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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d)  For the Quarterly Period Ended March 31, 2004 Commission File Number 0-22280 PHILADELPHIA CONSOLIDATED HOLDING CORP. 
  PENNSYLVANIA
    
    23-2202671(State of Incorporation)
    
    (IRS Employer Identification No.)
 One Bala Plaza, Suite 100
Bala Cynwyd, Pennsylvania 19004
(610) 617-7900    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES: [X]      NO: [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES: [X]      NO: [  ] Indicate the number of shares outstanding of each of the issuers classes of
common stock as of April 30, 2004. Common Stock, no par value, 22,032,397 shares outstanding




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIESINDEX For the Quarterly Period Ended March 31, 2004  
 Part I - Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets  March 31, 2004 and
December 31, 2003
    
    
    3Consolidated Statements of Operations and Comprehensive
Income - For the three months ended March 31, 2004 and 2003
    
    
    4Consolidated Statements of Changes in Shareholders Equity - For
the three months ended March 31, 2004 and year ended
December 31, 2003
    
    
    5Consolidated Statements of Cash Flows - For the three
months ended March 31, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-12Item 2.Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13-19Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.Controls and Procedures
    
    
    21Part II - Other Information
    
    
    22-23Signatures
    
    
    24CEO CERTIFICATION PURSUANT TO SECTION 302CFO CERTIFICATION PURSUANT TO SECTION 302CEO CERTIFICATION PURSUANT TO SECTION 1350CFO CERTIFICATION PURSUANT TO SECTION 1350
  2




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS  As ofMarch 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $1,162,540 AND $1,066,523)
    
    $
    1,186,934
    
    
    $
    1,081,694EQUITY SECURITIES AT MARKET (COST $99,939
AND $79,813)
    
    
    111,125
    
    
    
    90,358TOTAL INVESTMENTS
    
    
    1,298,059
    
    
    
    1,172,052CASH AND CASH EQUIVALENTS
    
    
    64,743
    
    
    
    73,942ACCRUED INVESTMENT INCOME
    
    
    12,195
    
    
    
    11,008PREMIUMS RECEIVABLE
    
    
    165,281
    
    
    
    179,509PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
    
    
    287,208
    
    
    
    292,157DEFERRED INCOME TAXES
    
    
    15,169
    
    
    
    19,176DEFERRED ACQUISITION COSTS
    
    
    69,357
    
    
    
    56,288PROPERTY AND EQUIPMENT, NET
    
    
    18,027
    
    
    
    16,821GOODWILL
    
    
    25,724
    
    
    
    25,724OTHER ASSETS
    
    
    19,314
    
    
    
    22,354TOTAL ASSETS
    
    $
    1,975,077
    
    
    $
    1,869,031LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    673,535
    
    
    $
    627,086UNEARNED PREMIUMS
    
    
    433,809
    
    
    
    422,589TOTAL POLICY LIABILITIES AND ACCRUALS
    
    
    1,107,344
    
    
    
    1,049,675FUNDS HELD PAYABLE TO REINSURER
    
    
    115,353
    
    
    
    110,011LOANS PAYABLE
    
    
    47,062
    
    
    
    48,482PREMIUMS PAYABLE
    
    
    39,887
    
    
    
    35,044OTHER LIABILITIES
    
    
    88,976
    
    
    
    82,083TOTAL LIABILITIES
    
    
    1,398,622
    
    
    
    1,325,295COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING
    
    
    
    
    
    
    COMMON STOCK, NO PAR VALUE,
100,000,000 SHARES AUTHORIZED, 22,033,897 AND
22,007,552 SHARES ISSUED AND OUTSTANDING
    
    
    281,951
    
    
    
    281,088NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (5,046
    )
    
    
    (5,444
    )ACCUMULATED OTHER COMPREHENSIVE INCOME
    
    
    23,127
    
    
    
    16,715RETAINED EARNINGS
    
    
    276,423
    
    
    
    251,377TOTAL SHAREHOLDERS EQUITY
    
    
    576,455
    
    
    
    543,736TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,975,077
    
    
    $
    1,869,031
 The accompanying notes are an integral part of the consolidated financial statements. 3




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited) For the Three MonthsEnded March 31,2004
    
    2003REVENUE:NET EARNED PREMIUMS
    
    $
    168,784
    
    
    $
    148,362NET INVESTMENT INCOME
    
    
    9,973
    
    
    
    9,805NET REALIZED INVESTMENT GAIN (LOSS)
    
    
    1,778
    
    
    
    (1,133
    )OTHER INCOME
    
    
    1,382
    
    
    
    661TOTAL REVENUE
    
    
    181,917
    
    
    
    157,695LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    130,686
    
    
    
    103,085NET REINSURANCE RECOVERIES
    
    
    (34,443
    )
    
    
    (12,725
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    96,243
    
    
    
    90,360ACQUISITION COSTS AND OTHER UNDERWRITING
EXPENSES
    
    
    47,354
    
    
    
    46,420OTHER OPERATING EXPENSES
    
    
    1,769
    
    
    
    1,674TOTAL LOSSES AND EXPENSES
    
    
    145,366
    
    
    
    138,454INCOME BEFORE INCOME TAXES
    
    
    36,551
    
    
    
    19,241INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    10,950
    
    
    
    7,764DEFERRED
    
    
    555
    
    
    
    (1,756
    )TOTAL INCOME TAX EXPENSE
    
    
    11,505
    
    
    
    6,008NET INCOME
    
    $
    25,046
    
    
    $
    13,233OTHER COMPREHENSIVE INCOME, (LOSS), NET OF TAX:HOLDING GAIN, (LOSS) ARISING DURING PERIOD
    
    $
    7,568
    
    
    $
    (3,941
    )RECLASSIFICATION ADJUSTMENT
    
    
    (1,156
    )
    
    
    736OTHER COMPREHENSIVE INCOME, (LOSS)
    
    
    6,412
    
    
    
    (3,205
    )COMPREHENSIVE INCOME
    
    $
    31,458
    
    
    $
    10,028PER AVERAGE SHARE DATA:BASIC EARNINGS PER SHARE
    
    $
    1.14
    
    
    $
    0.61DILUTED EARNINGS PER SHARE
    
    $
    1.08
    
    
    $
    0.59WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    22,018,270
    
    
    
    21,865,269WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    1,082,611
    
    
    
    562,552WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    23,100,881
    
    
    
    22,427,821
 The accompanying notes are an integral part of the consolidated financial statements. 4




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) For the ThreeMonths Ended
    
    For the Year EndedMarch 31, 2004
    
    December 31,(Unaudited)
    
    2003COMMON SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    22,007,552
    
    
    
    21,868,877EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    26,000
    
    
    
    99,875ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET
    
    
    345
    
    
    
    38,800BALANCE AT END OF PERIOD
    
    
    22,033,897
    
    
    
    22,007,552TREASURY SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    
    
    
    
    SHARES REPURCHASED PURSUANT TO AUTHORIZATION
    
    
    
    
    
    
    10,000EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    
    
    
    
    (6,500
    )ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET
    
    
    
    
    
    
    (3,500
    )BALANCE AT END OF PERIOD
    
    
    
    
    
    
    COMMON STOCK:BALANCE AT BEGINNING OF YEAR
    
    $
    281,088
    
    
    $
    276,945EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    819
    
    
    
    2,852ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    44
    
    
    
    1,291BALANCE AT END OF PERIOD
    
    
    281,951
    
    
    
    281,088NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (5,444
    )
    
    
    (6,407
    )NOTES RECEIVABLE (ISSUED) FORFEITURES PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
    
    
    25
    
    
    
    (1,065
    )COLLECTION OF NOTES RECEIVABLE
    
    
    373
    
    
    
    2,028BALANCE AT END OF PERIOD
    
    
    (5,046
    )
    
    
    (5,444
    )ACCUMULATED OTHER COMPREHENSIVE INCOME,NET OF DEFERRED INCOME TAXES:BALANCE AT BEGINNING OF YEAR
    
    
    16,715
    
    
    
    16,185OTHER COMPREHENSIVE INCOME, NET OF TAXES
    
    
    6,412
    
    
    
    530BALANCE AT END OF PERIOD
    
    
    23,127
    
    
    
    16,715RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    251,377
    
    
    
    191,100NET INCOME
    
    
    25,046
    
    
    
    60,277BALANCE AT END OF PERIOD
    
    
    276,423
    
    
    
    251,377COMMON STOCK HELD IN TREASURY:BALANCE AT BEGINNING OF YEAR
    
    
    
    
    
    
    EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    
    
    
    
    94COMMON SHARES REPURCHASED
    
    
    
    
    
    
    (300
    )ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    
    
    
    
    206BALANCE AT END OF PERIOD
    
    
    
    
    
    
    TOTAL SHAREHOLDERS EQUITY
    
    $
    576,455
    
    
    $
    543,736
 The accompanying notes are an integral part of the consolidated financial statements. 5




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited) For the Three Months Ended March 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    25,046
    
    
    $
    13,233ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT (GAIN) LOSS
    
    
    (1,778
    )
    
    
    1,133DEPRECIATION AND AMORTIZATION EXPENSE
    
    
    3,131
    
    
    
    1,724DEFERRED INCOME TAX EXPENSE, (BENEFIT)
    
    
    555
    
    
    
    (1,756
    )CHANGE IN PREMIUMS RECEIVABLE
    
    
    14,228
    
    
    
    (290
    )CHANGE IN OTHER RECEIVABLES
    
    
    3,761
    
    
    
    (779
    )CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    (13,069
    )
    
    
    (1,774
    )CHANGE IN INCOME TAXES PAYABLE
    
    
    8,612
    
    
    
    5,450CHANGE IN OTHER ASSETS
    
    
    1,743
    
    
    
    (4,256
    )CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES
    
    
    46,449
    
    
    
    41,647CHANGE IN UNEARNED PREMIUMS
    
    
    11,220
    
    
    
    20,297CHANGE IN FUNDS HELD PAYABLE TO REINSURER
    
    
    5,342
    
    
    
    CHANGE IN OTHER LIABILITIES
    
    
    1,753
    
    
    
    7,347TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS
    
    
    387
    
    
    
    NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    107,380
    
    
    
    81,976CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES
    
    
    17,051
    
    
    
    6,504PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES
    
    
    33,972
    
    
    
    47,509PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES
    
    
    8,853
    
    
    
    3,053COST OF FIXED MATURITIES ACQUIRED
    
    
    (146,682
    )
    
    
    (150,325
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (26,889
    )
    
    
    (1,850
    )PURCHASE OF PROPERTY AND EQUIPMENT, NET
    
    
    (2,338
    )
    
    
    (1,104
    )NET CASH USED FOR INVESTING ACTIVITIES
    
    
    (116,033
    )
    
    
    (96,213
    )CASH FLOWS FROM FINANCING ACTIVITIES:PROCEEDS FROM LOANS PAYABLE
    
    
    20,084
    
    
    
    15,161REPAYMENTS ON LOANS PAYABLE
    
    
    (21,504
    )
    
    
    (4,957
    )PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    432
    
    
    
    PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
    
    
    69
    
    
    
    19PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE
    
    
    373
    
    
    
    396COST OF COMMON STOCK REPURCHASED
    
    
    
    
    
    
    (300
    )NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
    
    
    (546
    )
    
    
    10,319NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (9,199
    )
    
    
    (3,918
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    73,942
    
    
    
    42,002CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    64,743
    
    
    $
    38,084CASH PAID DURING THE PERIOD FOR:INCOME TAXES
    
    $
    2,650
    
    
    $
    1,930INTEREST
    
    $
    145
    
    
    $
    134NON-CASH TRANSACTIONS:ISSUANCE (FORFEITURES) OF SHARES PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE
    
    $
    (25
    )
    
    $
    (59
    )
 The accompanying notes are an integral part of the consolidated financial statements. 6




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements
   1.
    
    Basis of PresentationThe consolidated financial statements as of and for the three months ended
March 31, 2004 and 2003 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 only normal recurring
accruals, necessary for a fair statement of the information set forth
therein. The results of operations for the three months ended March 31,
2004 are not necessarily indicative of the operating results to be expected
for the full year or any other period. Certain prior years amounts have
been reclassified for comparative purposes.These financial statements should be read in conjunction with the financial
statements and notes included in the Companys Annual Report on Form 10-K as
of and for the year ended December 31, 2003.2.
    
    InvestmentsThe carrying amounts 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 dealers. At
March 31, 2004, the Company held no derivative financial instruments or
embedded financial derivatives.The Company performs various analytical procedures with respect to its
investments, including identifying any security whose fair value is below
its cost. Upon identification of such securities, a detailed review is
performed for such securities, except interests in securitized assets,
meeting predetermined thresholds to determine whether a decline in fair
value below a securitys cost basis is other than temporary. If the Company
determines a decline in value to be other than temporary, the cost basis of
the security is written down to its fair value with the amount of the write
down included in earnings as a realized loss in the period the impairment
arose. Non-cash realized investment losses recorded for the three months
ended March 31, 2004 and 2003 were $0 million and $0.9 million,
respectively, as a result of the Companys other than temporary impairment
evaluation.The Companys impairment evaluation and recognition for interests in
securitized assets is conducted in accordance with the guidance provided by
the Emerging Issues Task Force of the Financial Accounting Standards Board.
Under this guidance, impairment losses on securities must be recognized if
both the fair value of the security is less than its book value and the net
present value of expected future cash flows is less than the net present
value of expected future cash flows at the most recent (prior) estimation
date. If these criteria are met, an impairment charge, calculated as the
difference between the current book value of the security and its fair
value, is included in earnings as a realized loss in the period the
impairment arose. Non-cash realized investment losses recorded for the
three months ended March 31, 2004 and 2003 were $1.0 million and $0.6
million, respectively, as a result of the Companys impairment evaluation
for investments in securitized assets.The following table (in thousands) identifies the period of time securities
with an unrealized loss at March 31, 2004 have continuously been in an
unrealized loss position. Included in the amounts displayed in the table
are $4.8 million of unrealized losses due to non-investment grade fixed
maturity securities having a fair value of $20.6 million. No issuer of
securities or industry represents more than 5.8% and 18.2%, respectively, of
the total estimated fair value, or 18.6% and 46.9%, respectively, of the
total gross unrealized loss included in the table below. As previously
discussed, there are certain risks and uncertainties inherent in the
Companys impairment methodology, such as the financial condition of
specific industry sectors and the resultant effect on underlying security
collateral values. Should the Company subsequently determine a decline in
the fair value below the cost basis to be other than temporary, the security
would be written down to its fair value and the difference would be included
in earnings as a realized loss for the period such determination was made. 7




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Less Than 12 Months
    
    12 Months or More
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesFixed Maturities:Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    604
    
    
    $
    5
    
    
    $
    
    
    
    $
    
    
    
    $
    604
    
    
    $
    5Obligations of States and
Political Subdivisions
    
    
    71,993
    
    
    
    884
    
    
    
    
    
    
    
    
    
    
    
    71,993
    
    
    
    884Corporate and Bank Debt Securities
    
    
    17,557
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    17,557
    
    
    
    185Asset Backed Securities
    
    
    10,647
    
    
    
    401
    
    
    
    15,377
    
    
    
    5,049
    
    
    
    26,024
    
    
    
    5,450Mortgage Pass-Through Securities
    
    
    7,584
    
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    7,584
    
    
    
    147Collateralized Mortgage Obligations
    
    
    11,418
    
    
    
    113
    
    
    
    693
    
    
    
    145
    
    
    
    12,111
    
    
    
    258Total Fixed Maturities
Available for Sale
    
    
    119,803
    
    
    
    1,735
    
    
    
    16,070
    
    
    
    5,194
    
    
    
    135,873
    
    
    
    6,929Equity Securities
    
    
    18,752
    
    
    
    1,928
    
    
    
    
    
    
    
    
    
    
    
    18,752
    
    
    
    1,928Total Investments
    
    $
    138,555
    
    
    $
    3,663
    
    
    $
    16,070
    
    
    $
    5,194
    
    
    $
    154,625
    
    
    $
    8,857
  Based upon the Companys impairment evaluation as of March 31, 2004, it was
concluded that the remaining unrealized losses in the table above are not
other than temporary.3.
    
    Restricted AssetsThe Insurance Subsidiaries have investments, principally U.S. Treasury
securities, on deposit with the various states in which they are licensed
insurers. At March 31, 2004 and December 31, 2003, the carrying value of
the securities on deposit totaled $15.3 million and $15.5 million,
respectively.Additionally, the Insurance Subsidiaries have investments, principally asset
backed securities, which collateralize the borrowings from the Federal Home
Loan Bank of Pittsburgh, see Note 7. The carrying value of these
investments was $56.7 million and $59.1 million as of March 31, 2004 and
December 31, 2003, respectively.4.
    
    GoodwillThe carrying amount of goodwill is subject to an annual impairment test to
identify potential goodwill impairment and measure the amount of a goodwill
impairment loss to be recognized (if any). As a result of the impairment
analysis, no change in the carrying amount of goodwill was recorded by the
Company for the year ended December 31, 2003. No events have occurred or
circumstances have arisen subsequent to December 31, 2003 that would
necessitate the Company to perform an interim impairment test. Consequently
no change in the carrying amount of goodwill has been recorded for the three
months ended March 31, 2004.5.
    
    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 which have occurred. The
process of establishing the ultimate claims liability is necessarily a
complex imprecise process, requiring the use of informed estimates and
judgments using data currently available. The liability includes an amount
determined on the basis of claim adjusters evaluations with respect to
insured events that have occurred and an amount for losses incurred that
have not been reported to the Company. In some cases significant periods of
time, up to several years or more, may elapse between the occurrence of an
insured loss and the reporting of such to the Company. The method for
determining the Companys liability for unpaid loss and loss adjustment
expenses includes, but is not limited to, reviewing past loss experience
and, industry data and considering other factors such as legal, social, and
economic developments. The methods of making such estimates and
establishing the resulting liabilities are regularly reviewed and updated
and any adjustments there 8




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from are made in the accounting period in which the adjustment arose. If
the Companys ultimate losses, net of reinsurance, prove to differ
substantially from the amounts recorded at March 31, 2004, the related
adjustments could have a material adverse impact on the Companys financial
condition, and results of operations.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 effective
January 1, 2004 and thereafter. The Company receives a provisional
commission of 33.0% adjusted pro-rata based upon the ratio of losses
incurred to premiums earned. Pursuant to this reinsurance agreement the
Company withholds the reinsurance premium due the reinsurers reduced by the
reinsurers expense allowance, and the Companys ceding commission allowance
in a Funds Held Payable to Reinsurer account. This Funds Held Payable to
Reinsurer account is also reduced by ceded paid losses and loss adjustment
expenses under this agreement, and increased by an interest credit. The
interest credit (expense), which is included in net investment income, was
$1.1 million for the three months ended March 31, 2004.Pursuant to the quota share reinsurance agreement, the Company ceded $18.3
million of net written premiums, $38.9 million of net earned premiums and
$22.8 million in net loss and loss adjustment expenses for the three months
ended March 31, 2004. In addition, the Company earned $15.3 million in
ceding commissions during the three months ended March 31, 2004.7.
    
    Loans PayableAs of March 31, 2004, the Company had aggregate borrowings of $47.1 million
from the Federal Home Loan Bank. These borrowings bear interest at adjusted
LIBOR and mature twelve months from inception. The proceeds from these
borrowings are invested in collateralized mortgage obligation and asset
backed securities to achieve a positive spread between the rate of interest
on these securities and the borrowing rates.8.
    
    Earnings Per ShareEarnings per common share has 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 months ended March 31, 2004 and 2003,
respectively (in thousands, except per share data): For the Three MonthsEnded March 31,2004
    
    2003Weighted-Average Common Shares Outstanding
    
    
    22,018
    
    
    
    21,865Weighted-Average Share Equivalents Outstanding
    
    
    1,083
    
    
    
    563Weighted-Average Shares and Share
Equivalents Outstanding
    
    
    23,101
    
    
    
    22,428Net Income
    
    $
    25,046
    
    
    $
    13,233Basic Earnings per Share
    
    $
    1.14
    
    
    $
    0.61Diluted Earnings per Share
    
    $
    1.08
    
    
    $
    0.59
  9.
    
    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. 9




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##### Table of Contents



10.
    
    Stock-Based CompensationStock-based compensation plans are accounted for under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no compensation
expense is recognized for fixed stock option grants and the Companys stock
purchase plans. The following table illustrates the effect on net income
and earnings per share as if the provisions of statement of Financial
Accounting Standards (SFAS) No. 123 (as amended by SFAS No. 148),
Accounting for Stock-Based Compensation, had been applied for the three
months ended March 31, 2004 and 2003, respectively:  (In thousands, except per share data) Three Months Ended March 31,2004
    
    2003Net Income As Reported
    
    $
    25,046
    
    
    $
    13,233Assumed Stock Compensation Cost
    
    
    (794
    )
    
    
    (688
    )Pro Forma Net Income
    
    $
    24,252
    
    
    $
    12,545Basic Earnings Per Share:As Reported
    
    $
    1.14
    
    
    $
    0.61Pro Forma
    
    $
    1.10
    
    
    $
    0.57Diluted Earnings Per Share:As Reported
    
    $
    1.08
    
    
    $
    0.59Pro Forma
    
    $
    1.05
    
    
    $
    0.56
  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 limited loss exposure and diversifying
business. Reinsurance contracts do not relieve the Company from its
obligations to policyholders. The effect of reinsurance on premiums written
and earned is as follows (See Note 6):  (In thousands)For the Three Months Ended March 31, 2004 Written
    
    EarnedDirect Business
    
    $
    250,861
    
    
    $
    239,087Reinsurance Assumed
    
    
    1,576
    
    
    
    2,130Reinsurance Ceded
    
    
    52,495
    
    
    
    72,433Net Premiums
    
    $
    199,942
    
    
    $
    168,784% Assumed of Net
    
    
    0.8
    %
    
    
    1.3
    %
  For the Three Months Ended March 31, 2003 Written
    
    EarnedDirect Business
    
    $
    192,312
    
    
    $
    172,311Reinsurance Assumed
    
    
    970
    
    
    
    675Reinsurance Ceded
    
    
    21,634
    
    
    
    24,624Net Premiums
    
    $
    171,648
    
    
    $
    148,362% Assumed of Net
    
    
    0.6
    %
    
    
    0.5
    %
  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. 10




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##### Table of Contents



13.
    
    Comprehensive IncomeComponents of comprehensive income, as detailed in the Consolidated
Statements of Operations and Comprehensive Income, are net of tax. The
related tax effect of Holding Gains (Losses) arising during the three months
ended March 31, 2004 and 2003 was ($4.1) million and $2.1 million,
respectively. The related tax effect of Reclassification Adjustments for
the three months ended March 31, 2004 and 2003 was $0.6 million and ($0.4)
million, respectively.14.
    
    Segment InformationThe Companys operations are classified into three reportable business
segments which are organized around its three underwriting divisions: The
Commercial Lines Underwriting Group, which has underwriting responsibility
for the Commercial Automobile and Commercial Property and Commercial
multi-peril package insurance products; The Specialty Lines Underwriting
Group, which has underwriting responsibility for the professional liability
insurance products; and The Personal Lines Group, which designs, markets and
underwrites personal property and casualty insurance products for the
Manufactured Housing and Homeowners markets. Each business segments
responsibilities include: pricing, managing the risk selection process and
monitoring the loss ratios by product and insured. The reportable segments
operate solely within the United States and have not been aggregated.The segments follow the same accounting policies used for the Companys
consolidated financial statements as described in the summary of significant
accounting policies. Management evaluates a segments performance based
upon premium production and the associated loss experience which includes
paid losses, an amount determined on the basis of claim adjusters
evaluation with respect to insured events that have occurred and an amount
for losses incurred that have not been reported. Investments and investment
performance including investment income and net realized investment gain
(loss), acquisition costs and other underwriting expenses including
commissions, premium taxes and other acquisition costs, and other operating
expenses are managed at a corporate level by the corporate accounting
function in conjunction with other corporate departments, and are included
in Corporate. 11




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##### Table of Contents



Following is a tabulation of business segment information for the three
months ended March 31, 2004 and 2003. Corporate information is included to
reconcile segment data to the consolidated financial statements (in
thousands): Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalMarch 31, 2004:Gross Written Premiums
    
    $
    175,072
    
    
    $
    47,393
    
    
    $
    29,972
    
    
    $
    
    
    
    $
    252,437Net Written Premiums
    
    $
    142,278
    
    
    $
    39,950
    
    
    $
    17,714
    
    
    $
    
    
    
    $
    199,942Revenue:Net Earned Premiums
    
    $
    131,057
    
    
    $
    29,313
    
    
    $
    8,414
    
    
    $
    
    
    
    $
    168,784Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,973
    
    
    
    9,973Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,778
    
    
    
    1,778Other Income
    
    
    
    
    
    
    
    
    
    
    1,143
    
    
    
    239
    
    
    
    1,382Total Revenue
    
    
    131,057
    
    
    
    29,313
    
    
    
    9,557
    
    
    
    11,990
    
    
    
    181,917Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    73,909
    
    
    
    18,055
    
    
    
    4,279
    
    
    
    
    
    
    
    96,243Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,354
    
    
    
    47,354Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    245
    
    
    
    1,524
    
    
    
    1,769Total Losses and Expenses
    
    
    73,909
    
    
    
    18,055
    
    
    
    4,524
    
    
    
    48,878
    
    
    
    145,366Income Before Income Taxes
    
    
    57,148
    
    
    
    11,258
    
    
    
    5,033
    
    
    
    (36,888
    )
    
    
    36,551Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,505
    
    
    
    11,505Net Income
    
    $
    57,148
    
    
    $
    11,258
    
    
    $
    5,033
    
    
    $
    (48,393
    )
    
    $
    25,046Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    291,466
    
    
    $
    1,683,611
    
    
    $
    1,975,077March 31, 2003:Gross Written Premiums
    
    $
    127,897
    
    
    $
    40,387
    
    
    $
    24,998
    
    
    $
    
    
    
    $
    193,282Net Written Premiums
    
    $
    120,353
    
    
    $
    37,317
    
    
    $
    13,978
    
    
    $
    
    
    
    $
    171,648Revenue:Net Earned Premiums
    
    $
    109,258
    
    
    $
    29,118
    
    
    $
    9,986
    
    
    $
    
    
    
    $
    148,362Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,805
    
    
    
    9,805Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,133
    )
    
    
    (1,133
    )Other Income
    
    
    
    
    
    
    
    
    
    
    580
    
    
    
    81
    
    
    
    661Total Revenue
    
    
    109,258
    
    
    
    29,118
    
    
    
    10,566
    
    
    
    8,753
    
    
    
    157,695Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    65,938
    
    
    
    18,641
    
    
    
    5,781
    
    
    
    
    
    
    
    90,360Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,420
    
    
    
    46,420Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    1,349
    
    
    
    1,674Total Losses and Expenses
    
    
    65,938
    
    
    
    18,641
    
    
    
    6,106
    
    
    
    47,769
    
    
    
    138,454Income Before Income Taxes
    
    
    43,320
    
    
    
    10,477
    
    
    
    4,460
    
    
    
    (39,016
    )
    
    
    19,241Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,008
    
    
    
    6,008Net Income
    
    $
    43,320
    
    
    $
    10,477
    
    
    $
    4,460
    
    
    $
    (45,024
    )
    
    $
    13,233Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    232,292
    
    
    $
    1,226,511
    
    
    $
    1,458,803
 12




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General Although the Companys financial performance is dependent upon its own specific
business characteristics, certain risk factors can affect the profitability of
the Company. These include, but are not limited to:  
    
    Industry factors  Historically the financial performance of the
property and casualty insurance industry has tended to fluctuate in
cyclical patterns of soft markets followed by hard markets. The
Companys strategy is to focus on underwriting profits, and
accordingly the Companys marketing organization is being directed
into those niche businesses that exhibit the greatest potential for
underwriting profits.
    
    Competition  The Company competes in the property and casualty
business with other domestic and international insurers having greater
financial and other resources than the Company.
    
    Financial Strength Rating  If
A.M. Best Company downgrades the rating of the Companys insurance
subsidiaries the Company may not be able to compete as effectively
with its commercial and specialty lines competitors.
    
    Regulation  The Companys insurance subsidiaries are subject to a
substantial degree of regulatory oversight, which generally is
designed to protect the interests of policyholders, as opposed to
shareholders.
    
    Litigation  Adverse rulings in any material litigation to which the
Company is a party could materially affect its financial position and
results of operations.
    
    Inflation  Property and casualty insurance premiums are established
before the amount of losses and loss adjustment expenses, or the
extent to which inflation may affect such amounts is known.
    
    Investment Risk  Substantial future increases in interest rates could
result in a decline in the market value of the Companys investment
portfolio and resulting losses and/or reduction in shareholders
equity.
    
    Claims development and the process of estimating loss reserves 
Estimating the Companys ultimate liability for unpaid loss and loss
adjustment expenses is necessarily a complex and judgmental process,
inasmuch as the amounts of any ultimate liability of the Company with
respect to such claims are based on managements informed estimates
and judgments using data currently available.
    
    Catastrophe Exposure  The Companys insurance subsidiaries issue
insurance policies which provide coverage for commercial and personal
property and casualty risks. It is possible that a catastrophic event
could greatly increase claims under the insurance policies the
insurance subsidiaries issue. Catastrophes may result from a variety
of events or conditions, including hurricanes, windstorms,
earthquakes, hail and other severe weather conditions and may include
terrorist events. It is possible that a catastrophic event could
adversely impact profitability.
    
    Reinsurance  The adequacy of reinsurance coverage which may be
obtained by the Company and the ability and willingness of the
Companys reinsurers to pay. The above risk factors should be read in conjunction with the Certain Critical
Accounting Estimates and Judgments included in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2003. 13




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) Investments The Companys investment objective is the realization of relatively high levels
of investment income while generating competitive after-tax total rates of
return within a prudent level of risk and within the constraints of maintaining
adequate securities in amount and duration to meet cash requirements of current
operations and long-term liabilities, as well as maintaining and improving the
Companys A.M. Best rating. The Company utilizes external independent
professional investment managers for its fixed maturity and equity investments.
These investments consist of diversified issuers and issues, and as of March
31, 2004, approximately 88.0% and 7.6% of the total invested assets (total
investments plus cash equivalents) on a cost basis consisted of investments in
fixed maturity and equity securities, respectively, versus 87.8% and 6.6%,
respectively, at December 31, 2003. During 2004 the relative percentage investment in tax-exempt fixed maturity
securities versus taxable fixed maturity securities increased, due to the
Company taking advantage of the more favorable after-tax yields. As of March
31, 2004, on a cost basis, investment grade tax-exempt fixed maturity
securities represented 39.6% of the total invested assets, compared to 39.2% as
of the end of 2003. Asset backed, mortgage pass through, and collateralized mortgage obligation
securities, on a cost basis, amounted to $167.1 million, $183.0 million and
$47.6 million, respectively, as of March 31, 2004 and $183.0 million, $159.2
million and $53.8 million, respectively, as of December 31, 2003. The asset
backed, mortgage pass through, and collateralized mortgage obligation
investments are amortizing securities possessing favorable prepayment risk
and/or extension profiles. The Company regularly performs various analytical procedures with respect to
its investments, including identifying any security whose fair value is below
its cost. Upon identification of such securities, a detailed review is
performed for all securities, except interests in securitized assets, meeting
predetermined thresholds to determine whether such decline is other than
temporary. If the Company determines a decline in value to be other than
temporary, based upon its detailed review, or if a decline in value for an
equity investment has persisted continuously for nine months, the cost basis of
the security is written down to its fair value. The factors considered in
reaching the conclusion that a decline below cost is other than temporary
include, but are not limited to, whether: the issuer is in financial distress;
the investment is secured; a significant credit rating action has occurred;
scheduled interest payments have been delayed or missed; or changes in laws
and/or regulations have impacted an issuer or industry. The amount of any
write down is included in earnings as a realized loss in the period the
impairment arose. This evaluation resulted in non-cash realized investment
losses of $0 million and $0.9 million for the three months ended March 31, 2004
and 2003, respectively. Such non-cash realized investment losses resulted from
other than temporary declines in the fair value of certain holdings in the
Companys common stock portfolio occurring primarily in the fourth quarter of
2002 and the first quarter of 2003. The Company primarily attributes these
other than temporary declines in fair value to the uncertain economic climate,
the overhang of corporate governance issues, and the high profile bankruptcies
occurring during 2002 into early 2003. Additionally, the Company conducts its impairment evaluation and recognition
for interests in securitized assets in accordance with the guidance provided by
the Emerging Issues Task Force of the Financial Accounting Standards Board
(EITF) in EITF 99-20. Under this guidance, impairment losses on securities
must be recognized if both the fair value of the security is less than its book
value and the net present value of expected future cash flows is less than the
net present value of expected future cash flows at the most recent (prior)
estimation date. If these criteria are met, an impairment charge, calculated
as the difference between the current book value of the security and its fair
value, is included in earnings as a realized loss in the period the impairment
arose. This evaluation resulted in non-cash realized investment losses of $1.0
million and $0.6 million for the three months ended March 31, 2004 and 2003,
respectively. These non-cash realized investment losses were primarily due to
investments in collateralized bond obligations as a result of the non
investment grade default rates which remain higher than historic averages. The Companys fixed maturity portfolio amounted to $1,186.9 million and
$1,081.7 million, as of March 31, 2004 and December 31, 2003, respectively, of
which 98.3% and 98.6% of the portfolio for as of March 31, 2004 and December
31, 2003, respectively, was comprised of investment grade securities. From the
fourth quarter of 2001 14




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) into early 2003 following the war in Iraq, U.S. investment grade securities
experienced varying price and ratings volatility, having been affected by the
uncertain economic climate, corporate governance issues, and the subsequent
stream of corporate scandals and high profile bankruptcies. More recently
certain sectors of the investment grade security market have continued to lag
despite a return to a more favorable economic climate. However, the high
quality of the Companys overall AA+ rated fixed maturity portfolio, has
mitigated potential volatility. The Company had fixed maturity investments
with unrealized losses amounting to $6.9 million and $10.6 million as of March
31, 2004 and December 31, 2003, respectively. Of these amounts, interests in
securitized assets had unrealized losses amounting to $5.8 million and $9.2
million as of March 31, 2004 and December 31, 2003, respectively. As discussed
above, the Companys impairment evaluation and recognition for interests in
securitized assets is conducted in accordance with the guidance provided by the
EITF. The following table identifies the period of time securities with an unrealized
loss at March 31, 2004 have continuously been in an unrealized loss position.
Included in the amounts displayed in the table are $4.8 million of unrealized
losses due to non-investment grade fixed maturity securities having a fair
value of $20.6 million. No issuer of securities or industry represents more
than 5.8% and 18.2%, respectively, of the total estimated fair value, or 18.6%
and 46.9%, respectively, of the total gross unrealized loss included in the
table below. As previously discussed, there are certain risks and
uncertainties inherent in the Companys impairment methodology, such as the
financial condition of specific industry sectors and the resultant effect on
underlying security collateral values. Should the Company subsequently
determine a decline in the fair value below the cost basis to be other than
temporary, the security would be written down to its fair value and the
difference would be included in earnings as a realized loss for the period such
determination was made. Gross Unrealized Losses (1)(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
    
    $
    0.8
    
    
    $
    0.3
    
    
    $
    1.1
    
    
    $
    0.3
    
    
    $
    1.43  6 months
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    1.6
    
    
    
    1.76  9 months
    
    
    
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    0.29  12 months
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    
    
    
    
    0.312  18 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18  24 months
    
    
    
    
    
    
    2.8
    
    
    
    2.8
    
    
    
    
    
    
    
    2.8> 24 months
    
    
    
    
    
    
    2.4
    
    
    
    2.4
    
    
    
    
    
    
    
    2.4Total Gross
Unrealized Losses
    
    $
    1.1
    
    
    $
    5.8
    
    
    $
    6.9
    
    
    $
    1.9
    
    
    $
    8.8Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    90.2
    
    
    $
    45.7
    
    
    $
    135.9
    
    
    $
    18.7
    
    
    $
    154.6
 15




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) The following table presents certain information with respect to individual
securities with a significant unrealized loss position as of March 31, 2004. Significant Unrealized Losses by Security(in millions)Issuer
    
    Security Type
    
    Carrying Value
    
    Unrealized Loss (1)Batterson Park CBO I CLC 144A
    
    Equity Security-Equity Tranche of
Securitized Asset
    
    $
    0.0
    
    
    $
    1.2Conseco Fin SEC Corp 2000-4 M1
    
    Fixed Maturity  Interest in Securitized Assets
    
    
    0.5
    
    
    
    1.6Conseco Fin SEC Corp SER 2000-4 M2
    
    Fixed Maturity  Interest in Securitized Assets
    
    
    0.1
    
    
    
    1.0Greentree Financial Corp. 99-2 B1
    
    Fixed Maturity  Interest in Securitized Assets
    
    
    0.2
    
    
    
    1.6$
    0.8
    
    
    $
    5.4
  (1)
    
    Based upon the Companys impairment evaluation as of March 31, 2004
utilizing cash flow assumptions of the supporting collateral, estimated
default and recovery rates it was concluded that the remaining unrealized
losses in the Gross Unrealized Losses and Significant Unrealized Losses by
Security tables are temporary. For the three months ended March 31, 2004 the Companys gross loss on the sale
of fixed maturity and equity securities amounted to $0.2 million and $0.1
million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $2.8 million and $1.5 million, respectively.
For the three months ended March 31, 2003 the Companys gross loss on the sale
of fixed maturity and equity securities amounted to $0 million and $0.5
million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $0 million and $1.4 million, respectively.
The decision to sell these securities was based upon an assessment of economic
conditions. Results of Operations (Three Months ended March 31, 2004 vs. March 31, 2003) Premiums: Premium information for the three months ended March 31, 2004
vs. March 31, 2003 for the Companys business segments is as follows (in
millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Gross Written Premiums
    
    $
    175.0
    
    
    $
    47.4
    
    
    $
    30.0
    
    
    $
    252.42003 Gross Written Premiums
    
    $
    127.9
    
    
    $
    40.4
    
    
    $
    25.0
    
    
    $
    193.3Percentage Increase
    
    
    36.8
    %
    
    
    17.3
    %
    
    
    20.0
    %
    
    
    30.6
    %2004 Gross Earned Premiums
    
    $
    178.8
    
    
    $
    39.3
    
    
    $
    23.1
    
    
    $
    241.22003 Gross Earned Premiums
    
    $
    120.7
    
    
    $
    31.6
    
    
    $
    20.7
    
    
    $
    173.0Percentage Increase
    
    
    48.1
    %
    
    
    24.4
    %
    
    
    11.6
    %
    
    
    39.4
    %
 The overall growth in gross written premiums is primarily attributable to the
following:  
    
    Further rating downgrades of certain major competitor property and
casualty insurance companies have led to their diminished presence in
the Companys commercial and specialty lines business segments and
continue to result in additional prospects and increased premium
writings, most notably for the Companys various commercial package
and non-profit D&O product lines.  
    
    The displacement of certain competitor property and casualty insurance
companies and their independent agency relationships continues to
result in new agency relationship opportunities for the Company.
These relationship opportunities have resulted in additional
policyholders and premium writings for the Companys commercial and
specialty lines segments.  
    
    Continued expansion of marketing efforts relating to commercial lines
and specialty lines products through the Companys field organization
and preferred agents. 16




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)  
    
    In-force policy counts as of March 31, 2004 versus March 31, 2003 have
increased 10.6% and 33.8% for the commercial and specialty lines
segments, respectively, primarily as a result of the factors discussed
above. Policy counts were approximately the same for the personal
lines segment as a result of restricting new business and not renewing
certain business to manage overall property exposures and the related
catastrophe loss considerations. However, due to a recent termination
of a brokering agreement, Liberty American has recently commenced
writing a previously brokered homeowners product on a direct basis.
Gross written premiums from this homeowners product approximated $2.4
million for the three months ended March 31, 2004. Firming prices in
the property and casualty industry resulted in weighted average rate
increases on renewal business approximating 4.3%, 2.8%, and 13.4% for
the commercial, specialty and personal lines segments, respectively. The respective net written premium changes for commercial lines, specialty
lines and personal lines segments for the three months ended March 31, 2004 vs.
March 31, 2003 were (in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Net Written Premiums
    
    $
    142.2
    
    
    $
    40.0
    
    
    $
    17.7
    
    
    $
    199.92003 Net Written Premiums
    
    $
    120.3
    
    
    $
    37.3
    
    
    $
    14.0
    
    
    $
    171.6Percentage Increase
    
    
    18.2
    %
    
    
    7.2
    %
    
    
    26.4
    %
    
    
    16.5
    %2004 Net Earned Premiums
    
    $
    131.1
    
    
    $
    29.3
    
    
    $
    8.4
    
    
    $
    168.82003 Net Earned Premiums
    
    $
    109.3
    
    
    $
    29.1
    
    
    $
    10.0
    
    
    $
    148.4Percentage Increase (Decrease)
    
    
    19.9
    %
    
    
    0.7
    %
    
    
    (16.0
    %)
    
    
    13.7
    %
 The differing percentage changes in net premiums versus gross premiums for the
commercial lines, specialty lines and personal lines segments during the
quarter results primarily from the following change in the Companys
reinsurance program:  
    
    Effective April 1, 2003, the Company entered into a Quota Share
reinsurance agreement covering substantially all of the Companys lines of
business. Under this agreement, the Company cedes 22% of its net written
premium and loss and loss adjustment expenses for policies effective April
1, 2003 through December 31, 2003 and 10% of its commercial and specialty
lines net written premium and loss and loss adjustment expenses for
policies effective January 1, 2004 and thereafter. The Company receives a
provisional commission of 33.0% adjusted based upon the ratio of losses
incurred to premiums earned. Pursuant to this reinsurance agreement the
Company withholds the reinsurance premium, reduced by the reinsurers
expense allowance, and the Companys ceding commission allowance in a
Funds Held Payable to Reinsurer account. This Funds Held Payable to
Reinsurer account is also reduced by ceded paid losses and loss adjustment
expenses under this agreement, and increased by an interest credit.
During the three months ended March 31, 2004, the Company ceded $18.3
million of net written premiums and $38.9 million of net earned premiums. Net Investment IncomeNet investment income approximated $10.0 for the
three months ended March 31, 2004 and $9.8 million for the same period of 2003.
Total investments grew to $1,298.1 million at March 31, 2004 from $1,002.4
million at March 31, 2003. The growth in investment income is due to investing
net cash flows provided from operating activities. The Companys average
duration of its fixed income portfolio increased to approximately 3.9 years at
March 31, 2004, compared to 3.2 years at March 31, 2003 as a result of
investing in overall AAA rated intermediate to longer tax exempt fixed income
securities due to their perceived relative value to taxable alternatives. The
Companys taxable equivalent book yield on its fixed income holdings
approximated 4.8% at March 31, 2004 and 2003, respectively. Net investment
income was reduced by $1.1 million due to the interest credit on the Funds Held
Account balance pursuant to the Companys quota share reinsurance agreement
(see Premiums). The total return, which includes the effects of both income and price
returns on securities, of the Companys fixed income portfolio was 1.82% and
0.97% for the three months ended March 31, 2004 and 2003, respectively, and was
similar to the Lehman Brothers Intermediate Aggregate Bond Index (the Index)
total return of 2.27% and 1.27% for the same periods, respectively. The
Company expects some variation in its portfolios total 17




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) return compared to the index because of the differing sector, security and
duration composition of its portfolio compared to the index. Net Realized Investment Gain (Loss):Net realized investment gains
(losses) were $1.8 million for the three months ended March 31, 2004 and ($1.1)
million for the same period in 2003. The Company realized net investment gains
of $0.5 million and $2.3 million from the sale of fixed maturity and equity
securities, respectively, for the three months ended March 31, 2004, and $1.0
million in non-cash realized investment losses for fixed maturity investments
as a result of the Companys impairment evaluations. The Company realized $0.4 million in net investment gains from the sale of
fixed maturity securities for the three months ended March 31, 2003.
Additionally, $0.9 million and $0.6 million in non-cash realized investment
losses were recorded for common stock and fixed maturity investments,
respectively as a result of the Companys impairment evaluations. Other Income: Other income approximated $1.4 million for the three months
ended March 31, 2004 and $0.7 million for the same period of 2003. Other
income primarily consists of commissions earned on brokered personal lines
business, and to a lesser extent brokered commercial lines business. The
Company seeks to increase brokering activities in its personal lines segment as
a means of diversifying its growth and managing property and related
catastrophe loss exposures. However, a broker market recently terminated its
brokering agreement with the Company. Other income from this brokering
agreement amounted to $0.4 million and $2.6 million for the three months ended
March 31, 2004 and year ended December 31, 2003, respectively. The Company is
currently writing this previously brokered business on a direct basis (See
Premiums). Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $5.8 million (6.4%) to $96.2 million for the three months
ended March 31, 2004 from $90.4 million for the same period of 2003 and the
loss ratio decreased to 57.0% in 2004 from 60.9% in 2003. This increase in net
loss and loss adjustment expenses was due to the 13.8% growth in net earned
premiums. The decrease in the loss ratio is primarily attributed to price
increases realized on its renewal business and to a lesser extent a reduction
in large property losses during the three months ended March 31, 2004 versus
March 31, 2003. Additionally, during the three months ended March 31, 2004 the
Company ceded $38.9 million of net earned premium and $22.8 million in net loss
and loss adjustment expenses pursuant to the quota share reinsurance agreement
(see Premiums). Acquisition Costs and Other Underwriting Expenses:Acquisition costs and
other underwriting expenses increased $1.0 million (2.2%) to $47.4 million for
the three months ended March 31, 2004 from $46.4 million for the same period of
2003 and the expense ratio decreased to 28.1% in 2004 from 31.3% in 2003. The
increase in acquisition costs and other underwriting expenses was due primarily
to the 13.8% growth in net earned premiums. This increase was offset in part
by and the decrease in the expense ratio is due primarily to ceding commissions
earned under the quota share reinsurance agreement (See Premiums). For the
three months ended March 31, 2004 the Company ceded $38.9 million of net earned
premium and earned $15.3 million in ceding commission. Other Operating Expenses: Other operating expenses increased $0.1 million
to $1.8 million for the three months ended March 31, 2004 from $1.7 million for
the same period of 2003 as the Company continues to control its expenses during
this period of premium growth. Income Tax Expense:The Companys effective tax rate for the three months
ended March 31, 2004 and 2003 was 31.5% and 31.2%, respectively. The effective
rates differed from the 35% statutory rate principally due to investments in
tax-exempt securities and the relative proportion of tax exempt income to total
income before tax. Liquidity and Capital Resources For the three months ended March 31, 2004, the Companys investments
experienced unrealized investment appreciation of $6.4 million, net of the
related deferred tax expense of $3.5 million. At March 31, 2004, the Company
had total investments with a carrying value of $1,298.1 million, of which 91.4%
consisted of investments 18




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) in fixed maturity securities, including U.S. treasury securities and
obligations of U.S. government corporations and agencies, obligations of states
and political subdivisions, corporate debt securities, collateralized mortgage
securities and asset backed securities. The collateralized mortgage securities
and asset backed securities consist of amortizing securities possessing
favorable pre-payment and/or extension risk profiles. The remaining 8.6% of
the Companys total investments consisted primarily of publicly traded common
stock securities. The Company produced net cash from operations of $107.4 million and $82.0
million, respectively, for the three months ended March 31, 2004 and 2003.
Sources of operating funds consist primarily of net premiums collected and
investment income. Funds are used primarily to pay claims and operating
expenses and for the purchase of investments. The source of cash from
operations for the three months ended March 31, 2004 was primarily generated
from strong premium growth during the current year due to increases in the
number of policies written and price increases realized on renewal business.
Net loss and loss expense payments were $64.4 million and $48.5 million,
respectively, for the three months ended March 31, 2004 and 2003. Management
believes that the Company has adequate liquidity to pay all claims and meet all
other cash needs. Two of the Companys insurance subsidiaries are members of the Federal
Home Loan Bank of Pittsburgh (FHLB). A primary advantage of FHLB membership
is the ability of members to access credit products from a reliable capital
markets provider. The availability of any one members access to credit is
based upon its FHLB eligible collateral. At March 31, 2004 the insurance
subsidiaries borrowing capacity was $139.8 million. The insurance
subsidiaries have utilized a portion of their borrowing capacity to purchase a
diversified portfolio in investment grade floating rate securities. These
purchases were funded by floating rate FHLB borrowings to achieve a positive
spread between the rate of interest on these securities and borrowing rates.
The remaining borrowing capacity will provide an immediately available line of
credit. Borrowings aggregated $47.1 million at March 31, 2004, bear interest
at adjusted LIBOR, mature twelve months from inception and are collateralized
by $56.7 million of the Companys fixed maturity securities. The
weighted-average interest rate on borrowings outstanding as of March 31, 2004
was 1.2%. Risk-based capital is a method developed by the NAIC designed to measure
the acceptable amount of capital and surplus an insurer should have based on
the inherent specific risks of each insurer. The adequacy of a companys
actual capital and surplus is evaluated by a comparison to the risk-based
capital results. Insurers failing to meet minimum risk-based capital
requirements may be subject to scrutiny by the insurers domiciliary insurance
department and ultimately rehabilitation or liquidation. Based on the
standards currently adopted, the Companys insurance subsidiaries capital and
surplus is in excess of the prescribed risk-based capital requirements. Forward-Looking Information Certain information included in this report and other statements or
materials published or to be published by the Company are not historical facts
but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new and
existing products, expectations for market segment and growth, and similar
matters. In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the Company provides the following
cautionary remarks regarding important factors which, among others, could cause
the Companys actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Companys
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, results of the Companys business, and
the other matters referred to above include, but are not limited to: (i)
changes in the business environment in which the Company operates, including
inflation and interest rates; (ii) changes in taxes, governmental laws, and
regulations; (iii) competitive product and pricing activity; (iv) difficulties
of managing growth profitably; (v) claims development and the adequacy of our
liability for unpaid loss and loss adjustment; (vi) severity of natural
disasters and other catastrophe losses; (vii) adequacy of reinsurance coverage
which may be obtained by the Company; (viii) ability and willingness of our
reinsurers to pay; and (ix) future terrorist attacks. 19




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 The Companys financial instruments are subject to the market risk of
potential losses from adverse changes in market rates and prices. The primary
market risks to the Company are equity price risk associated with investments
in equity securities and interest rate risk associated with investments in
fixed maturities. The Company has established, among other criteria, duration,
asset quality and asset allocation guidelines for managing its investment
portfolio market risk exposure. The Companys investments are held for
purposes other than trading and consist of diversified issuers and issues. The table below provides information about the Companys financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. The information is presented
in U.S. dollar equivalents. MARCH 31, 2004
EXPECTED MATURITY DATES
(In thousands, except average interest rate) TOTALFAIR2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TOTAL
    
    VALUEFIXED MATURITIES
AVAILABLE FOR SALE:Principal Amount
    
    $
    100,613
    
    
    $
    146,594
    
    
    $
    121,433
    
    
    $
    118,111
    
    
    $
    163,617
    
    
    $
    487,747
    
    
    $
    1,134,115
    
    
    $
    1,183,505Book Value
    
    $
    99,757
    
    
    $
    149,288
    
    
    $
    123,404
    
    
    $
    119,405
    
    
    $
    166,455
    
    
    $
    500,938
    
    
    $
    1,159,247
    
    
    
    Average Interest Rate
    
    
    3.92
    %
    
    
    3.64
    %
    
    
    3.53
    %
    
    
    4.61
    %
    
    
    4.26
    %
    
    
    4.11
    %
    
    
    4.05
    %
    
    
    3.48
    %PREFERRED:Principal Amount
    
    $
    1,500
    
    
    $
    1,000
    
    
    $
    3,500
    
    
    
    
    
    
    
    
    
    
    $
    375
    
    
    $
    6,375
    
    
    $
    6,810Book Value
    
    $
    1,489
    
    
    $
    1,040
    
    
    $
    3,666
    
    
    
    
    
    
    
    
    
    
    $
    376
    
    
    $
    6,571
    
    
    
    Average Interest Rate
    
    
    6.06
    %
    
    
    6.84
    %
    
    
    6.33
    %
    
    
    
    
    
    
    
    
    
    
    8.57
    %
    
    
    6.48
    %
    
    
    6.25
    %SHORT-TERM INVESTMENTS:Principal Amount
    
    $
    59,172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    59,172
    
    
    $
    59,172Book Value
    
    $
    59,172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    59,172
    
    
    
    Average Interest Rate
    
    
    1.19
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.19
    %
    
    
    1.19
    %LOANS PAYABLE:Principal Amount
    
    $
    39,709
    
    
    $
    7,353
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    47,062
    
    
    
    Average Interest Rate
    
    
    1.18
    %
    
    
    1.20
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.18
    %
    
    
    
 20




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Item 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures. The Companys Chief
Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) have
concluded that, as of the end of the period covered by this report on Form
10-Q, the Companys disclosure controls and procedures were effective to ensure
that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within such entities,
particularly during the period in which this quarterly report on Form 10-Q was
being prepared. (b) Changes in Internal Controls. There has been no change in the
Companys internal control over financial reporting during the Companys most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. 21




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
  Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities, Use of Proceeds and Issuer purchase of Equity Securities The Companys purchases of its common stock during the first quarter of
2004 are shown in the following table: (c) Total
    
    (d)Number of
    
    ApproximateShares
    
    Dollar Value ofPurchased as
    
    Shares ThatPart of
    
    May Yet BePublicly
    
    Purchased(a) Total Number
    
    (b) Average
    
    Announced
    
    Under theof Shares
    
    Price Paid per
    
    Plans or
    
    Plans orPeriod
    
    Purchased
    
    Share
    
    Programs
    
    ProgramsJanuary 1  January 31
    
    
    400
    (1)
    
    $
    34.02
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,700,000
    (2)February 1  February 29
    
    
    200
    (1)
    
    $
    25.35
    
    
    
    
    
    
    
    $
    24,700,000
    (2)March 1  March 31
    
    
    200
    (1)
    
    $
    29.69
    
    
    
    
    
    
    
    $
    24,700,000
    (2)Total
    
    
    800
  (1)
    
    Such shares were issued under the Companys Employee Stock
Purchase Plan and were repurchased by the Company upon the Employees
termination.(2)
    
    The Companys total stock purchase authorization which was
publicly announced in August 1998, amounts to $55.0 million, of which
$30.3 million has been utilized. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other information Not applicable. 22




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K  a.
    
    Exhibits: 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.  b.
    
    The Company did not file any reports on Form 8-K during the
quarterly period ended March 31, 2004 but did furnish the following
reports: Date of Report
    
    Item ReportedFebruary 12, 2004
    
    Fourth Quarter Results December 31, 2003 and Regulation
FD DisclosureFebruary 24, 2004
    
    February 24, 2004 Investor Presentation
 23




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. PHILADELPHIA CONSOLIDATED HOLDING CORP.Registrant
 Date May 7, 2004
    James J. Maguire, Jr.

James J. Maguire, Jr.
President and Chief Executive Officer
(Principal Executive Officer) Date May 7, 2004
    Craig P. Keller
 Craig P. Keller
Executive Vice President, Secretary, 
Treasurer and Chief Financial Officer 
(Principal Financial and Accounting 
Officer) 24