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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, 2006
 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
  þ o o
  o þ




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##### 



INDEX
 For the Quarterly Period Ended June 30, 2006
 Part I - Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets June 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations and Comprehensive Income - For the three and six months ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Changes in Shareholders Equity - For the six months ended June 30, 2006 and the year ended December 31, 2005
    
    
    5Consolidated Statements of Cash Flows - For the six months ended June 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-23Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24-39Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    41Part II - Other InformationItem 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    43Signatures
    
    
    44Certification of the Company's chief executive officerCertification of the Company's chief financial officerCertification of the Company's chief executive officer, pursuant to Section 906Certification of the Company's chief financial officer, pursuant to Section 906
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
  As ofJune 30, 2006
    
    
    December 31,(Unaudited)
    
    
    2005ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $1,930,635 AND $1,778,215)
    
    $
    1,882,505
    
    
    $
    1,761,530EQUITY SECURITIES AT MARKET (COST $233,339
AND $160,926)
    
    
    250,395
    
    
    
    173,455TOTAL INVESTMENTS
    
    
    2,132,900
    
    
    
    1,934,985CASH AND CASH EQUIVALENTS
    
    
    107,999
    
    
    
    74,385ACCRUED INVESTMENT INCOME
    
    
    18,592
    
    
    
    18,095PREMIUMS RECEIVABLE
    
    
    283,252
    
    
    
    286,778PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
    
    
    270,702
    
    
    
    396,248DEFERRED INCOME TAXES
    
    
    48,087
    
    
    
    31,893DEFERRED ACQUISITION COSTS
    
    
    136,678
    
    
    
    129,486PROPERTY AND EQUIPMENT, NET
    
    
    24,507
    
    
    
    23,886OTHER ASSETS
    
    
    30,411
    
    
    
    32,070TOTAL ASSETS
    
    $
    3,053,128
    
    
    $
    2,927,826LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    1,248,218
    
    
    $
    1,245,763UNEARNED PREMIUMS
    
    
    651,525
    
    
    
    631,468TOTAL POLICY LIABILITIES AND ACCRUALS
    
    
    1,899,743
    
    
    
    1,877,231FUNDS HELD PAYABLE TO REINSURER
    
    
    
    
    
    
    39,221PREMIUMS PAYABLE
    
    
    54,168
    
    
    
    58,839OTHER LIABILITIES
    
    
    154,921
    
    
    
    136,039TOTAL LIABILITIES
    
    
    2,108,832
    
    
    
    2,111,330COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING
    
    
    
    
    
    
    COMMON STOCK, NO PAR VALUE, 100,000,000 SHARES AUTHORIZED, 70,379,718 AND 69,266,016
SHARES ISSUED AND OUTSTANDING
    
    
    356,474
    
    
    
    332,757NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (10,815
    )
    
    
    (7,217
    )ACCUMULATED OTHER COMPREHENSIVE LOSS
    
    
    (20,199
    )
    
    
    (2,702
    )RETAINED EARNINGS
    
    
    618,836
    
    
    
    493,658TOTAL SHAREHOLDERS EQUITY
    
    
    944,296
    
    
    
    816,496TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    3,053,128
    
    
    $
    2,927,826
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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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUE:NET EARNED PREMIUMS
    
    $
    288,794
    
    
    $
    233,136
    
    
    $
    565,340
    
    
    $
    469,891NET INVESTMENT INCOME
    
    
    21,677
    
    
    
    15,373
    
    
    
    41,739
    
    
    
    28,864NET REALIZED INVESTMENT GAIN (LOSS)
    
    
    (2,412
    )
    
    
    296
    
    
    
    (2,806
    )
    
    
    11,094OTHER INCOME
    
    
    417
    
    
    
    300
    
    
    
    908
    
    
    
    780TOTAL REVENUE
    
    
    308,476
    
    
    
    249,105
    
    
    
    605,181
    
    
    
    510,629LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    95,603
    
    
    
    142,393
    
    
    
    257,627
    
    
    
    296,857NET REINSURANCE RECOVERIES
    
    
    13,152
    
    
    
    (26,591
    )
    
    
    (5,207
    )
    
    
    (54,584
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    108,755
    
    
    
    115,802
    
    
    
    252,420
    
    
    
    242,273ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES
    
    
    85,337
    
    
    
    57,826
    
    
    
    162,354
    
    
    
    121,774OTHER OPERATING EXPENSES
    
    
    2,948
    
    
    
    6,010
    
    
    
    5,280
    
    
    
    9,949TOTAL LOSSES AND EXPENSES
    
    
    197,040
    
    
    
    179,638
    
    
    
    420,054
    
    
    
    373,996INCOME BEFORE INCOME TAXES
    
    
    111,436
    
    
    
    69,467
    
    
    
    185,127
    
    
    
    136,633INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    37,599
    
    
    
    29,585
    
    
    
    66,723
    
    
    
    53,860DEFERRED
    
    
    (1,020
    )
    
    
    (7,258
    )
    
    
    (6,774
    )
    
    
    (9,938
    )TOTAL INCOME TAX EXPENSE
    
    
    36,579
    
    
    
    22,327
    
    
    
    59,949
    
    
    
    43,922NET INCOME
    
    $
    74,857
    
    
    $
    47,140
    
    
    $
    125,178
    
    
    $
    92,711OTHER COMPREHENSIVE INCOME, NET OF TAX:HOLDING GAIN (LOSS) ARISING DURING
PERIOD
    
    $
    (13,427
    )
    
    $
    13,220
    
    
    $
    (19,321
    )
    
    $
    (3,276
    )RECLASSIFICATION ADJUSTMENT
    
    
    1,568
    
    
    
    (192
    )
    
    
    1,824
    
    
    
    (7,211
    )OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (11,859
    )
    
    
    13,028
    
    
    
    (17,497
    )
    
    
    (10,487
    )COMPREHENSIVE INCOME
    
    $
    62,998
    
    
    $
    60,168
    
    
    $
    107,681
    
    
    $
    82,224PER AVERAGE SHARE DATA:NET INCOME
 BASIC
    
    $
    1.07
    
    
    $
    0.68
    
    
    $
    1.80
    
    
    $
    1.36NET INCOME
 DILUTED
    
    $
    1.03
    
    
    $
    0.64
    
    
    $
    1.73
    
    
    $
    1.29WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    69,775,336
    
    
    
    68,858,718
    
    
    
    69,577,653
    
    
    
    68,070,354WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    2,721,730
    
    
    
    4,461,048
    
    
    
    2,915,528
    
    
    
    3,955,779WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    72,497,066
    
    
    
    73,319,766
    
    
    
    72,493,181
    
    
    
    72,026,133
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES
 IN SHAREHOLDERS EQUITY
  For the SixMonths EndedJune 30, 2006
    
    
    For the Year Ended(Unaudited)
    
    
    December 31, 2005COMMON SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    69,266,016
    
    
    
    66,821,751ISSUANCE OF SHARES PURSUANT TO
STOCK PURCHASE PLANS, NET
    
    
    234,131
    
    
    
    1,589,406ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
    
    
    879,571
    
    
    
    854,859BALANCE AT END OF PERIOD
    
    
    70,379,718
    
    
    
    69,266,016COMMON STOCK:BALANCE AT BEGINNING OF YEAR
    
    $
    332,757
    
    
    $
    292,856ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    6,651
    
    
    
    27,817EFFECTS OF ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
    
    
    16,889
    
    
    
    11,939OTHER
    
    
    177
    
    
    
    145BALANCE AT END OF PERIOD
    
    
    356,474
    
    
    
    332,757NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (7,217
    )
    
    
    (5,465
    )NOTES RECEIVABLE ISSUED PURSUANT TO EMPLOYEE
STOCK PURCHASE PLANS
    
    
    (4,900
    )
    
    
    (4,095
    )COLLECTION OF NOTES RECEIVABLE
    
    
    1,302
    
    
    
    2,343BALANCE AT END OF PERIOD
    
    
    (10,815
    )
    
    
    (7,217
    )ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF DEFERRED INCOME TAXES:BALANCE AT BEGINNING OF YEAR
    
    
    (2,702
    )
    
    
    19,796OTHER COMPREHENSIVE LOSS, NET OF TAXES
    
    
    (17,497
    )
    
    
    (22,498
    )BALANCE AT END OF PERIOD
    
    
    (20,199
    )
    
    
    (2,702
    )RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    493,658
    
    
    
    336,970NET INCOME
    
    
    125,178
    
    
    
    156,688BALANCE AT END OF PERIOD
    
    
    618,836
    
    
    
    493,658TOTAL SHAREHOLDERS EQUITY
    
    $
    944,296
    
    
    $
    816,496
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   For the Six Months Ended June 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    125,178
    
    
    $
    92,711ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT LOSS (GAIN)
    
    
    2,806
    
    
    
    (11,094
    )AMORTIZATION OF INVESTMENT PREMIUMS, NET OF DISCOUNT
    
    
    5,441
    
    
    
    5,827DEPRECIATION
    
    
    2,844
    
    
    
    2,217DEFERRED INCOME TAX BENEFIT
    
    
    (6,774
    )
    
    
    (9,938
    )CHANGE IN PREMIUMS RECEIVABLE
    
    
    3,526
    
    
    
    625CHANGE IN PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES, NET OF FUNDS HELD PAYABLE TO REINSURER
    
    
    86,325
    
    
    
    41,321CHANGE IN OTHER RECEIVABLES
    
    
    (497
    )
    
    
    (2,864
    )CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    (7,192
    )
    
    
    (14,050
    )CHANGE IN INCOME TAXES PAYABLE
    
    
    6,094
    
    
    
    3,150CHANGE IN OTHER ASSETS
    
    
    1,357
    
    
    
    6,875CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    2,455
    
    
    
    55,835CHANGE IN UNEARNED PREMIUMS
    
    
    20,057
    
    
    
    1,235CHANGE IN OTHER LIABILITIES
    
    
    (1,753
    )
    
    
    (6,493
    )FAIR VALUE OF STOCK BASED COMPENSATION
    
    
    6,371
    
    
    
    31TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
    
    
    
    
    
    
    5,172EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
    
    
    (8,088
    )
    
    
    NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    238,150
    
    
    
    170,560CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES
    
    
    115,024
    
    
    
    131,447PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES
    
    
    128,116
    
    
    
    98,750PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES
    
    
    50,384
    
    
    
    117,951COST OF FIXED MATURITIES ACQUIRED
    
    
    (385,073
    )
    
    
    (517,119
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (122,023
    )
    
    
    (128,791
    )SETTLEMENT OF CASH FLOW HEDGE
    
    
    
    
    
    
    (3,148
    )PURCHASE OF PROPERTY AND EQUIPMENT
    
    
    (3,465
    )
    
    
    (3,987
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (217,037
    )
    
    
    (304,897
    )CASH FLOWS FROM FINANCING ACTIVITIES:REPAYMENTS ON LOANS PAYABLE
    
    
    
    
    
    
    (44,787
    )PROCEEDS FROM LOANS PAYABLE
    
    
    
    
    
    
    11,381PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    6,037
    
    
    
    3,679PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE
    
    
    1,302
    
    
    
    1,064PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
    
    
    1,750
    
    
    
    23,686EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
    
    
    8,088
    
    
    
    COST OF SHARES WITHHELD TO SATSIFY MINIMUM REQUIRED TAX
WITHHOLDING OBLIGATION ARISING UPON EXERCISE
OF OPTIONS
    
    
    (4,676
    )
    
    
    NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
    
    
    12,501
    
    
    
    (4,977
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    33,614
    
    
    
    (139,314
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    74,385
    
    
    
    195,496CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    107,999
    
    
    $
    56,182NON-CASH TRANSACTIONS:ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK
PURCHASE PLANS IN EXCHANGE FOR NOTES RECEIVABLE
    
    $
    4,900
    
    
    $
    4,681
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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, 2006 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, 2006 are not necessarily
indicative of the operating results to be expected for the full year or any other period.
Certain prior years amounts have been reclassified for comparative purposes.These consolidated financial statements should be read in conjunction with the financial
statements and notes included in the Companys Annual Report on Form 10-K as of and for the year
ended December 31, 2005.2.
    
    InvestmentsThe carrying amount for the Companys investments approximates their estimated fair value. The
Company measures the fair value of investments based upon quoted market prices or by obtaining
quotes from third party broker-dealers. Material assumptions and factors utilized by such
broker-dealers in pricing these securities include: future cash flows, constant default rates,
recovery rates and any market clearing activity that may have occurred since the prior month-end
pricing period. For mortgage and asset-backed securities (structured securities) of high
credit quality, changes in expected cash flows are recognized using the retrospective method.
For structured securities where the possibility of credit loss is other than remote, changes in
expected cash flows are recognized on the prospective method over the remaining life of the
securities. Cash flow assumptions for structured securities are obtained from a primary market
provider of such information. These assumptions represent a market based best estimate of the
amount and timing of estimated principal and interest cash flows based on current information
and events.The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security whose fair value is below its cost. Upon identification of
such securities, a detailed review is performed for such securities, except interests in
securitized assets, meeting predetermined thresholds to determine whether such decline is other
than temporary. If the Company determines a decline in value to be other than temporary, the
cost basis of the security is written down to its fair value with the amount of the write down
included in earnings as a realized loss in the period the impairment arose. This evaluation
resulted in non-cash realized investment losses of $0.6 million and $0.1 million, respectively,
for the three months ended June 30, 2006 and 2005, and $1.3 million and $0.2 million,
respectively, for the six months ended June 30, 2006 and 2005.The Companys impairment evaluation and recognition for interests in securitized assets is
conducted in accordance with the guidance provided by the Emerging Issues Task Force of the
Financial Accounting Standards Board. Pursuant to this guidance, impairment losses on
securities must be recognized if both the fair value of the security is less than its book value
and the net present value of expected future cash flows is less than the net present value of
expected future cash flows at the most recent estimation date. If these criteria are met, an
impairment charge, calculated as the difference between the current book value of the security
and its fair value, is included in earnings as a realized loss in the period the impairment
arose. There were no non-cash realized investment losses recorded for the three or six months
ended June 30, 2006 or 2005 as a result of the Companys impairment evaluation for investments
in securitized assets.The following table identifies the period of time securities with an unrealized loss at June 30,
2006 have continuously been in an unrealized loss position. Included in the amounts displayed
in the table are $0.01 million of unrealized losses due to non-investment grade fixed maturity
securities having a fair value of $2.4 million. No issuer of securities or industry represents
more than 2.5% and 18.7%, respectively, of the total estimated fair value, or 3.3% and 24.7%,
respectively, of the total gross unrealized loss included in the table below. This industry
concentration represents investments in AAA rated Mortgage Backed Securities issued
 7




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by Agencies of the U.S. Government which are collateralized by pools of residential mortgage
loans. The unrealized losses on these securities are attributable generally to interest rate
increases. The contractual cash flows of these securities are guaranteed by Agencies of the
U.S. Government, and it is therefore expected that the securities would not be settled at a
price less than the amortized cost of the Companys investment. Since the Company has the
ability and intent to hold these securities until a recovery of fair value, which may be
at maturity, the Company does not consider these investments to be other than temporarily impaired
at June 30, 2006.
 Less Than 12 Months
    
    12 Months or More
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedAs of June 30, 2006
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses(In Thousands)Fixed Maturities Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Agencies
    
    $
    6,769
    
    
    $
    125
    
    
    $
    27,170
    
    
    $
    398
    
    
    $
    33,939
    
    
    $
    523Obligations of States and
Political Subdivisions
    
    
    455,384
    
    
    
    10,818
    
    
    
    211,051
    
    
    
    7,328
    
    
    
    666,435
    
    
    
    18,146Corporate Debt Securities
    
    
    36,710
    
    
    
    1,143
    
    
    
    150,002
    
    
    
    6,207
    
    
    
    186,712
    
    
    
    7,350Asset Backed Securities
    
    
    140,909
    
    
    
    2,289
    
    
    
    18,443
    
    
    
    670
    
    
    
    159,352
    
    
    
    2,959Mortgage Pass-Through Securities
    
    
    232,635
    
    
    
    9,572
    
    
    
    88,067
    
    
    
    4,842
    
    
    
    320,702
    
    
    
    14,414Collateralized Mortgage Obligations
    
    
    217,016
    
    
    
    5,179
    
    
    
    58,118
    
    
    
    2,264
    
    
    
    275,134
    
    
    
    7,443Total Fixed Maturities
Available for Sale
    
    $
    1,089,423
    
    
    $
    29,126
    
    
    $
    552,851
    
    
    $
    21,709
    
    
    $
    1,642,274
    
    
    $
    50,835Equity Securities
    
    
    74,204
    
    
    
    7,436
    
    
    
    
    
    
    
    
    
    
    
    74,204
    
    
    
    7,436Total Investments
    
    $
    1,163,627
    
    
    $
    36,562
    
    
    $
    552,851
    
    
    $
    21,709
    
    
    $
    1,716,478
    
    
    $
    58,271
 The Companys impairment evaluation as of June 30, 2006 concluded the following:US Treasury Securities and Obligations of U.S. Government Agencies:The unrealized losses on the Companys Aaa/AAA rated investments in U.S. Treasury Securities and
Obligations of U.S. Government Agencies are attributable to interest rate increases. Of the 40
investment positions held, approximately 92% 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. Since the Company has the ability and
intent to hold the investments until a recovery of fair value, which may be maturity, the
Company does not consider the investments to be other-than-temporarily impaired.Obligations of States and Political Subdivisions:The unrealized losses on the Companys investments in long term tax exempt securities which have
ratings of A2/A to AAA/Aaa are generally caused by interest rate increases. Of the 638
investment positions held, approximately 81% 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. The Company currently believes it is
probable that it will be able to collect all amounts due according to the contractual terms of
the investments. Since the Company has the ability and intent to hold the investments until
recovery of fair value, which may be maturity, the Company does not consider the investments to
be other than temporarily impaired.Corporate Debt Securities:The unrealized losses on the Companys long term investments in Corporate bonds which have
ratings from Ba1/BB+ to Aaa/AAA are generally caused by interest rate increases. Of the 166
investment positions held, approximately 95% 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. Therefore, it is expected that the
securities would not be settled at a price less than the amortized cost of the investments. The
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Company currently believes it is probable that it will be able to collect all amounts due
according to the contractual terms of the investments. Since the Company has the ability and
intent to hold the investments until recovery of fair value, which may be maturity, the Company
does not consider the investments to be other than temporarily impaired.Asset Backed Securities:The unrealized losses on the Companys investments in Asset Backed Securities which have ratings
of Aa1/AA+ to Aaa/AAA are generally caused by interest rate increases. Of the 155 investment
positions held, approximately 74% 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. The Company currently believes it is probable that it will
be able to collect all amounts due according to the contractual terms of the investments. Since
the Company has the ability and intent to hold the investments until recovery of fair value,
which may be maturity, the Company does not consider the investments to be other than
temporarily impaired.Mortgage Pass-Through Securities:The unrealized losses on the Companys investments in Mortgage Pass-Through Securities which
have ratings of Aaa/AAA are generally caused by interest rate increases. Of the 120 investment
positions held, approximately 67% 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. The Company currently believes it is probable that it will
be able to collect all amounts due according to the contractual terms of the investments. Since
the Company has the ability and intent to hold the investments until recovery of fair value,
which may be maturity, the Company does not consider the investments to be other than
temporarily impaired.Collateralized Mortgage Obligations:The unrealized losses on the Companys investments in Collateralized Mortgage Obligations which
have ratings of Aaa/AAA are generally caused by interest rate increases. Of the 157 investment
positions held, approximately 92% 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. The Company currently believes it is probable that it will
be able to collect all amounts due according to the contractual terms of the investments. Since
the Company has the ability and intent to hold the investments until recovery of fair value,
which may be maturity, the Company does not consider the investments to be other than
temporarily impaired.Equity Securities:Based upon the analytical procedures performed with respect to the Companys equity securities,
the Company does not consider the equity securities to be other than temporarily impaired. Of
the 3,481 investment positions held, approximately 35% were in an unrealized loss position.The following table identifies the period of time securities with an unrealized loss at December
31, 2005 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 1.5% and 19.4%, respectively, of the total estimated fair value,
or 2.2% and 20.9%, respectively, of the total gross unrealized loss included in the table below.
 9




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Less Than 12 Months
    
    12 Months or More
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedAs of December 31, 2005
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses(In Thousands)Fixed Maturities Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Agencies
    
    $
    10,968
    
    
    $
    141
    
    
    $
    47,030
    
    
    $
    505
    
    
    $
    57,998
    
    
    $
    646Obligations of States and
Political Subdivisions
    
    
    391,586
    
    
    
    4,732
    
    
    
    107,099
    
    
    
    2,135
    
    
    
    498,685
    
    
    
    6,867Corporate Debt Securities
    
    
    84,848
    
    
    
    2,367
    
    
    
    125,359
    
    
    
    3,896
    
    
    
    210,207
    
    
    
    6,263Asset Backed Securities
    
    
    75,151
    
    
    
    648
    
    
    
    20,029
    
    
    
    545
    
    
    
    95,180
    
    
    
    1,193Mortgage Pass-Through Securities
    
    
    202,901
    
    
    
    3,661
    
    
    
    61,399
    
    
    
    1,860
    
    
    
    264,300
    
    
    
    5,521Collateralized Mortgage Obligations
    
    
    175,397
    
    
    
    2,387
    
    
    
    20,865
    
    
    
    575
    
    
    
    196,262
    
    
    
    2,962Total Fixed Maturities
Available for Sale
    
    $
    940,851
    
    
    $
    13,936
    
    
    $
    381,781
    
    
    $
    9,516
    
    
    $
    1,322,632
    
    
    $
    23,452Equity Securities
    
    
    38,709
    
    
    
    3,012
    
    
    
    
    
    
    
    
    
    
    
    38,709
    
    
    
    3,012Total Investments
    
    $
    979,560
    
    
    $
    16,948
    
    
    $
    381,781
    
    
    $
    9,516
    
    
    $
    1,361,341
    
    
    $
    26,464
 Based upon the Companys impairment evaluation as of December 31, 2005, it was concluded that
the remaining unrealized losses in the table above were not other than temporary.There are certain risks and uncertainties inherent in the Companys impairment methodology,
including, but not limited to, the financial condition of specific industry sectors and the
resultant effect on any such underlying security collateral values and changes in accounting,
tax, and/or regulatory requirements which may have an effect on either, or both, the investor
and/or the issuer. Should the Company subsequently determine a decline in the fair value below
the cost basis to be other than temporary, the security would be written down to its fair value
and the difference would be included in earnings as a realized loss for the period such
determination was made.3.
    
    Restricted AssetsThe Insurance Subsidiaries have investments, principally U.S. Treasury securities, Obligations
of U.S. Government Corporations and Agencies and Obligations of States and Political
Subdivisions, on deposit with the various states in which they are licensed insurers. At June
30, 2006 and December 31, 2005, the carrying value of the securities on deposit totaled $14.6
million and $15.1 million, respectively.4.
    
    Derivative InstrumentsStatement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), as amended, requires that derivatives be recorded on the
balance sheet as either assets or liabilities measured at fair value. Changes in the fair value
of derivatives are recorded either through current earnings or as other comprehensive income,
depending on the type of hedge transaction. Gains and losses on the derivative instrument
reported in other comprehensive income are reclassified into earnings in the periods in which
earnings are impacted by the variability of the cash flow of the hedged item. The ineffective
portion of all hedge transactions is recognized in current period earnings.During the first quarter of 2005, a cash flow hedge derivative instrument was purchased to
manage interest rate risk for a potential debt offering. Subsequent to the purchase of the cash
flow hedge, the Company decided against the issuance of a debt offering, and as a result, the
cash flow hedge became an ineffective hedge. For the three months ended March 31, 2005, the
Company recorded the change in fair value of $0.3 million as a reduction to net realized
investment gain. Subsequently, upon settlement, the loss in fair value increased to $3.2
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##### Table of Contents



million. The $2.9 million change in fair value since March 31, 2005 was recorded as a net
realized investment loss during the three months ended June 30, 2005. The Company does not
hold any other derivative instruments.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 establishing the ultimate claims liability is necessarily a complex
imprecise process, requiring the use of informed estimates and judgments using data currently
available. The liability includes an amount determined on the basis of claim adjusters
evaluations with respect to insured events that have occurred and 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 of such to the Company. Estimates for unpaid loss and loss
adjustment expenses are based upon managements assessment of known facts and circumstances,
review of past loss experience and settlement patterns and consideration of other factors such
as legal, social, and economic developments. These estimates are reviewed regularly and any
adjustments therefrom are made in the accounting period in which the adjustment arose. If the
Companys ultimate losses, net of reinsurance, prove to differ substantially from the amounts
recorded at June 30, 2006, 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, 2006, the Company decreased the estimated net unpaid loss
and loss adjustment expenses for accident years 2005 and prior by the following amounts:
 Net Basis Decrease(In millions)Accident Year 2005
    
    $
    23.1Accident Year 2004
    
    
    4.2Accident Year 2003
    
    
    0.8Accident Years 2002 and prior
    
    
    7.6Total Decrease
    
    $
    35.7
 For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for property coverages on commercial package
policies and for professional liability policies due to better than expected case incurred loss
development.For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for all coverages on
commercial package polices due to
better than expected case incurred loss development.For accident year 2003, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for property and auto coverages on commercial
package policies due to better than expected case incurred loss development.For accident years 2002 and prior, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for property and auto coverages on
commercial package policies, commercial auto policies and professional liability policies due to
lower than expected case incurred loss development.6.
    
    Funds Held Payable To ReinsurerEffective April 1, 2003, the Company entered into a quota share reinsurance agreement. Under
this agreement, the Company ceded 22% of its net written premiums and loss and loss adjustment
expenses for substantially all of the Companys lines of business on policies effective April 1,
2003 through December 31, 2003, and 10% of its commercial and specialty lines net written
premiums and loss and loss adjustment expenses for policies
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effective January 1, 2004 through December 31, 2004. The Company received a provisional
commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums
earned. Pursuant to this reinsurance agreement the Company withheld the reinsurance premium due
the reinsurers reduced by the reinsurers expense allowance, and the Companys ceding commission
allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer
account was also reduced by ceded paid losses and loss adjustment expenses under this agreement,
and increased by an interest credit. In addition, the agreement allowed for a profit commission
to be paid to the Company upon commutation. Effective January 1, 2006 and January 1, 2005, the
Company entered into Reinsurance Commutation and Release Agreements with respect to the 2004
Whole Account Net Quota Share Reinsurance Contract and the 2003 Whole Account Net Quota Share
Reinsurance Contract, respectively. As a result of the commutation effective January 1, 2006,
the Funds Held Payable to Reinsurer liability was reduced by approximately $39.2 million, offset
by an increase to net Unpaid Loss and Loss Adjustment Expenses of $31.9 million, an increase to
net Unearned Premiums of $0.3 million, and a reduction to the profit commission receivable of
approximately $7.0 million. No gain or loss was realized as a result of this commutation.Activity for the Funds Held Payable to Reinsurer is summarized as follows (in thousands):
 As of and For the
    
    
    As of and For theSix Months Ended
    
    
    Year EndedJune 30, 2006
    
    
    December 31, 2005Funds Held Payable to Reinsurer Balance at Beginning of
Period
    
    $
    39,221
    
    
    $
    131,119Net Written Premiums Ceded
    
    
    
    
    
    
    (316
    )Reinsurer Expense Allowance
    
    
    
    
    
    
    11Provisional Commission
    
    
    
    
    
    
    (6,722
    )Paid Loss and Loss Adjustment Expenses
    
    
    
    
    
    
    (8,451
    )Interest Credit
    
    
    
    
    
    
    1,486Commutation
    
    
    (39,221
    )
    
    
    (77,906
    )Other
    
    
    
    
    
    
    Subtotal Activity
    
    
    (39,221
    )
    
    
    (91,898
    )Funds Held Payable to Reinsurer Balance at End of Period
    
    $
    
    
    
    $
    39,221
 7.
    
    Shareholders EquityThe Philadelphia Consolidated Holding Corp Amended and Restated Employees Stock Incentive and
Performance Based Compensation Plan (the Plan) (formerly known as Philadelphia Consolidated
Holding Corp. Stock Option Plan) provides incentives and awards to those employees and members
of the Board (participants) largely responsible for the long term success to the Company.The maximum number of shares of the Companys common stock which may be subject to awards
granted under the Plan are 18,750,000 (restated to reflect a three-for-one split of the
Companys common stock distributed on March 1, 2006), and the plan permits (but does not
require) the grant of restricted stock awards under conditions meeting the performance based
compensation requirements of Section 162(m) of the Internal Revenue Code. The maximum number of shares includes all shares previously available for grants under the stock option plan prior to
the adoption of this Amended and Restated Plan. As of June 30, 2006, 5,023,391 shares of common
stock remain reserved for future issuance pursuant to awards granted under the Plan. Stock
options, restricted stock awards and stock settled appreciation rights (SARS) have been
granted to employees, and restricted stock awards have been granted to the Companys
non-employee directors pursuant to the Plan as of June 30, 2006.Under the Plan, the Company may grant stock options, SARS, restricted stock awards and
restricted stock units to employees and members of the Board of Directors. During 2006, the
Company granted SARS and restricted stock awards to certain employees and granted restricted
stock awards to its non-employee directors. Stock options are granted for the purchase of
common stock at a price not less than the fair market value on the grant
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##### Table of Contents



date. Stock options and SARS are generally exercisable after the expiration of five years
following the grant date and expire ten years following the grant date. Compensation expense
for stock options and SARS is recognized ratably over the vesting period. Stock options and
SARS are generally forfeited by participants who terminate employment prior to vesting.Compensation expense for restricted stock awards is recognized ratably over the vesting period
(Restriction Period). Stock subject to restricted stock awards granted to employees during
2006 become free of the risk of forfeiture (i.e., become vested) generally after the expiration
of five years following the grant date (the applicable Restriction Period). Stock subject to
restricted stock awards granted to the Companys non-employee directors during 2006 become free
of the risk of forfeiture after the expiration of three years following the grant date.
Generally, if a participant terminates employment prior to the expiration of the Restriction
Period, the award will lapse and all shares of common stock still subject to the restriction
are forfeited.The following table presents certain information regarding stock option transactions.
 As of And For the Six Months
    
    
    As of And For the Year EndedEnded June 30, 2006
    
    
    December 31, 2005 (1)Exercise Price
    
    
    
    
    
    
    Exercise PriceOptions
    
    
    Per Option(2)
    
    
    Options
    
    
    Per Option(2)Outstanding at beginning of period
    
    
    8,483,991
    
    
    $
    13.54
    
    
    
    7,931,100
    
    
    $
    10.86Granted
    
    
    
    
    
    $
    
    
    
    
    1,485,000
    
    
    $
    23.34Exercised
    
    
    (996,843
    )
    
    $
    6.06
    
    
    
    (854,859
    )
    
    $
    5.36Canceled
    
    
    (339,000
    )
    
    $
    17.58
    
    
    
    (77,250
    )
    
    $
    17.58Outstanding at end of period
    
    
    7,148,148
    
    
    $
    14.39
    
    
    
    8,483,991
    
    
    $
    13.54Exercisable at end of period
    
    
    1,704,648
    
    
    
    
    
    
    
    1,474,491Weighted-average fair value of
options granted during the
period(3)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    9.40
 The total intrinsic value of options exercised during the six months ended June 30, 2006 and the
year ended December 31, 2005 was $26.9 million and $18.6 million, respectively.
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March 1, 2006.(2)
    
    Weighted average.(3)
    
    The Company uses the Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant. The following table presents certain information regarding stock options outstanding at June 30,
2006.
 Outstanding
    
    
    Exercise Price
    
    
    Remaining
    
    
    
    
    
    
    Exercise PriceAt
    
    
    Per
    
    
    Contractual Life
    
    
    Exercisable at
    
    
    PerRange of Exercise Prices
    
    June 30, 2006
    
    
    Option(1)
    
    
    (Years)(1)
    
    
    June 30, 2006
    
    
    Option(1)$2.83 to $5.00
    
    
    416,448
    
    
    $
    4.69
    
    
    
    3.4
    
    
    
    416,448
    
    
    $
    4.69$5.60 to $7.67
    
    
    169,800
    
    
    $
    7.60
    
    
    
    3.3
    
    
    
    169,800
    
    
    $
    7.60$7.83 to $11.17
    
    
    1,836,900
    
    
    $
    9.55
    
    
    
    5.5
    
    
    
    950,400
    
    
    $
    8.93$11.42 to $14.16
    
    
    1,866,000
    
    
    $
    12.96
    
    
    
    6.4
    
    
    
    168,000
    
    
    $
    12.83$15.33 to $19.14
    
    
    1,497,000
    
    
    $
    17.39
    
    
    
    7.7
    
    
    
    
    
    
    $
    $22.62 to $28.30
    
    
    1,362,000
    
    
    $
    23.41
    
    
    
    8.7
    
    
    
    
    
    
    $
    7,148,148
    
    
    $
    14.39
    
    
    
    
    
    
    
    1,704,648
    
    
    $
    7.73
 The aggregate intrinsic value of outstanding and exercisable options at June 30, 2006 was $113.6
million and $37.9 million, respectively. The total fair value of exercisable options at June
30, 2006 was $5.7 million.
 
 (1)
    
    Weighted average. 13




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##### Table of Contents



The following table presents information regarding SARS transactions.
 As of And For the Six Months
    
    
    As of And For the Year EndedEnded June 30, 2006
    
    
    December 31, 2005 (1)Exercise Price
    
    
    
    
    
    
    Exercise PriceSARS
    
    
    Per SAR (2)
    
    
    SARS
    
    
    Per SAR (2)Outstanding at beginning of period
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Granted
    
    
    919,000
    
    
    $
    33.16
    
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Canceled
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Outstanding at end of period
    
    
    919,000
    
    
    $
    33.16
    
    
    
    
    
    
    $
    Exercisable at end of period
    
    
    
    
    
    
    
    
    
    
    Weighted-average fair value of
SARS granted during the period
(3)
    
    
    
    
    
    $
    14.40
    
    
    $
    
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March 1, 2006.(2)
    
    Weighted average.(3)
    
    The Company uses the Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant. The following table presents certain information regarding SARS outstanding at June 30, 2006.
 Outstanding
    
    Exercise Price
    
    Remaining
    
    
    
    
    
    Exercise PriceAt June
    
    Per
    
    Contractual Life
    
    Exercisable at
    
    PerRange of Exercise Prices
    
    30, 2006
    

SAR(1)
    

(Years)(1)
    
    June 30, 2006
    

SAR(1)$32.81 to $35.35
    
    
    919,000
    
    
    $
    33.16
    
    
    
    9.6
    
    
    
    
    
    
    $
    
 As of June 30, 2006, the grant price per share of all outstanding SARS was higher than the June
30, 2006 market value per share of the Companys common stock. Therefore, as of June 30, 2006
the outstanding SARS have a zero intrinsic value.
 
 (1)
    
    Weighted average. The following table presents information regarding restricted stock award transactions.
 As of And For the Six Months
    
    
    As of And For the YearEnded June 30, 2006
    
    
    Ended December 31, 2005Weighted
    
    
    
    
    
    
    WeightedAverage Grant
    
    
    
    
    
    
    Average GrantRestricted Stock
    
    
    Date Fair
    
    
    Restricted Stock
    
    
    Date FairShares (1)
    
    

Value
(1)(2)
    
    
    Shares(1)
    
    

Value(1)(2)Unvested at beginning of period
    
    
    141,465
    
    
    $
    27.75
    
    
    
    
    
    
    $
    Granted
    
    
    35,505
    
    
    $
    33.17
    
    
    
    145,140
    
    
    $
    27.74Vested
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    (7,686
    )
    
    $
    25.04
    
    
    
    (3,675
    )
    
    $
    27.52Unvested at end of period
    
    
    169,284
    
    
    $
    29.59
    
    
    
    141,465
    
    
    $
    27.75
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March 1, 2006.(2)
    
    The Company uses the Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant. As of June 30, 2006, there was $33.5 million of total pre-tax unrecognized compensation costs related to
stock options, SARS and restricted stock granted under the Companys Plan. This unrecognized
compensation cost is expected to be recognized over a weighted-average period of 3.6 years.The Company has established the following stock purchase plans (all 2005 share and purchase
rights granted amounts have been restated to reflect a three-for-one split of the Companys
common stock which was distributed on March 1, 2006):
 14




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##### Table of Contents



Employee Stock Purchase Plan (the Stock Purchase Plan): The aggregate maximum number of shares
that may be issued pursuant to the Stock Purchase Plan as amended is 3,000,000. Shares may be
purchased under the Stock Purchase Plan by eligible employees during designated one-month
offering periods established by the Compensation Committee of the Board of Directors at a
purchase price of the lesser of 85% of the fair market value of the shares on the first business
day of the offering period or the date the shares are purchased. Shares purchased are
restricted for a period of two years from the first day of the offering period. The purchase
price of shares may be paid by the employee over six years pursuant to the execution of a
promissory note. The promissory note(s) are collateralized by such shares purchased under the
Stock Purchase Plan and are interest free. Under the Stock Purchase Plan, the Company issued
180,322 shares during the six months ended June 30, 2006 and issued 217,806 shares during the
year ended December 31, 2005. The weighted-average fair value per share of those purchase rights
granted in 2006 and 2005 was $5.94 and $4.13, respectively.The Nonqualified Employee Stock Purchase Plan (the Nonqualified Stock Plan): The aggregate
maximum number of shares that may be issued pursuant to the Nonqualified Stock Plan is
3,000,000. Shares may be purchased under the Nonqualified Stock Plan by eligible employees
during designated one-month offering periods established by the Compensation Committee of the
Board of Directors at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased.
Shares purchased are restricted for a period of five years from the first day of the offering
period. The purchase price of shares may be paid by the employee over nine years pursuant to
the execution of a promissory note. The promissory note(s) are collateralized by such shares
purchased under the Nonqualified Stock Plan and are interest free. Under the Nonqualified Stock
Plan, the Company issued 4,733 shares during the six months ended June 30, 2006 and issued
1,263,600 shares during the year ended December 31, 2005. The weighted-average fair value per
share of those purchase rights granted in 2006 and 2005 was $5.94 and $4.03, respectively.Directors Stock Purchase Plan (Directors Plan): The Directors Plan has been established for
the benefit of non-employee Directors. The aggregate maximum number of shares that may be issued
pursuant to the Directors Plan is 150,000. Non-employee Directors, during monthly offering
periods, may designate a portion of his or her fees to be used for the purchase of shares under
the terms of the Directors Plan at a purchase price of the lesser of 85% of the fair market
value of the shares on the first business day of the offering period or the date the shares are
purchased. Under the Directors Plan, the Company issued 4,293 shares during the six months ended
June 30, 2006 and 8,883 shares during the year ended December 31, 2005. The weighted-average
fair value per share of those purchase rights granted in 2006 and 2005 was $5.84 and $3.90,
respectively.Preferred Agents Stock Purchase Plan (Preferred Agents Plan): The Preferred Agents Plan has
been established for the benefit of eligible Preferred Agents. The aggregate maximum number of
shares that may be issued pursuant to the Preferred Agents Plan is 600,000. Eligible Preferred
Agents during designated offering periods may either remit cash or have the Company withhold
from commissions or other compensation amounts to be used for the purchase of shares under the
terms of the Preferred Agents Plan at a purchase price of the lesser of 85% of the fair market
value of the shares on the first business day of the offering period or the date the shares are
purchased. Shares purchased are restricted for a period of two years from the first day of the
offering period. Under the Preferred Agent Plan, the Company issued 60,492 shares during the
six months ended June 30, 2006. There were no shares issued during the year ended December 31,
2005. The weighted-average fair value of those purchase rights granted in 2006 was $5.80.The fair value of each stock option and SAR award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the following table.
Expected volatilities are based on the historical volatility of the Companys common stock. The
Company uses historical data to estimate stock option and SAR terms, and employee terminations
that are utilized within the valuation model; separate groups of employees that have similar
historical exercise behavior are considered separately for valuation purposes. The expected
term of stock options and SARS granted represents the period of time that stock option and SAR
awards granted are expected to be outstanding. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant appropriate for the expected life of the
Companys stock options and SARS. The dividend yield assumption is based on history and
expectation of dividend payouts. The ranges given below result from certain groups of employees
exhibiting different behavior and from the differing market conditions which existed on the
various grant dates.
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For the Six Months
    
    For the Year EndedEnded June 30, 2006
    
    December 31, 2005Expected Stock Volatility
    
    
    33.5% - 35.5
    %
    
    
    33.9
    %Weighted Average Expected Stock Volatility
    
    
    33.9
    %
    
    
    33.9
    %Risk-Free Interest Rate
    
    
    4.4% - 4.8
    %
    
    
    3.8% - 4.2
    %Weighted Average Risk-Free Interest Rate
    
    
    4.6
    %
    
    
    3.8
    %Expected Option Life (Years)
    
    
    6.0  9.0
    
    
    
    6.0Weighted Average Expected Option Life (Years)
    
    
    6.5
    
    
    
    6.0Expected Dividends
    
    
    0.0
    %
    
    
    0.0
    %
 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. Following is the computation of earnings per share for the three and six months ended
June 30, 2006 and 2005, respectively (in thousands, except per share data):
 As of and For the Three
    
    
    As of and For the SixMonths Ended June 30,
    
    
    Months Ended June 30,2006
    
    
    2005(1)
    
    
    2006
    
    
    2005(1)Weighted-Average Common Shares Outstanding
    
    
    69,775
    
    
    
    68,859
    
    
    
    69,578
    
    
    
    68,070Weighted-Average Potential Shares Issuable
    
    
    2,722
    
    
    
    4,461
    
    
    
    2,915
    
    
    
    3,956Weighted-Average Shares and Potential
Shares Issuable
    
    
    72,497
    
    
    
    73,320
    
    
    
    72,493
    
    
    
    72,026Net Income
    
    $
    74,857
    
    
    $
    47,140
    
    
    $
    125,178
    
    
    $
    92,711Basic Earnings per Share
    
    $
    1.07
    
    
    $
    0.68
    
    
    $
    1.80
    
    
    $
    1.36Diluted Earnings per Share
    
    $
    1.03
    
    
    $
    0.64
    
    
    $
    1.73
    
    
    $
    1.29
 
 (1)
    
    Share information restated to reflect a three-for-one split of the Companys
common stock and distributed on March 1, 2006. 9.
    
    Stock Based CompensationEffective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123 (revised 2004), Share Based Payment (SFAS 123(R)) using the modified prospective
transition method, which requires the measurement and recognition of compensation expense for
all share-based payment awards made to the Companys employees and directors including stock
options, stock settled appreciation rights (SARS), restricted stock and employee and director
stock purchases related to the Employee Stock Purchase Plan, Nonqualified Employee Stock
Purchase Plan, and Directors Stock Purchase Plan based on fair values. The Companys financial
statements as of and for the three and six months ended June 30, 2006 reflect the impact of SFAS
123(R). In accordance with the modified prospective transition method, the Companys financial
statements for prior periods have not been restated to reflect, and do not include, the impact
of SFAS 123(R). Share-based compensation expense recognized is based on the value of the portion
of share-based payment awards that is ultimately expected to vest. Share-based compensation
expense recognized in the Companys Consolidated Statement of Operations and Comprehensive
Income for the three and six months ended June 30, 2006 included compensation expense for
share-based payment awards granted prior to, but not yet vested as of December 31, 2005 based
on the grant date fair value estimated in accordance with the pro forma provisions of
SFAS 123 and compensation expense for the share-based payment awards granted subsequent to
December 31, 2005 based on the grant date fair value estimated in accordance with the provisions
of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to
attribute the value of share-based compensation to expense using the straight-line method, which
was previously used for its pro forma
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##### Table of Contents



information required under SFAS 123. Share-based
compensation expense related to stock options and SARS was $1.7 million and $3.1 million,
respectively, before income taxes for the three and six months ended June 30, 2006. During the
three and six months ended June 30, 2005, no share-based compensation expense related to stock
options was recognized under the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25). During the three and
six months ended June 30, 2006, share-based compensation expense related to restricted stock
grants and employee and director stock purchase plans was $0.9 million and $1.6 million,
respectively. During the three and six months ended June 30, 2005, share-based compensation
expense related to restricted stock grants was $0.03 million under APB 25.Upon adoption of SFAS 123(R), the Company elected to value share-based payment awards granted
beginning in 2006 using the Black-Scholes option-pricing model, (the Black-Scholes model),
which was also previously used for the pro forma information required under SFAS 123. The
Black-Scholes model requires the input of certain assumptions. The Companys stock options and
the option component of the Employee Stock Purchase Plan shares have characteristics
significantly different from those of traded options, and changes in the assumptions can
materially affect the fair value estimates.The expected term of stock options and SARS represent the weighted-average period the stock
options and SARS are expected to remain outstanding. The expected term is based on the observed
and expected time to post-vesting exercise and forfeitures of options by the Companys
employees. The Company uses historical volatility in deriving the expected volatility
assumption. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant appropriate for the expected life of the Companys stock options and SARS. The
dividend yield assumption is based on history and expectation of dividend payouts.As the share-based compensation expense recognized in the Consolidated Statement of Operations
and Comprehensive Income for the three and six months ended June 30, 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on
historical experience. In the Companys pro forma information required under SFAS 123 for the
periods prior to January 1, 2006, forfeitures were estimated based on historical experience.SFAS 123(R) requires that share-based compensation cost is recorded in the financial statements
in the same classifications as the related employees cash compensation. Accordingly, upon
adoption of SFAS 123(R), a portion of the share-based compensation cost related to unvested
awards and new awards has been capitalized as part of the Companys Deferred Acquisition Costs.
As of June 30, 2006, approximately $1.7 million of share-based compensation cost is included in
Deferred Acquisition Costs on the Consolidated Balance Sheet. In the Companys pro forma
information required under SFAS 123 for the periods prior to January 1, 2006, share-based
compensation costs were not capitalized.The effect of recording share-based compensation expense for the three and six months ended June
30, 2006 is as follows:
 17




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##### Table of Contents



Three Months Ended
    
    
    Six Months Ended(In thousands, except per share amounts)
    
    June 30, 2006
    
    
    June 30, 2006Stock-based compensation expense
    
    $
    2,560
    
    
    $
    4,668Tax benefit
    
    
    (896
    )
    
    
    (1,634
    )Net decrease in net income
    
    $
    1,664
    
    
    $
    3,034Stock-based compensation cost capitalized (gross
of amortization) as deferred acquisition costs
    
    $
    1,318
    
    
    $
    2,259Effect on:Cash flows from operating activities
    
    $
    710
    
    
    $
    1,247Cash flows from financing activities
    
    $
    4,054
    
    
    $
    8,088Effect on:Net earnings per share  Basic
    
    $
    0.02
    
    
    $
    0.04Net earnings per share  Diluted
    
    $
    0.00
    
    
    $
    0.00
 SFAS 123(R) requires the Company to present pro forma information for the comparative period
prior to the adoption as if it had accounted for all of its share-based compensation under the
fair value method of SFAS 123. The following table illustrates the pro forma information
regarding the effect on net earnings and net earnings per share if the Company had accounted for
the share-based employee compensation under the fair value method of accounting:
 Three MonthsEnded
    
    
    Six Months Ended(In thousands, except per share amounts)
    
    June 30, 2005 (1)
    
    
    June 30, 2005 (1)Net income, as reported
    
    $
    47,140
    
    
    $
    92,711Add: Stock-based employee compensation
expense included in reported net income
under APB No. 25, net of related tax
effects
    
    
    
    
    
    
    Deduct: Total stock-based employee
compensation determined under the fair
value method for all awards, net of
related tax effects
    
    
    (1,533
    )
    
    
    (3,027
    )Pro forma net income
    
    $
    45,607
    
    
    $
    89,684Net earnings per share  Basic:As reported
    
    $
    0.68
    
    
    $
    1.36Pro forma
    
    $
    0.66
    
    
    $
    1.32Net earnings per share  Diluted:As reported
    
    $
    0.64
    
    
    $
    1.29Pro forma
    
    $
    0.62
    
    
    $
    1.25
 
 (1)
    
    Share information restated to reflect a three-for-one split of the Companys common
stock distributed on March 1, 2006. 10.
    
    Income TaxesThe effective tax rate differs from the 35% marginal tax rate principally as a result of
tax-exempt interest income, the dividend received deduction and other differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
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11.
    
    ReinsuranceIn the normal course of business, the Company has entered into various reinsurance contracts
with unrelated reinsurers. The Company participates in such agreements for the purpose of
limiting loss exposure, managing capacity constraints and diversifying business. Reinsurance
contracts do not relieve the Company from its obligations to policyholders. The effect of
reinsurance on premiums written and earned is as follows:
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30, 2006
    
    
    June 30, 2006(In thousands)
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect Business
    
    $
    340,430
    
    
    $
    330,746
    
    
    $
    667,107
    
    
    $
    647,085Reinsurance Assumed
    
    
    933
    
    
    
    976
    
    
    
    2,299
    
    
    
    2,264Reinsurance Ceded
    
    
    (45,111
    )
    
    
    (42,928
    )
    
    
    (85,198
    )
    
    
    (84,009
    )Net Premiums
    
    $
    296,252
    
    
    $
    288,794
    
    
    $
    584,208
    
    
    $
    565,340
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30, 2005
    
    
    June 30, 2005Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect Business
    
    $
    283,378
    
    
    $
    279,395
    
    
    $
    567,445
    
    
    $
    566,167Reinsurance Assumed
    
    
    967
    
    
    
    808
    
    
    
    2,005
    
    
    
    2,048Reinsurance Ceded
    
    
    (33,995
    )
    
    
    (47,067
    )
    
    
    (65,314
    )
    
    
    (98,324
    )Net Premiums
    
    $
    250,350
    
    
    $
    233,136
    
    
    $
    504,136
    
    
    $
    469,891
 Certain of the Companys reinsurance contracts have provisions whereby the Company is entitled
to a return profit commission based on the ultimate experience of the underlying business ceded
to the contracts. Under the terms of these contracts, the Company accrued profit commissions of
$0 million and $1.2 million for the three months ended June 30, 2006 and 2005, respectively and
$0 million and $2.5 million for the six months ended June 30, 2006 and 2005, respectively. The
profit commissions reduce ceded written and earned premiums and increase net written and earned
premiums.Approximately $17.1 million of the Companys reinsurance receivable balances at June 30, 2006
are with Converium Reinsurance North American Inc. (CRNA). During 2004, Converium AG
(Switzerland), CRNAs parent company, placed CRNA into an orderly runoff. Of the $17.1 million
reinsurance receivable balances with CRNA, $0.8 million are receivables on paid losses and $16.3
million are receivables on unpaid loss and loss adjustment expense. The Company continues to
monitor CRNAs ability to pay claims, and at this time, believes that the amounts with CRNA will
be collectible.12.
    
    Commitments and ContingenciesThe Company is subject to routine legal proceedings in connection with its property and casualty
insurance business. The Company is not involved in any other pending or threatened legal or
administrative proceedings which management believes can reasonably be expected to have a
material adverse effect on the Companys financial condition or results of operations.Credit Agreement:On June 30, 2006, the Company entered into 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, with a maturity date of
June 29, 2007. The Credit Agreement contains an annual commitment fee of 8.0 basis points per
annum on the unused commitments under the Credit Agreement. As of June 30, 2006, no borrowings
have been made by the Company under this Credit Agreement.
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##### Table of Contents



Each loan under the Facility will bear interest at a per annum rate equal to, at the
Companys option, (i) Libor plus 0.40% or the higher of the Administrative Agent and Lenders
prime rate and/or the Federal Funds rate plus 0.50%. The Credit Agreement contains various
representations, covenants and events of default typical for credit facilities of this type. At
June 30, 2006, the Company was in compliance with all covenants contained in the Credit
Agreement.State Insurance Guaranty Funds:As of June 30, 2006 and December 31, 2005, included in Other Liabilities in the Consolidated
Balance Sheets were $19.4 million and $12.8 million, respectively, of liabilities for state
guaranty funds. As of June 30, 2006 and December 31, 2005, included in Other Assets in the
Consolidated Balance Sheets were $0.1 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.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 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 10% of the deficit or 10% 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. Participating companies
are obligated to purchase any unsold bonds issued by Florida Citizens.Florida Citizens reported a deficit for the 2004 plan year. During 2005, the Company recognized
a $3.9 million net (of reinsurance recoveries) assessment expense for Florida Citizens amounts
assessed and paid during 2005. Any recoupments of the Florida Citizens assessment through
future policy surcharges will be allocated between the Company and its reinsurers. Recoupments
are recorded by the Company as the related premiums are written. During the three and six
months ended June 30, 2006, the Company recognized a reduction to its net (of reinsurance
recoveries) expense related to the Florida Citizens 2004 plan year of $0.6 million and $1.0
million, respectively, primarily attributable to policy surcharge recoupments.During 2005, Florida Citizens also reported losses from Hurricane Wilma, which followed the
deficit for the 2004 plan year and announced that a future assessment as a result of Florida
Citizens current financial deficit was both probable and could be reasonably estimated. As of
December 31, 2005, the Company accrued its estimated gross (of reinsurance recoveries)
assessment of $12.4 million, which represented its portion of the maximum regular assessment
available to Florida Citizens, and resulted in a $2.0 million net (of reinsurance recoveries)
assessment expense during 2005. During the second quarter of 2006, the Florida legislature
approved a $715 million budget appropriation to be used to reduce the Florida Citizens deficit.
As a result, during the second quarter of 2006, the Company reduced its accrual of its estimated
gross (of reinsurance recoveries) assessment to $3.8 million, which represents its portion of
the regular assessment expected for the Florida Citizens 2005 plan year. During the three and
six months ended June 30, 2006, the Company recognized a reduction to its net (of reinsurance
recoveries) expense related to this assessment of $0.6 million and $1.7 million, respectively,
due to changes in related reinsurance recoveries resulting from updated estimates of 2005
hurricane losses reported by Florida citizens during 2006 as well as the impact of the budget
appropriation noted above.
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##### Table of Contents



Three Months EndedCommercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalJune 30, 2006:Gross Written Premiums
    
    $
    265,185
    
    
    $
    53,736
    
    
    $
    22,443
    
    
    
    
    
    
    $
    341,364Net Written Premiums
    
    $
    247,660
    
    
    $
    43,792
    
    
    $
    4,800
    
    
    
    
    
    
    $
    296,252Revenue:Net Earned Premiums
    
    $
    235,598
    
    
    $
    43,507
    
    
    $
    9,689
    
    
    
    
    
    
    $
    288,794Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,677
    
    
    
    21,677Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,412
    )
    
    
    (2,412
    )Other Income
    
    
    
    
    
    
    
    
    
    
    342
    
    
    
    75
    
    
    
    417Total Revenue
    
    
    235,598
    
    
    
    43,507
    
    
    
    10,031
    
    
    
    19,340
    
    
    
    308,476Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    84,374
    
    
    
    21,376
    
    
    
    3,005
    
    
    
    
    
    
    
    108,755Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,337
    
    
    
    85,337Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    266
    
    
    
    2,682
    
    
    
    2,948Total Losses and Expenses
    
    
    84,374
    
    
    
    21,376
    
    
    
    3,271
    
    
    
    88,019
    
    
    
    197,040Income Before Income Taxes
    
    
    151,224
    
    
    
    22,131
    
    
    
    6,760
    
    
    
    (68,679
    )
    
    
    111,436Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,579
    
    
    
    36,579Net Income
    
    $
    151,224
    
    
    $
    22,131
    
    
    $
    6,760
    
    
    $
    (105,258
    )
    
    $
    74,857Total Assets
    
    
    
    
    
    
    
    
    
    $
    158,213
    
    
    $
    2,894,915
    
    
    $
    3,053,128June 30, 2005:Gross Written Premiums
    
    $
    211,801
    
    
    $
    48,187
    
    
    $
    24,357
    
    
    
    
    
    
    $
    284,345Net Written Premiums
    
    $
    198,051
    
    
    $
    39,608
    
    
    $
    12,691
    
    
    
    
    
    
    $
    250,350Revenue:Net Earned Premiums
    
    $
    183,457
    
    
    $
    36,836
    
    
    $
    12,843
    
    
    
    
    
    
    $
    233,136Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,373
    
    
    
    15,373Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    296
    
    
    
    296Other Income
    
    
    
    
    
    
    
    
    
    
    236
    
    
    
    64
    
    
    
    300Total Revenue
    
    
    183,457
    
    
    
    36,836
    
    
    
    13,079
    
    
    
    15,733
    
    
    
    249,105Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    83,238
    
    
    
    23,878
    
    
    
    8,686
    
    
    
    
    
    
    
    115,802Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,826
    
    
    
    57,826Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    5,967
    
    
    
    6,010Total Losses and Expenses
    
    
    83,238
    
    
    
    23,878
    
    
    
    8,729
    
    
    
    63,793
    
    
    
    179,638Income Before Income Taxes
    
    
    100,219
    
    
    
    12,958
    
    
    
    4,350
    
    
    
    (48,060
    )
    
    
    69,467Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,327
    
    
    
    22,327Net Income
    
    $
    100,219
    
    
    $
    12,958
    
    
    $
    4,350
    
    
    $
    (70,387
    )
    
    $
    47,140Total Assets
    
    
    
    
    
    
    
    
    
    $
    190,472
    
    
    $
    2,362,484
    
    
    $
    2,552,956
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Six Months EndedCommercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalJune 30, 2006:Gross Written Premiums
    
    $
    508,292
    
    
    $
    111,804
    
    
    $
    49,310
    
    
    
    
    
    
    $
    669,406Net Written Premiums
    
    $
    475,778
    
    
    $
    89,220
    
    
    $
    19,210
    
    
    
    
    
    
    $
    584,208Revenue:Net Earned Premiums
    
    $
    459,969
    
    
    $
    83,434
    
    
    $
    21,937
    
    
    
    
    
    
    $
    565,340Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,739
    
    
    
    41,739Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,806
    )
    
    
    (2,806
    )Other Income
    
    
    
    
    
    
    
    
    
    
    782
    
    
    
    126
    
    
    
    908Total Revenue
    
    
    459,969
    
    
    
    83,434
    
    
    
    22,719
    
    
    
    39,059
    
    
    
    605,181Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    195,172
    
    
    
    48,195
    
    
    
    9,053
    
    
    
    
    
    
    
    252,420Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,354
    
    
    
    162,354Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    514
    
    
    
    4,766
    
    
    
    5,280Total Losses and Expenses
    
    
    195,172
    
    
    
    48,195
    
    
    
    9,567
    
    
    
    167,120
    
    
    
    420,054Income Before Income Taxes
    
    
    264,797
    
    
    
    35,239
    
    
    
    13,152
    
    
    
    (128,061
    )
    
    
    185,127Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,949
    
    
    
    59,949Net Income
    
    $
    264,797
    
    
    $
    35,239
    
    
    $
    13,152
    
    
    $
    (188,010
    )
    
    $
    125,178Total Assets
    
    
    
    
    
    
    
    
    
    $
    158,213
    
    
    $
    2,894,915
    
    
    $
    3,053,128June 30, 2005:Gross Written Premiums
    
    $
    421,811
    
    
    $
    101,822
    
    
    $
    45,817
    
    
    
    
    
    
    $
    569,450Net Written Premiums
    
    $
    402,374
    
    
    $
    75,909
    
    
    $
    25,853
    
    
    
    
    
    
    $
    504,136Revenue:Net Earned Premiums
    
    $
    367,175
    
    
    $
    72,221
    
    
    $
    30,495
    
    
    
    
    
    
    $
    469,891Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,864
    
    
    
    28,864Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,094
    
    
    
    11,094Other Income
    
    
    
    
    
    
    
    
    
    
    450
    
    
    
    330
    
    
    
    780Total Revenue
    
    
    367,175
    
    
    
    72,221
    
    
    
    30,945
    
    
    
    40,288
    
    
    
    510,629Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    172,924
    
    
    
    49,741
    
    
    
    19,608
    
    
    
    
    
    
    
    242,273Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,774
    
    
    
    121,774Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    9,906
    
    
    
    9,949Total Losses and Expenses
    
    
    172,924
    
    
    
    49,741
    
    
    
    19,651
    
    
    
    131,680
    
    
    
    373,996Income Before Income Taxes
    
    
    194,251
    
    
    
    22,480
    
    
    
    11,294
    
    
    
    (91,392
    )
    
    
    136,633Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,922
    
    
    
    43,922Net Income
    
    $
    194,251
    
    
    $
    22,480
    
    
    $
    11,294
    
    
    $
    (135,314
    )
    
    $
    92,711Total Assets
    
    
    
    
    
    
    
    
    
    $
    190,472
    
    
    $
    2,362,484
    
    
    $
    2,552,956
 23




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
   Critical Accounting Estimates
  Share-based Compensation Expense
  24




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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, 2006 vs. June 30, 2005)
 Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Gross Written Premiums
    
    $
    508.3
    
    
    $
    111.8
    
    
    $
    49.3
    
    
    $
    669.42005 Gross Written Premiums
    
    $
    421.8
    
    
    $
    101.8
    
    
    $
    45.8
    
    
    $
    569.4Percentage Increase
    
    
    20.5
    %
    
    
    9.8
    %
    
    
    7.6
    %
    
    
    17.6
    %2006 Gross Earned Premiums
    
    $
    493.5
    
    
    $
    104.6
    
    
    $
    51.2
    
    
    $
    649.32005 Gross Earned Premiums
    
    $
    423.0
    
    
    $
    94.5
    
    
    $
    50.7
    
    
    $
    568.2Percentage Increase
    
    
    16.7
    %
    
    
    10.7
    %
    
    
    0.1
    %
    
    
    14.3
    %
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships
formed by the Companys marketing Regional Vice Presidents continue to result in additional
prospects and increased
 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
 premium writings, most notably for the Companys various commercial package and non profit
management liability product lines.
    
    Continued expansion of marketing efforts relating to commercial lines and specialty
lines products through the Companys field organization and preferred agents.
    
    The introduction of several new niche product offerings, including religious
organization commercial package and sports and fitness products.
    
    An increase to in-force policy counts as of June 30, 2006 versus June 30, 2005 of 25.9%
and 19.3% for the commercial lines and specialty lines segments, respectively, primarily as
a result of the factors discussed above.
    
    Realized average rate increases on renewal business approximating 0.8%, and 7.2% for the
commercial and personal lines segments, respectively.
    
    An increase of $9.5 million in homeowners gross written premium as a result of Liberty
American Insurance Group, Inc.s continued planned shift in product mix of increasing
homeowners product policies and reducing mobile homeowners product policies.
  
    
    The decision by an automobile leasing customer to self-insure business previously
written by the Company. As a result, gross written premiums for the commercial lines
segment were reduced by $12.5 million.
    
    A decrease in mobile homeowners gross written premium of $9.6 million resulting from the
continued planned shift in product mix noted above.
    
    A decrease in in-force policy counts for the personal lines segment of 25.0%, resulting
from a decrease to the in-force counts for the mobile homeowners product of 77.9% and an
increase to the in-force policy counts for the homeowners product of 43.1%, as a result of
the continued planned shift in product mix noted above.
    
    Realized average rate decreases on renewal business approximating 0.6% for the specialty
lines segment.
  Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Net Written Premiums
    
    $
    475.8
    
    
    $
    89.2
    
    
    $
    19.2
    
    
    $
    584.22005 Net Written Premiums
    
    $
    402.3
    
    
    $
    75.9
    
    
    $
    25.9
    
    
    $
    504.1Percentage Increase (Decrease)
    
    
    18.3
    %
    
    
    17.5
    %
    
    
    (25.9
    )%
    
    
    15.9
    %2006 Net Earned Premiums
    
    $
    460.0
    
    
    $
    83.4
    
    
    $
    21.9
    
    
    $
    565.32005 Net Earned Premiums
    
    $
    367.2
    
    
    $
    72.2
    
    
    $
    30.5
    
    
    $
    469.9Percentage Increase (Decrease)
    
    
    25.3
    %
    
    
    15.5
    %
    
    
    (28.2
    )%
    
    
    20.3
    %
  
    
    A change in the Companys net liability cession percentage under its quota share
reinsurance agreement whereby the Company ceded 10% of its commercial and specialty lines net
written and earned premiums and loss and loss adjustment expenses for policies incepting
during 2004, due to its decision to terminate this
 26




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 agreement on a run-off basis effective December 31, 2004. Pursuant to the agreement, during the
six months ended June 30, 2006 and 2005, the Company ceded $(0.3) million (($0.3) million for
the commercial lines segment and $0 million for the specialty lines segment) and $(0.4) million
($0.4 million for the commercial lines segment, $(0.8) million for the specialty lines segment)
of net written premiums, respectively, and $0 million and $33.2 million ($27.7 million for the
commercial lines segment, $5.4 million for the specialty lines segment, and $0.1 million for the
personal lines segment) of net earned premiums, respectively.
    
    Certain of the Companys reinsurance contracts have reinstatement or additional premium
provisions under which the Company must pay reinstatement or additional reinsurance premiums
to reinstate coverage provisions upon utilization of initial reinsurance coverage. During the
six months ended June 30, 2006 and 2005, the Company accrued $3.2 million ($1.3 million for
the commercial lines segment and $1.9 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 its
casualty excess of loss reinsurance treaty, as a result of changes in ultimate loss estimates.
The reinstatement premium increased ceded written and earned premiums and reduced net written
and earned premiums.
    
    The Company also experienced higher property catastrophe reinsurance costs, increased catastrophe
loss retentions, and decreased catastrophe coverage limits for its June 1, 2006 reinsurance renewal
compared to the June 1, 2005 renewal as a result of the hardening property catastrophe reinsurance
market. This hardening of the property catastrophe reinsurance market is generally due to the
extent of catastrophe losses incurred by reinsurers during 2004 and 2005 along with the revision of
reinsurers predictive models of potential future catastrophe risk. The Companys property
catastrophe reinsurance coverage effective June 1, 2006 through May 31, 2007 is as follows:
 -
    
    For its personal lines catastrophe losses, the Companys reinsurance coverage is approximately
$200.2 million in excess of the Companys $7.5 million per occurrence retention. Of this total
amount, the Florida Hurricane Catastrophe Fund (the FHCF) provides on an aggregate basis for
Liberty American Select Insurance Company (LASIC) and Liberty American Insurance Company (LAIC)
90% coverage for approximately $108.6 million in excess of $34.4 million. In addition, LASIC purchased
additional reimbursement coverage of $10.0 million in excess of approximately $7.5 million, which
includes one prepaid reinstatement premium at no additional charge. The FHCF coverage inures to the
benefit of the Companys open-market catastrophe program. The coverage provided by the 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, except for
the $10.0 million provided for in LASICs additional reimbursement coverage. Since the FHCF
reimbursement coverage cannot be reinstated, the Companys 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 coverage which has been utilized.-
    
    In addition, the Company has purchased reinstatement premium protection reinsurance contracts for
its personal lines open-market catastrophe reinsurance contracts, effective June 1, 2006, which pay
100% of the reinstatement premium for the one mandatory reinstatement which the Company becomes
liable to pay as a result of loss occurrences exceeding $17.5 million for its personal lines
open-market catastrophe reinsurance program.-
    
    For its commercial lines catastrophe losses, the Companys open-market catastrophe reinsurance
coverage is $90.0 million in excess of the Companys $10.0 million per occurrence retention. In
addition, the FHCF provides on an aggregate basis for Philadelphia Indemnity Insurance Company 90%
coverage for approximately $1.1 million in excess of $0.4 million, resulting in total commercial lines
reinsurance coverage of approximately $91.1 million in excess of the Companys $10.0 per occurrence
retention.
 Net Investment Income:
 27




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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.
    
    A $15.5 million reduction in ceded loss and loss adjustment expenses pursuant to a 10%
quota share agreement (See Premiums). Ceded loss and loss adjustment expenses pursuant to
this quota share agreement for the six months ended June 30, 2005 were $15.5 million;
however, due to the Companys decision to terminate this agreement on a run-off basis
effective December 31, 2004, there were no losses ceded to this agreement during 2006.
  
    
    Net reserve actions taken during the six months ended June 30, 2006, wherein the net
estimated unpaid loss and loss adjustment expenses for accident years 2005 and prior were
decreased by $35.6 million as compared to net reserve actions taken during the six months ended June
30, 2005 wherein the estimated net unpaid loss and loss adjustment expenses for accident
years 2004 and prior were decreased by $7.4 million. Decreases in
 28




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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 Basis Decrease(In millions)Accident Year 2005
    
    $
    26.4Accident Year 2004
    
    
    3.5Accident Year 2003
    
    
    0.6Accident Years 2002 and prior
    
    
    5.1Total Decrease
    
    $
    35.6
 For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for property coverages on commercial
package policies and for professional liability policies due to better than expected case
incurred loss development.For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for all coverages on commercial package
polices due better than expected case incurred loss development.For accident year 2003, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for property and auto coverages on
commercial package policies due to better than expected case incurred development.For accident years 2002 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for auto coverages on
commercial package policies, commercial auto policies, and professional liability policies
due to lower than expected case incurred development.
    
    During the six months ended June 30, 2005, the Company incurred $3.0 million of net loss
and loss adjustment expenses attributable to estimated personal lines catastrophe losses
from hailstorms which struck Florida in March 2005. There were no such catastrophe losses
during the six months ended June 30, 2006.
 Acquisition Costs and Other Underwriting Expenses:
 
    
    The growth in net earned premiums.
    
    An increase in insurance guaranty fund assessments.
    
    Share-based compensation expense recognized under SFAS 123(R), which was adopted by the
Company on January 1, 2006.
    
    A $15.0 million decrease in ceding commission earned pursuant to the Companys quota
share agreements (See Premiums). During the six months ended June 30, 2006, the Company
earned no ceding commissions related to quota share agreements as compared to $15.0 million during the
same period of 2005. There were no ceded earned premiums pursuant to these quota share
agreements for the six months ended June 30, 2006 as compared to $33.2 million for the same period of
2005 due to the Companys decision to terminate its 10% quota share agreement on a run-off
basis effective December 31, 2004.
 29




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Other Operating Expenses
 Income Tax Expense:
 Results of Operations (Three Months ended June 30, 2006 vs. June 30, 2005)
 Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Gross Written Premiums
    
    $
    265.3
    
    
    $
    53.7
    
    
    $
    22.4
    
    
    $
    341.42005 Gross Written Premiums
    
    $
    211.8
    
    
    $
    48.2
    
    
    $
    24.3
    
    
    $
    284.3Percentage Increase (Decrease)
    
    
    25.2
    %
    
    
    11.4
    %
    
    
    (7.8
    )%
    
    
    20.1
    %2006 Gross Earned Premiums
    
    $
    252.8
    
    
    $
    53.1
    
    
    $
    25.8
    
    
    $
    331.72005 Gross Earned Premiums
    
    $
    209.3
    
    
    $
    47.2
    
    
    $
    23.7
    
    
    $
    280.2Percentage Increase
    
    
    20.8
    %
    
    
    12.5
    %
    
    
    8.9
    %
    
    
    18.4
    %
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships
formed by the Companys marketing Regional Vice Presidents continue to result in additional
prospects and increased premium writings, most notably for the Companys various commercial
package and non profit management liability product lines.
    
    Continued expansion of marketing efforts relating to commercial lines and specialty
lines products through the Companys field organization and preferred agents.
    
    The introduction of several new niche product offerings, including religious
organization commercial package and sports and fitness products.
    
    An increase to in-force policy counts as of June 30, 2006 versus June 30, 2005 of 25.9%
and 19.3% for the commercial lines and specialty lines segments, respectively, primarily as
a result of the factors discussed above.
    
    Realized average rate increases on renewal business approximating 1.3%, and 8.3% for the
commercial and personal lines segments, respectively.
  
    
    A decrease in mobile homeowners gross written premium of $2.6 million, resulting from
the continued planned shift in product mix to homeowners product policies.
    
    A decrease in in-force policy counts for the personal lines segment of 25.0%, resulting
from a decrease to the in-force counts for the mobile homeowners product of 77.9% and an
increase to the in-force policy counts for the homeowners product of 43.1%, as a result of
the continued planned shift in product mix noted above.
 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
 
    
    Realized average rate decreases on renewal business approximating 0.5% for the specialty
lines segment.
  Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Net Written Premiums
    
    $
    247.7
    
    
    $
    43.8
    
    
    $
    4.8
    
    
    $
    296.32005 Net Written Premiums
    
    $
    198.1
    
    
    $
    39.6
    
    
    $
    12.7
    
    
    $
    250.4Percentage Increase (Decrease)
    
    
    25.0
    %
    
    
    10.6
    %
    
    
    (62.2
    )%
    
    
    18.3
    %2006 Net Earned Premiums
    
    $
    235.6
    
    
    $
    43.5
    
    
    $
    9.7
    
    
    $
    288.82005 Net Earned Premiums
    
    $
    183.5
    
    
    $
    36.8
    
    
    $
    12.8
    
    
    $
    233.1Percentage Increase (Decrease)
    
    
    28.4
    %
    
    
    18.2
    %
    
    
    (24.2
    )%
    
    
    23.9
    %
  
    
    A change in the Companys net liability cession percentage under its quota share
reinsurance agreement, whereby the Company ceded 10% of its commercial and specialty lines
net written and earned premiums and loss and loss adjustment expenses for policies
incepting during 2004, due to its decision to terminate this agreement on a run-off basis
effective December 31, 2004. Pursuant to the agreement, during the three months ended June
30, 2006 and 2005, the Company ceded $0 million and $(0.2) million for the commercial lines
segment of net written premiums, respectively, and $0 million and $14.4 million ($12.1
million for the commercial lines segment, $2.3 million for the specialty lines segment, and
$0 million for the personal lines segment) of net earned premiums, respectively.
  Net Investment Income:
  31




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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:
  
    
    Net reserve actions taken during the three months ended June 30, 2006, wherein the net
estimated unpaid loss and loss adjustment expenses for accident years 2005 and prior were
decreased by $35.7 million as compared to reserve actions taken during the three months ended June 30,
2005 wherein the estimated net unpaid loss and loss adjustment expenses for accident years
2004 and prior were decreased by $8.1 million. Decreases in the estimated net unpaid loss
and loss adjustment expenses during the three months ended June 30, 2006 by accident year
are as follows:
 Net Basis Decrease(In millions)Accident Year 2005
    
    $
    23.1Accident Year 2004
    
    
    4.2Accident Year 2003
    
    
    0.8Accident Years 2002 and prior
    
    
    7.6Total Decrease
    
    $
    35.7
   32




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 For accident year 2003, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for property and auto coverages on
commercial package policies due to better than expected case incurred development.For accident years 2002 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for property and auto
coverages on commercial package policies, commercial auto policies and professional
liability policies due to lower than expected case incurred loss development.
    
    A $6.6 million reduction in ceded loss and loss adjustment expenses pursuant to a 10%
quota share agreement (See Premiums). Ceded loss and loss adjustment expenses pursuant to
this quota share agreement for the three months ended June 30, 2005 were $6.6 million;
however, due to the Companys decision to terminate this agreement on a run-off basis
effective December 31, 2004, there were no losses ceded to this agreement during 2006.
  Acquisition Costs and Other Underwriting Expenses:
 
    
    The growth in net earned premiums.
    
    An increase in insurance guaranty fund assessments.
    
    Share-based compensation expense recognized under SFAS 123(R), which was adopted by the
Company on January 1, 2006.
    
    A $6.6 million decrease in ceding commission earned pursuant to quota share agreements
(See Premiums). During the three months ended June 30, 2006, the Company earned no ceding
commissions related to quota share agreements as compared to $6.6 million of earned ceding commissions
related to quota share agreements during the same period of 2005. There were no ceded
earned premiums pursuant to these quota share agreements for the three months ended June
30, 2006 as compared to $14.4 million for the same period of 2005, due to the Companys decision to
terminate its 10% quota share agreement on a run-off basis effective December 31, 2004.
 Other Operating Expenses
 Income Tax Expense:
 Investments
  33




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




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Gross Unrealized Losses as of June 30, 2006(in millions)Fixed MaturitiesContinuous
    
    Available for Sale
    
    
    
    
    
    
    Totaltime in unrealized
    
    Excluding Interests
    
    
    Interests in
    
    
    Fixed Maturitiesloss position
    
    in Securitized Assets
    
    
    Securitized Assets
    
    
    Available for Sale
    
    
    Equity Securities
    
    
    Total Investments0  3 months
    
    $
    0.3
    
    
    $
    0.9
    
    
    $
    1.2
    
    
    $
    4.0
    
    
    $
    5.24  6 months
    
    
    3.5
    
    
    
    5.6
    
    
    
    9.1
    
    
    
    3.2
    
    
    
    12.37  9 months
    
    
    0.7
    
    
    
    1.5
    
    
    
    2.2
    
    
    
    0.2
    
    
    
    2.410  12 months
    
    
    7.7
    
    
    
    9.0
    
    
    
    16.7
    
    
    
    
    
    
    
    16.713  18 months
    
    
    6.1
    
    
    
    3.8
    
    
    
    9.9
    
    
    
    
    
    
    
    9.919  24 months
    
    
    4.7
    
    
    
    2.7
    
    
    
    7.4
    
    
    
    
    
    
    
    7.4> 24 months
    
    
    3.1
    
    
    
    1.3
    
    
    
    4.4
    
    
    
    
    
    
    
    4.4Total Gross
Unrealized Losses
    
    $
    26.1
    
    
    $
    24.8
    
    
    $
    50.9
    
    
    $
    7.4
    
    
    $
    58.3Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    887.1
    
    
    $
    755.2
    
    
    $
    1,642.3
    
    
    $
    74.2
    
    
    $
    1,716.5
        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
             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
    Liquidity and Capital Resources
    37




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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 Pronouncement
  Forward-Looking Information
  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
  39




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   TEstimated
    
    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, 2006InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,882,505
    
    
    200 bp decrease
    
    $
    2,030,157
    
    
    
    7.8
    %
    
    
    10.2
    %100 bp decrease
    
    $
    1,958,894
    
    
    
    4.1
    %
    
    
    5.3
    %50 bp decrease
    
    $
    1,920,965
    
    
    
    2.0
    %
    
    
    2.7
    %50 bp increase
    
    $
    1,844,046
    
    
    
    (2.0
    )%
    
    
    (2.7
    )%100 bp increase
    
    $
    1,806,054
    
    
    
    (4.1
    )%
    
    
    (5.3
    )%200 bp increase
    
    $
    1,732,609
    
    
    
    (8.0
    )%
    
    
    (10.3
    )%June 30, 2005InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,599,748
    
    
    200 bp decrease
    
    $
    1,720,295
    
    
    
    7.5
    %
    
    
    10.3
    %100 bp decrease
    
    $
    1,661,621
    
    
    
    3.9
    %
    
    
    5.3
    %50 bp decrease
    
    $
    1,631,882
    
    
    
    2.0
    %
    
    
    2.8
    %50 bp increase
    
    $
    1,566,142
    
    
    
    (2.1
    )%
    
    
    (2.9
    )%100 bp increase
    
    $
    1,532,150
    
    
    
    (4.2
    )%
    
    
    (5.8
    )%200 bp increase
    
    $
    1,465,058
    
    
    
    (8.4
    )%
    
    
    (11.5
    )%
 40




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
 Item 4. Controls and Procedures
    41




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 
  
   
   
   (c) Total
    
    (d)Number of
    
    ApproximateShares
    
    Dollar Value ofPurchased as
    
    Shares ThatPart of
    
    May Yet BePublicly
    
    Purchased(a) Total Number
    
    (b) Average
    
    Announced
    
    Under theof Shares
    
    Price Paid per
    
    Plans or
    
    Plans orPeriod
    
    Purchased
    
    Share
    
    Programs
    
    ProgramsApril 1 - April 30
    
    
    7,755
    (1)
    
    $
    22.90
    
    
    
    
    
    
    
    $
    45,000,000
    (2)May 1 - May 31
    
    
    1,155
    (1)
    
    $
    21.47
    
    
    
    
    
    
    
    $
    45,000,000
    (2)June 1 - June 30
    
    
    2,518
    (1)
    
    $
    24.25
    
    
    
    
    
    
    
    $
    45,000,000
    (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, amounted to $75.3 million, of which $30.3
million has been utilized. 
   
   42




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##### Table of Contents



Name
    
    Votes For
    
    Votes WithheldAminta Hawkins Breaux
    
    
    61,770,203
    
    
    
    213,029Michael J. Cascio
    
    
    59,774,105
    
    
    
    2,209,127Elizabeth H. Gemmill
    
    
    61,771,648
    
    
    
    211,584James J. Maguire
    
    
    53,365,680
    
    
    
    8,617,552James J. Maguire, Jr.
    
    
    52,261,676
    
    
    
    9,721,556Margaret M. Mattix
    
    
    61,771,668
    
    
    
    211,564Michael J. Morris
    
    
    51,369,827
    
    
    
    10,613,405Shaun F. OMalley
    
    
    53,347,930
    
    
    
    8,635,302Donald A. Pizer
    
    
    61,772,173
    
    
    
    211,059Ronald R. Rock
    
    
    61,771,873
    
    
    
    211,359Sean S. Sweeney
    
    
    53,362,245
    
    
    
    8,620,987
  Votes For
    
    Votes Against
    
    Abstentions
    
    Broker-Non VotesApproval of the
Appointment of
PricewaterhouseCoopers, LLP as
Independent
Registered Public
Accounting Firm for
the Fiscal Year
Ending December 31,
2006
    
    
    61,825,837
    
    
    
    138,830
    
    
    
    18,564
    
    
    
    
 
   
   Exhibit No.
    
    Description31.1*
    
    Certification of the Companys chief executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of the Companys chief financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of the Companys chief executive officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of the Companys chief financial officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith. 43




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##### Table of Contents



SIGNATURES
  PHILADELPHIA CONSOLIDATED HOLDING CORP.RegistrantDate August 7, 2006
    
    
    
    James J. Maguire, Jr.

James J. Maguire, Jr.President and Chief Executive Officer(Principal Executive Officer)Date August 7, 2006
    
    
    
    Craig P. KellerCraig P. KellerExecutive Vice President, Secretary,Treasurer and Chief Financial Officer(Principal Financial and AccountingOfficer)
 44