##### 



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 March 31, 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
 
    þ o
  þ o o
  o þ




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INDEX
 For the Quarterly Period Ended March 31, 2006
 Part I  Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets March 31, 2006 and
December 31, 2005
    
    
    3Consolidated Statements of Operations and Comprehensive
Income  For the three months ended March 31, 2006 and 2005
    
    
    4Consolidated Statements of Changes in Shareholders Equity  For
the three months ended March 31, 2006 and the year ended
December 31, 2005
    
    
    5Consolidated Statements of Cash Flows  For the three
months ended March 31, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-19Item 2.Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    20-28Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.Controls and Procedures
    
    
    30Part II  Other InformationItem 1.Legal Proceedings
    
    
    31Item 1A.Risk Factors
    
    
    31Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3.Defaults Upon Senior Securities
    
    
    31Item 4.Submission of Matters to a Vote of Security Holders
    
    
    31Item 5.Other Information
    
    
    31Item 6.Exhibits
    
    
    32Signatures
    
    
    33
 2




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 As ofMarch 31, 2006
    
    
    December 31,(Unaudited)
    
    
    2005ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $1,841,899 AND $1,778,215)
    
    $
    1,808,325
    
    
    $
    1,761,530EQUITY SECURITIES AT MARKET (COST $215,567
AND $160,926)
    
    
    236,310
    
    
    
    173,455TOTAL INVESTMENTS
    
    
    2,044,635
    
    
    
    1,934,985CASH AND CASH EQUIVALENTS
    
    
    115,479
    
    
    
    74,385ACCRUED INVESTMENT INCOME
    
    
    18,129
    
    
    
    18,095PREMIUMS RECEIVABLE
    
    
    264,319
    
    
    
    286,778PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
    
    
    327,953
    
    
    
    396,248DEFERRED INCOME TAXES
    
    
    40,683
    
    
    
    31,893DEFERRED ACQUISITION COSTS
    
    
    134,495
    
    
    
    129,486PROPERTY AND EQUIPMENT, NET
    
    
    23,896
    
    
    
    23,886OTHER ASSETS
    
    
    24,654
    
    
    
    32,070TOTAL ASSETS
    
    $
    2,994,243
    
    
    $
    2,927,826LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    1,270,631
    
    
    $
    1,245,763UNEARNED PREMIUMS
    
    
    641,882
    
    
    
    631,468TOTAL POLICY LIABILITIES AND ACCRUALS
    
    
    1,912,513
    
    
    
    1,877,231FUNDS HELD PAYABLE TO REINSURER
    
    
    
    
    
    
    39,221PREMIUMS PAYABLE
    
    
    60,783
    
    
    
    58,839OTHER LIABILITIES
    
    
    147,544
    
    
    
    136,039TOTAL LIABILITIES
    
    
    2,120,840
    
    
    
    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, 69,782,270
AND 69,266,016 SHARES ISSUED AND OUTSTANDING
    
    
    344,381
    
    
    
    332,757NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (6,617
    )
    
    
    (7,217
    )ACCUMULATED OTHER COMPREHENSIVE LOSS
    
    
    (8,340
    )
    
    
    (2,702
    )RETAINED EARNINGS
    
    
    543,979
    
    
    
    493,658TOTAL SHAREHOLDERS EQUITY
    
    
    873,403
    
    
    
    816,496TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,994,243
    
    
    $
    2,927,826
   3




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
 For the Three MonthsEnded March 31,2006
    
    
    2005REVENUE:NET EARNED PREMIUMS
    
    $
    276,546
    
    
    $
    236,755NET INVESTMENT INCOME
    
    
    20,062
    
    
    
    13,491NET REALIZED INVESTMENT GAIN (LOSS)
    
    
    (394
    )
    
    
    10,798OTHER INCOME
    
    
    491
    
    
    
    480TOTAL REVENUE
    
    
    296,705
    
    
    
    261,524LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    162,024
    
    
    
    154,464NET REINSURANCE RECOVERIES
    
    
    (18,359
    )
    
    
    (27,993
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    143,665
    
    
    
    126,471ACQUISITION COSTS AND OTHER UNDERWRITING
EXPENSES
    
    
    77,017
    
    
    
    63,948OTHER OPERATING EXPENSES
    
    
    2,332
    
    
    
    3,939TOTAL LOSSES AND EXPENSES
    
    
    223,014
    
    
    
    194,358INCOME BEFORE INCOME TAXES
    
    
    73,691
    
    
    
    67,166INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    29,124
    
    
    
    24,275DEFERRED
    
    
    (5,754
    )
    
    
    (2,680
    )TOTAL INCOME TAX EXPENSE
    
    
    23,370
    
    
    
    21,595NET INCOME
    
    $
    50,321
    
    
    $
    45,571OTHER COMPREHENSIVE LOSS, NET OF TAX:HOLDING LOSS ARISING DURING PERIOD
    
    $
    (5,894
    )
    
    $
    (16,496
    )RECLASSIFICATION ADJUSTMENT
    
    
    256
    
    
    
    (7,019
    )OTHER COMPREHENSIVE LOSS
    
    
    (5,638
    )
    
    
    (23,515
    )COMPREHENSIVE INCOME
    
    $
    44,683
    
    
    $
    22,056PER AVERAGE SHARE DATA:BASIC EARNINGS PER SHARE
    
    $
    0.73
    
    
    $
    0.68DILUTED EARNINGS PER SHARE
    
    $
    0.70
    
    
    $
    0.64WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    69,377,774
    
    
    
    67,273,227WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    2,982,230
    
    
    
    4,310,019WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    72,360,004
    
    
    
    71,583,246
   4




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
 For the ThreeMonths EndedMarch 31, 2006
    
    
    For the Year Ended(Unaudited)
    
    
    December 31, 2005COMMON SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    69,266,016
    
    
    
    66,821,751ISSUANCE (FORFEITURE) OF SHARES PURSUANT TO
STOCK PURCHASE PLANS, NET
    
    
    (6,675
    )
    
    
    1,589,406ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
    
    
    522,929
    
    
    
    854,859BALANCE AT END OF PERIOD
    
    
    69,782,270
    
    
    
    69,266,016COMMON STOCK:BALANCE AT BEGINNING OF YEAR
    
    $
    332,757
    
    
    $
    292,856ISSUANCE (FORFEITURE) OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    (92
    )
    
    
    27,817EFFECTS OF ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
    
    
    11,655
    
    
    
    11,939OTHER
    
    
    61
    
    
    
    145BALANCE AT END OF PERIOD
    
    
    344,381
    
    
    
    332,757NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (7,217
    )
    
    
    (5,465
    )NOTES RECEIVABLE (ISSUED) FORFEITURES PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
    
    
    118
    
    
    
    (4,095
    )COLLECTION OF NOTES RECEIVABLE
    
    
    482
    
    
    
    2,343BALANCE AT END OF PERIOD
    
    
    (6,617
    )
    
    
    (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
    
    
    (5,638
    )
    
    
    (22,498
    )BALANCE AT END OF PERIOD
    
    
    (8,340
    )
    
    
    (2,702
    )RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    493,658
    
    
    
    336,970NET INCOME
    
    
    50,321
    
    
    
    156,688BALANCE AT END OF PERIOD
    
    
    543,979
    
    
    
    493,658TOTAL SHAREHOLDERS EQUITY
    
    $
    873,403
    
    
    $
    816,496
   5




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Three Months Ended March 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    50,321
    
    
    $
    45,571ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT LOSS (GAIN)
    
    
    394
    
    
    
    (10,798
    )AMORTIZATION OF INVESTMENT PREMIUMS, NET OF DISCOUNT
    
    
    2,905
    
    
    
    2,896DEPRECIATION
    
    
    1,383
    
    
    
    1,006DEFERRED INCOME TAX BENEFIT
    
    
    (5,754
    )
    
    
    (2,680
    )CHANGE IN PREMIUMS RECEIVABLE
    
    
    22,459
    
    
    
    16,605CHANGE IN PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES, NET OF FUNDS HELD
PAYABLE TO REINSURER
    
    
    29,074
    
    
    
    26,935CHANGE IN OTHER RECEIVABLES
    
    
    (34
    )
    
    
    (2,428
    )CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    (5,009
    )
    
    
    (8,003
    )CHANGE IN INCOME TAXES PAYABLE
    
    
    19,305
    
    
    
    20,885CHANGE IN OTHER ASSETS
    
    
    7,196
    
    
    
    12,176CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES
    
    
    24,868
    
    
    
    15,326CHANGE IN UNEARNED PREMIUMS
    
    
    10,414
    
    
    
    (2,907
    )CHANGE IN OTHER LIABILITIES
    
    
    1,313
    
    
    
    7,885FAIR VALUE OF STOCK BASED COMPENSATION
    
    
    2,921
    
    
    
    TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
    
    
    
    
    
    
    3,365EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT
TO STOCK BASED COMPENSATION PLANS
    
    
    (4,034
    )
    
    
    NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    157,722
    
    
    
    125,834CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES
    
    
    46,246
    
    
    
    59,637PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES
    
    
    71,740
    
    
    
    50,062PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES
    
    
    24,578
    
    
    
    91,619COST OF FIXED MATURITIES ACQUIRED
    
    
    (189,571
    )
    
    
    (312,503
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (76,994
    )
    
    
    (89,799
    )PURCHASE OF PROPERTY AND EQUIPMENT, NET
    
    
    (1,393
    )
    
    
    (1,876
    )NET CASH USED FOR INVESTING ACTIVITIES
    
    
    (125,394
    )
    
    
    (202,860
    )CASH FLOWS FROM FINANCING ACTIVITIES:REPAYMENTS ON LOANS PAYABLE
    
    
    
    
    
    
    (44,787
    )PROCEEDS FROM LOANS PAYABLE
    
    
    
    
    
    
    11,381PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    4,224
    
    
    
    2,407PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE
    
    
    482
    
    
    
    557PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
    
    
    26
    
    
    
    23,666EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT
TO STOCK BASED COMPENSATION PLANS
    
    
    4,034
    
    
    
    NET CASH
PROVIDED (USED) BY FINANCING ACTIVITIES
    
    
    8,766
    
    
    
    (6,776
    )NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    41,094
    
    
    
    (83,802
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    74,385
    
    
    
    195,496CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    115,479
    
    
    $
    111,694CASH PAID DURING THE PERIOD FOR:INCOME TAXES
    
    $
    9,818
    
    
    $
    INTEREST
    
    $
    
    
    
    $
    165NON-CASH TRANSACTIONS:ISSUANCE (FORFEITURES) OF SHARES PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE
    
    $
    (118
    )
    
    $
    4,702
  6




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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 March 31, 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 three months ended March 31, 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 broker dealer
survey values or internal estimates consistent with the current interest rate and economic
environments. These assumptions represent the Companys best estimate of the amount and timing
of estimated principal and interest cash flows based on current information and events that a
market participant would use in determining the current fair value of the security.The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security whose fair value is below its cost. Upon identification of
such securities, a detailed review is performed for such securities, 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 $0.7 million and $0.1 million, respectively,
for the three months ended March 31, 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 months ended
March 31, 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 March
31, 2006 have continuously been in an unrealized loss position. None of the amounts displayed
in the table are unrealized losses due to non-investment grade fixed maturity securities. No
issuer of securities or industry represents more than 2.7% and 20.0%, respectively, of the total
estimated fair value, or 2.8% and 24.5%, respectively, of the total gross unrealized loss
included in the table below. The industry concentration represents investments in
 7




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AAA rated Mortgage Backed Securities issued by Agencies of the U.S. Government which are
collateralized by pools of residential mortgage loans. 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.
 Less Than 12 Months
    
    12 Months or More
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFixed Maturities:
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesAvailable for Sale
    
    (In Thousands)U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    3,710
    
    
    $
    94
    
    
    $
    29,984
    
    
    $
    459
    
    
    $
    33,694
    
    
    $
    553Obligations of States and
Political Subdivisions
    
    
    446,215
    
    
    
    6,969
    
    
    
    194,457
    
    
    
    5,260
    
    
    
    640,672
    
    
    
    12,229Corporate and Bank Debt Securities
    
    
    43,649
    
    
    
    1,024
    
    
    
    165,595
    
    
    
    6,474
    
    
    
    209,244
    
    
    
    7,498Asset Backed Securities
    
    
    115,641
    
    
    
    1,370
    
    
    
    15,989
    
    
    
    544
    
    
    
    131,630
    
    
    
    1,914Mortgage Pass-Through Securities
    
    
    233,464
    
    
    
    6,280
    
    
    
    91,869
    
    
    
    3,947
    
    
    
    325,333
    
    
    
    10,227Collateralized Mortgage Obligations
    
    
    172,663
    
    
    
    3,556
    
    
    
    48,706
    
    
    
    1,696
    
    
    
    221,369
    
    
    
    5,252Total Fixed Maturities
Available for Sale
    
    $
    1,015,342
    
    
    $
    19,293
    
    
    $
    546,600
    
    
    $
    18,380
    
    
    $
    1,561,942
    
    
    $
    37,673Equity Securities
    
    
    63,973
    
    
    
    4,016
    
    
    
    
    
    
    
    
    
    
    
    63,973
    
    
    
    4,016Total Investments
    
    $
    1,079,315
    
    
    $
    23,309
    
    
    $
    546,600
    
    
    $
    18,380
    
    
    $
    1,625,915
    
    
    $
    41,689
 Based upon the Companys impairment evaluation as of March 31, 2006, 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, 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 March
31, 2006 and December 31, 2005, the carrying value of the securities on deposit totaled $14.7
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
 8




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##### 



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 did 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 there from are made in the accounting period in which the adjustment arose. If the
Companys ultimate losses, net of reinsurance, prove to differ substantially from the amounts
recorded at March 31, 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 March 31, 2006, the Company decreased the estimated net unpaid
loss and loss adjustment expenses for accident year 2005, and increased the estimated net unpaid
loss and loss adjustment expenses for accident years 2004 and prior by the following amounts:
 Net Basisincrease (decrease)(In millions)Accident Year 2005
    
    $
    (3.3
    )Accident Year 2004
    
    
    0.7Accident Year 2003
    
    
    0.2Accident Years 2002 and prior
    
    
    2.4Total
    
    $
    0.0
 For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for commercial package policies and professional
liability policies due to better than expected case incurred loss development.For accident year 2004, the increase in estimated net unpaid loss and loss adjustment expenses
was principally due to higher loss estimates for commercial package polices due to higher than
expected claim severity.For accident years 2002 and prior, the increase in estimated net unpaid loss and loss adjustment
expenses was principally due to higher loss estimates for professional liability and commercial
package policies due to higher than expected claim severity.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 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
 9




---



##### 



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 theThree Months Ended
    
    
    Year EndedMarch 31, 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
    )
    
    
    91,898Funds Held Payable to Reinsurer
Balance at End of Period
    
    $
    
    
    
    $
    39,221
 The Companys profit commission receivable based upon the experience of the underlying business
ceded to this quota share reinsurance agreement was reduced to $0 million as of March 31, 2006
from $7.0 million as of December 31, 2005, as a result of the commutation effective January 1,
2006.7.
    
    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 March 31, 2006, 4,644,357 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 March 31, 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 and SARS are granted for the purchase
of common stock at a price not less than the fair market value on the grant date. Stock options
and SARS are primarily exercisable after the expiration of five years following
 10




---



##### 



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
shall be forfeited.The following table presents certain information regarding stock option transactions.
 As of And For the Three Months
    
    As of And For the Year EndedEnded March 31, 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
    
    
    (512,621
    )
    
    $
    8.24
    
    
    
    (854,859
    )
    
    $
    5.36Canceled
    
    
    (201,000
    )
    
    $
    18.10
    
    
    
    (77,250
    )
    
    $
    17.58Outstanding at end of period
    
    
    7,770,370
    
    
    $
    13.77
    
    
    
    8,483,991
    
    
    $
    13.54Exercisable at end of period
    
    
    2,151,370
    
    
    
    
    
    
    
    1,474,491Weighted-average fair value of
options granted during the period
(2)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    9.40
   Outstanding
    
    Exercise Price
    
    Remaining
    
    
    
    
    
    Exercise PriceAt March
    
    Per
    
    Contractual Life
    
    Exercisable at
    
    PerRange of Exercise Prices
    
    31, 2006
    
    Option(2)
    
    (Years)(2)
    
    March 31, 2006
    
    Option(2)$2.83 to $5.00
    
    
    841,398
    
    
    $
    3.91
    
    
    
    2.0
    
    
    
    841,398
    
    
    $
    3.91$5.60 to $7.67
    
    
    199,072
    
    
    $
    7.60
    
    
    
    3.6
    
    
    
    199,072
    
    
    $
    7.60$7.83 to $11.17
    
    
    1,866,900
    
    
    $
    9.54
    
    
    
    5.7
    
    
    
    942,900
    
    
    $
    9.89$11.42 to $14.16
    
    
    1,921,500
    
    
    $
    12.97
    
    
    
    6.6
    
    
    
    168,000
    
    
    $
    12.83$15.33 to $19.14
    
    
    1,549,500
    
    
    $
    17.39
    
    
    
    8.0
    
    
    
    
    
    
    $
    $22.62 to $28.30
    
    
    1,392,000
    
    
    $
    23.39
    
    
    
    8.9
    
    
    
    
    
    
    $
    7,770,370
    
    
    $
    13.77
    
    
    
    
    
    
    
    2,151,370
    
    
    $
    6.34
  11




---



##### 



As of And For the Three Months
    
    As of And For the Year EndedEnded March 31, 2006
    
    December 31, 2005 (1)Exercise Price
    
    
    
    
    
    Exercise PriceSARS
    
    Per SAR (2)
    
    SARS
    
    Per SAR (2)Outstanding at beginning of period
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Granted
    
    
    874,000
    
    
    $
    33.11
    
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Canceled
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Outstanding at end of period
    
    
    874,000
    
    
    $
    33.11
    
    
    
    
    
    
    $
    Exercisable at end of period
    
    
    
    
    
    
    
    
    
    
    Weighted-average fair value of
SARS granted during the period
(2)
    
    
    
    
    
    $
    14.38
    
    
    
    
    
    
    $
    
  Outstanding
    
    Exercise Price
    
    Remaining
    
    
    
    
    
    Exercise PriceAt March
    
    Per
    
    Contractual Life
    
    Exercisable at
    
    PerRange of Exercise Prices
    
    31, 2006
    
    SAR(2)
    
    (Years)(2)
    
    March 31, 2006
    
    SAR(2)$32.81 to $35.35
    
    
    874,000
    
    
    $
    33.11
    
    
    
    9.8
    
    
    
    
    
    
    $
    
   As of And For the Three Months
    
    As of And For the Year EndedEnded March 31, 2006
    
    December 31, 2005Weighted
    
    
    
    
    
    WeightedAverage Grant
    
    
    
    
    
    Average GrantRestricted Stock
    
    Date Fair
    
    Restricted Stock
    
    Date FairShares (1)
    
    Value (1)
    
    Shares (1)
    
    Value (1)Unvested at beginning of
period (1)
    
    
    141,465
    
    
    $
    27.75
    
    
    
    
    
    
    $
    Granted
    
    
    13,626
    
    
    $
    33.00
    
    
    
    145,140
    
    
    $
    27.74Vested
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    3,318
    
    
    $
    28.63
    
    
    
    (3,675
    )
    
    $
    27.52Unvested at end of period
    
    
    151,773
    
    
    $
    28.20
    
    
    
    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)
    
    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.   12




---



##### 



13




---



##### 



For the Three Months
    
    For the Year EndedEnded March 31, 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 months ended March 31,
2006 and 2005, respectively (in thousands, except per share data):
 As of and For the Three MonthsEnded March 31,2006
    
    
    2005(1)Weighted-Average Common Shares Outstanding
    
    
    69,378
    
    
    
    67,273Weighted-Average Potential Shares Issuable
    
    
    2,982
    
    
    
    4,310Weighted-Average Shares and Potential Shares Issuable
    
    
    72,360
    
    
    
    71,583Net Income
    
    $
    50,321
    
    
    $
    45,571Basic Earnings per Share
    
    $
    0.73
    
    
    $
    0.68Diluted Earnings per Share
    
    $
    0.70
    
    
    $
    0.64
 
 (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 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 stock
purchases related to the Employee Stock Purchase Plan and Nonqualified Employee Stock Purchase
Plan, based on fair values. The Companys financial statements as of and for the three months
ended March 31, 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 months
ended March 31, 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
information required under SFAS 123. Share-based compensation expense related to stock options
and SARS was $1.9 million, before income taxes for the three
 14




---



##### 



months ended March 31, 2006. During the three months ended March 31, 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 months ended March 31, 2006, share-based compensation
expense related to restricted stock grants and imputed interest on employee stock purchase loans
was $0.2 million which was recorded 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 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 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 share-based compensation expense recognized in the Consolidated Statement of Operations and
Comprehensive Income for the three months ended March 31, 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 March 31, 2006, approximately $0.8 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 months ended March 31,
2006 is as follows:
 Three Months Ended(In thousands, except per share amounts)
    
    March 31, 2006Stock-based compensation expense
    
    $
    2,108Tax benefit
    
    
    (738
    )Net decrease in net income
    
    $
    1,370Stock-based compensation cost capitalized (gross of
amortization) as deferred acquisition costs
    
    $
    941Effect on:Cash flows from operating activities
    
    $
    537Cash flows from financing activities
    
    $
    4,034Effect on:Net earnings per share  Basic
    
    $
    0.02Net earnings per share  Diluted
    
    $
    0.00
 15




---



##### 



Three Months Ended(In thousands, except per share amounts)
    
    March 31, 2005(1)Net income, as reported
    
    $
    45,571Add: 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
    
    
    (1,494
    )Pro forma net income
    
    $
    44,077Net earnings per share  Basic:As reported
    
    $
    0.68Pro forma
    
    $
    0.66Net earnings per share  Diluted:As reported
    
    $
    0.64Pro forma
    
    $
    0.62
 
 (1)
    
    Share information restated to reflect a three-for-one split of the Companys common
stock distributed on March 1, 2006. 10.
    
    Income Taxes
  11.
    
    Reinsurance
  For the Three Months Ended
    
    
    For the three Months EndedMarch 31, 2006
    
    
    March 31, 2005(In thousands)
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect Business
    
    $
    326,677
    
    
    $
    316,340
    
    
    $
    284,067
    
    
    $
    286,772Reinsurance Assumed
    
    
    1,365
    
    
    
    1,288
    
    
    
    1,038
    
    
    
    1,240Reinsurance Ceded
    
    
    40,086
    
    
    
    41,082
    
    
    
    31,319
    
    
    
    51,257Net Premiums
    
    $
    287,956
    
    
    $
    276,546
    
    
    $
    253,786
    
    
    $
    236,755
  16




---



##### 



12.
    
    Commitments and Contingencies
         17




---



##### 



13.
    
    Comprehensive Income
  14.
    
    Segment Information
    18




---



##### 



Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalMarch 31, 2006:Gross Written Premiums
    
    $
    243,107
    
    
    $
    58,068
    
    
    $
    26,867
    
    
    $
    
    
    
    $
    328,042Net Written Premiums
    
    $
    228,119
    
    
    $
    45,428
    
    
    $
    14,409
    
    
    $
    
    
    
    $
    287,956Revenue:Net Earned Premiums
    
    $
    224,370
    
    
    $
    39,928
    
    
    $
    12,248
    
    
    $
    
    
    
    $
    276,546Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,062
    
    
    
    20,062Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (394
    )
    
    
    (394
    )Other Income
    
    
    
    
    
    
    
    
    
    
    440
    
    
    
    51
    
    
    
    491Total Revenue
    
    
    224,370
    
    
    
    39,928
    
    
    
    12,688
    
    
    
    19,719
    
    
    
    296,705Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    110,798
    
    
    
    26,819
    
    
    
    6,048
    
    
    
    
    
    
    
    143,665Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,017
    
    
    
    77,017Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    248
    
    
    
    2,084
    
    
    
    2,332Total Losses and Expenses
    
    
    110,798
    
    
    
    26,819
    
    
    
    6,296
    
    
    
    79,101
    
    
    
    223,014Income Before Income Taxes
    
    
    113,572
    
    
    
    13,109
    
    
    
    6,392
    
    
    
    (59,382
    )
    
    
    73,691Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,370
    
    
    
    23,370Net Income
    
    $
    113,572
    
    
    $
    13,109
    
    
    $
    6,392
    
    
    $
    (82,752
    )
    
    $
    50,321Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    183,674
    
    
    $
    2,810,569
    
    
    $
    2,994,243March 31, 2005:Gross Written Premiums
    
    $
    210,010
    
    
    $
    53,635
    
    
    $
    21,460
    
    
    $
    
    
    
    $
    285,105Net Written Premiums
    
    $
    204,323
    
    
    $
    36,301
    
    
    $
    13,162
    
    
    $
    
    
    
    $
    253,786Revenue:Net Earned Premiums
    
    $
    183,718
    
    
    $
    35,385
    
    
    $
    17,652
    
    
    $
    
    
    
    $
    236,755Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,491
    
    
    
    13,491Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,798
    
    
    
    10,798Other Income
    
    
    
    
    
    
    
    
    
    
    214
    
    
    
    266
    
    
    
    480Total Revenue
    
    
    183,718
    
    
    
    35,385
    
    
    
    17,866
    
    
    
    24,555
    
    
    
    261,524Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    90,297
    
    
    
    25,832
    
    
    
    10,342
    
    
    
    
    
    
    
    126,471Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,948
    
    
    
    63,948Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,939
    
    
    
    3,939Total Losses and Expenses
    
    
    90,297
    
    
    
    25,832
    
    
    
    10,342
    
    
    
    67,887
    
    
    
    194,358Income Before Income Taxes
    
    
    93,421
    
    
    
    9,553
    
    
    
    7,524
    
    
    
    (43,332
    )
    
    
    67,166Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,595
    
    
    
    21,595Net Income
    
    $
    93,421
    
    
    $
    9,553
    
    
    $
    7,524
    
    
    $
    (64,927
    )
    
    $
    45,571Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    169,143
    
    
    $
    2,301,798
    
    
    $
    2,470,941
 15.
    
    Subsequent Event
  19




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##### 



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
 
 20




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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 (Three Months ended March 31, 2006 vs. March 31, 2005)
 Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Gross Written Premiums
    
    $
    243.0
    
    
    $
    58.1
    
    
    $
    26.9
    
    
    $
    328.02005 Gross Written Premiums
    
    $
    210.0
    
    
    $
    53.6
    
    
    $
    21.5
    
    
    $
    285.1Percentage Increase
    
    
    15.7
    %
    
    
    8.4
    %
    
    
    25.1
    %
    
    
    15.0
    %2006 Gross Earned Premiums
    
    $
    240.8
    
    
    $
    51.5
    
    
    $
    25.3
    
    
    $
    317.62005 Gross Earned Premiums
    
    $
    213.7
    
    
    $
    47.3
    
    
    $
    27.0
    
    
    $
    288.0Percentage Increase (Decrease)
    
    
    12.7
    %
    
    
    8.9
    %
    
    
    (6.3
    )%
    
    
    10.3
    %
  
    
    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
 21




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    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 March 31, 2006 versus March 31, 2005 of
18.8% and 16.6% 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 0.6%, and 7.4% for the
commercial and personal lines segments, respectively. Realized average rates on renewal
business decreased 0.8% for the specialty lines segment.
    
    An increase of $10.3 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 $12.9 million.
    
    A decrease in mobile homeowners gross written premium of $7.0 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 36.7%, resulting
from a decrease to the in-force counts for the mobile homeowners product of 80.8% and an
increase to the in-force policy counts for the homeowners product of 63.7%, as a result of
the continued planned shift in product mix noted above.
  Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Net Written Premiums
    
    $
    228.2
    
    
    $
    45.4
    
    
    $
    14.4
    
    
    $
    288.02005 Net Written Premiums
    
    $
    204.3
    
    
    $
    36.3
    
    
    $
    13.2
    
    
    $
    253.8Percentage Increase
    
    
    11.7
    %
    
    
    25.1
    %
    
    
    9.1
    %
    
    
    13.5
    %2006 Net Earned Premiums
    
    $
    224.4
    
    
    $
    39.9
    
    
    $
    12.2
    
    
    $
    276.52005 Net Earned Premiums
    
    $
    183.7
    
    
    $
    35.4
    
    
    $
    17.7
    
    
    $
    236.8Percentage Increase (Decrease)
    
    
    22.2
    %
    
    
    12.7
    %
    
    
    (31.1
    )%
    
    
    16.8
    %
  
    
    A reduction in the Companys net liability cession percentage under its quota share
reinsurance agreements, 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. Pursuant to this agreement, during the
 22




---



##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    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
three months ended March 31, 2006 and 2005, the Company accrued $3.7 million ($1.6 million for
the commercial lines segment and $2.1 million for the specialty lines segment) and $1.7
million ($0.7 million for the commercial lines segment and $1.0 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.
  Net Investment Income:
  Net Realized Investment Gain (Loss):
  Other Income
 23




---



##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Net Loss and Loss Adjustment Expenses:
  
    
    The growth in net earned premiums.
 
    
    An $8.9 million reduction in ceded loss and loss adjustment
expenses pursuant to a quota share agreement (See Premiums). Ceded
loss and loss adjustment expenses pursuant to this quota share
agreement for the three months ended March 31, 2005 were $8.9
million; however, due to the commutation of this agreement
effective January 1, 2006, there were no losses ceded to this
agreement during 2006.
  
    
    A $3.0 million decrease in 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 three months ended March 31, 2006.
    
    No net reserve actions were taken on the aggregate estimated unpaid loss and loss
adjustment expenses for accident years 2005 and prior during the three months ended March
31, 2006 vs. reserve actions taken during the three months ended March 31, 2005 whereby the
estimated net unpaid loss and loss adjustment expenses for accident years 2004 and prior
were increased by $0.7 million. Changes in the estimated net unpaid loss and loss
adjustment expenses by accident year during the three months ended March 31, 2006 by
accident year are as follows:
 Net Basisincrease (decrease)(in millions)Accident Year 2005
    
    $
    (3.3
    )Accident Year 2004
    
    
    0.7Accident Year 2003
    
    
    0.2Accident Years 2002 and prior
    
    
    2.4Total
    
    $
    0.0
    Acquisition Costs and Other Underwriting Expenses:
 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
  Other Operating Expenses
 Income Tax Expense:
 Investments
     25




---



##### 



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 March 31, 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
    
    $
    1.4
    
    
    $
    2.8
    
    
    $
    4.2
    
    
    $
    2.5
    
    
    $
    6.74  6 months
    
    
    0.4
    
    
    
    1.1
    
    
    
    1.5
    
    
    
    1.1
    
    
    
    2.67  9 months
    
    
    5.4
    
    
    
    6.8
    
    
    
    12.2
    
    
    
    0.4
    
    
    
    12.610  12 months
    
    
    0.9
    
    
    
    0.5
    
    
    
    1.4
    
    
    
    
    
    
    
    1.413  18 months
    
    
    8.7
    
    
    
    4.8
    
    
    
    13.5
    
    
    
    
    
    
    
    13.519  24 months
    
    
    2.7
    
    
    
    0.7
    
    
    
    3.4
    
    
    
    
    
    
    
    3.4> 24 months
    
    
    0.8
    
    
    
    0.7
    
    
    
    1.5
    
    
    
    
    
    
    
    1.5Total GrossUnrealized Losses
    
    $
    20.3
    
    
    $
    17.4
    
    
    $
    37.7
    
    
    $
    4.0
    
    
    $
    41.7Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    883.6
    
    
    $
    678.3
    
    
    $
    1.561.9
    
    
    $
    64.0
    
    
    $
    1,625.9
   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
   Liquidity and Capital Resources
      27




---



##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Forward-Looking Information
  28




---



##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Estimated
    
    Hypothetical PercentageHypothetical Change
    
    Fair Value after
    
    Increase (Decrease) inEstimated
    
    in Interest Rates
    
    Hypothetical Changes
    
    
    
    
    
    ShareholdersFair Value
    
    (bp=basis points)
    
    in Interest Rates
    
    Fair Value
    
    Equity(Dollars in Thousands)March 31, 2006InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,808,325
    
    
    200 bp decrease
    
    $
    1,952,480
    
    
    
    8.0
    %
    
    
    10.7
    %100 bp decrease
    
    $
    1,883,754
    
    
    
    4.2
    %
    
    
    5.6
    %50 bp decrease
    
    $
    1,846,409
    
    
    
    2.1
    %
    
    
    2.8
    %50 bp increase
    
    $
    1,770,080
    
    
    
    (2.1
    )%
    
    
    (2.9
    )%100 bp increase
    
    $
    1,732,035
    
    
    
    (4.2
    )%
    
    
    (5.7
    )%200 bp increase
    
    $
    1,658,555
    
    
    
    (8.3
    )%
    
    
    (11.2
    )%March 31, 2005InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,483,259
    
    
    200 bp decrease
    
    $
    1,603,106
    
    
    
    8.1
    %
    
    
    11.2
    %100 bp decrease
    
    $
    1,543,776
    
    
    
    4.1
    %
    
    
    5.7
    %50 bp decrease
    
    $
    1,513,665
    
    
    
    2.1
    %
    
    
    2.8
    %50 bp increase
    
    $
    1,452,407
    
    
    
    (2.1
    )%
    
    
    (2.9
    )%100 bp increase
    
    $
    1,421,407
    
    
    
    (4.2
    )%
    
    
    (5.8
    )%200 bp increase
    
    $
    1,359,555
    
    
    
    (8.3
    )%
    
    
    (11.6
    )%
 29




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##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 4. Controls and Procedures
    30




---



##### 



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
       (c) Total
    
    (d)Number of
    
    ApproximageShares
    
    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
    
    8,814 (1)
    
    $
    18.28
    
    
    
    
    $45,000,000 (2)February 1  February 28
    
    1,218 (1)
    
    $
    27.93
    
    
    
    

$45,000,000 (2)March 1  March 31
    
    885 (1)
    
    $
    19.87
    
    
    
    
    $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.       31




---



##### 



Exhibit No.
    
    Description10.1(1)
    
    Lease Agreement dated as of March 1, 2006 between Bala Plaza Property,
Inc., and Philadelphia Consolidated Holding Corp.10.2*
    
    Excess Catastrophe Reinsurance Contract effective June 1, 200510.3*
    
    Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 200510.4*
    
    Reinstatement Premium Protection Reinsurance Contract effective June 1, 200510.5*
    
    2004 Whole Account Net Quota Share Reinsurance Commutation and Release
Agreement effective January 1, 2006 with Federal Insurance Company, through
Chubb Re, Inc.10.6*
    
    2004 Whole Account Net Quota Share Reinsurance Commutation and Release
Agreement effective January 1, 2006 with Swiss Reinsurance America
Corporation10.7*
    
    Casualty Excess of Loss Reinsurance Agreement effective January 1, 2006 
80% Placement via Willis Re Inc.10.8*
    
    Property Third and Fourth Excess of Loss Reinsurance Agreement effective
January 1, 2006  50% Placement via Willis Re Inc.31.1*
    
    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.(1)
    
    Filed as an Exhibit to the Companys Form 8-K dated March 21, 2006 and incorporated
by reference. 32




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##### 



SIGNATURES
  PHILADELPHIA CONSOLIDATED HOLDING CORP.RegistrantDate May 8, 2006
    
    
    
    James J. Maguire, Jr.

   James J. Maguire, Jr.President and Chief Executive Officer(Principal Executive Officer)Date May 8, 2006
    
    
    
    Craig P. Keller

   Craig P. KellerExecutive Vice President, Secretary, Treasurer andChief Financial
Officer
    (Principal Financial and Accounting Officer)
 33