reinsurance Ceded
    
    
    101,723
    
    
    
    93,333
    
    
    
    207,765
    
    
    
    232,288Net Premiums
    
    $
    265,703
    
    
    $
    187,845
    
    
    $
    692,480
    
    
    $
    548,830
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##### Table of Contents



Certain of the Companys reinsurance contracts have provisions whereby the Company is entitled
to a return profit commission based on the ultimate experience of the underlying business ceded
to the contracts. Under the terms of these contracts, the Company accrued profit commissions of
$0.8 million and $4.6 million for the three months ended September 30, 2005 and 2004,
respectively and $3.3 million and $13.3 million for the nine months ended September 30, 2005 and
2004, respectively. The profit commissions reduce ceded written and earned premiums and
increase net written and earned premiums.Approximately $15.2 million of the Companys reinsurance receivable balances at September 30,
2005 are with Converium Reinsurance North American Inc. (CRNA). During the third quarter of
2004, Converium AG (Switzerland), CRNAs parent company, placed CRNA into an orderly runoff. Of
the $15.2 million reinsurance receivable balances with CRNA, $0.3 million are receivables on
paid losses and $14.9 million are receivables on unpaid loss and loss adjustment expense. The
Company is monitoring CRNAs ability to pay claims, and at this time, believes that the amounts
with CRNA will be collectible.14.
    
    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.The Company is subject to assessments from Citizens Property Insurance Corporation (Citizens),
which was created by the state of Florida to provide insurance to property owners unable to
obtain coverage in the private insurance market. Citizens, at the discretion of its Board of
Governors (Citizens Board), can levy a regular assessment on participating companies for a
deficit in any calendar year up to the greater of 10% of the deficit or 10% of Florida property
premiums industry-wide for the prior year. An insurer may recoup a regular assessment through a
surcharge to Florida policyholders. In order to recoup its Citizens regular assessment, an
insurer must file for a policy surcharge with the Florida Office of Insurance Regulation
(FOIR) at least fifteen days prior to imposing the surcharge on policies. If a deficit
remains after the regular assessment, Citizens can also fund the remaining deficit by issuing
bonds. The costs of these bonds are then funded through emergency assessments in subsequent
years. Companies are required to collect the emergency assessments directly from Florida
residential property policyholders and remit them to Citizens as they are collected.
Participating companies are obligated to purchase any unsold bonds issued by Citizens.Citizens is designed so that the ultimate cost is borne by Florida policyholders, however the
exposure to assessments and the availability of recoupments may not offset each other.
Moreover, even if they do offset each other, they may not offset each other in the same fiscal
periods financial statements due to the ultimate timing of the assessments and recoupments, as
well as the possibility of policies not being renewed in subsequent years.Citizens reported incurred losses from the hurricanes that struck Florida in the third quarter
of 2004 and a deficit for the 2004 plan year. On August 17, 2005, the Citizens Board authorized
the levying of a regular assessment, and on August 26, 2005, the FOIR also approved the
assessment. Based on the Companys market share, the Company was assessed and paid $11.9
million during the three months ended September 30, 2005. This assessment may be recouped
through future insurance policy surcharges to Florida policyholders. These recoupments will be
recorded in the consolidated financial statements as the related premiums are written.
Additionally, the Company recognized and paid an additional $0.6 million related to the Citizens
assessment pursuant to a quota share reinsurance agreement whereby the Company assumed a 50%
participation from an unaffiliated Florida insurer.Of the $12.5 million in total payments related to the Citizens assessment, $9.0 million is
recoverable from certain of the Companys catastrophe reinsurers under its 2004 catastrophe
reinsurance program, resulting in a $3.5 million net assessment expense being recognized during
the three months ended September 30, 2005. Any recoupment of the Citizens assessment through
future policy surcharges will be allocated between the Company and its catastrophe reinsurers.
 14




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##### Table of Contents



15.
    
    Comprehensive IncomeComponents of comprehensive income, as detailed in the Consolidated Statements of Operations and
Comprehensive Income, are net of tax. The related tax effect of Holding Gains (Losses) arising
during the three and nine months ended September 30, 2005 and 2004 was $(4.6) million and $6.0
million, respectively, and $(6.4) million and $(0.1) million, respectively. The related tax
effect of Reclassification Adjustments for the three and nine months ended September 30, 2005
and 2004 was $(0.4) million and $(0.1) million, respectively, and $(4.3) million and $(0.3)
million, respectively.16.
    
    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.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 three and nine months ended
September 30, 2005 and 2004. Corporate information is included to reconcile segment data to the
consolidated financial statements (in thousands):
 15




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##### Table of Contents



Three Months EndedCommercial
    
    
    Specialty
    
    
    PersonalLines
    
    
    Lines
    
    
    Lines
    
    
    Corporate
    
    
    TotalSeptember 30, 2005:Gross Written Premiums
    
    $
    305,482
    
    
    $
    55,463
    
    
    $
    27,577
    
    
    $
    
    
    
    $
    388,522Net Written Premiums
    
    $
    284,315
    
    
    $
    44,751
    
    
    $
    11,303
    
    
    $
    
    
    
    $
    340,369Revenue:Net Earned Premiums
    
    $
    197,400
    
    
    $
    39,006
    
    
    $
    8,364
    
    
    $
    
    
    
    $
    244,770Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,979
    
    
    
    16,979Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,097
    
    
    
    1,097Other Income
    
    
    
    
    
    
    
    
    
    
    259
    
    
    
    341
    
    
    
    600Total Revenue
    
    
    197,400
    
    
    
    39,006
    
    
    
    8,623
    
    
    
    18,417
    
    
    
    263,446Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    107,237
    
    
    
    25,535
    
    
    
    9,087
    
    
    
    
    
    
    
    141,859Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,542
    
    
    
    67,542Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    242
    
    
    
    4,900
    
    
    
    5,142Total Losses and Expenses
    
    
    107,237
    
    
    
    25,535
    
    
    
    9,329
    
    
    
    72,442
    
    
    
    214,543Income (Loss) Before Income Taxes
    
    
    90,163
    
    
    
    13,471
    
    
    
    (706
    )
    
    
    (54,025
    )
    
    
    48,903Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,813
    
    
    
    13,813Net Income (Loss)
    
    $
    90,163
    
    
    $
    13,471
    
    
    $
    (706
    )
    
    $
    (67,838
    )
    
    $
    35,090Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    184,277
    
    
    $
    2,560,271
    
    
    $
    2,744,548September 30, 2004:Gross Written Premiums
    
    $
    289,002
    
    
    $
    49,358
    
    
    $
    29,066
    
    
    $
    
    
    
    $
    367,426Net Written Premiums
    
    $
    237,925
    
    
    $
    41,626
    
    
    $
    (13,848
    )
    
    $
    
    
    
    $
    265,703Revenue:Net Earned Premiums
    
    $
    165,756
    
    
    $
    35,791
    
    
    $
    (13,702
    )
    
    $
    
    
    
    $
    187,845Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,896
    
    
    
    10,896Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    268Other Income
    
    
    
    
    
    
    
    
    
    
    376
    
    
    
    343
    
    
    
    719Total Revenue
    
    
    165,756
    
    
    
    35,791
    
    
    
    (13,326
    )
    
    
    11,507
    
    
    
    199,728Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    70,023
    
    
    
    52,280
    
    
    
    25,466
    
    
    
    
    
    
    
    147,769Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,863
    
    
    
    56,863Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    396
    
    
    
    1,278
    
    
    
    1,674Total Losses and Expenses
    
    
    70,023
    
    
    
    52,280
    
    
    
    25,862
    
    
    
    58,141
    
    
    
    206,306Income (Loss) Before Income Taxes
    
    
    95,733
    
    
    
    (16,489
    )
    
    
    (39,188
    )
    
    
    (46,634
    )
    
    
    (6,578
    )Total Income Tax Benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,483
    )
    
    
    (4,483
    )Net Income (Loss)
    
    $
    95,733
    
    
    $
    (16,489
    )
    
    $
    (39,188
    )
    
    $
    (42,151
    )
    
    $
    (2,095
    )Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    788,607
    
    
    $
    1,972,038
    
    
    $
    2,760,645
 16




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##### Table of Contents



Nine Months EndedCommercial
    
    
    Specialty
    
    
    PersonalLines
    
    
    Lines
    
    
    Lines
    
    
    Corporate
    
    
    TotalSeptember 30, 2005:Gross Written Premiums
    
    $
    727,292
    
    
    $
    157,286
    
    
    $
    73,394
    
    
    $
    
    
    
    $
    957,972Net Written Premiums
    
    $
    686,689
    
    
    $
    120,660
    
    
    $
    37,156
    
    
    $
    
    
    
    $
    844,505Revenue:Net Earned Premiums
    
    $
    564,575
    
    
    $
    111,227
    
    
    $
    38,859
    
    
    $
    
    
    
    $
    714,661Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,843
    
    
    
    45,843Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,191
    
    
    
    12,191Other Income
    
    
    
    
    
    
    
    
    
    
    709
    
    
    
    671
    
    
    
    1,380Total Revenue
    
    
    564,575
    
    
    
    111,227
    
    
    
    39,568
    
    
    
    58,705
    
    
    
    774,075Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    280,161
    
    
    
    75,276
    
    
    
    28,695
    
    
    
    
    
    
    
    384,132Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,316
    
    
    
    189,316Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    285
    
    
    
    14,806
    
    
    
    15,091Total Losses and Expenses
    
    
    280,161
    
    
    
    75,276
    
    
    
    28,980
    
    
    
    204,122
    
    
    
    588,539Income (Loss) Before Income Taxes
    
    
    284,414
    
    
    
    35,951
    
    
    
    10,588
    
    
    
    (145,417
    )
    
    
    185,536Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,735
    
    
    
    57,735Net Income (Loss)
    
    $
    284,414
    
    
    $
    35,951
    
    
    $
    10,588
    
    
    $
    (203,152
    )
    
    $
    127,801Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    184,277
    
    
    $
    2,560,271
    
    
    $
    2,744,548September 30, 2004:Gross Written Premiums
    
    $
    662,691
    
    
    $
    143,188
    
    
    $
    94,367
    
    
    $
    
    
    
    $
    900,246Net Written Premiums
    
    $
    547,690
    
    
    $
    119,819
    
    
    $
    24,971
    
    
    $
    
    
    
    $
    692,480Revenue:Net Earned Premiums
    
    $
    445,910
    
    
    $
    96,808
    
    
    $
    6,112
    
    
    $
    
    
    
    $
    548,830Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,669
    
    
    
    31,669Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    985
    
    
    
    985Other Income
    
    
    
    
    
    
    
    
    
    
    2,179
    
    
    
    751
    
    
    
    2,930Total Revenue
    
    
    445,910
    
    
    
    96,808
    
    
    
    8,291
    
    
    
    33,405
    
    
    
    584,414Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    225,016
    
    
    
    92,033
    
    
    
    34,280
    
    
    
    
    
    
    
    351,329Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,489
    
    
    
    155,489Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,508
    
    
    
    4,577
    
    
    
    6,085Total Losses and Expenses
    
    
    225,016
    
    
    
    92,033
    
    
    
    35,788
    
    
    
    160,066
    
    
    
    512,903Income (Loss) Before Income Taxes
    
    
    220,894
    
    
    
    4,775
    
    
    
    (27,497
    )
    
    
    (126,661
    )
    
    
    71,511Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,179
    
    
    
    20,179Net Income (Loss)
    
    $
    220,894
    
    
    $
    4,775
    
    
    $
    (27,497
    )
    
    $
    (146,840
    )
    
    $
    51,332Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    788,607
    
    
    $
    1,972,038
    
    
    $
    2,760,645
 17




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##### Table of Contents



17.
    
    Subsequent EventOn October 24, 2005 Hurricane Wilma made landfall in Florida. The Companys insurance
subsidiaries write commercial and personal property and casualty insurance in Florida. The
Company does not have sufficient information at this time to develop a meaningful loss estimate
for Hurricane Wilma. Additionally, the ultimate impact of Hurricane Wilma on Citizens Property
Insurance Corporation (Citizens) is currently uncertain, but could result in Citizens
recognizing a financial deficit. Citizens, at the discretion of its Board of Governors, can
levy a regular or emergency assessment on participating companies for a deficit in any calendar
year, adversely affecting the Companys results of operations. (See Note 14).
 18




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
  
    
    Business Environment and 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.
    
    Changes in taxes, governmental laws and regulations 
Significant new legislation and/or regulation could adversely
impact profitability.
    
    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 insurance
subsidiaries, the Company may not be able to compete as
effectively with its commercial and specialty lines
competitors.
    
    Regulation  The Companys insurance subsidiaries are
subject to a substantial degree of regulatory oversight,
which generally is designed to protect the interests of
policyholders, as opposed to shareholders.
    
    Litigation  Adverse rulings in any material litigation
to which the Company is a party could materially affect its
financial position and results of operations.
    
    Inflation  Property and casualty insurance premiums are
established before the amount of losses and loss adjustment
expenses, or the extent to which inflation may affect such
amounts, is known.
    
    Investment Risk  Substantial future increases in
interest rates could result in a decline in the market value
of the Companys investment portfolio and resulting losses
and/or reduction in shareholders equity.
    
    Claims development and the process of estimating loss
reserves  Estimating the Companys ultimate liability for
unpaid loss and loss adjustment expenses is necessarily a
complex and judgmental process, inasmuch as the amounts of
any ultimate liability of the Company with respect to such
claims are based on managements informed estimates and
judgments using data currently available.
    
    Catastrophe Exposure  The Companys insurance
subsidiaries issue insurance policies which provide coverage
for commercial and personal property and casualty risks. It
is possible that one or more catastrophic events could result
in significantly higher 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. Catastrophic
events could adversely affect the Companys 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.
    
    Contingent Commission Arrangements  The outcome of
industry-wide investigations being conducted by various
insurance departments, attorneys-general and other
authorities relating to the use of contingent commission
arrangements.
 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
 
    
    Finite Risk Reinsurance Arrangements  The outcome of
the United States Securities and Exchange Commissions
(SEC) industry-wide investigation relating to the use of
non-traditional insurance products, including finite risk
reinsurance arrangements. As previously announced by the
Company, the SEC issued a subpoena to the Company in June,
2005 requesting documents and other information regarding any
non-traditional insurance products entered into by the
Company with Gen Re Corporation and its affiliates. The
Company has supplied documents and other information to the
SEC in response to such subpoena.
    
    Future Terrorist Attacks  The Companys insurance
subsidiaries issue insurance policies which provide coverage
for commercial and personal property and casualty risks. It
is possible that a terrorist attack could greatly increase
claims under the insurance policies the insurance
subsidiaries issue. It is possible that a terrorist attack
could adversely impact profitability.
  Results of Operations (Nine Months ended September 30, 2005 vs. September 30, 2004)
 Premiums
 Commercial Lines
    
    
    Specialty Lines
    
    
    Personal Lines
    
    
    Total2005 Gross Written Premiums
    
    $
    727.3
    
    
    $
    157.3
    
    
    $
    73.4
    
    
    $
    958.02004 Gross Written Premiums
    
    $
    662.7
    
    
    $
    143.2
    
    
    $
    94.4
    
    
    $
    900.3Percentage Increase (Decrease)
    
    
    9.7
    %
    
    
    9.8
    %
    
    
    (22.2
    )%
    
    
    6.4
    %2005 Gross Earned Premiums
    
    $
    643.2
    
    
    $
    143.6
    
    
    $
    73.4
    
    
    $
    860.22004 Gross Earned Premiums
    
    $
    580.0
    
    
    $
    124.9
    
    
    $
    76.2
    
    
    $
    781.1Percentage Increase (Decrease)
    
    
    10.9
    %
    
    
    15.0
    %
    
    
    (3.7
    )%
    
    
    10.1
    %
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships
formed by the Companys marketing Regional Vice Presidents continue to result in additional
prospects and increased premium writings, most notably for the Companys various commercial
package and non profit management liability product lines.
    
    Continued expansion of marketing efforts relating to commercial lines and specialty
lines products through the Companys field organization and preferred agents.
    
    In-force policy counts as of September 30, 2005 versus September 30, 2004 have increased
14.6% and 23.1% for the commercial lines and specialty lines segments, respectively,
primarily as a result of the factors discussed above.
    
    Realized average rate increases on renewal business approximating 2.1%, and 17.3% for
the specialty and personal lines segments, respectively.
  
    
    Liberty American Insurance Group, Inc.s planned shift in product mix of reducing mobile
homeowners product policies and increasing homeowners product policies. As a result,
mobile homeowners gross written premium decreased $37.4 million and homeowners gross
written premium increased $13.1 million. Additionally, it is anticipated that the shift in
product mix from mobile homeowners products to
 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
 homeowners products will result in
approximately $8.0 million of lower mobile homeowners gross written premiums during the
remaining three months of 2005 compared to the same period in 2004.
    
    In-force policy counts for the personal lines segment decreased 35.0%, resulting from a
decrease in the in-force counts for the mobile homeowners product of 60.4% and an increase
in in-force policy counts for the homeowners product of 36.0%, as a result of the planned
shift in product mix noted above.
    
    The decisions by an automobile leasing customer and an automobile excess liability
customer to self-insure business previously written by the Company. As a result, gross
written premiums for the commercial lines segment were reduced by $57.5 million. It is
anticipated that this decision to self-insure will result in approximately $19.3 million of
non-renewed commercial automobile gross written premium during the remaining three months
of 2005, compared to the same period in 2004.
    
    Re-underwriting the lawyers errors and omissions and program umbrella books of
business, resulting in gross written premiums for the specialty lines segment being reduced
by $9.1 million and $4.9 million, respectively.
    
    Increased pricing competition for specialty lines segment products and for the specialty
property product (commercial lines segment).
  Commercial Lines
    
    
    Specialty Lines
    
    
    Personal Lines
    
    
    Total2005 Net Written Premiums
    
    $
    686.7
    
    
    $
    120.6
    
    
    $
    37.2
    
    
    $
    844.52004 Net Written Premiums
    
    $
    547.7
    
    
    $
    119.8
    
    
    $
    25.0
    
    
    $
    692.5Percentage Increase
    
    
    25.4
    %
    
    
    0.7
    %
    
    
    48.8
    %
    
    
    22.0
    %2005 Net Earned Premiums
    
    $
    564.6
    
    
    $
    111.2
    
    
    $
    38.9
    
    
    $
    714.72004 Net Earned Premiums
    
    $
    445.9
    
    
    $
    96.8
    
    
    $
    6.1
    
    
    $
    548.8Percentage Increase
    
    
    26.6
    %
    
    
    14.9
    %
    
    
    537.7
    %
    
    
    30.2
    %
  
    
    A change in the Companys reinsurance program whereby, effective April 1, 2003, the Company
entered into a Quota Share reinsurance agreement covering substantially all of the Companys
lines of business. Under this agreement:
 
    
    The Company ceded 22% of its net written and earned premiums and loss and loss
adjustment expenses for policies effective April 1, 2003 through December 31, 2003 and 10%
of its commercial and specialty lines net written and earned premiums and loss and loss
adjustment expenses for policies becoming effective during 2004. During the nine months
ended September 30, 2005 and 2004, the Company ceded $(0.5) million ($0.2 million for the
commercial lines segment and ($0.7) million for the specialty lines segment) and $71.7
million ($58.8 million for the commercial lines segment, $13.1 million for the specialty
lines segment, and $(0.2) million for the personal lines segment) of net written premiums,
respectively, and $41.0 million ($34.2 million for the commercial lines segment, $6.7
million for the specialty lines segment and $0.1 million for the personal lines segment)
and $106.9 million ($83.0 million for the commercial lines
segment, $18.8 million for the specialty lines segment, and $5.1 million for the personal
lines segment) of net earned premiums, respectively.
 
    
    As a result of the January 1, 2005 casualty excess of loss treaty
renewal, the reinsurance costs by product charged by the
reinsurers are at a different level than that charged under the
prior treaty to reflect their view of
 21




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 expected treaty experience.
Accordingly, the specialty lines segment product reinsurance costs
were increased, and the commercial lines segment product
reinsurance costs were decreased. The overall cost of the
casualty excess of loss treaty reinsurance renewal is expected to
approximate 8.1% of gross written casualty premiums.
    
    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 $3.3 million ($2.8 million for the
commercial lines segment and $0.5 million for the specialty lines
segment) and $13.3 million ($11.2 million for the commercial lines
segment, $1.6 million for the specialty lines segment, and $0.5
million for the personal lines segment) for the nine months ended
September 30, 2005 and 2004, respectively. The profit commissions
reduce ceded written and earned premiums and increase net written
and earned premiums.
    
    Certain of the Companys reinsurance contracts have reinstatement
provisions whereby the Company must pay additional reinsurance
premiums to reinstate coverage provisions upon utilization of
initial reinsurance coverage. During the nine months ended
September 30, 2005, the Company accrued $2.4 million (commercial
lines segment) of reinstatement reinsurance premium under its
casualty excess of loss reinsurance treaty, as a result of changes
in ultimate loss estimates. The reinstatement premium increased
ceded written and earned premiums and reduced net written and
earned premiums. No reinstatement reinsurance premiums were
accrued under the Companys casualty excess of loss reinsurance
treaty during the nine months ended September 30, 2004.
    
    On December 31, 2004, the Company terminated a quota share
reinsurance agreement under which it ceded 15% of its mobile
homeowners and homeowners business (personal lines segment). Upon
termination, the Company increased its unearned premium reserve
and net written premium by $5.7 million.
    
    A reduction in accelerated, reinstatement and additional
reinsurance premium costs related to the Companys catastrophe
reinsurance coverages:
 
    
    During the nine months ended September 30, 2005, the Company experienced catastrophe
losses attributable to Hurricanes Dennis, Katrina and Rita. These multiple hurricane
events resulted in the recognition of reinstatement and accelerated catastrophe reinsurance
premium expense of $1.4 million ($1.0 million for the Commercial Lines Segment and $0.4
million for the Personal Lines Segment) during the three months ended September 30, 2005
due to the utilization of certain of the catastrophe reinsurance coverages. This
recognition of reinstatement and accelerated reinsurance premium expense increased
reinsurance ceded written and earned premiums and reduced net written and earned premiums.
    
    During the nine months ended September 30, 2004, the Company experienced catastrophe
losses attributable to Hurricanes Charley, Frances, Ivan and Jeanne. Due to these multiple
hurricane events, the Company purchased additional catastrophe reinsurance coverages (which
provided coverage from the inception date of the coverage through May 31, 2005) to
supplement its original reinsurance programs. The estimated aggregate pre-tax cost of
these additional catastrophe reinsurance coverages was $18.8 million. These multiple
hurricane events resulted in the recognition of reinstatement and accelerated reinsurance
premium expense of $27.7 million ($2.6 million for the commercial lines segment and $25.1
million for the personal lines segment) due to the utilization of certain of the
catastrophe reinsurance coverages. Of this $27.7 million, $13.0 million ($12.4 million for
the personal lines segment and $0.6 million for the commercial lines segment) was
attributable to the additional reinsurance coverages purchased referred to above. This
recognition of reinstatement and accelerated reinsurance premium
expense increased reinsurance ceded written and earned premiums and reduced net written and
earned premiums.
 Net Investment Income:
 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
   Net Realized Investment Gain:
  Other Income
 Net Loss and Loss Adjustment Expenses:
  
    
    The growth in net earned premiums.
    
    A $28.3 million reduction in ceded loss and loss adjustment
expenses pursuant to quota share agreement (See Premiums). Ceded
loss and loss adjustment expenses pursuant to this quota share
agreement for the nine months ended September 30, 2005 were $18.6
million vs. $46.9 million for the same period during 2004.
  
    
    A $21.4 million reduction in hurricane catastrophe losses incurred. During the nine
months ended September 30, 2005, the Company incurred $17.0 million of net loss and loss
adjustment expenses related to Hurricanes Dennis, Katrina and Rita. During the nine months
ended September 30, 2004, the Company
 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
 incurred $38.4 million of net loss and loss
adjustment expenses related to Hurricanes Charley, Frances, Ivan and Jeanne.
    
    Reserve actions taken during the nine months ended September 30, 2005 whereby the
estimated net unpaid loss and loss adjustment expenses for accident years 2004 and prior
were decreased by $14.7 million vs. reserve actions taken during the nine months ended
September 30, 2004 whereby the estimated net unpaid loss and loss adjustment expenses for
accident years 2003 and prior were increased by $28.9 million. Changes in the estimated
net unpaid loss and loss adjustment expenses during the nine months ended September 30,
2005 by accident year are as follows:
 Net Basisincrease (decrease)(in millions)Accident Year 2004
    
    $
    (15.9
    )Accident Year 2003
    
    
    1.9Accident Year 2002
    
    
    (3.0
    )Accident Years 2001 and prior
    
    
    2.3Total
    
    $
    (14.7
    )
 The decrease in estimated net loss and loss adjustment expenses was principally due to a
lower loss estimate for commercial package policies for the 2004 accident year as a result
of better than expected claim frequency, and a lower loss estimate for professional
liability policies for the 2004 accident year due to better than expected case incurred
development.
   Acquisition Costs and Other Underwriting Expenses:
 
    
    The growth in net earned premiums
    
    A $3.5 million net charge during the three months ended September
30, 2005 for an insurance related assessment from Citizens
Property Insurance Corporation (Citizens). Citizens was created
by the state of Florida to provide insurance to property owners
unable to obtain coverage in the private insurance market.Citizens reported incurred losses from the hurricanes that struck Florida in the third quarter
of 2004 and a deficit for the 2004 plan year. During the three months ended September 30, 2005,
the Board of Governors of Citizens
 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
 authorized the levying of a regular assessment, and the
Florida Office of Insurance Regulation also approved the assessment. Based on the Companys
market share, the Company was assessed and paid $11.9 million in Citizens assessments during the
three months ended September 30, 2005. This assessment may be recouped through future insurance
policy surcharges to Florida insureds. These surcharges will be recorded in the consolidated
financial statements as the related premiums are written. Additionally, the Company recognized
and paid an additional $0.6 million related to this Citizens assessment pursuant to a quota
share reinsurance agreement whereby the Company assumed a 50% participation from an unaffiliated
Florida insurer.Of the $12.5 million in total payments related to the Citizens assessment, $9.0 million is
recoverable from certain of the Companys catastrophe reinsurers under its 2004 catastrophe
reinsurance program, resulting in a $3.5 million net assessment expense being recognized during
the three months ended September 30, 2005. Any recoupment of the Citizens assessment through
future policy surcharges will be allocated between the Company and its catastrophe reinsurers.
  
    
    A $31.3 million decrease in acquisition costs and other
underwriting expenses due to an automobile excess liability
customers decision to self insure business previously written by
the Company (See Premiums). During the nine months ended
September 30, 2005 the Company incurred $8.8 million in
acquisition and underwriting expenses vs. $40.1 million during the
same period in 2004 for the automobile excess liability product.
Net earned premiums for this product were $13.5 million for the
nine months ended September 30, 2005 vs. $61.4 million for the
same period of 2004.
    
    A $31.7 million decrease in ceding commission earned pursuant to
quota share agreements (See Premiums). During the nine months
ended September 30, 2005, the Company earned $18.9 million in
ceding commissions vs. $50.6 million during the same period of
2004. Ceded earned premiums pursuant to these quota share
agreements were $41.0 million for the nine months ended September
30, 2005 vs. $106.9 million for the same period of 2004.
 Other Operating Expenses
 Income Tax Expense:
 Results of Operations (Three Months ended September 30, 2005 vs. September 30, 2004)
 Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2005 Gross Written Premiums
    
    $
    305.4
    
    
    $
    55.5
    
    
    $
    27.6
    
    
    $
    388.52004 Gross Written Premiums
    
    $
    289.0
    
    
    $
    49.4
    
    
    $
    29.0
    
    
    $
    367.4Percentage Increase (Decrease)
    
    
    5.7
    %
    
    
    12.4
    %
    
    
    (4.8
    )%
    
    
    5.7
    %2005 Gross Earned Premiums
    
    $
    220.2
    
    
    $
    49.1
    
    
    $
    22.7
    
    
    $
    292.02004 Gross Earned Premiums
    
    $
    209.7
    
    
    $
    44.0
    
    
    $
    27.5
    
    
    $
    281.2Percentage Increase (Decrease)
    
    
    5.0
    %
    
    
    11.6
    %
    
    
    (17.5
    )%
    
    
    3.8
    %
 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
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships
formed by the Companys marketing Regional Vice Presidents continue to result in additional
prospects and increased premium writings, most notably for the Companys various commercial
package and non profit management liability product lines.
    
    Continued expansion of marketing efforts relating to commercial lines and specialty
lines products through the Companys field organization and preferred agents.
    
    In-force policy counts as of September 30, 2005 versus September 30, 2004 have increased
14.6% and 23.1% for the commercial lines and specialty lines segments, respectively,
primarily as a result of the factors discussed above.
    
    Realized average rate increases on renewal business approximating 0.8% and 20.1% for the
specialty and personal lines segments, respectively.
  
    
    Liberty American Insurance Group, Inc.s planned shift in product mix of reducing mobile
homeowners product policies and increasing homeowners product policies. As a result,
mobile homeowners gross written premium decreased $9.8 million and homeowners gross written
premium increased $7.3 million.
    
    In-force policy counts for the personal lines segment decreased 35.0%, resulting from a
decrease in the mobile homeowners product of 60.4%, and an increase in in-force policy
counts for the homeowners product of 36.0%, as a result of the planned shift in product
mix noted above.
    
    The decisions by an automobile leasing customer and an automobile excess liability
customer to self-insure business previously written by the Company. As a result, gross
written premiums for the commercial lines segment were reduced by $29.4 million;
    
    Realized average rate decreases on renewal business approximating 1.1% for the
commercial lines segment.
    
    Re-underwriting the professional liability excess and lawyers errors and omissions books
of business, resulting in gross written premiums for the specialty lines segment being
reduced by $2.0 million and $2.1 million, respectively.
    
    Increased pricing competition for specialty lines segment products and for the specialty
property product (commercial lines segment).
  Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2005 Net Written Premiums
    
    $
    284.3
    
    
    $
    44.8
    
    
    $
    11.3
    
    
    $
    340.42004 Net Written Premiums
    
    $
    237.9
    
    
    $
    41.6
    
    
    $
    (13.8
    )
    
    $
    265.7Percentage Increase
    
    
    19.5
    %
    
    
    7.7
    %
    
    
    N/A
    
    
    
    28.1
    %2005 Net Earned Premiums
    
    $
    197.4
    
    
    $
    39.0
    
    
    $
    8.4
    
    
    $
    244.82004 Net Earned Premiums
    
    $
    165.8
    
    
    $
    35.8
    
    
    $
    (13.8
    )
    
    $
    187.8Percentage Increase
    
    
    19.1
    %
    
    
    8.9
    %
    
    
    N/A
    
    
    
    30.3
    %
 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
  
    
    A change in the Companys reinsurance program whereby, effective April 1, 2003, the Company
entered into a Quota Share reinsurance agreement covering substantially all of the Companys
lines of business. Under this agreement:
 
    
    The Company ceded 22% of its net written and earned premiums and loss and loss
adjustment expenses for policies effective April 1, 2003 through December 31, 2003 and 10%
of its commercial and specialty lines net written and earned premiums and loss and loss
adjustment expenses for policies becoming effective during 2004. During the three months
ended September 30, 2005 and 2004, the Company ceded $(0.1) million and $30.4 million of
net written premiums, respectively, and $7.8 million and $30.7 million of net earned
premiums, respectively.
 
    
    As a result of the January 1, 2005 casualty excess of loss treaty
renewal, the reinsurance costs by product charged by the
reinsurers are at a different level than that charged under the
prior treaty to reflect their view of expected treaty experience.
Accordingly, the specialty lines segment product reinsurance costs
were increased, and the commercial lines segment product
reinsurance costs were decreased. The overall cost of the
casualty excess of loss treaty reinsurance renewal is expected to
approximate 8.1% of gross written casualty premiums.
    
    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 $0.8 million ($0.7 million for the
commercial lines segment and $0.1 million for the specialty lines
segment) and $4.5 million ($3.5 million for the commercial lines
segment, $0.7 for the specialty lines segment and $0.3 million for
the personal lines segment) for the three months ended September
30, 2005 and 2004, respectively. The profit commissions reduce
ceded written and earned premiums and increase net written and
earned premiums.
    
    A reduction in accelerated, reinstatement and additional
reinsurance premium costs related to the Companys catastrophe
reinsurance coverages:
 
    
    During the three months ended September 30, 2005, the Company experienced catastrophe
losses attributable to Hurricanes Dennis, Katrina and Rita. These events resulted in the
recognition of reinstatement and accelerated catastrophe reinsurance premium expense of
$1.4 million ($1.0 million for the Commercial Lines Segment, and $0.4 million for the
Personal Lines Segment) during the three months ended September 30, 2005 due to the
utilization of certain of the catastrophe reinsurance coverage. This recognition of
reinstatement and accelerated reinsurance premium expense increased reinsurance ceded
written and earned premiums and reduced net written and earned premiums.
    
    During the three months ended September 30, 2004 the Company experienced catastrophe
losses attributable to Hurricanes Charley, Frances, Ivan and Jeanne. Due to these multiple
hurricane events, the Company purchased additional catastrophe reinsurance coverages (which
provided coverage from the inception date of the coverage through May 31, 2005) to
supplement its original reinsurance programs. The estimated aggregate pre-tax cost of
these additional catastrophe reinsurance coverages was $18.8 million. These multiple
hurricane events resulted in the recognition of reinstatement and accelerated reinsurance
premium expense of $27.7 million ($2.6 million for the commercial lines segment, and $25.1
million for the personal lines segment) catastrophe reinsurance premium expense due to the
utilization of certain of the catastrophe reinsurance coverages. Of this $27.7 million,
$13.0 million ($12.4 million for the personal lines segment and $0.6 million for the
commercial lines segment) was attributable to the additional reinsurance coverages
purchased referred to above. This recognition of reinstatement and accelerated reinsurance
premium expense increased reinsurance ceded written and earned premiums and reduced net
written and earned premiums.
 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
 Net Investment Income
  Net Realized Investment Gain:
  Other Income
 Net Loss and Loss Adjustment Expenses:
 
    
    A $21.4 million reduction in hurricane catastrophe losses incurred. During the three
months ended September 30, 2005, the Company incurred $17.0 million of net loss and loss
adjustment expenses related to Hurricanes Dennis, Katrina and Rita. For the three months
ended September 30, 2004, the Company incurred $38.4 million of net loss and loss
adjustment expenses related to hurricanes Charley, Frances, Ivan and Jeanne.
    
    Reserve actions taken during the three months ended September 30, 2005, whereby the
estimated net unpaid loss and loss adjustment expenses for accident years 2004 and prior
were decreased by $7.3 million vs. reserve actions taken during the three months ended
September 30, 2004 whereby the estimated net unpaid loss and loss adjustment expenses for
accident years 2003 and prior were increased by $25.1 million. Changes in the estimated
net unpaid loss and loss adjustment expenses during the three months ended September 30,
2005 by accident year are as follows:
 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
 Net Basis(In millions)
    
    increase (decrease)Accident Year 2004
    
    $
    (8.2
    )Accident Year 2003
    
    
    2.1Accident Year 2002
    
    
    (1.1
    )Accident Years 2001 and prior
    
    
    (0.1
    )Total
    
    $
    (7.3
    )
 The decrease in estimated net unpaid loss and loss adjustment expenses for accident year
2004 was principally due to a lower net loss estimate for commercial package policies as a
result of better than expected claim frequency and professional liability policies due to
better than expected case incurred loss development.
   Acquisition Costs and Other Underwriting Expenses:
 
    
    The growth in net earned premiums
    
    A $3.5 million net charge during the three months ended September
30, 2005 for an insurance related assessment from Citizens
Property Insurance Corporation (Citizens), which was created by
the state of Florida to provide insurance to property owners
unable to obtain coverage in the private insurance market.Citizens reported incurred losses from the hurricanes that struck Florida in the third quarter
of 2004 and a deficit for the 2004 plan year. During the three months ended September 30, 2005,
the Board of Governors of Citizens authorized the levying of a regular assessment, and the
Florida Office of Insurance Regulation also approved the assessment. Based on the Companys
market share, the Company was assessed and paid $11.9 million in Citizens assessments during the
three months ended September 30, 2005. This assessment may be recouped through future insurance
policy surcharges to Florida insureds. These recoupments will be recorded in the consolidated
financial statements as thre related premiums are written. Additionally, the Company recognized
and paid an additional $0.6 million related to this Citizens assessment pursuant to a quota
share reinsurance agreement whereby the Company assumed a 50% participation from an unaffiliated
Florida insurer.Of the $12.5 million in total payments related to the Citizens assessment, $9.0 million is
recoverable from certain of the Companys catastrophe reinsurers under its 2004 catastrophe
reinsurance program, resulting in a
 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
 $3.5 million net assessment expense being recognized during the three months ended September 30,
2005. Any recoupment of the Citizens assessment through future policy surcharges will be
allocated between the Company and its catastrophe reinsurers.
    
    A $16.5 million decrease in acquisition costs and other
underwriting expenses due to an automobile excess liability
customers decision to self insure business previously written by
the Company (See Premiums). During the three months ended
September 30, 2005 the Company incurred $0.2 million in
acquisition and underwriting expenses vs. $16.7 million during the
same period in 2004 for the automobile excess liability product.
Net earned premiums for this product were $0.3 million for the
three months ended September 30, 2005 vs. $25.6 million for the
same period of 2004.
    
    A $14.2 million decrease in ceding commission earned pursuant to
quota share agreements (See Premiums). During the three months
ended September 30, 2005, the Company earned $3.9 million in
ceding commissions vs. $18.1 million during the same period of
2004. Ceded earned premiums pursuant to these quota share
agreements were $7.8 million for the three months ended September
30, 2005 vs. $30.7 million for the same period of 2004.
 Other Operating Expenses
 Income Tax Expense:
 Investments
    30




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
     31




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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
  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
    
    $
    2.4
    
    
    $
    2.6
    
    
    $
    5.0
    
    
    $
    1.0
    
    
    $
    6.04  6 months
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    1.57  9 months
    
    
    2.7
    
    
    
    1.3
    
    
    
    4.0
    
    
    
    1.9
    
    
    
    5.910  12 months
    
    
    2.6
    
    
    
    1.1
    
    
    
    3.7
    
    
    
    
    
    
    
    3.713  18 months
    
    
    2.7
    
    
    
    0.8
    
    
    
    3.5
    
    
    
    
    
    
    
    3.519  24 months
    
    
    0.6
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.6> 24 months
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.7
    
    
    
    
    
    
    
    0.7Total Gross
Unrealized Losses
    
    $
    11.6
    
    
    $
    6.7
    
    
    $
    18.3
    
    
    $
    3.6
    
    
    $
    21.9Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    777.3
    
    
    $
    515.1
    
    
    $
    1,292.4
    
    
    $
    46.5
    
    
    $
    1,338.9
     Liquidity and Capital Resources
  32




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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
     New Accounting Pronouncements
   Forward-Looking Information
  33




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  34




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Estimated
    
    
    Hypothetical PercentageHypothetical Change
    
    Fair Value after
    
    
    Increase (Decrease) inEstimated
    
    
    in Interest Rates
    
    Hypothetical Changes
    
    
    
    
    
    
    ShareholdersInvestments
    
    Fair Value
    
    
    (bp=basis points)
    
    in Interest Rates
    
    
    Fair Value
    
    
    EquityTotal Fixed Maturities Available For Sale
    
    $
    1,670,815
    
    
    200 bp decrease
    
    $
    1,796,534
    
    
    
    7.5
    %
    
    
    10.4
    %100 bp decrease
    
    $
    1,737,497
    
    
    
    4.0
    %
    
    
    5.5
    %50 bp decrease
    
    $
    1,705,111
    
    
    
    2.0
    %
    
    
    2.8
    %50 bp increase
    
    $
    1,635,843
    
    
    
    (2.1
    )%
    
    
    (2.9
    )%100 bp increase
    
    $
    1,600,881
    
    
    
    (4.2
    )%
    
    
    (5.8
    )%200 bp increase
    
    $
    1,532,688
    
    
    
    (8.3
    )%
    
    
    (11.4
    )%
 35




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Item 4. Controls and Procedures
    36




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
  
   
   (c) Total
    
    (d)Number of
    
    ApproximateShares
    
    Dollar Value ofPurchased as
    
    Shares ThatPart of
    
    May Yet BePublicly
    
    Purchased(a) Total Number
    
    (b) Average
    
    Announced
    
    Under theof Shares
    
    Price Paid per
    
    Plans or
    
    Plans orPeriod
    
    Purchased
    
    Share
    
    Programs
    
    ProgramsJuly 1  July 31
    
    
    1,336
    (1)
    
    $
    59.79
    
    
    
    
    
    
    
    $
    45,000,000
    (2)August 1  August 31
    
    
    368
    (1)
    
    $
    57.67
    
    
    
    
    
    
    
    $
    45,000,000
    (2)September 1  September 30
    
    
    747
    (1)
    
    $
    48.58
    
    
    
    
    
    
    
    $
    45,000,000
    (2)Total
 
 (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 and subsequently increased, amounted to $75.3 million, of which $30.3
million has been utilized. 
   
   
   37




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##### Table of Contents



Exhibit No.
    
    Description31.1*
    
    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. 38




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##### Table of Contents



SIGNATURES
  PHILADELPHIA
CONSOLIDATED HOLDING CORP.RegistrantDate November 8, 2005
    
    
    
    James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive Officer(Principal Executive Officer)Date November 8, 2005
    
    
    
    Craig P. KellerCraig P. KellerExecutive Vice President, Secretary, Treasurerand Chief Financial Officer (PrincipalFinancial and Accounting Officer)
 39