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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 June 30, 2008
 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
 (Address, including zip code and telephone number,
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
 For the Quarterly Period Ended June 30, 2008
 Part I  Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets June 30, 2008 and
December 31, 2007
    
    3Consolidated Statements of Operations and Comprehensive
Income  For the three and six months ended June 30, 2008 and 2007
    
    4Consolidated Statements of Changes in Shareholders Equity  For
the six months ended June 30, 2008 and the year ended
December 31, 2007
    
    5Consolidated Statements of Cash Flows  For the six
months ended June 30, 2008 and 2007
    
    6Notes to Consolidated Financial Statements
    
    7  - 25Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    26  - 46Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    47Item 4. Controls and Procedures
    
    48Part II  Other InformationItem 1. Legal Proceedings
    
    49Item 1A. Risk Factors
    
    49Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    50Item 3. Defaults Upon Senior Securities
    
    50Item 4. Submission of Matters to a Vote of Security Holders
    
    50        -        51Item 5. Other Information
    
    51Item 6. Exhibits
    
    52Signatures
    
    53Casualty Excess of Loss Reinsurance Contract effective January 1, 2008Casualty (Clash) Excess of Loss Contract effective January 1, 2008Property Per Risk Excess of Loss Agreement of Reinsurance with General Reinsurance Corporation effective January 1, 2008Property Fourth Per Risk Excess of Loss Reinsurance Agreement effective January 1, 2008 - 25% Placement via Willis Re IncProperty Fifth Per Risk Excess of Loss Reinsurance Agreement effective January 1, 2008 - 50% Share with Arch Reinsurance CompanyTerrorism Catastrophe Excess of Loss Reinsurance Contract - 20% Share with Validus Reinsurance, LTD. effective March 1, 2008Certification of the Company's chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Certification of the Company's chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Certification 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 2002Certification 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
  2




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 As ofJune 30, 2008
    
    
    December 31,(Unaudited)
    
    
    2007ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $2,864,732 AND $2,639,471)
    
    $
    2,844,209
    
    
    $
    2,659,197EQUITY SECURITIES AT MARKET (COST $339,169
AND $322,877)
    
    
    348,374
    
    
    
    356,026TOTAL INVESTMENTS
    
    
    3,192,583
    
    
    
    3,015,223CASH AND CASH EQUIVALENTS
    
    
    89,657
    
    
    
    106,342ACCRUED INVESTMENT INCOME
    
    
    28,300
    
    
    
    24,964PREMIUMS RECEIVABLE
    
    
    399,896
    
    
    
    378,217PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
    
    
    301,012
    
    
    
    280,110DEFERRED INCOME TAXES
    
    
    81,717
    
    
    
    42,855DEFERRED ACQUISITION COSTS
    
    
    187,389
    
    
    
    184,446PROPERTY AND EQUIPMENT, NET
    
    
    21,992
    
    
    
    26,330OTHER ASSETS
    
    
    100,964
    
    
    
    41,451TOTAL ASSETS
    
    $
    4,403,510
    
    
    $
    4,099,938LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    1,613,322
    
    
    $
    1,431,933UNEARNED PREMIUMS
    
    
    866,596
    
    
    
    847,485TOTAL POLICY LIABILITIES AND ACCRUALS
    
    
    2,479,918
    
    
    
    2,279,418PREMIUMS PAYABLE
    
    
    77,770
    
    
    
    97,674OTHER LIABILITIES
    
    
    251,135
    
    
    
    175,373TOTAL LIABILITIES
    
    
    2,808,823
    
    
    
    2,552,465COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:PREFERRED STOCK, $.01 PAR VALUE,10,000,000 SHARES AUTHORIZED,

NONE ISSUED AND OUTSTANDING
 
    
    
    
    
    
    COMMON STOCK, NO PAR VALUE,125,000,000 SHARES AUTHORIZED, 71,503,346 AND 

72,087,287 SHARES ISSUED AND OUTSTANDING
    
    
    399,704
    
    
    
    423,379NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (22,565
    )
    
    
    (19,595
    )ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (7,356
    )
    
    
    34,369RETAINED EARNINGS
    
    
    1,224,904
    
    
    
    1,109,320TOTAL SHAREHOLDERS EQUITY
    
    
    1,594,687
    
    
    
    1,547,473TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    4,403,510
    
    
    $
    4,099,938
  3




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUE:NET EARNED PREMIUMS
    
    $
    393,037
    
    
    $
    337,315
    
    
    $
    772,425
    
    
    $
    656,033NET INVESTMENT INCOME
    
    
    32,299
    
    
    
    28,522
    
    
    
    64,304
    
    
    
    55,495NET REALIZED INVESTMENT GAIN (LOSS)
    
    
    (11,513
    )
    
    
    28,064
    
    
    
    (22,907
    )
    
    
    29,821OTHER INCOME
    
    
    3,654
    
    
    
    850
    
    
    
    5,007
    
    
    
    1,680TOTAL REVENUE
    
    
    417,477
    
    
    
    394,751
    
    
    
    818,829
    
    
    
    743,029LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    266,106
    
    
    
    172,234
    
    
    
    489,492
    
    
    
    332,753NET REINSURANCE RECOVERIES
    
    
    (42,836
    )
    
    
    (23,645
    )
    
    
    (72,803
    )
    
    
    (33,659
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    223,270
    
    
    
    148,589
    
    
    
    416,689
    
    
    
    299,094ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES
    
    
    115,479
    
    
    
    101,746
    
    
    
    229,635
    
    
    
    198,650OTHER OPERATING EXPENSES
    
    
    4,376
    
    
    
    2,981
    
    
    
    7,965
    
    
    
    6,136TOTAL LOSSES AND EXPENSES
    
    
    343,125
    
    
    
    253,316
    
    
    
    654,289
    
    
    
    503,880INCOME BEFORE INCOME TAXES
    
    
    74,352
    
    
    
    141,435
    
    
    
    164,540
    
    
    
    239,149INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    30,072
    
    
    
    56,511
    
    
    
    65,350
    
    
    
    93,330DEFERRED
    
    
    (8,628
    )
    
    
    (9,477
    )
    
    
    (16,394
    )
    
    
    (14,562
    )TOTAL INCOME TAX EXPENSE
    
    
    21,444
    
    
    
    47,034
    
    
    
    48,956
    
    
    
    78,768NET INCOME
    
    $
    52,908
    
    
    $
    94,401
    
    
    $
    115,584
    
    
    $
    160,381OTHER COMPREHENSIVE LOSS, NET OF TAX:HOLDING LOSS ARISING DURING PERIOD
    
    $
    (32,906
    )
    
    $
    (11,920
    )
    
    $
    (56,615
    )
    
    $
    (3,039
    )RECLASSIFICATION ADJUSTMENT
    
    
    7,484
    
    
    
    (18,242
    )
    
    
    14,890
    
    
    
    (19,384
    )OTHER COMPREHENSIVE LOSS
    
    
    (25,422
    )
    
    
    (30,162
    )
    
    
    (41,725
    )
    
    
    (22,423
    )COMPREHENSIVE INCOME
    
    $
    27,486
    
    
    $
    64,239
    
    
    $
    73,859
    
    
    $
    137,958PER AVERAGE SHARE DATA:NET INCOME  BASIC
    
    $
    0.76
    
    
    $
    1.34
    
    
    $
    1.65
    
    
    $
    2.28NET INCOME  DILUTED
    
    $
    0.73
    
    
    $
    1.27
    
    
    $
    1.59
    
    
    $
    2.16WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    69,809,174
    
    
    
    70,361,554
    
    
    
    70,128,823
    
    
    
    70,255,758WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    2,608,996
    
    
    
    3,835,617
    
    
    
    2,597,895
    
    
    
    3,966,198WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    72,418,170
    
    
    
    74,197,171
    
    
    
    72,726,718
    
    
    
    74,221,956
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
 For the SixMonths EndedJune 30, 2008
    
    
    For the Year Ended(Unaudited)
    
    
    December 31, 2007COMMON SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    72,087,287
    
    
    
    70,848,482ISSUANCE OF SHARES PURSUANT TO STOCK PURCHASE PLANS, NET
    
    
    195,654
    
    
    
    491,416ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
    
    
    573,605
    
    
    
    747,389LESS: TREASURY SHARES ACQUIRED
    
    
    (1,353,200
    )
    
    
    BALANCE AT END OF PERIOD
    
    
    71,503,346
    
    
    
    72,087,287COMMON STOCK:BALANCE AT BEGINNING OF YEAR
    
    $
    423,379
    
    
    $
    376,986ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    5,060
    
    
    
    16,448EFFECTS OF ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
    
    
    14,166
    
    
    
    29,155OTHER
    
    
    
    
    
    
    790LESS: COST OF TREASURY SHARES ACQUIRED
    
    
    (42,901
    )
    
    
    BALANCE AT END OF PERIOD
    
    
    399,704
    
    
    
    423,379NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (19,595
    )
    
    
    (17,074
    )NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
    
    
    (4,934
    )
    
    
    (8,466
    )COLLECTION OF NOTES RECEIVABLE
    
    
    1,964
    
    
    
    5,945BALANCE AT END OF PERIOD
    
    
    (22,565
    )
    
    
    (19,595
    )ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES:BALANCE AT BEGINNING OF YEAR
    
    
    34,369
    
    
    
    24,848OTHER COMPREHENSIVE INCOME (LOSS) INCOME,
NET OF TAXES
    
    
    (41,725
    )
    
    
    9,521BALANCE AT END OF PERIOD
    
    
    (7,356
    )
    
    
    34,369RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    1,109,320
    
    
    
    782,507NET INCOME
    
    
    115,584
    
    
    
    326,813BALANCE AT END OF PERIOD
    
    
    1,224,904
    
    
    
    1,109,320TOTAL SHAREHOLDERS EQUITY
    
    $
    1,594,687
    
    
    $
    1,547,473
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Six Months Ended June 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    115,584
    
    
    $
    160,381ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT (GAIN) LOSS
    
    
    22,907
    
    
    
    (29,821
    )GAIN ON SALE OF FIXED ASSETS
    
    
    (1,174
    )
    
    
    AMORTIZATION OF INVESTMENT PREMIUMS, NET OF DISCOUNT
    
    
    4,916
    
    
    
    3,044AMORTIZATION OF INTANGIBLE ASSETS
    
    
    1,946
    
    
    
    1,434DEPRECIATION
    
    
    4,374
    
    
    
    3,821DEFERRED INCOME TAX BENEFIT
    
    
    (16,394
    )
    
    
    (14,562
    )CHANGE IN PREMIUMS RECEIVABLE
    
    
    (21,679
    )
    
    
    9,019CHANGE IN PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES, NET OF FUNDS HELD PAYABLE TO REINSURER
    
    
    (20,902
    )
    
    
    (2,866
    )CHANGE IN ACCRUED INVESTMENT INCOME
    
    
    (3,336
    )
    
    
    (2,172
    )CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    (2,943
    )
    
    
    (8,547
    )CHANGE IN INCOME TAXES PAYABLE
    
    
    (11,022
    )
    
    
    11,544CHANGE IN OTHER ASSETS
    
    
    (12,006
    )
    
    
    4,542CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    181,389
    
    
    
    100,213CHANGE IN UNEARNED PREMIUMS
    
    
    19,111
    
    
    
    19,513CHANGE IN OTHER LIABILITIES
    
    
    (13,009
    )
    
    
    1,854FAIR VALUE OF STOCK BASED COMPENSATION
    
    
    8,393
    
    
    
    7,649EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
    
    
    (1,971
    )
    
    
    (2,902
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    254,184
    
    
    
    262,144CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES
    
    
    500
    
    
    
    114,212PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES
    
    
    158,054
    
    
    
    119,214PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES
    
    
    40,859
    
    
    
    199,048COST OF FIXED MATURITIES ACQUIRED
    
    
    (388,919
    )
    
    
    (479,195
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (69,926
    )
    
    
    (220,459
    )PROCEEDS FROM SALE OF FIXED ASSETS
    
    
    3,825
    
    
    
    PURCHASE OF PROPERTY AND EQUIPMENT, NET
    
    
    (2,687
    )
    
    
    (2,704
    )PAYMENT FOR ACQUISITION OF GILLINGHAM & ASSOCIATES INC.,
NET OF CASH ACQUIRED
    
    
    (32,881
    )
    
    
    PURCHASE OF OTHER INTANGIBLES
    
    
    (1,877
    )
    
    
    (8,564
    )NET CASH USED FOR INVESTING ACTIVITIES
    
    
    (293,052
    )
    
    
    (278,448
    )CASH FLOWS FROM FINANCING ACTIVITIES:REPAYMENTS ON LOANS
    
    
    (45,000
    )
    
    
    PROCEEDS FROM LOANS
    
    
    102,220
    
    
    
    PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    3,803
    
    
    
    3,835PROCEEDS FROM COLLECTION OF SHAREHOLDER NOTES RECEIVABLE
    
    
    1,964
    
    
    
    2,791PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
    
    
    126
    
    
    
    206EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
    
    
    1,971
    
    
    
    2,902COST OF COMMON STOCK REPURCHASED
    
    
    (42,901
    )
    
    
    NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    22,183
    
    
    
    9,734NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (16,685
    )
    
    
    (6,570
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    106,342
    
    
    
    108,671CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    89,657
    
    
    $
    102,101NON-CASH TRANSACTIONS:ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK
PURCHASE PLANS IN EXCHANGE FOR NOTES RECEIVABLE
    
    $
    4,934
    
    
    $
    3,450
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 1.
    
    Basis of PresentationThe consolidated financial statements for the quarterly period ended June 30, 2008 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 six months ended June 30, 2008 are not necessarily
indicative of the operating results to be expected for the full year or any other period.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, 2007.2.
    
    Fair Value MeasurementsOn January 1, 2008, the Company adopted the provisions of Financial Accounting Standards Board
(FASB) Statement No. 157 Fair Value Measurements (SFAS 157). SFAS 157 defines fair value
and provides a consistent framework for measuring items at fair value as previously permitted by
existing accounting pronouncements. SFAS 157 provides a fair value hierarchy which
prioritizes the quality of inputs used when measuring items at fair value and requires expanded
disclosures for fair value measurements.On February 12, 2008, SFAS 157 was amended by FASB Staff Position No. FAS 157-2 (FSP FAS
157-2). FSP FAS 157-2 delayed the effective date of SFAS 157 for non-financial assets and
non-financial liabilities which are measured at fair value on a nonrecurring basis.
Non-financial assets and non-financial liabilities which are measured at fair value on a
recurring basis (i.e. at least annually) are not subject to this deferral. This deferral is
effective until fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. At that time, provisions of SFAS 157 will apply to non-financial assets and
non-financial liabilities which are measured at fair value on a non-recurring basis.As of June 30, 2008, the Company has no non-financial assets or non-financial liabilities that
are measured at fair value on a recurring basis. The Company is currently evaluating the impact
of measuring non-financial assets and non-financial liabilities on a non-recurring basis.The Companys financial assets consist of its investments in fixed maturity and equity
securities, and cash equivalents. The Company accounts for its fixed maturity and equity
securities assets at fair value under FASB Statement No. 115 Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115). Historically, the Companys external fixed
maturity investment manager has provided pricing for the Companys financial assets based upon
pricing methodologies approved by the investment managers internal pricing committee utilizing
pricing information from market vendors on a pre-established provider list. Effective with the
Companys adoption of SFAS 157 and as of June 30, 2008, the Companys external fixed maturity
investment manager has assisted the Company in measuring the fair value of these financial
assets accounted for under SFAS 115, in accordance with the provisions of SFAS 157. No
cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2008
was required as the result of the adoption of SFAS 157. As of June 30, 2008, the Company has no
liabilities required to be measured at fair value in accordance with the provisions of SFAS 157.SFAS 157 Valuation Techniques:SFAS 157 provides three acceptable valuation techniques that should be used to measure fair
value. The following is a brief description of these valuation techniques:
  7




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Fair Value Hierarchy to SFAS 157 Valuation Techniques:
      8




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##### Table of Contents



SFAS 157 Recurring Fair Value Measurements:
  Fair Value Measurements as of June 30, 2008 Utilizing:(In Thousands)Quoted Prices Active Markets
    
    
    
    
    
    SignificantIdentical Assets 
    
    Significant Other
    
    UnobservableObservable Inputs
    
    Observable Inputs
    
    InputsDescription
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    TotalUS Treasury Securities and
Obligations of US Government
Corporations and Agencies
    
    $
    9,363
    
    
    $
    4,016
    
    
    $
    
    
    
    $
    13,379Obligations of States and
Political
Subdivisions
    
    
    
    
    
    
    1,597,298
    
    
    
    
    
    
    
    1,597,298Corporate and Bank Debt
Securities
    
    
    
    
    
    
    154,885
    
    
    
    
    
    
    
    154,885Asset Backed Securities
    
    
    
    
    
    
    200,677
    
    
    
    19,161
    
    
    
    219,838Mortgage Pass-Through Securities
    
    
    
    
    
    
    570,405
    
    
    
    
    
    
    
    570,405Collateralized Mortgage
Obligations
    
    
    
    
    
    
    288,404
    
    
    
    
    
    
    
    288,404Total Fixed Maturities
Available
For Sale at Market
    
    $
    9,363
    
    
    $
    2,815,685
    
    
    $
    19,161
    
    
    $
    2,844,209Equity Securities at Market
    
    
    318,378
    
    
    
    7,602
    
    
    
    22,394
    
    
    
    348,374Cash Equivalents
    
    
    101,594
    
    
    
    
    
    
    
    
    
    
    
    101,594Total Fair Value Measurements
    
    $
    429,335
    
    
    $
    2,823,287
    
    
    $
    41,555
    
    
    $
    3,294,177% of Total Fair Value
Measurements
    
    
    13.0
    %
    
    
    85.7
    %
    
    
    1.3
    %
    
    
    100.0
    %
  9




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##### Table of Contents



Fair Value Measurements Utilizing Level 3 Inputs:
    Fair Value Measurements Utilizing Significant Unobservable (Level 3) Inputs:(In Thousands)CollateralizedAsset Backed
    
    Mortgage
    
    EquitySecurities
    
    Obligations
    
    Securities
    
    TotalFor The Three Months Ended
June 30, 2008:Beginning Balance as of April 1, 2008:
    
    $
    9,682
    
    
    $
    142
    
    
    $
    16,399
    
    
    $
    26,223Total gains or loss (realized/unrealized)Included in earnings
    
    
    
    
    
    
    (7
    )
    
    
    (192
    )
    
    
    (199
    )Included in Other Comprehensive Income
    
    
    (65
    )
    
    
    13
    
    
    
    (614
    )
    
    
    (666
    )Purchases, issuances, settlements
    
    
    9,882
    
    
    
    (8
    )
    
    
    6,801
    
    
    
    16,675Transfers in and/or out of Level 3
    
    
    (338
    )
    
    
    (140
    )
    
    
    
    
    
    
    (478
    )Ending Balance as of June 30, 2008:
    
    $
    19,161
    
    
    $
    
    
    
    $
    22,394
    
    
    $
    41,555For The Six Months Ended June 30, 2008:Beginning Balance as of January 1, 2008:
    
    $
    10,511
    
    
    $
    121
    
    
    $
    11,505
    
    
    $
    22,137Total gains or loss (realized/unrealized)Included in earnings
    
    
    1
    
    
    
    (12
    )
    
    
    (795
    )
    
    
    (806
    )Included in Other Comprehensive Income
    
    
    (835
    )
    
    
    47
    
    
    
    (1,862
    )
    
    
    (2,650
    )Purchases, issuances, settlements
    
    
    9,822
    
    
    
    (16
    )
    
    
    13,546
    
    
    
    23,352Transfers in and/or out of Level 3
    
    
    (338
    )
    
    
    (140
    )
    
    
    
    
    
    
    (478
    )Ending Balance as of June 30, 2008:
    
    $
    19,161
    
    
    $
    
    
    
    $
    22,394
    
    
    $
    41,555
   SFAS 159 Fair Value Option for Eligible Financial Assets and Liabilities:
  10




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##### Table of Contents



3.
    
    InvestmentsImpairment Reviews as of June 30, 2008:The Company regularly performs impairment reviews with respect to its investments. There are
certain risks and uncertainties inherent in the Companys impairment methodology, including, but
not limited to, the financial condition of specific industry sectors and the resultant effect on
any such underlying security collateral values and changes in accounting, tax, and/or regulatory
requirements which may have an effect on either, or both, the investor and/or the issuer. For
investments other than interests in securitized assets, these reviews include identifying any
security whose fair value is below its cost and an analysis of securities meeting predetermined
impairment thresholds to determine whether such decline is other than temporary. If the Company
does not intend to hold a security to maturity or 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 investment loss in the period the impairment
arose. This evaluation, for investments other than interests in securitized assets, resulted
in non-cash realized investment losses of $11.7 million and $0.1 million, respectively, for the
three months ended June 30, 2008 and 2007, and $22.4 million and $2.6 million, respectively, for
the six months ended June 30, 2008 and 2007. The Companys impairment review also includes an
impairment evaluation for interests in securitized assets conducted in accordance with the
guidance provided by the Emerging Issues Task Force of the FASB. As a result of the Companys
impairment evaluation for investments in securitized assets, there were no non-cash realized
investment losses recorded for the three or six months ended June 30, 2008 or 2007The following table identifies the period of time securities with an unrealized loss as of June
30, 2008 have continuously been in an unrealized loss position. None of the amounts displayed in
the table are due to non-investment grade fixed maturity securities. No issuer of securities or
industry represents more than 2.0% and 22.9%, respectively, of the total estimated fair value,
or 4.7% and 11.4%, respectively, of the total gross unrealized loss included in the table below.
The industry concentration as a percentage of total estimated fair value represents investments
in a geographically diversified pool of investment grade Municipal securities issued by states,
political subdivisions, and public authorities under general obligation and/or special
district/purpose issuing authority.  The industry concentration as a percentage of the total
gross unrealized loss primarily represents investments in equity securities issued by companies
in the Diversified Financial Services industry.
 11




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##### Table of Contents



Less Than 12 Months
    
    12 Months or More
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesJune 30, 2008Fixed Maturities Available for Sale:
    
    
    
    
    
    
    
    
    
    (In Thousands)U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    714
    
    
    $
    22
    
    
    $
    
    
    
    $
    
    
    
    $
    714
    
    
    $
    22Obligations of States and
Political Subdivisions
    
    
    871,007
    
    
    
    13,875
    
    
    
    165,804
    
    
    
    6,176
    
    
    
    1,036,811
    
    
    
    20,051Corporate and Bank Debt Securities
    
    
    83,673
    
    
    
    1,816
    
    
    
    5,458
    
    
    
    315
    
    
    
    89,131
    
    
    
    2,131Asset Backed Securities
    
    
    100,906
    
    
    
    3,083
    
    
    
    13,420
    
    
    
    1,079
    
    
    
    114,326
    
    
    
    4,162Mortgage Pass-Through Securities
    
    
    318,167
    
    
    
    4,591
    
    
    
    25,203
    
    
    
    897
    
    
    
    343,370
    
    
    
    5,488Collateralized Mortgage Obligations
    
    
    82,578
    
    
    
    2,993
    
    
    
    20,468
    
    
    
    1,057
    
    
    
    103,046
    
    
    
    4,050Total Fixed Maturities
Available for Sale
    
    $
    1,457,045
    
    
    $
    26,380
    
    
    $
    230,353
    
    
    $
    9,524
    
    
    $
    1,687,398
    
    
    $
    35,904Equity Securities
    
    
    155,737
    
    
    
    30,255
    
    
    
    
    
    
    
    
    
    
    
    155,737
    
    
    
    30,255Total Investments
    
    $
    1,612,782
    
    
    $
    56,635
    
    
    $
    230,353
    
    
    $
    9,524
    
    
    $
    1,843,135
    
    
    $
    66,159
  
 
 
    12




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##### Table of Contents



Structured Securities Investment Portfolio:
  
    
    $569.4 million of U.S. government agency backed Mortgage Pass-Through Securities;
    
    $207.7 million of U.S. government agency backed Collateralized Mortgage Obligations;
    
    $68.1 million of non-U.S. government agency Collateralized Mortgage Obligations backed
by pools of prime loans (generally consists of loans made to the highest credit quality
borrowers with Fair Isaac Corporation (FICO) scores generally greater than 720);
    
    $16.2 million of structured securities backed by pools of ALT A loans (loans with less
than normal documentation and borrowers with FICO scores in the approximate range of 650 to
the low 700s); and
    
    $3.1 million of structured securities backed by pools of subprime loans (loans with low
documentation, higher combined loan-to-value ratios and borrowers with FICO scores capped
at approximately 650).
  
    
    first to pay or among the first cash flow tranches of their respective transactions;
    
    weighted average life of 1.9 years;
    
    spread across multiple vintages (origination year of underlying collateral pool); and
    
    have not experienced any ratings downgrades as of June 30, 2008.
  13




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##### Table of Contents



Amortized Cost of Structured Securities:
    Municipal Bond Portfolio:
  Market Value of Insured
    
    
    
    
    
    Weighted AverageMunicipal Bonds
    
    
    Percentage of Municipal
    
    
    Underlying Rating ofMonoline Insurer
    
    (In Thousands)
    
    
    Bond Portfolio
    
    
    Insured Municipal BondsFinancial Security Assurance, Inc.
    
    $
    327,889
    
    
    
    20.4
    %
    
    AAMBIA, Inc.
    
    
    298,740
    
    
    
    18.6
    
    
    AAFGIC Corporation.
    
    
    198,943
    
    
    
    12.4
    
    
    AA-AMBAC Financial Group, Inc.
    
    
    166,058
    
    
    
    10.3
    
    
    AA-XL Capital, LTD.
    
    
    4,444
    
    
    
    0.3
    
    
    AA-Total
    
    $
    996,074
    
    
    
    62.0
    %
    
    AA
 14




---



##### Table of Contents



Impairment Reviews as of December 31, 2007:
  Less Than 12 Months
    
    12 Months or More
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesDecember 31, 2007Fixed Maturities Available for Sale:
    
    
    
    
    
    
    
    
    
    (In Thousands)U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    
    
    
    $
    
    
    
    $
    5,670
    
    
    $
    21
    
    
    $
    5,670
    
    
    $
    21Obligations of States and
Political Subdivisions
    
    
    294,719
    
    
    
    2,377
    
    
    
    203,427
    
    
    
    1,006
    
    
    
    498,146
    
    
    
    3,383Corporate and Bank Debt Securities
    
    
    7,835
    
    
    
    33
    
    
    
    58,709
    
    
    
    570
    
    
    
    66,544
    
    
    
    603Asset Backed Securities
    
    
    50,574
    
    
    
    138
    
    
    
    13,989
    
    
    
    81
    
    
    
    64,563
    
    
    
    219Mortgage Pass-Through Securities
    
    
    68,691
    
    
    
    366
    
    
    
    128,382
    
    
    
    1,493
    
    
    
    197,073
    
    
    
    1,859Collateralized Mortgage Obligations
    
    
    30,731
    
    
    
    236
    
    
    
    65,252
    
    
    
    725
    
    
    
    95,983
    
    
    
    961Total Fixed Maturities
Available for Sale
    
    
    452,550
    
    
    
    3,150
    
    
    
    475,429
    
    
    
    3,896
    
    
    
    927,979
    
    
    
    7,046Equity Securities
    
    
    118,095
    
    
    
    22,159
    
    
    
    
    
    
    
    
    
    
    
    118,095
    
    
    
    22,159Total Investments
    
    $
    570,645
    
    
    $
    25,309
    
    
    $
    475,429
    
    
    $
    3,896
    
    
    $
    1,046,074
    
    
    $
    29,205
      15




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##### Table of Contents



4.
    
    Restricted AssetsThe Insurance Subsidiaries have investments, principally U.S. Treasury securities and
Obligations of States and Political Subdivisions, on deposit with the various states in which
they are licensed insurers. As of June 30, 2008 and December 31, 2007, the carrying value of the
securities on deposit totaled $16.7 million and $15.7 million, respectively.Additionally, as of June 30, 2008 the Insurance Subsidiaries had $57.2 million
of borrowings outstanding within the Federal Home Loan Bank of Pittsburgh (FHLB).
These borrowings are collateralized by investments, principally asset backed securities, with a
carrying value of $82.1 million as of June 30, 2008. As of December 31, 2007,
the Insurance Subsidiaries had no borrowings outstanding or investments pledged as collateral
to FHLB.5.
    
    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
 16




---



##### Table of Contents



establishing the liability for property and casualty unpaid loss and loss adjustment expenses is
a complex and imprecise process, requiring the use of informed estimates and judgments. The
liability includes an amount determined on the basis of claim adjusters evaluations with
respect to insured events that have been reported to the Company and an amount for losses
incurred that have not yet 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 it to the Company.Estimates for unpaid loss and loss adjustment expenses are based on managements assessment of
known facts and circumstances, review of past loss experience and settlement patterns and
consideration of other internal and external factors. These factors include, but are not
limited to, the Companys growth, changes in the Companys operations, and legal, social, and
economic developments. These estimates are reviewed regularly and any resulting adjustments 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 as of June 30, 2008,
the related adjustments could have a material adverse impact on the Companys financial
condition and results of operations.During the three months ended June 30, 2008, the Company decreased the estimated net unpaid loss
and loss adjustment expenses for accident years 2007 and prior by the following amounts:
 Net(In Millions)
    
    DecreaseAccident Year 2007
    
    $
    6.6Accident Year 2006
    
    
    4.8Accident Year 2005
    
    
    4.1Accident Years 2004 and prior
    
    
    3.0Total
    
    $
    18.5
      17




---



##### Table of Contents



Net(In Millions)
    
    DecreaseAccident Year 2007
    
    $
    4.7Accident Year 2006
    
    
    8.9Accident Year 2005
    
    
    5.3Accident Years 2004 and prior
    
    
    5.5Total
    
    $
    24.4
     6.
    
    Shareholders EquityThe Philadelphia Consolidated Holding Corp. Amended and Restated Employees Stock Incentive and
Performance Based Compensation Plan (the Plan) provides incentives and awards to those
employees and members of the Board (participants) largely responsible for the long term
success of the Company. Under the Plan, the Company issued 512,760 and 436,607 stock settled
appreciation rights (SARS) during the six months ended June 30, 2008 and the year ended
December 31, 2007, respectively. The Company also issued 259,695 and 146,884 shares of
restricted stock awards during the six months ended June 30, 2008 and the year ended December
31, 2007, respectively.7.
    
    Stock RepurchaseDuring the six months ended June 30, 2008, the Company repurchased 1,353,200 shares of stock at
a cost of $42.9 million under its stock repurchase authorization. As of June 30, 2008, $52.1
million remains available under previous stock purchase authorizations which aggregated $125.3
million. During the six months ended June 30, 2007, the Company did not repurchase any shares
of stock under its stock repurchase authorization.8.
    
    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. The computation of earnings per share for the three and six months ended June 30, 2008
and 2007, is as follows:
 18




---



##### Table of Contents



As of and For the Three
    
    
    As of and For the SixMonths Ended June 30,
    
    
    Months Ended June 30,(In Thousands, Except Per Share Amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted-Average Common Shares Outstanding
    
    
    69,809
    
    
    
    70,362
    
    
    
    70,129
    
    
    
    70,256Weighted-Average Potential Shares Issuable
    
    
    2,609
    
    
    
    3,835
    
    
    
    2,598
    
    
    
    3,966Weighted-Average Shares and Potential
Shares Issuable
    
    
    72,418
    
    
    
    74,197
    
    
    
    72,727
    
    
    
    74,222Net Income
    
    $
    52,908
    
    
    $
    94,401
    
    
    $
    115,584
    
    
    $
    160,381Basic Earnings per Share
    
    $
    0.76
    
    
    $
    1.34
    
    
    $
    1.65
    
    
    $
    2.28Diluted Earnings per Share
    
    $
    0.73
    
    
    $
    1.27
    
    
    $
    1.59
    
    
    $
    2.16
  As of and For the Three Months Ended June 30, 2008
    
    As of and For the Three Months Ended June 30, 2007SARS Outstanding
    
    
    
    
    
    

    
    SARS Outstandingas of
    
    Hypothetical
    
    Expiration Date
    
    as of
    
    Hypothetical
    
    Expiration DateJune 30, 2008

    Option Price

    of SAR
    
    June 30, 2007
    
    Option Price
    
    of SAR30,000
    
    
    $
    39.95
    
    
    September 28, 2016
    
    
    407,446
    
    
    $
    47.52
    
    
    February 21, 2017407,446
    
    
    $
    47.52
    
    
    February 21, 2017
    
    
    25,000
    
    
    $
    43.44
    
    
    March 19, 201725,000
    
    
    $
    43.44
    
    
    March 19, 2017661
    
    
    $
    42.41
    
    
    May 1, 20173,500
    
    
    $
    36.85
    
    
    August 1, 201765,620
    
    
    $
    37.12
    
    
    April 29, 2018As of and For the Six Months Ended June 30, 2008
    
    As of and For the Six Months Ended June 30, 2007SARS Outstanding
    
    

    
    
    
    
    
    SARS Outstandingas of
    
    Hypothetical
    
    Expiration Date
    
    as of
    
    Hypothetical
    
    Expiration DateJune 30, 2008

    Option Price

    of SAR
    
    June 30, 2007
    
    Option Price
    
    of SAR22,500

    
    $
    35.35
    
    
    March 1, 2016
    
    
    407,446
    
    
    $
    47.52
    
    
    February 21, 201730,000

    
    $
    39.95
    
    
    September 28, 2016407,446

    
    $
    47.52
    
    
    February 21, 201725,000

    
    $
    43.44
    
    
    March 19, 2017661

    
    $
    42.41
    
    
    May 1, 20173,500

    
    $
    36.85
    
    
    August 1, 201765,620

    
    $
    37.12
    
    
    April 29, 2018
 9.
    
    Income TaxesThe Companys liability for its unrecognized tax benefits was $0.2 million as of June 30, 2008
and December 31, 2007. As of June 30, 2008 and December 31, 2007, the total amount of
unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.2
million. Interest and penalties accrued for the underpayment of taxes are recorded as a
component of income tax expense. The liability for interest and penalties amounted to $0.1
million as of June 30, 2008 and December 31, 2007.The Company and its subsidiaries file Federal and State income tax returns as required. The
Company and its subsidiaries are subject to Federal and State examinations for tax years 2003
through 2007, and 2005 through 2007, respectively.The 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.10.
    
    ReinsuranceIn the normal course of business, the Company has entered into various reinsurance contracts
with unrelated reinsurers. The Company participates in such agreements for the purpose of
limiting loss exposure and diversifying business. Reinsurance contracts do not relieve the
Company from its obligations to policyholders. The effect of reinsurance on written and earned
premiums is as follows:
 For the Three Months Ended
    
    
    For the Three Months EndedJune 30, 2008
    
    
    June 30, 2007(In Thousands)
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect Business
    
    $
    444,741
    
    
    $
    439,538
    
    
    $
    397,829
    
    
    $
    394,634Reinsurance Assumed
    
    
    538
    
    
    
    808
    
    
    
    684
    
    
    
    865Reinsurance Ceded
    
    
    (46,833
    )
    
    
    (47,309
    )
    
    
    (59,326
    )
    
    
    (58,184
    )Net Premiums
    
    $
    398,446
    
    
    $
    393,037
    
    
    $
    339,187
    
    
    $
    337,315
 For the Six Months Ended
    
    
    For the Six Months EndedJune 30, 2008
    
    
    June 30, 2007Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect Business
    
    $
    887,345
    
    
    $
    867,830
    
    
    $
    791,360
    
    
    $
    771,576Reinsurance Assumed
    
    
    1,021
    
    
    
    1,425
    
    
    
    1,267
    
    
    
    1,538Reinsurance Ceded
    
    
    (83,952
    )
    
    
    (96,830
    )
    
    
    (116,007
    )
    
    
    (117,081
    )Net Premiums
    
    $
    804,414
    
    
    $
    772,425
    
    
    $
    676,620
    
    
    $
    656,033
 19




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##### Table of Contents



11.
    
    Commitments and ContingenciesLegal Proceedings:On February 26, 2008, the Company received a complaint filed on February 14, 2008 with the U.S.
District Court for the Southern District of Florida by seven individuals. These individuals
purported to act on behalf of a class of similarly situated persons who had been issued
insurance policies by Liberty American Select Insurance Company, formerly known as Mobile USA
Insurance Company (LASIC). The complaint, which is alleged to be a class action complaint,
was filed against the Company and its subsidiaries, LASIC, Liberty American Insurance Company
and Liberty American Insurance Group, Inc. The complaint requests an unspecified amount of
damages in excess of $5,000,000 and equitable relief to prevent the defendants from committing
what are alleged to be unfair business practices. The plaintiffs allege that from the period
from at least as early as September 1, 2003 through December 31, 2006 they and other
policyholders sustained property damage covered under policies issued by LASIC, and that LASIC
improperly denied or paid only a portion of the policyholders claims for which they were
entitled to be reimbursed.The Company believes that it has valid defenses to the claims made in the complaint, and that
the claims may not be entitled to be brought as a class action. The Company will vigorously
defend against such claims. Although there is no assurance as to the outcome of this litigation
or as to its effect on the Companys financial position, the Company believes, based on the
facts currently known to it, that the outcome of this litigation will not have a material
adverse effect on its financial position.The Company is also subject to routine legal proceedings in connection with its property and
casualty insurance business.Credit Agreement:The Company maintains an unsecured Credit Agreement (the Credit Agreement) which establishes a
revolving credit facility providing for loans to the Company of up to $50.0 million in principal
amount outstanding at any one time. The Credit Agreement had a maturity date of June 27, 2008,
which was extended to July 11, 2008. The Credit Agreement contains an annual commitment fee of
6.0 basis points per annum on the unused commitments under the Credit Agreement. Each loan under
the amended Credit Agreement will bear interest at a per annum rate equal to, at the Companys
option, (i) Libor plus 0.35% or (ii) the higher of the administrative agent and lenders prime
rate and the Federal Funds rate plus 0.50%. As of June 30, 2008, no borrowings were outstanding
under the Credit Agreement. The Credit Agreement contains various representations, covenants and
events of default typical for credit facilities of this type. As of June 30, 2008, the Company
was in compliance with all covenants contained in the Credit Agreement.On July 11, 2008, the Company entered into an Amended and Restated Credit Agreement (the
Amended Credit Agreement) with Bank of America, N.A. and Wachovia Bank, National Association.
The Amended Credit Agreement amended and restated the Companys existing unsecured Credit
Agreement among the Company and such Banks. The Amended Credit Agreement changed the terms of
the existing Credit Agreement by extending the maturity date to June 26, 2009, including a $10.0
million letter of credit facility as part of the aggregate $50.0 million revolving credit
commitments of the Bank lenders, increasing the unused commitment fee from 6.0 basis points to
7.0 basis points per annum and increasing the Companys Libor option per annum interest rate
from Libor plus 0.35% to Libor plus 0.40%.State Insurance Guaranty Funds:As of June 30, 2008 and December 31, 2007, included in Other Liabilities in the Consolidated
Balance Sheets were $17.9 million and $13.2 million, respectively, of liabilities for state
insurance guaranty funds. As of June 30, 2008 and December 31, 2007, included in Other Assets
in the Consolidated Balance Sheets were $0.2 million of related assets for premium tax offsets
or policy surcharges. The related asset is limited to the amount that is determined based upon
future premium collections or policy surcharges from policies in force.
 20




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##### Table of Contents



State Insurance Facility Assessments:The Company continually monitors developments with respect to state insurance facilities. The
Company is required to participate in various state insurance facilities that provide insurance
coverage to individuals or entities that otherwise are unable to purchase such coverage from
private insurers. Because of the Companys participation, it may be exposed to losses that
surpass the capitalization of these facilities and/or to assessments from these facilities.Among other state insurance facilities, the Company is subject to assessments from Florida
Citizens Property Insurance Corporation (Florida Citizens), which was originally created by
the state of Florida to provide insurance to property owners unable to obtain coverage in the
private insurance market. Florida Citizens, at the discretion and direction of its Board of
Governors (Florida Citizens Board), can levy a regular assessment on participating companies
for a deficit in any calendar year up to a maximum of the greater of 6% of the deficit or 6% of
Florida property premiums industry-wide for the prior year. The portion of the total assessment
attributable to the Company is based on its market share. An insurer may recoup a regular
assessment through a surcharge to policyholders. If a deficit remains after the regular
assessment, Florida Citizens can also fund any remaining deficit through emergency assessments
in the current and subsequent years. Companies are required to collect the emergency assessments
directly from residential property policyholders and remit to Florida Citizens as collected. In
addition, Florida Citizens may issue bonds to further fund a deficit.Florida Hurricane Catastrophe Fund:The Company and other insurance companies writing residential property policies in Florida must
participate in the Florida Hurricane Catastrophe Fund (FHCF). If the FHCF does not have
sufficient funds to pay its ultimate reimbursement obligations to participating insurance
companies, it has the authority to issue bonds, which are funded by assessments on generally all
property and casualty premiums in Florida. By law, these assessments are the obligation of
insurance policyholders, which insurance companies must collect. The FHCF assessments are
limited to 6% of premiums per year beginning the first year in which reimbursements require
bonding, and up to a total of 10% of premiums per year for assessments in the second and
subsequent years, if required to fund additional bonding. Upon the order of the Florida Office
of Insurance Regulation (FLOIR), companies are required to collect the FHCF assessments
directly from their policyholders and remit them to the FHCF as they are collected.12.
    
    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 Losses arising during
the three and six months ended June 30, 2008 and 2007 was $17.7 million and $6.4 million,
respectively, and $30.5 million and $1.6 million, respectively. The related tax effect of
Reclassification Adjustments for the three and six months ended June 30, 2008 and 2007 was $4.0
million and $(9.8) million, respectively, and $8.0 million and $(10.4) million, respectively.13.
    
    New Accounting PronouncementsIn March 2008, the FASB issued Statement No. 161 Disclosures about Derivative Instruments and
Hedging Activities (SFAS 161) to enhance disclosures about an entitys derivative and hedging
activities. SFAS 161 is effective for all financial statements issued in fiscal years and
interim periods beginning after November 15, 2008 and early application is encouraged. SFAS 161
also encourages but does not require comparative disclosures for earlier periods at initial
adoption. As the Company does not currently engage in derivative transactions or hedging
activities, the Company does not anticipate any significant financial statement disclosure
impact resulting from its evaluation of SFAS 161.In May 2008, the FASB issued Statement No. 162 The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162) to identify the sources of accounting principles and provide a
framework for selecting the principles to be used in the preparation of financial statements in
accordance with generally accepted accounting principles in the United States. SFAS 162 is
effective 60 days following the Securities and Exchange Commissions approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles.
 21




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##### Table of Contents



The Company does not anticipate any significant financial statement impact resulting from its
evaluation of SFAS 162.In May 2008, the FASB issued Statement No. 163 Accounting for Financial Guarantee Insurance
Contracts  an interpretation of FASB Statement No. 60 (SFAS 163) to eliminate diversity in
practice in accounting for financial guarantee insurance contracts by insurance enterprises
under FASB Statement No. 60 Accounting and Reporting by Insurance Enterprises. SFAS 163 is
effective for all financial statements issued in fiscal years and interim periods beginning
after December 15, 2008, with the exception of disclosures about insurance enterprises
risk-management activities used to track and monitor deteriorating insured financial
obligations, which are effective for the first period, including interim periods, after the
issuance of SFAS 163. Except for these risk-management disclosures, early application is not
permitted. As the Company does not currently enter into financial guarantee insurance
contracts, the Company does not anticipate any significant financial statement or disclosure
impact resulting from its evaluation of SFAS 163.14.
    
    Segment InformationThe Companys operations are classified into three reportable business segments which are
organized around its underwriting divisions:
 
    
    The Commercial Lines Underwriting Group, which has underwriting responsibility for
the commercial multi-peril package, commercial automobile, specialty property and
inland marine, and antique/collector car insurance products;
    
    The Specialty Lines Underwriting Group, which has underwriting responsibility for
the professional and management liability insurance products; and
    
    The Run-Off (previously the Personal Lines Group) business segment, which pursuant
to approval received in February, 2008 from the Florida Office of Insurance Regulation,
is currently in the process of non-renewing all personal lines policies, other than
policies issued pursuant to the National Flood Insurance Program (NFIP), beginning
with policies expiring on or about July 23, 2008. The Company currently expects the
non-renewal process to be completed by July 23, 2009.
    22




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##### Table of Contents



As of and For The Three Months Ended June 30,Commercial
    
    Specialty(In Thousands)
    
    Lines
    
    Lines
    
    Run-Off
    
    Corporate
    
    Total2008:Gross Written Premiums
    
    $
    364,625
    
    
    $
    65,198
    
    
    $
    15,457
    
    
    $
    
    
    
    $
    445,280Net Written Premiums
    
    $
    335,469
    
    
    $
    60,085
    
    
    $
    2,892
    
    
    $
    
    
    
    $
    398,446Revenue:Net Earned Premiums
    
    $
    332,583
    
    
    $
    58,348
    
    
    $
    2,106
    
    
    $
    
    
    
    $
    393,037Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,299
    
    
    
    32,299Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,513
    )
    
    
    (11,513
    )Other Income
    
    
    
    
    
    
    
    
    
    
    1,381
    
    
    
    2,273
    
    
    
    3,654Total Revenue
    
    
    332,583
    
    
    
    58,348
    
    
    
    3,487
    
    
    
    23,059
    
    
    
    417,477Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    205,107
    
    
    
    17,231
    
    
    
    932
    
    
    
    
    
    
    
    223,270Acquisition
Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,479
    
    
    
    115,479Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    4,255
    
    
    
    4,376Total Losses and Expenses
    
    
    205,107
    
    
    
    17,231
    
    
    
    1,053
    
    
    
    119,734
    
    
    
    343,125Income Before Income Taxes
    
    
    127,476
    
    
    
    41,117
    
    
    
    2,434
    
    
    
    (96,675
    )
    
    
    74,352Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,444
    
    
    
    21,444Net Income
    
    $
    127,476
    
    
    $
    41,117
    
    
    $
    2,434
    
    
    $
    (118,119
    )
    
    $
    52,908Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    88,589
    
    
    $
    4,314,921
    
    
    $
    4,403,5102007:Gross Written Premiums
    
    $
    321,908
    
    
    $
    59,963
    
    
    $
    16,642
    
    
    $
    
    
    
    $
    398,513Net Written Premiums
    
    $
    293,543
    
    
    $
    49,337
    
    
    $
    (3,693
    )
    
    $
    
    
    
    $
    339,187Revenue:Net Earned Premiums
    
    $
    286,642
    
    
    $
    47,811
    
    
    $
    2,862
    
    
    $
    
    
    
    $
    337,315Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,522
    
    
    
    28,522Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,064
    
    
    
    28,064Other Income
    
    
    
    
    
    
    
    
    
    
    630
    
    
    
    220
    
    
    
    850Total Revenue
    
    
    286,642
    
    
    
    47,811
    
    
    
    3,492
    
    
    
    56,806
    
    
    
    394,751Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    123,238
    
    
    
    24,024
    
    
    
    1,327
    
    
    
    
    
    
    
    148,589Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,746
    
    
    
    101,746Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    357
    
    
    
    2,624
    
    
    
    2,981Total Losses and Expenses
    
    
    123,238
    
    
    
    24,024
    
    
    
    1,684
    
    
    
    104,370
    
    
    
    253,316Income Before Income Taxes
    
    
    163,404
    
    
    
    23,787
    
    
    
    1,808
    
    
    
    (47,564
    )
    
    
    141,435Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,034
    
    
    
    47,034Net Income
    
    $
    163,404
    
    
    $
    23,787
    
    
    $
    1,808
    
    
    $
    (94,598
    )
    
    $
    94,901Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    107,019
    
    
    $
    3,647,930
    
    
    $
    3,754,949
 23




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##### Table of Contents



As of and For The Six Months Ended June 30,Commercial
    
    Specialty(In Thousands)
    
    Lines
    
    Lines
    
    Run-Off
    
    Corporate
    
    Total2008:Gross Written Premiums
    
    $
    722,978
    
    
    $
    134,330
    
    
    $
    31,058
    
    
    $
    
    
    
    $
    888,366Net Written Premiums
    
    $
    662,800
    
    
    $
    133,659
    
    
    $
    7,955
    
    
    $
    
    
    
    $
    804,414Revenue:Net Earned Premiums
    
    $
    653,816
    
    
    $
    113,987
    
    
    $
    4,622
    
    
    $
    
    
    
    $
    772,425Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,304
    
    
    
    64,304Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,907
    )
    
    
    (22,907
    )Other Income
    
    
    
    
    
    
    
    
    
    
    1,807
    
    
    
    3,200
    
    
    
    5,007Total Revenue
    
    
    653,816
    
    
    
    113,987
    
    
    
    6,429
    
    
    
    44,597
    
    
    
    818,829Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    366,086
    
    
    
    47,969
    
    
    
    2,634
    
    
    
    
    
    
    
    416,689Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,635
    
    
    
    229,635Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    586
    
    
    
    7,379
    
    
    
    7,965Total Losses and Expenses
    
    
    366,086
    
    
    
    47,969
    
    
    
    3,220
    
    
    
    237,014
    
    
    
    654,289Income Before Income Taxes
    
    
    287,730
    
    
    
    66,018
    
    
    
    3,209
    
    
    
    (192,417
    )
    
    
    164,540Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,956
    
    
    
    48,956Net Income
    
    $
    287,730
    
    
    $
    66,018
    
    
    $
    3,209
    
    
    $
    (241,373
    )
    
    $
    115,584Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    88,589
    
    
    $
    4,314,921
    
    
    $
    4,403,5102007:Gross Written Premiums
    
    $
    633,277
    
    
    $
    120,705
    
    
    $
    38,645
    
    
    $
    
    
    
    $
    792,627Net Written Premiums
    
    $
    578,965
    
    
    $
    99,897
    
    
    $
    (2,242
    )
    
    $
    
    
    
    $
    676,620Revenue:Net Earned Premiums
    
    $
    558,547
    
    
    $
    93,293
    
    
    $
    4,193
    
    
    $
    
    
    
    $
    656,033Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,495
    
    
    
    55,495Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,821
    
    
    
    29,821Other Income
    
    
    
    
    
    
    
    
    
    
    1,448
    
    
    
    232
    
    
    
    1,680Total Revenue
    
    
    558,547
    
    
    
    93,293
    
    
    
    5,641
    
    
    
    85,548
    
    
    
    743,029Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    238,706
    
    
    
    54,800
    
    
    
    5,588
    
    
    
    
    
    
    
    299,094Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198,650
    
    
    
    198,650Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    796
    
    
    
    5,340
    
    
    
    6,136Total Losses and Expenses
    
    
    238,706
    
    
    
    54,800
    
    
    
    6,384
    
    
    
    203,990
    
    
    
    503,880Income Before Income Taxes
    
    
    319,841
    
    
    
    38,493
    
    
    
    (743
    )
    
    
    (118,442
    )
    
    
    239,149Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,768
    
    
    
    78,768Net Income
    
    $
    319,841
    
    
    $
    38,493
    
    
    $
    (743
    )
    
    $
    (197,210
    )
    
    $
    160,381Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    107,019
    
    
    $
    3,647,930
    
    
    $
    3,754,949
 24




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##### Table of Contents



For The Three Months Ended
    
    
    For The Six Months EndedJune 30,
    
    
    June 30,(In Thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Commercial Lines Net Earned PremiumsCommercial Package
    
    $
    303,282
    
    
    $
    261,611
    
    
    $
    595,084
    
    
    $
    513,053Specialty Property
    
    
    14,498
    
    
    
    14,508
    
    
    
    30,042
    
    
    
    27,757Commercial Auto
    
    
    6,073
    
    
    
    6,104
    
    
    
    11,750
    
    
    
    11,238Antique/Collector Auto
    
    
    7,967
    
    
    
    3,566
    
    
    
    15,552
    
    
    
    5,136All Other
    
    
    763
    
    
    
    853
    
    
    
    1,388
    
    
    
    1,363Total Commercial Lines
    
    
    332,583
    
    
    
    286,642
    
    
    
    653,816
    
    
    
    558,547Specialty Lines Net Earned PremiumsManagement Liability
    
    
    35,176
    
    
    
    25,940
    
    
    
    67,555
    
    
    
    49,658Professional Liability
    
    
    23,172
    
    
    
    21,871
    
    
    
    46,432
    
    
    
    43,635Total Specialty Lines
    
    
    58,348
    
    
    
    47,811
    
    
    
    113,987
    
    
    
    93,293Run-Off Net Earned PremiumsHomeowners and Manufactured Housing
    
    
    2,106
    
    
    
    2,862
    
    
    
    4,622
    
    
    
    4,193National Flood Insurance Program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Run-Off Net Earned Premiums
    
    
    2,106
    
    
    
    2,862
    
    
    
    4,622
    
    
    
    4,193Other Income
    
    
    1,381
    
    
    
    630
    
    
    
    1,807
    
    
    
    1,448Total Run-Off
    
    
    3,487
    
    
    
    3,492
    
    
    
    6,429
    
    
    
    5,641CorporateNet Investment Income
    
    
    32,299
    
    
    
    28,522
    
    
    
    64,304
    
    
    
    55,495Net Realized Investment Gain (Loss)
    
    
    (11,513
    )
    
    
    28,064
    
    
    
    (22,907
    )
    
    
    29,821Other Income
    
    
    2,273
    
    
    
    220
    
    
    
    3,200
    
    
    
    232Total Corporate
    
    
    23,059
    
    
    
    56,806
    
    
    
    44,597
    
    
    
    85,548Total Revenue
    
    $
    417,477
    
    
    $
    394,751
    
    
    $
    818,829
    
    
    $
    743,029
 15.
    
    Subsequent EventOn July 23, 2008, the Company and Tokio Marine Holdings, Inc. (TMHD) entered into an Agreement
and Plan of Merger under which, at the closing of the merger, TMHD
would acquire all outstanding shares of the Company for $61.50 per share, in cash, through TMHDs wholly owned subsidiary,
Tokio Marine & Nichido Fire Insurance Co., Ltd. The total value of this transaction is
approximately $4,700.0 million, and the transaction is expected to close in the fourth quarter
of 2008. The closing of the merger is subject to regulatory and shareholder approval, as well
as other customary closing conditions.
 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
 Forward-Looking Information
  General
     Critical Accounting Estimates
  
    
    Investments  fair value;
 
    
    Investments  other than temporary impairments;
 
    
    Liability for unpaid loss and loss adjustment expenses;
 
    
    Reinsurance receivables;
 
    
    Liability for preferred agent profit sharing; and
 
    
    Share-based compensation expense.
 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
   Results of Operations (Six Months Ended June 30, 2008 compared to June 30, 2007)
 Premiums
 (Dollars In Millions)
    
    Commercial Lines
    
    Specialty Lines
    
    Run-off
    
    Total2008 Gross Written Premiums
    
    $
    723.0
    
    
    $
    134.3
    
    
    $
    31.1
    
    
    $
    888.42007 Gross Written Premiums
    
    $
    633.3
    
    
    $
    120.7
    
    
    $
    38.6
    
    
    $
    792.6Percentage Increase (Decrease)
    
    
    14.2
    %
    
    
    11.3
    %
    
    
    (19.4
    )%
    
    
    12.1
    %2008 Gross Earned Premiums
    
    $
    716.3
    
    
    $
    124.6
    
    
    $
    28.4
    
    
    $
    869.32007 Gross Earned Premiums
    
    $
    613.2
    
    
    $
    115.2
    
    
    $
    44.7
    
    
    $
    773.1Percentage Increase (Decrease)
    
    
    16.8
    %
    
    
    8.2
    %
    
    
    (36.5
    )%
    
    
    12.4
    %
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships
formed by our marketing Regional Vice Presidents continue to result in additional prospects
and increased premium writings in existing product offerings, most notably for the
following:
 §
    
    Our condominium and homeowners associations, religious organizations,
non-profit, antique/collector vehicle, golf and country clubs, day care centers,
and specialty schools products in the commercial package product grouping. These
product offerings accounted for approximately $49.2 million of the $89.7 million
total commercial lines segment gross written premiums increase.§
    
    Our consultant liability product in the professional liability product grouping,
as well as our private company protection, directors and officers, and business
owners products in the management liability product grouping. These product
offerings accounted for all of the $13.6 million total specialty lines segment
gross written premiums increase.
 
    
    The introduction of several new niche product offerings, such as the affordable housing,
special events, and museum commercial package products, as well as the difference in
conditions inland marine specialty property product. These new product offerings accounted
for approximately $26.1 million of the $89.7 million total commercial lines segment gross
written premiums increase.
    
    The acquisition of Gillingham & Associates, Inc. on March 10, 2008, which accounted for
approximately $8.9 million of commercial lines segment gross written premium growth for the
six months ended June 30, 2008.
 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
 
    
    An increase in our marketing personnel, as well as an increase in the number of our
preferred agents.
 
    
    Our Firemark Producer program, which promotes our product offerings and underwriting
philosophy in selected producers offices.
    
    As a result of the factors noted above, the commercial lines and specialty lines
segments in-force policy counts increased by 12.6% and 49.3%, respectively, for the six
months ended June 30, 2008.
  
    
    Realized average rate decreases on renewal business approximating 4.6% and 2.2% for the
commercial lines and specialty lines segments, respectively.
    
    Continued price competition during the six months ended June 30, 2008, particularly with
respect to the following:
 §
    
    Large commercial property-driven accounts located in the non-coastal areas of
the country;§
    
    Commercial package business with annual premiums in excess of $100,000; and§
    
    Professional liability accounts at all premium levels.
 
    
    A reduction in personal lines (run-off segment) production for our homeowners and rental
dwelling policies. This reduction was imposed to reduce our exposure to catastrophe wind
losses. On February 29, 2008, we received approval from the Florida Office of Insurance
Regulation (FOIR) to non-renew all of our Florida personal lines policies, other than
policies issued pursuant to the National Flood Insurance Program, beginning with policies
expiring on or about July 23, 2008. We currently expect the non-renewal process to be
completed by July 23, 2009. As of June 30, 2008, there were approximately 3,677 in-force
policies with an aggregate in-force premium of approximately $2.9 million which expire
between July 23, 2008 and December 31, 2008, which we will not renew during 2008.
    
    A decrease in bowling centers commercial package product gross written premium of $3.2
million as a result of non-renewing policies due to unacceptable underwriting results. For
the six months ended June 30, 2008, gross written premium for the bowling centers
commercial package product was $0.6 million. The Company anticipates that it will continue
to non-renew its remaining bowling centers commercial package business throughout 2008,
which approximated $0.6 million of gross written premium for the six months ended December
31, 2007.
   (Dollars In Millions)
    
    Commercial Lines
    
    Specialty Lines
    
    Run-off
    
    Total2008 Net Written Premiums
    
    $
    662.8
    
    
    $
    133.7
    
    
    $
    7.9
    
    
    $
    804.42007 Net Written Premiums
    
    $
    578.9
    
    
    $
    99.9
    
    
    $
    (2.2
    )
    
    $
    676.6Percentage Increase
    
    
    14.5
    %
    
    
    33.8
    %
    
    
    459.1
    %
    
    
    18.9
    %2008 Net Earned Premiums
    
    $
    653.8
    
    
    $
    114.0
    
    
    $
    4.6
    
    
    $
    772.42007 Net Earned Premiums
    
    $
    558.5
    
    
    $
    93.3
    
    
    $
    4.2
    
    
    $
    656.0Percentage Increase
    
    
    17.1
    %
    
    
    22.2
    %
    
    
    9.5
    %
    
    
    17.7
    %
 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
  
    
    We experienced higher property catastrophe reinsurance rates, maintained the same
catastrophe loss retention, and increased catastrophe coverage limits for our annual June 1, 2007 reinsurance renewal compared to the June 1, 2006 renewal. This resulted in
increased property catastrophe costs for the six month period ended June 30, 2008, compared
to the six month period ended June 30, 2007.
    
    For our June 1, 2008 commercial lines segment property catastrophe reinsurance renewal,
we experienced higher reinsurance rates, purchased increased catastrophe limits due to
higher exposures primarily in the northeastern portion of the country, and increased our
catastrophe loss retention compared to the June 1, 2007 renewal. Our commercial lines
segment property catastrophe reinsurance coverage which is effective June 1, 2008 through
May 31, 2009 is as follows:
 §
    
    Our open-market catastrophe reinsurance coverage is $480.0 million in excess of a
$20.0 million per occurrence retention. The open-market catastrophe program
(coverage principally provided by large reinsurers that are rated at least A-
(Excellent) by A.M. Best Company) includes one mandatory reinstatement.§
    
    We also purchased a reinstatement premium protection contract for the First and
Second Excess Layers of our commercial lines segment open-market catastrophe
reinsurance coverage, effective June 1, 2008. This reinstatement premium protection
contract provides coverage for reinstatement premiums which we may become liable to
pay as a result of a loss occurrence between $20.0 million and $100.0 million (the
First and Second Excess Layers of the commercial lines segment open-market
catastrophe reinsurance program).
 
    
    For our run-off segment, our property catastrophe costs were significantly lower for the
six months ended June 30, 2008 compared to June 30, 2007. For our June 1, 2007 run-off
segment property catastrophe reinsurance renewal, we experienced reduced reinsurance rates,
lower catastrophe loss retention and purchased decreased catastrophe coverage limits due to
lower exposures, compared to the June 1, 2006 renewal.
    
    For our June 1, 2008 run-off segment property catastrophe reinsurance renewal, we experienced lower
reinsurance rates, maintained the same catastrophe loss retention, and purchased decreased
catastrophe coverage limits due to lower exposures, compared to our June 1, 2007 renewal.
Our run-off segment property catastrophe reinsurance coverage, which is effective June 1,
2008 through May 31, 2009 is as follows:
 §
    
    Our reinsurance coverage is approximately $43.3 million in excess of a $3.5
million per occurrence retention. Of this total amount, the Florida Hurricane
Catastrophe Fund (FHCF) provides, on an aggregate basis for Liberty American
Select Insurance Company and Liberty American Insurance Company, 90% coverage for
approximately $26.8 million in excess of $6.4 million per occurrence. The FHCF
coverage inures to the benefit of our open-market catastrophe program. The coverage
provided by our open-market catastrophe program (large reinsurers that are rated at
least A- (Excellent) by A.M. Best Company) includes one mandatory reinstatement,
but the FHCF coverage does not reinstate. Since the FHCF reimbursement coverage
cannot be reinstated, our open-market program is structured such that catastrophe
reinsurance coverage in excess of the FHCF coverage will drop down and fill in any
portion of the FHCF which has been utilized.
 
    
    For our commercial and specialty lines segments, we experienced rate reductions on our
annual January 1, 2008 renewal of our casualty excess of loss reinsurance coverage compared
to the rate on our January 1, 2007 renewal of this coverage.
 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
 
    
    For our commercial lines segment, we experienced a rate increase on our annual January
1, 2008 renewal of our property excess of loss reinsurance coverage compared to the rate on
our January 1, 2007 renewal of this coverage.
    
    For our specialty lines segment, the higher percentage increase in our net written
premiums compared to the percentage increase in our gross written premiums for the six
months ended June 30, 2008 is primarily
due to the January 1, 2008 renewal of our casualty excess of loss reinsurance coverage. We
experienced rate reductions on our January 1, 2008 renewal of this coverage compared to our
January 1, 2007 renewal of this coverage. This reduced rate was applied to our January 1,
2008 gross unearned premiums, which resulted in a reduction to ceded written premium as of
January 1, 2008.
    
    Certain of our reinsurance contracts have reinstatement or additional premium provisions
under which we must pay reinstatement or additional reinsurance premiums to reinstate
coverage provisions upon utilization of initial reinsurance coverage. During the six
months ended June 30, 2008 and 2007, we accrued $0.9 million ($1.0 million for the
commercial lines segment and $(0.1) million for the specialty lines segment) and $1.9
million ($0.8 million for the commercial lines segment and $1.1 million for the specialty
lines segment) respectively, of reinstatement or additional reinsurance premium under our
excess of loss reinsurance treaties, as a result of changes in our ultimate loss estimates.
These reinstatement and additional premiums increase ceded written and earned premiums and
decrease net written and earned premiums.
 Net Investment Income:
    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
 Net Realized Investment Gain (Loss):
   Other Income
 Net Loss and Loss Adjustment Expenses:
  
    
    The growth in net earned premiums.
    
    Net reserve actions taken during the six months ended June 30, 2008 which decreased net
estimated unpaid loss and loss adjustment expenses for accident years 2007 and prior by
$24.4 million, as compared to net reserve actions taken during the six months ended June
30, 2007 which decreased estimated net unpaid loss and loss adjustment expenses for
accident years 2006 and prior by $33.7 million. Decreases in the estimated net unpaid loss
and loss adjustment expenses for prior accident years during the six months ended June 30,
2008 were as follows:
 Net Basis(Dollars In Millions)
    
    DecreaseAccident Year 2007
    
    $
    4.7Accident Year 2006
    
    
    8.9Accident Year 2005
    
    
    5.3Accident Years 2004 and prior
    
    
    5.5Total
    
    $
    24.4
 For accident year 2007, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability and
management liability coverages due to better than expected case incurred loss development,
primarily as a result of claim frequency being less than anticipated for commercial general
liability coverage and claim severity being less than anticipated for management liability
coverage These lower loss estimates were partially offset by higher
 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
 loss estimates for
commercial automobile coverages due to higher than expected case incurred loss development,
primarily as a result of both claim frequency and severity being greater than anticipated.For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability,
commercial property, and professional liability coverages due to better than expected case
incurred loss development, primarily as a result of claim severity being less than
anticipated. These lower loss estimates were partially offset by higher loss estimates for
commercial automobile coverages due to higher than expected case incurred loss development,
primarily as a result of claim severity being greater than anticipated.For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability and
management liability and professional liability coverages due to better than expected case
incurred loss development, primarily as a result of claim severity being less than
anticipated.For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates across most coverages due to
better than expected case incurred loss development, primarily as a result of claim severity
being less than anticipated.
 
    
    An increase in the current accident year net ultimate loss and loss adjustment expense
ratio for the six months ended June 30, 2008 compared to 2007. During the six months ended
June 30, 2008, a net ultimate loss and loss adjustment expense ratio of 57.1% was estimated
for the 2008 accident year. During the six months ended June 30, 2007, a net ultimate loss
and loss adjustment expense ratio of 50.7% was estimated for the 2007 accident year. The
increase in the 2008 accident year loss and loss adjustment expense ratio is principally
attributable to:
 §
    
    Realized average rate decreases on renewal business approximating 4.6% and 2.2%
for the commercial and specialty lines segments, respectively, for the six months
ended June 30, 2008 compared to the same period in 2007.§
    
    $20.6 million of loss and loss adjustment expenses during the six months ended
June 30, 2008 resulting from hail, tornado, and wind losses which occurred in
Minnesota, Nebraska, Kansas, and Oklahoma during the period of May 22, 2008
through May 26, 2008, and which occurred in Illinois, Indiana, Kansas, Minnesota,
Nebraska, and Oklahoma during the period of May 29, 2008 through June 1, 2008. We
did not have similar losses during the six months ended June 30, 2007.
  Acquisition Costs and Other Underwriting Expenses:
 Income Tax Expense:
 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
 Results of Operations (Three Months Ended June 30, 2008 compared to June 30, 2007)
 Premiums
 (Dollars In Millions)
    
    Commercial Lines
    
    Specialty Lines
    
    Run-off
    
    Total2008 Gross Written Premiums
    
    $
    364.6
    
    
    $
    65.2
    
    
    $
    15.5
    
    
    $
    445.32007 Gross Written Premiums
    
    $
    321.9
    
    
    $
    60.0
    
    
    $
    16.6
    
    
    $
    398.5Percentage Increase (Decrease)
    
    
    13.3
    %
    
    
    8.7
    %
    
    
    (6.6
    )%
    
    
    11.7
    %2008 Gross Earned Premiums
    
    $
    363.4
    
    
    $
    63.3
    
    
    $
    13.6
    
    
    $
    440.32007 Gross Earned Premiums
    
    $
    315.5
    
    
    $
    58.4
    
    
    $
    21.6
    
    
    $
    395.5Percentage Increase (Decrease)
    
    
    15.2
    %
    
    
    8.4
    %
    
    
    (37.0
    )%
    
    
    11.3
    %
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships
formed by our marketing Regional Vice Presidents continue to result in additional prospects
and increased premium writings in existing product offerings, most notably for the
following:
 §
    
    Our condominium and homeowners associations, religious organizations,
non-profit, antique/collector vehicle, specialty schools, and golf and country
clubs products in the commercial package product grouping; These product offerings
accounted for approximately $21.6 million of the $42.7 million total commercial
lines segment gross written premiums increase.§
    
    Our consultant liability product in the professional liability product grouping,
as well as our private company protection, directors and officers, and business
owners products in the management liability product grouping. These product
offerings accounted for all of the $5.2 million total specialty lines segment gross
written premiums increase.
 
    
    The introduction of several new niche product offerings, such as the affordable housing,
vehicle parks, special events, and museums commercial package products, as well as the
difference in conditions inland marine specialty property product. These new product
offerings accounted for approximately $14.8 million of the $42.7 million total commercial
lines segment gross written premiums increase.
    
    The acquisition of Gillingham & Associates, Inc. on March 10, 2008, which accounted for
approximately $8.9 million of commercial lines segment gross written premium growth for the
three months ended June 30, 2008.
    
    An increase in our marketing personnel, as well as an increase in the number of our
preferred agents.
    
    Our Firemark Producer program, which promotes our product offerings and underwriting
philosophy in selected producers offices.
    
    As a result of the factors noted above the commercial and specialty lines segments
in-force policy counts increased by 5.6% and 17.8%, respectively, for the three months
ended June 30, 2008.
  
    
    Realized average rate decreases on renewal business approximating 4.4% and 2.4% for the
commercial lines and specialty lines segments, respectively.
 33




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 
    
    Continued price competition during the three months ended June 30, 2008, particularly
with respect to the following:
 §
    
    Large commercial property-driven accounts located in the non-coastal areas of
the country;§
    
    Commercial package business with annual premiums in excess of $100,000; and§
    
    Professional liability accounts at all premium levels.
 
    
    A reduction in personal lines (run-off segment) production for our homeowners and rental
dwelling policies. This reduction was imposed to reduce our exposure to catastrophe wind
losses.On February 29, 2008, we received approval from the Florida Office of Insurance Regulation
(FOIR) to non-renew all of our Florida personal lines policies, other than policies issued
pursuant to the National Flood Insurance Program, beginning with policies expiring on or
about July 23, 2008. We currently expect the non-renewal process to be completed by July
23, 2009. As of June 30, 2008, there were approximately 3,677 in-force policies with an
aggregate in-force premium of approximately $2.9 million which expire between July 23, 2008
and December 31, 2008, which we will not renew during 2008.
    
    A decrease in bowling centers commercial package product gross written premium of $0.8
million as a result of non-renewing policies due to unacceptable underwriting results. For
the three months ended June 30, 2008, gross written premium for the bowling centers
commercial package product was $0.3 million. The Company anticipates that it will continue
to non-renew its remaining bowling centers commercial package business throughout 2008,
which approximated $0.6 million of gross written premium for the six months ended December
31, 2007.
   (Dollars In Millions)
    
    Commercial Lines
    
    Specialty Lines
    
    Run-off
    
    Total2008 Net Written Premiums
    
    $
    335.4
    
    
    $
    60.1
    
    
    $
    2.9
    
    
    $
    398.42007 Net Written Premiums
    
    $
    293.6
    
    
    $
    49.3
    
    
    $
    (3.7
    )
    
    $
    339.2Percentage Increase
    
    
    14.2
    %
    
    
    21.9
    %
    
    
    178.4
    %
    
    
    17.5
    %2008 Net Earned Premiums
    
    $
    332.6
    
    
    $
    58.3
    
    
    $
    2.1
    
    
    $
    393.02007 Net Earned Premiums
    
    $
    286.6
    
    
    $
    47.8
    
    
    $
    2.9
    
    
    $
    337.3Percentage Increase (Decrease)
    
    
    16.1
    %
    
    
    22.0
    %
    
    
    (27.6
    )%
    
    
    16.5
    %
  
    
    We experienced higher property catastrophe reinsurance rates, maintained the same
catastrophe loss retention, and increased catastrophe coverage limits for our annual June
1, 2007 reinsurance renewal compared to the June 1, 2006 renewal. This resulted in
increased property catastrophe costs for the three month period ended June 30, 2008,
compared to the three month period ended June 30, 2007. For the June 1, 2008 commercial
lines segment property catastrophe reinsurance renewal, we experienced higher reinsurance
rates, purchased increased catastrophe limits due to higher exposures primarily in the
northeastern portion of the country, and increased our catastrophe loss retention compared
to the June 1, 2007 renewal.
 34




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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
 
    
    For our run-off segment, our property catastrophe costs were significantly lower for the
three months ended June 30, 2008 compared to June 30, 2007. For our June 1, 2007 run-off
segment property catastrophe reinsurance renewal, we experienced reduced reinsurance rates,
lower catastrophe loss retention and purchased decreased catastrophe coverage limits due to
lower exposures, compared to the June 1, 2006
renewal. For our June 1, 2008 run-off segment property catastrophe reinsurance renewal, we experienced
lower reinsurance rates, maintained the same catastrophe loss retention, and purchased
decreased catastrophe coverage limits due to lower exposures, compared to our June 1, 2007
renewal.
    
    For our commercial and specialty lines segments, we experienced rate reductions on our
annual January 1, 2008 renewal of our casualty excess of loss reinsurance coverage compared
to the rate on our January 1, 2007 renewal of this coverage.
    
    For our commercial lines segment, we experienced a rate increase on our annual January
1, 2008 renewal of our property excess of loss reinsurance coverage compared to the rate on
our January 1, 2007 renewal of this coverage.
 Net Investment Income:
    Net Realized Investment Gain (Loss):
  35




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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
   Other Income
 Net Loss and Loss Adjustment Expenses:
  
    
    The growth in net earned premiums.
    
    Net reserve actions taken during the three months ended June 30, 2008 which decreased
net estimated unpaid loss and loss adjustment expenses for accident years 2007 and prior by
$18.5 million, as compared to net reserve actions taken during the three months ended June
30, 2007 which decreased estimated net unpaid loss and loss adjustment expenses for
accident years 2006 and prior by $20.8 million. Decreases in the estimated net unpaid loss
and loss adjustment expenses for prior accident years during the three months ended June 30, 2008 were as follows:
 (Dollars In Millions)
    
    Net Basis DecreaseAccident Year 2007
    
    $
    6.6Accident Year 2006
    
    
    4.8Accident Year 2005
    
    
    4.1Accident Years 2004 and prior
    
    
    3.0Total
    
    $
    18.5
 For accident year 2007, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability,
commercial property, and management liability coverages due to better than expected case
incurred loss development, primarily as a result of claim frequency being less than
anticipated for commercial general liability and commercial property coverages, and claim
severity being less than anticipated for management liability coverage. These lower loss
estimates were partially offset by higher loss estimates for commercial automobile coverages
due to higher than expected case incurred loss development, primarily as a result of both
claim frequency and severity being greater than anticipated.For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial property and
professional liability coverages due to better than expected case incurred loss development,
primarily as a result of claim severity being less than anticipated. These lower loss
estimates were partially offset by higher loss estimates for commercial
 36




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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
 automobile coverages
due to higher than expected case incurred loss development, primarily as a result of claim
severity being greater than anticipated.For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for management liability and
professional liability coverages due to better than expected case incurred loss development,
primarily as a result of claim severity being less than anticipated.For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for commercial general
liability, management liability, and professional liability coverages due to better than
expected case incurred loss development, primarily as a result of claim severity being less
than anticipated.
    
    An increase in the current accident year net ultimate loss and loss adjustment expense
ratio for the three months ended June 30, 2008 compared to 2007. During the three months
ended June 30, 2008, a net ultimate loss and loss adjustment expense ratio of 61.5% was
estimated for the 2008 accident year. During the three months ended June 30, 2007, a net
ultimate loss and loss adjustment expense ratio of 50.2% was estimated for the 2007
accident year. The increase in the 2008 accident year loss and loss adjustment expense
ratio is principally attributable to:
 §
    
    Realized average rate decreases on renewal business approximating 4.4% and 2.4%
for the commercial and specialty lines segments, respectively, for the three
months ended June 30, 2008 compared to the same period in 2007.§
    
    $20.6 million of loss and loss adjustment expenses during the three months
ended June 30, 2008 resulting from hail, tornado, and wind losses which occurred
in Minnesota, Nebraska, Kansas, and Oklahoma during the period of May 22, 2008
through May 26, 2008, and which occurred in Illinois, Indiana, Kansas, Minnesota,
Nebraska, and Oklahoma during the period of May 29, 2008 through June 1, 2008. We
did not have similar losses during the three months ended June 30, 2007.
  Acquisition Costs and Other Underwriting Expenses:
 Income Tax Expense:
 Investments
  37




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  §
    
    The fair value of our total invested assets is primarily measured utilizing a market based
valuation methodology (Market Approach). A Market Approach utilizes prices and other
relevant information generated by market transactions involving identical or comparable assets
or liabilities to measure fair value. We have consistently applied the Market Approach as of
and for the three and six months ended June 30, 2008.
 §
    
    Approximately 98.7% of our total invested assets is measured utilizing significant
observable inputs (Level 1 or Level 2 per SFAS 157). Approximately 1.3% of our total invested
assets is measured utilizing significant unobservable inputs (Level 3 per SFAS 157).
 §
    
    Approximately 99.3% of our fixed maturity investments is measured utilizing significant
observable inputs (Level 1 or Level 2 per SFAS 157). Approximately 93.6% of our equity
investments is measured utilizing significant observable inputs (Level 1 or Level 2 per SFAS
157). We do not consider our use of unobservable inputs (Level 3 per SFAS 157) in our fair
value measurements to be significant to our financial position, results of operations, or
liquidity.
 §
    
    Significant observable inputs utilized to measure fair value include matrix pricing for
fixed maturity investments (Level 2 per SFAS 157) and quoted market prices for equity
investments (Level 1 per SFAS 157). Matrix pricing relies on observable inputs from active
markets other than quoted market prices including, but not limited to, benchmark securities
and yields, latest reported trades, quotes from brokers or dealers, issuer spreads, bids,
offers, and other relevant reference data to determine fair value. Matrix pricing is used
to measure the fair value of fixed maturity securities where obtaining individual quoted
market prices is impractical.
 §
    
    The significant unobservable inputs utilized to measure fair value include broker pricing
and net asset value calculations.
 §
    
    We made no material adjustments to the fair value of our invested assets as of and for the
three and six months ended June 30, 2008.
    38




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Securities with an Unrealized Loss as of June 30, 2008:
  
    
    The industry concentration as a percentage of total estimated fair value represents
investments in a geographically diversified pool of investment grade municipal securities
issued by states, political subdivisions, and public authorities under general obligation
and/or special district/purpose issuing authority. The unrealized losses on these
securities are generally attributable to changes both in market spreads and in the level of
Treasury yields. The primary factor underlying the spread widening is the increasing
market risk aversion to issues surrounding the monoline financial guarantors, given such
guarantors significant participation in the municipal sector through their financial
guarantee insurance.
    
    The industry concentration as a percentage of the total gross unrealized loss primarily
represents investments in equity securities issued by companies in the diversified
financial services industry. The unrealized losses on these securities are generally
attributable to the recent correction in the financial services industry primarily caused
by the deterioration of credit conditions and increased risk aversion in the marketplace
during the second half of 2007 and the first half of 2008. As of June 30, 2008, these
securities were evaluated for other than temporary impairment in accordance with the
Companys impairment policy, and the Company concluded that these securities were not other
than temporarily impaired.
  39




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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
  (In Millions)
    
    Gross Unrealized Losses as of June 30, 2008Fixed MaturitiesAvailable for SaleExcluding InterestsContinuous time in
    
    in Securitized
    
    
    Interests in
    
    
    Fixed Maturities
    
    
    
    
    
    
    TotalUnrealized loss position
    
    Assets
    
    
    Securitized Assets
    
    
    Available for Sale
    
    
    Equity Securities
    
    
    Investments0  3 months
    
    $
    5.0
    
    
    $
    6.0
    
    
    $
    11.0
    
    
    $
    10.7
    
    
    $
    21.74  6 months
    
    
    9.3
    
    
    
    4.4
    
    
    
    13.7
    
    
    
    9.3
    
    
    
    23.07  9 months
    
    
    1.3
    
    
    
    0.2
    
    
    
    1.5
    
    
    
    10.3
    
    
    
    11.810  12 months
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    
    
    
    
    0.213  18 months
    
    
    5.6
    
    
    
    0.9
    
    
    
    6.5
    
    
    
    
    
    
    
    6.519  24 months
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1> 24 months
    
    
    0.8
    
    
    
    2.1
    
    
    
    2.9
    
    
    
    
    
    
    
    2.9Total Gross
Unrealized Losses
    
    $
    22.2
    
    
    $
    13.7
    
    
    $
    35.9
    
    
    $
    30.3
    
    
    $
    66.2Estimated fair
value of
securities with a
gross
unrealized loss
    
    $
    1,126.7
    
    
    $
    560.7
    
    
    $
    1,687.4
    
    
    $
    155.7
    
    
    $
    1,843.1
  US Treasury Securities and Obligations of U.S. Government Agencies:The unrealized losses on our investments in U.S. Treasury Securities and Obligations of U.S.
Government Agencies which have ratings of Aaa/AAA are attributable to the general level of
interest rates. Of the 29 investment positions held, approximately 10.3% were in an unrealized
loss position as of June 30, 2008.Obligations of States and Political Subdivisions:The unrealized losses on our investments in long term tax exempt securities, which have ratings
of Baa3/BBB- to Aaa/AAA are attributable to changes both in market spreads and in the level of
Treasury yields. Of the 968 investment positions held, approximately 57.9% were in an
unrealized loss position. The contractual terms of the investments do not permit the issuer to
settle the securities at a price less than the amortized cost of the investments.Corporate Debt Securities:The unrealized losses on our long term investments in corporate bonds, which have ratings from
Baa3/BBB to Aaa/AAA are attributable primarily to changes in market spreads. Of the 62
investment positions held, approximately 59.7% were in an unrealized loss position. The
contractual terms of the investments do not permit the issuer to settle the securities at a
price less than the amortized cost of the investments.
  Asset Backed Securities:The unrealized losses on our investments in Asset Backed Securities which have ratings of
Baa2/BBB to Aaa/AAA, are attributable primarily to changes in market spreads. Of the 113
investment positions held, approximately 53.1% were in an unrealized loss position. The
contractual terms of the investments do not permit the issuer to settle the security at a price
less than the amortized cost of the investments.Mortgage Pass-Through Securities:The unrealized losses on our investments in Mortgage Pass-Through Securities which have ratings
of Aaa/AAA, are attributable primarily to changes in market spreads. Of the 150 investment
positions held,
 40




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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
 approximately 57.3% were in an unrealized loss position. The contractual terms
of the investments do not permit the issuer to settle the security at a price less than the
amortized cost of the investments.Collateralized Mortgage Obligations:The unrealized losses on our investments in Collateralized Mortgage Obligations which have
ratings of A2/A to Aaa/AAA, are attributable primarily to changes in market spreads. Of the 167
investment positions held, approximately 33.5% were in an unrealized loss position. The
contractual terms of the investments do not permit the issuer to settle the security at a price
less than the amortized cost of the investments.
  Structured Securities Portfolio:
  
    
    $569.4 million of U.S. government agency backed Mortgage Pass-Through Securities;
 
    
    $207.7 million of U.S. government agency backed Collateralized Mortgage Obligations;
 
    
    $68.1 million of non-U.S. government agency Collateralized Mortgage Obligations backed by
pools of prime loans (generally consists of loans made to the highest credit quality borrowers
with Fair Isaac Corporation (FICO) scores generally greater than 720);
 
    
    $16.2 million of structured securities backed by pools of ALT A loans (loans with less than
normal documentation and borrowers with FICO scores in the approximated range of 650 to the
low 700s); and
 
    
    $3.1 million of structured securities backed by pools of subprime loans (loans with less than
normal documentation, higher combined loan-to-value ratios and borrowers with FICO scores
capped at approximately 650).
  
    
    first to pay or among the first cash flow tranches of their respective transactions;
    
    weighted average life of 1.9 years;
    
    spread across multiple vintages (origination year of underlying collateral pool), and
    
    have not experienced any ratings downgrades as of June 30, 2008.
    41




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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
 Municipal Bond Portfolio:
  Weighted AverageMarket Value of Insured
    
    
    Percentage of
    
    
    Underlying Rating ofMunicipal Bonds
    
    
    Municipal Bond
    
    
    Insured MunicipalMonoline Insurer
    
    (In Millions)
    
    
    Portfolio
    
    
    BondsFinancial Security
Assurance, Inc.
    
    $
    327.9
    
    
    
    20.4
    %
    
    AAMBIA, Inc.
    
    
    298.7
    
    
    
    18.6
    
    
    AAFGIC Corporation.
    
    
    198.9
    
    
    
    12.4
    
    
    AA-AMBAC Financial Group, Inc.
    
    
    166.1
    
    
    
    10.3
    
    
    AA-XL Capital, LTD.
    
    
    4.4
    
    
    
    0.3
    
    
    AA-Total
    
    $
    996.0
    
    
    
    62.0
    %
    
    AA
  Securities with an Unrealized Loss as of December 31, 2007:
  
    
    The industry concentration as a percentage of total estimated fair value represents
investments in a geographically diversified pool of investment grade municipal securities
issued by states, political subdivisions, and public authorities under general obligation
and/or special district/purpose issuing authority. The unrealized losses on these securities
are generally attributable to spread widening. The primary factor underlying the spread
widening is the increasing market risk aversion to issues surrounding the monoline financial
guarantors, given the monolines significant participation in the municipal sector through
their financial guarantee insurance.
 
    
    The industry concentration as a percentage of the total gross unrealized loss primarily
represents investments in equity securities issued by companies in the Diversified Financial
Services industry. The unrealized losses on these securities are generally attributable to the
recent correction in the Financial Services industry primarily caused by the deterioration of
credit conditions in the marketplace during the third and fourth quarters of 2007. As of
December 31, 2007, these equity securities were evaluated for other than temporary impairment
in accordance with the Companys impairment policy and the Company concluded that these
securities were not other than temporarily impaired.
  42




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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
  (In Millions)
    
    Gross Unrealized Losses as of December 31, 2007Fixed MaturitiesAvailable for SaleExcluding Interests
    
    
    Interests in
    
    
    Fixed MaturitiesContinuous time in
    
    in Securitized
    
    
    Securitized
    
    
    Available
    
    
    Equity
    
    
    TotalUnrealized loss position
    
    Assets
    
    
    Assets
    
    
    for Sale
    
    
    Securities
    
    
    Investments0  3 months
    
    $
    0.2
    
    
    $
    0.7
    
    
    $
    0.9
    
    
    $
    8.1
    
    
    $
    9.0>3  6 months
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    6.5
    
    
    
    6.6>6  9 months
    
    
    0.8
    
    
    
    
    
    
    
    0.8
    
    
    
    7.6
    
    
    
    8.4>9  12 months
    
    
    1.3
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.3>12  18 months
    
    
    0.2
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2>18  24 months
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1> 24 months
    
    
    1.4
    
    
    
    2.2
    
    
    
    3.6
    
    
    
    
    
    
    
    3.6Total Gross Unrealized Losses
    
    $
    4.0
    
    
    $
    3.0
    
    
    $
    7.0
    
    
    $
    22.2
    
    
    $
    29.2Estimated fair value of
securities with a gross
unrealized loss
    
    $
    570.4
    
    
    $
    357.6
    
    
    $
    928.0
    
    
    $
    118.1
    
    
    $
    1,046.1
  US Treasury Securities and Obligations of U.S. Government Agencies:
The unrealized losses on our Aaa/AAA rated investments in U.S. Treasury Securities and
Obligations of U.S. Government Agencies are attributable to interest rate fluctuations since the
date of purchase. Of the 30 investment positions held, approximately 26.7% were in an
unrealized loss position. The contractual terms of the investments do not permit the issuer to
settle the securities at a price less than the amortized cost of the investments.Obligations of States and Political Subdivisions:The unrealized losses on our investments in long term tax exempt securities, which have ratings
of A1/A+ to AAA/Aaa, are generally caused by spread widening. Of the 873 investment positions
held, approximately 32.8% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the securities at a price less than the amortized
cost of the investments.Corporate Debt Securities:The unrealized losses on our long term investments in Corporate bonds, which have ratings from
Baa3/BBB to Aaa/AAA, are generally caused by spread widening. Of the 73 investment positions
held, approximately 79.5% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the securities at a price less than the amortized
cost of the investments.
  Asset Backed Securities:The unrealized losses on our investments in Asset Backed Securities, which have ratings from
A2/A to Aaa/AAA are generally caused by spread widening. Of the 116 investment positions held,
approximately 40.5% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the security at a price less than the amortized
cost of the investments.
 43




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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
 Mortgage Pass-Through Securities:The unrealized losses on our investments in Mortgage Pass-Through Securities which have ratings
of Aaa/AAA are generally caused by spread widening. Of the 150 investment positions held,
approximately 38.7% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the security at a price less than the amortized
cost of the investments.
 Collateralized Mortgage Obligations:The unrealized losses on our investments in Collateralized Mortgage Obligations which have
ratings of Aa2/AA+ to Aaa/AAA are generally caused by spread widening. Of the 172 investment
positions held, approximately 41.3% were in an unrealized loss position. The contractual terms
of the investments do not permit the issuer to settle the security at a price less than the
amortized cost of the investments.
  Gross Realized Losses:
     Liquidity and Capital Resources
   44




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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
     
    
    $57.2 million of cash provided from borrowings from the Federal Home Loan Bank of
Pittsburgh (FHLB),
    
    $45.0 million of cash provided from borrowings from our unsecured $50.0 million credit
agreement,
    
    $3.9 million of cash provided from proceeds from the issuance of shares pursuant to our
stock based compensation plans and stock purchase plans,
    
    $2.0 million of cash provided from excess tax benefit from the issuance of shares
pursuant to stock based compensation plans, and
    
    $2.0 million of cash provided from the collection of notes receivable associated with
our employee stock purchase plans.
  
    
    $42.9 million of cash used to repurchase common stock under our stock purchase
authorization;
    
    $45.0 million of cash used for repayments on our unsecured $50.0 million credit
agreement.
    45




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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
    46




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##### Table of Contents



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Fair Value
    
    (bp=basis points)
    
    in Interest Rates
    
    Fair Value
    
    Equity(Dollars in Thousands)June 30, 2008:InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    2,844,209
    
    
    200 bp decrease
    
    $
    3,133,908
    
    
    
    10.2
    %
    
    
    11.8
    %100 bp decrease
    
    $
    2,990,793
    
    
    
    5.2
    %
    
    
    6.0
    %50  bp decrease
    
    $
    2,917,768
    
    
    
    2.6
    %
    
    
    3.0
    %50  bp increase
    
    $
    2,770,855
    
    
    
    (2.6
    )%
    
    
    (3.0
    )%100 bp increase
    
    $
    2,698,571
    
    
    
    (5.1
    )%
    
    
    (5.9
    )%200 bp increase
    
    $
    2,558,889
    
    
    
    (10.0
    )%
    
    
    (11.6
    )%June 30, 2007:InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    2,367,228
    
    
    200 bp decrease
    
    $
    2,590,289
    
    
    
    9.4
    %
    
    
    11.0
    %100 bp decrease
    
    $
    2,479,171
    
    
    
    4.7
    %
    
    
    5.5
    %50  bp decrease
    
    $
    2,423,438
    
    
    
    2.4
    %
    
    
    2.8
    %50  bp increase
    
    $
    2,310,641
    
    
    
    (2.4
    )%
    
    
    (2.8
    )%100 bp increase
    
    $
    2,254,153
    
    
    
    (4.8
    )%
    
    
    (5.6
    )%200 bp increase
    
    $
    2,142,740
    
    
    
    (9.5
    )%
    
    
    (11.0
    )%
 47




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Item 4. Controls and Procedures
    48




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
  
    
         49




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##### Table of Contents



(c) Total
    
    (d)Number of
    
    ApproximateShares
    
    Dollar Value ofPurchased as
    
    Shares ThatPart of
    
    May Yet BePublicly
    
    Purchased(a) Total Number
    
    (b) Average
    
    Announced
    
    Under theof Shares
    
    Price Paid per
    
    Plans or
    
    Plans orPeriod
    
    Purchased
    
    Share
    
    Programs
    
    ProgramsApril 1  April 30
    
    
    6,170
    (1)
    
    $
    34.68
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    52,100,000
    (2)May 1  May 31
    
    
    500
    (1)
    
    $
    30.64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    52,100,000
    (2)June 1  June 30
    
    
    6,025
    (1)
    
    $
    34.36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    52,100,000
    (2)
 
 (1)
    
    Such shares were issued under the Companys Employee Stock Purchase Plan and
Amended and Restated Employees Stock Incentive and Performance Based Compensation 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, was $125.3 million as of June 30, 2008. As
of June 30, 2008, $73.2 million has been utilized. 
   
   Name
    
    Votes For
    
    Votes WithheldJames J. Maguire
    
    
    63,796,244
    
    
    
    3,647,074James J. Maguire, Jr.
    
    
    67,067,553
    
    
    
    375,765Sean S. Sweeney
    
    
    67,068,388
    
    
    
    374,930Aminta Hawkins Breaux
    
    
    67,071,030
    
    
    
    372,288Michael J. Cascio
    
    
    67,071,162
    
    
    
    372,156Elizabeth H. Gemmill
    
    
    67,071,757
    
    
    
    371,561Paul R. Hertel, Jr.
    
    
    67,069,780
    
    
    
    373,538Michael J. Morris
    
    
    64,618,801
    
    
    
    2,824,517Shaun F. OMalley
    
    
    67,069,063
    
    
    
    374,255Donald A. Pizer
    
    
    67,072,563
    
    
    
    370,755Ronald R. Rock
    
    
    67,072,403
    
    
    
    370,915
 50




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##### Table of Contents



BrokerVotes For
    
    Votes Against
    
    Abstentions
    
    Non-VotesApproval of the
appointment of
PricewaterhouseCoopers,
LLP as independent
registered public
accounting firm for the
year 2008
    
    
    67,339,986
    
    
    
    85,982
    
    
    
    17,352
    
    
    
    Approval of an
amendment to the
Companys Articles of
Incorporation to adopt
a majority vote
standard for
uncontested elections
of Directors and
eliminate cumulative
voting in elections of
Directors
    
    
    62,007,356
    
    
    
    1,124,776
    
    
    
    118,362
    
    
    
    4,192,827Approval of an
amendment to the
Companys Articles of
Incorporation to
increase the number of
authorized shares of
common stock from
100,000,000 to 125,000,000
    
    
    62,264,100
    
    
    
    3,164,956
    
    
    
    14,256
    
    
    
    
 
   51




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##### Table of Contents



Exhibit No.
    
    Description10.1*
    
    Casualty Excess of Loss Reinsurance Contract effective January 1, 2008.10.2*
    
    Casualty (Clash) Excess of Loss Contract effective January 1, 2008.10.3*
    
    Property Per Risk Excess of Loss Agreement of Reinsurance with General
Reinsurance Corporation effective January 1, 2008.10.4*
    
    Property Fourth Per Risk Excess of Loss Reinsurance Agreement
effective January 1, 2008  25% Placement via Willis Re Inc.10.5*
    
    Property Fifth Per Risk Excess of Loss Reinsurance Agreement effective
January 1, 2008  50% Share with Arch Reinsurance Company.10.6*
    
    Terrorism Catastrophe Excess of Loss Reinsurance Contract  20% Share
with Validus Reinsurance, LTD. effective March 1, 200831.1*
    
    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. 52




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##### Table of Contents



SIGNATURES
  PHILADELPHIA CONSOLIDATED HOLDING CORP.RegistrantDate August 5, 2008
    
    James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive Officer(Principal Executive Officer)Date August 5, 2008
    
    Craig P. KellerCraig P. KellerExecutive Vice President, Secretary,Treasurer and Chief Financial Officer(Principal Financial and Accounting Officer)
 53