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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q/A Amendment No. 1 [X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2003 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: o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES: x NO: o Indicate the number of shares outstanding of each of the issuers classes of
common stock as of November 10, 2003. Common Stock, no par value, 21,982,995 shares outstanding




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EXPLANATORY NOTE The Company has included its restated consolidated balance sheet as of
September 30, 2003, restated consolidated statements of operations and
comprehensive income for the three and nine months ended September 30, 2003 and
nine months ended September 30, 2002, restated consolidated statements of
changes in shareholders equity for the nine months ended September 30, 2003
and the year ended December 31, 2002, and restated consolidated
statements of
cash flows for the nine months ended September 30, 2003 and September 30, 2002
in this Form 10-Q/A. The restatement records in prior periods a portion of the
revenue and net income arising from profit commissions under three reinsurance
contracts, one of which originally had been recorded in the second quarter
2002, another of which originally had been recorded in the fourth quarter 2003,
and another of which should have been recorded in previous periods. These
profit commissions were due to the Company from reinsurers under a 2001
accident year aggregate stop loss reinsurance contract effective during the
period January 1, 2001 through December 31, 2001, a quota share reinsurance
contract effective during the period April 1, 2003 through December 31, 2003
and an excess catastrophe reinsurance contract effective during the period June
1, 2003 through May 31, 2004. The restatement is more fully described in Part
I herein under Item 2-Managements Discussion and Analysis of Financial
Condition and Results of Operations, and in Item 1 of Part I in our
consolidated unaudited financial statements and related notes, including,
without limitation, in Note 2. Any amounts shown herein as restated are the
restated amounts. This Amendment No. 1 to Quarterly Report on Form 10-Q/A amends Part I, Items 1,
2 and 4 and, Part II, Item 6, of the Companys previously filed Quarterly
Report on Form 10-Q for the Quarterly Period Ended September 30, 2003 to
reflect the aforementioned restatement and related changes. The applicable
rules require that each of these Items be entirely restated upon amendment.
Items other than those listed above have not been changed and therefore have
not been included in this Amendment No. 1 to Quarterly Report on Form 10-Q/A. In addition, as required by Rule 12b-15 under the Securities Exchange Act of
1934, as amended, new certifications by the Companys principal executive
officer and principal financial officer are being filed with this Form 10-Q/A. 2




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIESINDEX For the Quarterly Period Ended September 30, 2003  
 Part I - Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets  September 30, 2003 (Restated) and December 31, 2002
    
    
    4Consolidated Statements of Operations and Comprehensive Income - For the three and nine months ended September 30, 2003 (Restated) and 2002 (Restated)
    
    
    5Consolidated Statements of Changes in Shareholders Equity - For the nine months ended September 30, 2003 (Restated) and year ended December 31, 2002 (Restated)
    
    
    6Consolidated Statements of Cash Flows - For the nine months ended September 30, 2003 (Restated) and 2002 (Restated)
    
    
    7Notes to Consolidated Financial Statements
    
    
    8-16Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17-26Item 4.Controls and Procedures
    
    
    27Part II - Other InformationItem 6.Exhibits and Reports on Form 8-K
    
    
    28Signatures
    
    
    29CERTIFICATION OF THE COMPANY'S CHIEF EXECUTIVE OFFICERCERTIFICATION OF THE COMPANY'S CHIEF FINANCIAL OFFICERCERTIFICATION OF THE COMPANY'S CEO, SECTION 906CERTIFICATION OF THE COMPANY'S CFO, SECTION 906
  3




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) As ofSeptember 30,2003(Restated)
    
    December 31,(Unaudited)
    
    2002ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $1,054,193 AND $832,701)
    
    $
    1,074,520
    
    
    $
    854,513EQUITY SECURITIES AT MARKET (COST $78,665
AND $51,257)
    
    
    86,441
    
    
    
    54,346TOTAL INVESTMENTS
    
    
    1,160,961
    
    
    
    908,859CASH AND CASH EQUIVALENTS
    
    
    90,891
    
    
    
    42,002ACCRUED INVESTMENT INCOME
    
    
    10,512
    
    
    
    8,571PREMIUMS RECEIVABLE
    
    
    181,861
    
    
    
    130,007PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
    
    
    275,328
    
    
    
    151,352DEFERRED INCOME TAXES
    
    
    13,252
    
    
    
    7,541DEFERRED ACQUISITION COSTS
    
    
    54,161
    
    
    
    61,272PROPERTY AND EQUIPMENT, NET
    
    
    15,182
    
    
    
    12,794GOODWILL
    
    
    25,724
    
    
    
    25,724OTHER ASSETS
    
    
    14,655
    
    
    
    10,212TOTAL ASSETS
    
    $
    1,842,527
    
    
    $
    1,358,334LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    593,527
    
    
    $
    445,548UNEARNED PREMIUMS
    
    
    431,791
    
    
    
    306,093TOTAL POLICY LIABILITIES AND ACCRUALS
    

    
    1,025,318
    
    
    
    751,641FUNDS HELD PAYABLE TO REINSURER
    
    
    90,587
    
    
    
    LOANS PAYABLE
    
    
    49,750
    
    
    
    39,113PREMIUMS PAYABLE
    
    
    32,489
    
    
    
    33,553PAYABLE FOR SECURITIES PURCHASE
    
    
    46,690
    
    
    
    6,100OTHER LIABILITIES
    
    
    72,567
    
    
    
    50,104TOTAL LIABILITIES
    
    
    1,317,401
    
    
    
    880,511COMMITMENTS 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, 21,984,492 AND
21,868,877 SHARES ISSUED AND OUTSTANDING
    
    
    280,286
    
    
    
    276,945NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (6,197
    )
    
    
    (6,407
    )ACCUMULATED OTHER COMPREHENSIVE INCOME
    
    
    18,267
    
    
    
    16,185RETAINED EARNINGS
    
    
    232,770
    
    
    
    191,100TOTAL SHAREHOLDERS EQUITY
    
    
    525,126
    
    
    
    477,823TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,842,527
    
    
    $
    1,358,334
 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 OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    
    
    
    
    2003
    
    2002(Restated)
    
    2002
    
    (Restated)
    
    (Restated)REVENUE:NET EARNED PREMIUMS
    
    $
    146,676
    
    
    $
    106,146
    
    
    $
    418,387
    
    
    $
    292,199NET INVESTMENT INCOME
    
    
    9,173
    
    
    
    9,497
    
    
    
    28,348
    
    
    
    27,727NET REALIZED INVESTMENT GAIN (LOSS)
    
    
    474
    
    
    
    199
    
    
    
    (1,309
    )
    
    
    (2,935
    )OTHER INCOME
    
    
    1,988
    
    
    
    419
    
    
    
    3,689
    
    
    
    435TOTAL REVENUE
    
    
    158,311
    
    
    
    116,261
    
    
    
    449,115
    
    
    
    317,426LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    100,645
    
    
    
    114,325
    
    
    
    328,023
    
    
    
    252,003NET REINSURANCE RECOVERIES
    
    
    (21,240
    )
    
    
    (35,976
    )
    
    
    (65,232
    )
    
    
    (59,773
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    79,405
    
    
    
    78,349
    
    
    
    262,791
    
    
    
    192,230ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES
    
    
    41,542
    
    
    
    32,343
    
    
    
    120,120
    
    
    
    91,221OTHER OPERATING EXPENSES
    
    
    2,668
    
    
    
    1,632
    
    
    
    5,974
    
    
    
    4,570TOTAL LOSSES AND EXPENSES
    
    
    123,615
    
    
    
    112,324
    
    
    
    388,885
    
    
    
    288,021INCOME BEFORE INCOME TAXES
    
    
    34,696
    
    
    
    3,937
    
    
    
    60,230
    
    
    
    29,405INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    10,403
    
    
    
    2,044
    
    
    
    25,392
    
    
    
    14,413DEFERRED
    
    
    718
    
    

    
    (999
    )
    
    
    (6,832
    )
    
    
    (5,278
    )TOTAL INCOME TAX EXPENSE
    
    
    11,121
    
    
    
    1,045
    
    
    
    18,560
    
    
    
    9,135NET INCOME
    
    $
    23,575
    
    
    $
    2,892
    
    
    $
    41,670
    
    
    $
    20,270OTHER COMPREHENSIVE INCOME, NET OF TAX:HOLDING GAIN (LOSS) ARISING DURING
PERIOD
    
    
    (1,568
    )
    
    
    6,364
    
    
    
    1,231
    
    
    
    7,639RECLASSIFICATION ADJUSTMENT
    
    
    (308
    )
    
    
    (129
    )
    
    
    851
    
    
    
    1,908OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (1,876
    )
    
    
    6,235
    
    
    
    2,082
    
    
    
    9,547COMPREHENSIVE INCOME
    
    $
    21,699
    
    
    $
    9,127
    
    
    $
    43,752
    
    
    $
    29,817PER AVERAGE SHARE DATA:BASIC EARNINGS PER SHARE
    
    $
    1.08
    
    
    $
    0.13
    
    
    $
    1.90
    
    
    $
    0.94DILUTED EARNINGS PER SHARE
    
    $
    1.04
    
    
    $
    0.13
    
    
    $
    1.85
    
    
    $
    0.91WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    21,913,053
    
    
    
    21,625,799
    
    
    
    21,879,748
    
    
    
    21,577,670WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    787,627
    
    
    
    636,828
    
    
    
    681,716
    
    
    
    716,017WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    22,700,680
    
    
    
    22,262,627
    
    
    
    22,561,464
    
    
    
    22,293,687
 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 CHANGES
IN SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) For the Nine MonthsEnded
    
    For the Year EndedSeptember 30, 2003
    
    December 31,(Restated)
    
    2002(Unaudited)
    
    (Restated)COMMON SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    21,868,877
    
    
    
    21,509,723EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    75,125
    
    
    
    107,000ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET
    
    
    40,490
    
    
    
    252,154BALANCE AT END OF PERIOD
    
    
    21,984,492
    
    
    
    21,868,877TREASURY SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    
    
    
    
    SHARES REPURCHASED PURSUANT TO AUTHORIZATION
    
    
    10,000
    
    
    
    75,000EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    (6,500
    )
    
    
    ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    (3,500
    )
    
    
    (75,000
    )BALANCE AT END OF PERIOD
    
    
    
    
    
    
    COMMON STOCK:BALANCE AT BEGINNING OF YEAR
    
    $
    276,945
    
    
    $
    268,509EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    1,991
    
    
    
    2,115ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    1,350
    
    
    
    6,321BALANCE AT END OF PERIOD
    
    
    280,286
    
    
    
    276,945NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (6,407
    )
    
    
    (3,373
    )NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
    
    
    (1,154
    )
    
    
    (4,017
    )COLLECTION OF NOTES RECEIVABLE
    
    
    1,364
    
    
    
    983BALANCE AT END OF PERIOD
    
    
    (6,197
    )
    
    
    (6,407
    )ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES:BALANCE AT BEGINNING OF YEAR
    
    
    16,185
    

    
    
    8,461OTHER COMPREHENSIVE INCOME, NET OF TAXES
    
    
    2,082
    
    
    
    7,724BALANCE AT END OF PERIOD
    
    
    18,267
    
    
    
    16,185RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    191,100
    
    
    
    157,347NET INCOME
    
    
    41,670
    
    
    
    33,753BALANCE AT END OF PERIOD
    
    
    232,770
    
    
    
    191,100COMMON STOCK HELD IN TREASURY:BALANCE AT BEGINNING OF YEAR
    
    
    
    
    
    
    EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    94
    
    
    
    COMMON SHARES REPURCHASED
    
    
    (300
    )
    
    
    (2,023
    )ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    206
    
    
    
    2,023BALANCE AT END OF PERIOD
    
    
    
    
    
    
    TOTAL SHAREHOLDERS EQUITY
    
    $
    525,126
    
    
    $
    477,823
 The accompanying notes are an integral part of the consolidated financial statements. 6




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited) For the Nine Months Ended September 30,2003
    
    2002(Restated)
    
    (Restated)CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    41,670
    
    
    $
    20,270ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT LOSS
    
    
    1,309
    
    
    
    2,935DEPRECIATION AND AMORTIZATION EXPENSE
    
    
    6,148
    
    
    
    1,345DEFERRED INCOME TAX BENEFIT
    
    
    (6,832
    )
    
    
    (5,278
    )CHANGE IN PREMIUMS RECEIVABLE
    
    
    (51,854
    )
    
    
    (36,720
    )CHANGE IN PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES, NET OF FUNDS HELD
PAYABLE TO REINSURER
    
    
    (33,389
    )
    
    
    (35,759
    )CHANGE IN OTHER RECEIVABLES
    
    
    (1,941
    )
    
    
    (1,013
    )CHANGE IN INCOME TAXES PAYABLE
    
    
    636
    
    
    
    (5,520
    )CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    7,111
    
    
    
    (18,686
    )CHANGE IN OTHER ASSETS
    
    
    (4,750
    )
    
    
    3,006CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES
    
    
    147,979
    
    
    
    96,769CHANGE IN UNEARNED PREMIUMS
    
    
    125,698
    
    
    
    108,443CHANGE IN OTHER LIABILITIES
    
    
    20,763
    
    
    
    32,490TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS
    
    
    495
    
    
    
    1,251NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    253,043
    
    
    
    163,533CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES
    
    
    71,674
    
    
    
    188,746PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES
    
    
    162,032
    
    
    
    82,793PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES
    
    
    10,936
    
    
    
    13,898COST OF FIXED MATURITIES ACQUIRED
    
    
    (419,264
    )
    
    
    (422,182
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (38,593
    )
    
    
    (26,703
    )PURCHASE OF PROPERTY AND EQUIPMENT, NET
    
    
    (4,632
    )
    
    
    (2,484
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (217,847
    )
    
    
    (165,932
    )CASH FLOWS FROM FINANCING ACTIVITIES:REPAYMENTS ON LOANS PAYABLE
    
    
    (34,245
    )
    
    
    (29,842
    )PROCEEDS FROM LOANS PAYABLE
    
    
    44,882
    
    
    
    29,381PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS.
    
    
    1,590
    
    
    
    864PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE
    
    
    1,364
    
    
    
    617PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
    
    
    402
    
    
    
    410COST OF COMMON STOCK REPURCHASED
    
    
    (300
    )
    
    
    NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    13,693
    
    
    
    1,430NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    48,889
    
    
    
    (969
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    42,002
    
    
    
    49,910CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    90,891
    
    
    $
    48,941CASH PAID DURING THE PERIOD FOR:INCOME TAXES
    
    $
    23,635
    
    
    $
    18,412INTEREST
    
    $
    487
    
    
    $
    466NON-CASH TRANSACTIONS:ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE
    
    $
    1,154
    
    
    $
    (84
    )
 The accompanying notes are an integral part of the consolidated financial statements. 7




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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 nine months ended
September 30, 2003 and 2002 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 and adjustments necessary to reflect the
restatement discussed in Note 2), necessary for a fair statement of the
information set forth therein. The results of operations for the nine
months ended September 30, 2003 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.The consolidated financial statements for the periods ended September 30,
2003 and September 30, 2002 have been restated as further described in Note
2.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 for the Fiscal Year Ended December 31, 2002.2.
    
    Restatement of Financial StatementsThe Companys previously issued consolidated balance sheet as of September
30, 2003, consolidated statements of operations and comprehensive income for
the three and nine months ended September 30, 2003 and nine months ended
September 30, 2002, changes in shareholders equity for the nine months
ended September 30, 2003 and year ended December 31, 2002, and cash flows
for the nine months ended September 30, 2003 and September 30, 2002 have
been restated to include a portion of the revenue and net income in prior
periods arising from profit commissions under three reinsurance contracts.
The revenue and net income of one of the contracts had originally been
recorded in the second quarter of 2002 and portions of such revenue and net
income should have been recorded during each quarter of 2001. The revenue
and net income of another contract had originally been fully recorded in the
fourth quarter 2003 although portions of such revenue and net income should
have been recorded in the quarters ended June 30, 2003, September 30, 2003
and March 31, 2004. Portions of the revenue and net income for the other
contract should have been recorded in the quarters ended June 30, 2003,
September 30, 2003, December 31, 2003 and March 31, 2004. These profit
commissions were due to the Company from reinsurers under a 2001 aggregate
stop loss reinsurance contact effective during the period January 1, 2001
through December 31, 2001, a quota share reinsurance contract effective
during the period April 1, 2003 through December 31, 2003 and an excess
catastrophe reinsurance contract effective during the period June 1, 2003
through May 31, 2004.The decision to restate resulted from an analysis of the accounting effect
at the expiration of one of these reinsurance contracts. Based upon the
provisions of Emerging Issues Task Force No. 93-6, Accounting for Multiple
 Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises,
the Company determined that under generally acceptable accounting principles
there was an error in the prior period financial statements and it should
have been accruing a profit commission for each period since the inception
of the contracts based on the actual experience of the underlying business. As a result, the Company
has restated its aforementioned previously issued financial statements to
include a portion of the revenue and net income arising from the profit
commissions in each of the prior quarters that the contracts were in effect. 8




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The effect of this restatement on the consolidated statements of operations
and comprehensive income for the three and nine months ended September 30,
2003 and for the nine months ended September 30, 2002 and on the
consolidated balance sheet as of September 30, 2003 is shown in the tables
below (in thousands, except per share amounts):Consolidated Statements of Operations and Comprehensive Income Data Three Months Ended September 30, 2003
    
    Nine Months Ended September 30, 2003As
    
    
    
    
    
    
    
    
    
    AsPreviously
    
    Restatement
    
    As
    
    Previously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    Restated
    
    Reported
    
    Adjustment
    
    RestatedNet earned premiums
    
    $
    142,688
    
    
    $
    3,988
    
    
    $
    146,676
    
    
    $
    412,499
    
    
    $
    5,888
    
    
    $
    418,387Total revenue
    
    $
    154,323
    
    
    $
    3,988
    
    
    $
    158,311
    
    
    $
    443,227
    
    
    $
    5,888
    
    
    $
    449,115Income before income taxes
    
    $
    30,708
    
    
    $
    3,988
    
    
    $
    34,696
    
    
    $
    54,342
    
    
    $
    5,888
    
    
    $
    60,230Income tax
expense: deferred
    
    $
    (678
    )
    
    $
    1,396
    
    
    $
    718
    
    
    $
    (8,893
    )
    
    $
    2,061
    
    
    $
    (6,832
    )Total income tax expense
    
    $
    9,725
    
    
    $
    1,396
    
    
    $
    11,121
    
    
    $
    16,499
    
    
    $
    2,061
    
    
    $
    18,560Net income
    
    $
    20,983
    
    
    $
    2,592
    
    
    $
    23,575
    
    
    $
    37,843
    
    
    $
    3,827
    
    
    $
    41,670Basic earnings per share
    
    $
    0.96
    
    
    $
    0.12
    
    
    $
    1.08
    
    
    $
    1.73
    
    
    $
    0.17
    
    
    $
    1.90Diluted earnings per share
    
    $
    0.92
    
    
    $
    0.12
    
    
    $
    1.04
    
    
    $
    1.68
    
    
    $
    0.17
    
    
    $
    1.85
 Nine Months Ended September 30, 2002AsPreviously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedNet earned premiums
    
    $
    295,663
    
    
    $
    (3,464
    )
    
    $
    292,199Total revenue
    
    $
    320,890
    
    
    $
    (3,464
    )
    
    $
    317,426Income before income taxes
    
    $
    32,869
    
    
    $
    (3,464
    )
    
    $
    29,405Income tax expense: deferred
    
    $
    (4,066
    )
    
    $
    (1,212
    )
    
    $
    (5,278
    )Total income tax expense
    
    $
    10,347
    
    
    $
    (1,212
    )
    
    $
    9,135Net income
    
    $
    22,522
    
    
    $
    (2,252
    )
    
    $
    20,270Basic earnings per share
    
    $
    1.04
    
    
    $
    (0.10
    )
    
    $
    0.94Diluted earnings per share
    
    $
    1.01
    
    
    $
    (0.10
    )
    
    $
    0.91
  Consolidated Balance Sheet Data As of September 30, 2003AsPreviously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedDeferred income taxes
    
    $
    15,313
    
    
    $
    (2,061
    )
    
    $
    13,252Other assets
    
    $
    8,767
    
    
    $
    5,888
    
    
    $
    14,655Total assets
    
    $
    1,838,700
    
    
    $
    3,827
    
    
    $
    1,842,527Retained earnings
    
    $
    228,943
    
    
    $
    3,827
    
    
    $
    232,770Total shareholders equity
    
    $
    521,299
    
    
    $
    3,827
    
    
    $
    525,126Total liabilities and shareholders equity
    
    $
    1,838,700
    
    
    $
    3,827
    
    
    $
    1,842,527
  3.
    
    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
September 30, 2003, the Company held no derivative financial instruments or
embedded financial derivatives. 9




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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 and nine
months ended September 30, 2003 were $0 million and $0.9 million,
respectively, as a result of the Companys other than temporary impairment
evaluation. There were no non-cash realized investment losses recorded for
the three and nine months ended September 30, 2002 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 and nine months ended September 30, 2003 and 2002 were $0.4 million
and $0.3 million, respectively, and $2.6 million and $1.5 million,
respectively, as a result of the Companys impairment evaluation for
investments in securitized assets.4.
    
    Restricted AssetsThe Insurance Subsidiaries have investments, principally U.S. Treasury
securities, on deposit with the various states in which they are licensed
insurers. At September, 30, 2003 and December 31, 2002, the carrying value
of the securities on deposit totaled $17.0 million and $13.5 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 $62.2 million and $49.2 million as of September 30, 2003 and
December 31, 2002, respectively.5.
    
    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, 2002. No events have occurred or
circumstances have arisen subsequent to December 31, 2002 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 nine
months ended September 30, 2003.6.
    
    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. Estimating the ultimate
claims liability is necessarily a complex and judgmental process, inasmuch
as the amounts are based on managements informed estimates and judgments
using data currently available. 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
considering other factors such as legal, social, and economic developments.
As additional experience and data become available the Companys estimate
for the liability for unpaid loss and loss adjustment expenses is revised
accordingly. If the Companys ultimate losses, net of reinsurance, prove to
differ substantially from the amounts recorded at September 30, 2003, the
related adjustments could have a material adverse impact on the Companys
results of operations. 10




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##### Table of Contents



During the second quarter of 2003, the Company increased the estimated gross
and net loss for unreported claims incurred and related claim adjustment
expenses on residual value polices issued during the years 1998 through 2002
by $33.0 million. As of September 30, 2003 the Company has estimated a
total liability for unpaid loss and loss adjustment expenses for these
policies of $51.5 million ($51.3 million net of reinsurance) and
approximately 48,000 leases were outstanding under the Companys residual
value policies. As of June 30, 2003 the Company had estimated a total
liability for unpaid loss and loss adjustment expenses for these policies of
$59.8 million ($57.9 million net of reinsurance) and approximately 61,000
leases were outstanding under the residual value policies. The residual
value policies provide coverage guaranteeing the value of a leased
automobile at the lease termination, which can be up to five years from
lease inception. Adverse trends further deteriorated in both frequency and
severity on leases expiring in 2003. As part of the Companys monitoring
and evaluation process, a consulting firm was engaged during the second
quarter of 2003 to aid in evaluating the ultimate potential loss exposure
under these policies. Based upon the result of the subsequent evaluation by
the Company and changes in the Companys assumptions relating to future
frequency and severity of losses, the estimate for unpaid loss and loss
adjustment expenses was increased. The Company primarily attributes this
deterioration to the following factors that led to a softening of prices in
the used car market subsequent to the September 11, 2001 terrorist attacks:
prolonged 0% new car financing rates and other incentives which increased
new car sales and the volume of trade-ins, daily rental units being sold
into the market earlier and in greater numbers than expected further adding
to the over supply of used cars; and the overall general economic
conditions.During the second quarter of 2003, the Company also decreased the gross and
net liability for unpaid loss and loss adjustment expenses for accident year
2002, principally in the property line of its commercial package products,
by approximately $9.0 million due to better than expected loss experience.7.
    
    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. The Company receives a provisional commission of 33.0%
adjusted pro-rata based upon the ratio of losses incurred to premiums
earned. Pursuant to this reinsurance agreement the Company withholds the
reinsurance premium due the reinsurers reduced by the reinsurers expense
allowance, and the Companys ceding commission allowance in a Funds Held
Payable to Reinsurer account. This Funds Held Payable to Reinsurer account
is also reduced by ceded paid losses and loss adjustment expenses under this
agreement, and increased by an interest credit. In addition, the agreement
provides that a profit commission will be paid to the Company upon
commutation equal to the positive balance in the Funds Held Payable to
Reinsurer account.Pursuant to the quota share reinsurance agreement, the Company ceded $55.4
million and $159.0 million of net written premiums, $40.2 million and $74.5
million of net earned premiums, $21.3 million and $40.3 million in net loss
and loss adjustment expenses, and earned $16.3 million and $29.6 million in
ceding commissions, for the three and nine months ended September 30, 2003,
respectively. In addition, the interest credit (expense), which is included
in net investment income, for the three and nine months ended September 30,
2003 was $0.8 million and $1.3 million, respectively. The Company has also
accrued a profit commission based upon the experience of the underlying
business ceded to this reinsurance agreement, in the amounts of $1.8 million
and $3.0 million for the three and nine months ended September 30, 2003,
respectively. The profit commission reduces ceded written and earned
premiums.8.
    
    Loans PayableAs of September 30, 2003, the Company had aggregate borrowings of $49.7
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. 11




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##### Table of Contents



9.
    
    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 and nine months ended September 30, 2003
and 2002, respectively (in thousands, except per share data): For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    
    
    
    
    2003
    
    2002(Restated)
    
    2002
    
    (Restated)
    
    (Restated)Weighted-Average Common Shares Outstanding
    
    
    21,913
    
    
    
    21,626
    
    
    
    21,880
    
    
    
    21,578Weighted-Average Share Equivalents Outstanding
    
    
    788
    
    
    
    637
    
    
    
    681
    
    
    
    716Weighted-Average Shares and Share
Equivalents Outstanding
    
    
    22,701
    
    
    
    22,263
    
    
    
    22,561
    
    
    
    22,294Net Income
    
    $
    23,575
    
    
    $
    2,892
    
    
    $
    41,670
    
    
    $
    20,270Basic Earnings per Share
    
    $
    1.08
    
    
    $
    0.13
    
    
    $
    1.90
    
    
    $
    0.94Diluted Earnings per Share
    
    $
    1.04
    
    
    $
    0.13
    
    
    $
    1.85
    
    
    $
    0.91
  10.
    
    Income TaxesThe effective tax rate differs from the 35% marginal tax rate principally as
a result of tax-exempt interest income, the dividend received deduction and
other differences in the recognition of revenues and expenses for tax and
financial reporting purposes.11.
    
    Stock-Based CompensationStock-based compensation plans are accounted for under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no compensation
expense is recognized for fixed stock option grants and the Companys stock
purchase plans. The following table illustrates the effect on net income
and earnings per share as if the provisions of statement of Financial
Accounting Standards (SFAS) No. 123 (as amended by SFAS No. 148),
Accounting for Stock-Based Compensation, had been applied for the three
and nine months ended September 30, 2003 and 2002, respectively: (In thousands, except per share data)
    
    Three Months Ended Sept. 30,
    
    Nine Months Ended Sept. 30,2003
    
    
    
    
    
    2003
    
    2002(Restated)
    
    2002
    
    (Restated)
    
    (Restated)Net Income As Reported
    
    $
    23,575
    
    
    $
    2,892
    
    
    $
    41,670
    
    
    $
    20,270Assumed Stock Compensation Cost
    
    
    783
    
    
    
    609
    
    
    
    1,510
    
    
    
    1,114Pro Forma Net Income
    
    $
    22,792
    
    
    $
    2,283
    
    
    $
    40,160
    
    
    $
    19,156Basic Earnings Per Share:As Reported
    
    $
    1.08
    
    
    $
    0.13
    
    
    $
    1.90
    
    
    $
    0.94Pro Forma
    
    $
    1.04
    
    
    $
    0.11
    
    
    $
    1.83
    
    
    $
    0.89Diluted Earnings Per Share:As Reported
    
    $
    1.04
    
    
    $
    0.13
    
    
    $
    1.85
    
    
    $
    0.91Pro Forma
    
    $
    1.01
    
    
    $
    0.10
    
    
    $
    1.78
    
    
    $
    0.86
 12




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##### Table of Contents



12.
    
    Commitments and ContingenciesOn April 30, 2002, U.S. Bank, N.A. d/b/a Firstar Bank (Firstar), a bank to
which one of the Companys insurance subsidiaries, Philadelphia Indemnity
Insurance Company (PIIC), issued insurance coverages, filed a complaint
against PIIC in the United States District Court for the Southern District
of Ohio (Western Division). This matter was reported in Part II, Item 1 of
the Companys Form 10-Q for the period ended June 30, 2002. Firstar
subsequently has requested that the court permit Firstar to amend its
complaint against PIIC, which amended complaint would add a bad faith claim
for compensatory damages and punitive damages in three times the amount of
any compensatory damage award. Firstars original complaint indicated that
its projected damage estimates exceed $75.0 million. The proposed amended
complaint does not specify the amount of Firstars alleged or projected
damages. The Court has not ruled on Firstars request to amend its
complaint.On July 30, 2003, PIIC requested the court to allow PIIC to file a
counterclaim to Firstars complaint against PIIC seeking money damages and
equitable relief relating to certain residual value insurance policies
issued by PIIC to Firstar for policy years 1994, 1995, 1996, 1997 and 1998,
as a result of material misrepresentations by Firstar in its applications
for residual value insurance coverage. The counterclaim seeks money damages
representing the amount of claim payments to date under the policies, less
the amount of premium paid by Firstar, and a declaratory judgment that PIIC
has no obligation to pay pending or future claims arising under the
policies. The Court has not ruled on PIICs request to file a counterclaim
to Firstars complaint.The Company has not recorded a litigation reserve with respect to the
Firstar litigation.The 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.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 and
nine months ended September 30, 2003 and 2002 was ($0.8) million and $3.4
million, respectively and $0.7 million and $4.1 million, respectively. The
related tax effect of Reclassification Adjustments for the three and nine
months ended September 30, 2003 and 2002 was ($0.2) million and ($0.1)
million, respectively and $0.5 million and $1.0 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 13




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##### Table of Contents



a corporate level by the corporate accounting function in conjunction with
other corporate departments, and are included in Corporate.Following is a tabulation of business segment information for the nine and
three months ended September 30, 2003 and 2002. Corporate information is
included to reconcile segment data to the consolidated financial statements
(in thousands): 14




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##### Table of Contents



Nine Months Ended,Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalSeptember 30, 2003 (Restated):Gross Written Premiums
    
    $
    512,871
    
    
    $
    106,818
    
    
    $
    70,926
    
    
    $
    
    
    
    $
    690,615Net Written Premiums
    
    $
    354,297
    
    
    $
    73,132
    
    
    $
    24,687
    
    
    $
    
    
    
    $
    452,116Revenue:Net Earned Premiums
    
    $
    315,010
    
    
    $
    76,981
    
    
    $
    26,396
    
    
    $
    
    
    
    $
    418,387Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,348
    
    
    
    28,348Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,309
    )
    
    
    (1,309
    )Other Income
    
    
    
    
    
    
    
    
    
    
    3,361
    
    
    
    328
    
    
    
    3,689Total Revenue
    
    
    315,010
    
    
    
    76,981
    
    
    
    29,757
    
    
    
    27,367
    
    
    
    449,115Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    202,357
    
    
    
    45,941
    
    
    
    14,493
    
    
    
    
    
    
    
    262,791Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,120
    
    
    
    120,120Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    2,422
    
    
    
    3,552
    
    
    
    5,974Total Losses and Expenses
    
    
    202,357
    
    
    
    45,941
    
    
    
    16,915
    
    
    
    123,672
    
    
    
    388,885Income Before Income Taxes
    
    
    112,653
    
    
    
    31,040
    
    
    
    12,842
    
    
    
    (96,305
    )
    
    
    60,230Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,560
    
    
    
    18,560Net Income
    
    $
    112,653
    
    
    $
    31,040
    
    
    $
    12,842
    
    
    $
    (114,865
    )
    
    $
    41,670Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    283,625
    
    
    $
    1,558,902
    
    
    $
    1,842,527September 30, 2002 (Restated):Gross Written Premiums
    
    $
    360,169
    
    
    $
    82,427
    
    
    $
    65,125
    
    
    $
    
    
    
    $
    507,721Net Written Premiums
    
    $
    285,533
    
    
    $
    75,825
    
    
    $
    31,270
    
    
    $
    
    
    
    $
    392,628Revenue:Net Earned Premiums
    
    $
    206,132
    
    
    $
    60,357
    
    
    $
    25,710
    
    
    $
    
    
    
    $
    292,199Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,727
    
    
    
    27,727Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,935
    )
    
    
    (2,935
    )Other Income
    
    
    
    
    
    
    
    
    
    
    1,294
    
    
    
    (859
    )
    
    
    435Total Revenue
    
    
    206,132
    
    
    
    60,357
    
    
    
    27,004
    
    
    
    23,933
    
    
    
    317,426Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    147,723
    
    
    
    30,551
    
    
    
    13,956
    
    
    

    
    
    
    
    192,230Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,221
    
    
    
    91,221Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    4,430
    
    
    
    4,570Total Losses and Expenses
    
    
    147,723
    
    
    
    30,551
    
    
    
    14,096
    
    
    
    95,651
    
    
    
    288,021Income Before Income Taxes
    
    
    58,409
    
    
    
    29,806
    
    
    
    12,908
    
    
    
    (71,718
    )
    
    
    29,405Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,135
    
    
    
    9,135Net Income
    
    $
    58,409
    
    
    $
    29,806
    
    
    $
    12,908
    
    
    $
    (80,853
    )
    
    $
    20,270Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    215,058
    
    
    $
    1,081,182
    
    
    $
    1,296,240
 15




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##### Table of Contents



Three Months Ended,Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    TotalSeptember 30, 2003 (Restated):Gross Written Premiums
    
    $
    231,169
    
    
    $
    35,071
    
    
    $
    20,186
    
    
    $
    
    
    
    $
    286,426Net Written Premiums
    
    $
    168,262
    
    
    $
    25,765
    
    
    $
    6,338
    
    
    $
    
    
    
    $
    200,365Revenue:Net Earned Premiums
    
    $
    114,191
    
    
    $
    24,418
    
    
    $
    8,067
    
    
    $
    
    
    
    $
    146,676Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,173
    
    
    
    9,173Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474
    
    
    
    474Other Income
    
    
    
    
    
    
    
    
    
    
    1,807
    
    
    
    181
    
    
    
    1,988Total Revenue
    
    
    114,191
    
    
    
    24,418
    
    
    
    9,874
    
    
    
    9,828
    
    
    
    158,311Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    61,277
    
    
    
    13,948
    
    
    
    4,180
    
    
    
    
    
    
    
    79,405Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,542
    
    
    
    41,542Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,364
    
    
    
    1,304
    
    
    
    2,668Total Losses and Expenses
    
    
    61,277
    
    
    
    13,948
    
    
    
    5,544
    
    
    
    42,846
    
    
    
    123,615Income Before Income Taxes
    
    
    52,914
    
    
    
    10,470
    
    
    
    4,330
    
    
    
    (33,018
    )
    
    
    34,696Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    11,121
    
    
    
    11,121Net Income
    
    $
    52,914
    
    
    $
    10,470
    
    
    $
    4,330
    
    
    $
    (44,139
    )
    
    $
    23,575Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    283,507
    
    
    $
    1,558,902
    
    
    $
    1,842,527September 30, 2002:Gross Written Premiums
    
    $
    161,139
    
    
    $
    30,103
    
    
    $
    19,232
    
    
    $
    
    
    
    $
    210,474Net Written Premiums
    
    $
    126,595
    
    
    $
    28,137
    
    
    $
    6,501
    
    
    $
    
    
    
    $
    161,233Revenue:Net Earned Premiums
    
    $
    77,051
    
    
    $
    21,748
    
    
    $
    7,347
    
    
    $
    
    
    
    $
    106,146Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,497
    
    
    
    9,497Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199
    
    
    
    199Other Income
    
    
    
    
    
    
    
    
    
    
    372
    
    
    
    47
    
    
    
    419Total Revenue
    
    
    77,051
    
    
    
    21,748
    
    
    
    7,719
    
    
    
    9,743
    
    
    
    116,261Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    66,457
    
    
    
    7,398
    
    
    
    4,494
    
    
    
    
    
    
    
    78,349Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,343
    
    
    
    32,343Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    1,554
    
    
    
    1,632Total Losses and Expenses
    
    
    66,457
    
    
    
    7,398
    
    
    
    4,572
    
    
    
    33,897
    
    
    
    112,324Income Before Income Taxes
    
    
    10,594
    
    
    
    14,350
    
    
    
    3,147
    
    
    
    (24,154
    )
    
    
    3,937Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,045
    
    
    
    1,045Net Income
    
    $
    10,594
    
    
    $
    14,350
    
    
    $
    3,147
    
    
    $
    (25,199
    )
    
    $
    2,892Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    215,058
    
    
    $
    1,081,182
    
    
    $
    1,296,240
 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
 Restatement of Financial Statements The
Companys previously issued financial statements for the
quarterly periods
ended September 30, 2003 and September 30, 2002 have been restated to record a
portion of the revenue and net income arising from profit commissions under
three reinsurance contracts, one of which had originally been recorded in the
second quarter 2002, another of which had originally been recorded in the
fourth quarter 2003 and another of which should have been recorded in previous
periods. These profit commissions were due to the Company from reinsurers
under a 2001 aggregate stop loss reinsurance contract effective during the
period January 1, 2001 through December 31, 2001, a quota share reinsurance
contract effective during the period April 1, 2003 through December 31, 2003,
and an excess catastrophe reinsurance contract effective during the period June
1, 2003 through May 31, 2004. See Note 2 of Notes to Consolidated Financial
Statements for more information. The impact of this restatement on the previously reported results of operations
for the three and nine months ended September 30, 2003 was to increase net
income by $2.6 million ($0.12 diluted earnings per share) and $3.8 million
($0.17 diluted earnings per share), respectively. The impact of this
restatement on the previously reported results of operations for the nine
months ended September 30, 2002 was to decrease net income by $2.3 million
($0.10 diluted earnings per share). The restatement also resulted in an
increase to net earned premium in the amount of $4.0 million and $5.9 million
for the three and nine months ended September 30, 2003, respectively, and a
decrease to net earned premium in the amount of $3.5 million for the nine
months ended September 30, 2002. References herein to those fiscal periods
that have been restated are to the restated amounts. 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.  
    
    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.  
    
    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 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)  
    
    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, 2002. 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
September 30, 2003, approximately 86.2% and 6.4% 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 90.2%
and 5.6%, respectively, at December 31, 2002. During 2003, 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
September 30, 2003, on a cost basis, investment grade tax-exempt fixed maturity
securities represented 36.4% of the total invested assets, compared to 30.3% as
December 31, 2002. Collateralized mortgage and asset backed securities, on a cost basis, amounted
to $63.7 million and $357.3 million, respectively, as of September 30, 2003,
and $89.2 and $284.1, respectively, as of December 31, 2002. The collateralized
mortgage and asset backed investments are amortizing securities possessing
favorable prepayment and/or extension risk 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 for the three months ended September 30, 2003 and 2002 and
$0.9 million and $0 million, respectively, for the nine months ended September
30, 2003 and 2002. The $0.9 million in 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. The Company primarily
attributes these other than temporary declines in fair value to an uncertain
economic climate, the overhang of corporate governance issues, high profile
bankruptcies and the recent war with Iraq. 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). 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 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) included in earnings as a realized loss in the period the impairment arose.
This evaluation resulted in non-cash realized investment losses of $0.4 million
and $0.3 million, respectively, and $2.6 million and $1.5 million,
respectively, for the three and nine months ended September 30, 2003 and 2002,
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 $1,074.5 million and $854.5
million, as of September 30, 2003 and December 31, 2002, respectively, of which
98.3% of the portfolio is comprised of investment grade securities. Since the
fourth quarter of 2001, U.S. investment grade securities have 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. While these circumstances
have the potential to impact investment grade securities, the high quality of
the Companys overall AA+ rated fixed maturity portfolio have mitigated
potential volatility. The Company had fixed maturity investments with
unrealized losses amounting to $12.7 million and $9.2 million as of September
30, 2003 and December 31, 2002, respectively. Of these amounts, interests in
securitized assets had unrealized losses amounting to $10.6 million and $7.3
million as of September 30, 2003 and December 31, 2002, respectively, and
investments in aircraft collateralized Enhanced Equipment Trust Certificates
(EETCs) had unrealized losses amounting to $0.7 and $1.3 million as of
September 30, 2003 and December 31, 2002, 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. With respect to the EETCs, these investments are current on interest and
sinking fund payments, and are subjected to a quarterly impairment review which
includes performing a liquidation collateral analysis that incorporates various
stress scenarios impacting the securitys implied loan-to-value levels. The following table identifies the period of time securities with an unrealized
loss at September 30, 2003 have continuously been in an unrealized loss
position. Included in the amounts shown in the table are $8.8 million of
unrealized losses due to non-investment grade fixed maturity securities having
a fair value of $17.8 million. No issuer of securities or industry represents
more than 4.3% and 10.7%, respectively, of the total estimated fair value, or
19.0% and 37.4%, 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 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(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
    
    $
    0.2
    
    
    $
    0.4
    
    
    $
    0.6
    
    
    $
    0.3
    
    
    $
    0.94  6 months
    
    
    0.6
    
    
    
    1.3
    
    
    
    1.9
    
    
    
    0.1
    
    
    
    2.07  9 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.410  12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13  18 months
    
    
    
    
    
    
    3.2
    
    
    
    3.2
    
    
    
    
    
    
    
    3.219  24 months
    
    
    1.3
    
    
    
    2.6
    
    
    
    3.9
    
    
    
    
    
    
    
    3.9> 24 months
    
    
    
    
    
    
    3.1
    
    
    
    3.1
    
    
    
    
    
    
    
    3.1Total Gross
Unrealized Losses
    
    $
    2.1
    
    
    $
    10.6
    
    
    $
    12.7
    
    
    $
    0.8
    
    
    $
    13.5Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    70.7
    
    
    $
    92.7
    
    
    $
    163.4
    
    
    $
    16.4
    
    
    $
    179.8
 19




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) The following table presents certain information with respect to individual
securities with a significant unrealized loss position as of September 30,
2003. Significant Unrealized Losses by Security(in millions)Issuer
    
    Security Type
    
    Carrying Value
    
    Unrealized LossContinental Airlines 2000-1-C-2
    
    Fixed Maturity
    
    $
    2.4
    
    
    $
    0.6Conseco Fin SEC Corp 2000-4 M1
    
    Fixed Maturity  Interest in Securitized Assets
    
    
    0.5
    
    
    
    1.5Conseco Fin SEC Corp SER 2000-4 M2
    
    Fixed Maturity  Interest in Securitized Assets
    
    
    0.2
    
    
    
    1.0Greentree Financial Corp. 99-2 B1
    
    Fixed Maturity  Interest in Securitized Assets
    
    
    0.4
    
    
    
    2.6Nextcard CRCN MNT 2001-1 CLB144A
    
    Fixed Maturity  Interest in Securitized Assets
    
    
    3.2
    
    
    
    1.7Scotia Pacific Co LLC
    
    Fixed Maturity
    
    
    1.4
    
    
    
    0.7Waterside Loan TR JR NT CLO 144A
    
    Fixed Maturity  Interest in Securitized Assets
    
    
    2.2
    
    
    
    0.8$
    10.3
    
    
    $
    8.9
 For the nine months ended September 30, 2003 the Companys gross loss on the
sale of fixed maturity and equity securities amounted to $0.3 million and $0.7
million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $14.5 million and $3.5 million,
respectively. During the three months ended September 30, 2003 the Companys
gross loss on the sale of fixed maturity and equity securities amounted to $0.2
million and $0 million, respectively. The fair value of the fixed maturity and
equity securities at the time of sale was $13.0 million and $0.1 million,
respectively. The decision to sell these securities was based upon
managements assessment of economic conditions. Results of Operations (Nine Months ended September 30, 2003 (Restated) vs.
September 30, 2002 (Restated)) Premiums:Gross written premiums grew $182.9 million (36.0%) to $690.6
million for the nine months ended September 30, 2003 from $507.7 million for
the same period of 2002; gross earned premiums grew $165.2 million (41.3%) to
$564.9 million for the nine months ended September 30, 2003 from $399.7 million
for the same period of 2002; net written premiums increased $59.5 million
(15.2%) to $452.1 million for the nine months ended September 30, 2003 from
$392.6 million for the same period of 2002; and net earned premiums grew $126.2
million (43.2%) to $418.4 million in 2003 from $292.2 million in 2002. The respective gross written premium increases for commercial lines, specialty
lines and personal lines segments for the nine months ended September 30, 2003
vs. September 30, 2002 amount to $152.7 million (42.4%), $24.4 million (29.6%)
and $5.8 million (8.9%), respectively. 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.  
    
    In-force policy counts have increased 22.6% and 37.6% for the
commercial and specialty lines segments, respectively, primarily as a
result of the factors discussed above. Policy counts have decreased
approximately 1.0% 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. Firming prices in the 20




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)  property and casualty industry resulting in weighted average rate increases
on renewal business approximating 4.9%, 11.8%, and 9.2% for the commercial,
specialty and the personal lines segments, respectively. The respective net written premium changes for commercial lines, specialty
lines and personal lines segments for the nine months ended September 30, 2003
vs. September 30, 2002 amount to $68.8 million (24.1%), -$2.7 million (-3.6%)
and -$6.6 million (-21.1%) respectively. The differing percentage changes in
net written premiums versus gross written premiums for the commercial lines,
specialty lines and personal lines segments during the period results from:  
    
    The Company entering into a Quota Share reinsurance agreement
(effective April 1, 2003) covering all of the Companys lines of
business. Under this agreement, the Company cedes 22% of its net
written premium (including 22% of the net unearned premium reserves at
April 1, 2003) and loss and loss adjustment expenses. The Company
also 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 reduced by the reinsurers expense allowance and the Companys
ceding commission allowance in a Funds Held Payable to Reinsurer
account. This Funds Held Payable to Reinsurer account is also reduced
by ceded paid losses and loss adjustment expenses under this
agreement, and increased by an interest credit. In addition, the
agreement provides that a profit commission will be paid to the
Company upon commutation equal to the positive balance in the Funds
Held Payable to Reinsurer account. During the nine months ended
September 30, 2003, the Company ceded $156.0 million of written
premium, which included unearned premium reserves of $63.6 million at
April 1, 2003.  
    
    Relatively lower reinsurance costs (ceded premiums) as a result of
increasing the Companys loss retention from $0.5 million to $2.0
million on its commercial lines per-risk property reinsurance treaty
and from $0.9 million to $1.0 million on its excess liability
reinsurance treaty effective January 1, 2003. Net Investment IncomeNet investment income approximated $28.3 million for
the nine months ended September 30, 2003 and $27.7 million for the same period
of 2002. Total investments grew to $1,161.0 million at September 30, 2003 from
$859.6 million at September 30, 2002. 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 4.0
years at September 30, 2003, compared to 3.3 years at September 30, 2002 as a
result of investing in intermediate to long tax exempt fixed income securities
due to perceived value. Additionally, the Company has invested approximately
$57.5 million in overall AAA rated floating rate and shorter amortizing
securities to reduce interest rate risk with the expectation of reinvesting
these funds into longer duration investments at higher future fixed income
rates. The Companys tax equivalent book yield on its fixed income holdings
was 5.0% at September 30, 2003, compared to 5.7% at September 30, 2002 as a
result of investing in the capital market environment which has existed during
most of 2002 and 2003 (low U.S. Treasury yields). Net investment income was
reduced by $1.3 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 3.27% and
8.01% for the nine months ended September 30, 2003 and 2002, respectively, and
was similar to the Lehman Brothers Intermediate Aggregate Bond Index (the
Index) total return of 3.37% and 7.87% for the same periods, respectively. Net Realized Investment Gain (Loss):Net realized investment losses were
$1.3 million for the nine months ended September 30, 2003 and $2.9 million for
the same period in 2002. The Company realized net investment gains of $1.5
million and $0.7 million from the sale of fixed maturity and equity securities,
respectively, for the nine months ended September 30, 2003, and $2.6 million
and $0.9 million in non-cash realized investment losses for fixed maturity and
common stock investments, respectively, as a result of the Companys impairment
evaluation. The Company realized $1.2 million in net investment gains from the sale of
fixed maturity securities and $2.6 million in net investment losses from the
sale of common stock equity securities for the nine months ended September 30,
2002. Additionally, $1.5 million in non-cash realized losses were recorded for
fixed maturity investments as a result of the Companys impairment evaluation. 21




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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) Other Income: Other income approximated $3.7 million for the nine months
ended September 30, 2003 and $0.4 million for the same period of 2002. Other
income primarily consists of commissions earned on brokered personal lines
business, and to a lesser extent brokered commercial lines business. The
Company is seeking to increase brokering activities in its personal lines
segment as it is restricting new business and not renewing certain policies in
designated areas of Florida as a result of its property exposures in these
areas and related catastrophe loss considerations. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $70.6 million (36.7%) to $262.8 million for the nine months
ended September 30, 2003 from $192.2 million for the same period of 2002 and
the loss ratio increased to 65.8% in 2003 from 65.0% in 2002. This increase in
net loss and loss adjustment expenses was due to the 43.2% growth in net earned
premiums, the $33.0 million increase in the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses on residual
value polices issued during the years 1998 through 2002 and offset in part by
the 2002 and 2003 price increases which have exceeded loss trends (see
Premiums). Additionally, during the period the Company ceded $40.3 million in net loss and
loss adjustment expenses pursuant to the quota share reinsurance agreement (see
Premiums) and decreased the gross and net liability for unpaid loss and loss
adjustment expenses for accident year 2002, principally in the property line of
its commercial package products, by approximately $9.0 million due to better
than expected loss experience. As of September 30, 2003, the Company has estimated a total liability for
unpaid loss and loss adjustment expenses for the residual value policies of
$51.5 million ($51.3 million net of reinsurance). The residual value policies
provide coverage guaranteeing the value of a leased automobile at the lease
termination, which can be up to five years from lease inception. As part of
the Companys monitoring and evaluation process, a consulting firm was engaged
during the second quarter of 2003 to aid in evaluating the ultimate potential
loss exposure under these policies. Based upon the result of the indications
and subsequent evaluation by the Company and changes in the Companys
assumptions relating to future frequency and severity of losses, the estimate
for unpaid loss and loss adjustment expenses was increased. The Company
primarily attributes this deterioration to the following factors that led to a
softening of prices in the used car market subsequent to the September 11, 2001
terrorist attacks: prolonged 0% new car financing rates and other incentives
which increased new car sales and the volume of trade-ins, daily rental units
being sold into the market earlier and in greater numbers than expected further
adding to the oversupply of used cars; and the overall general economic
conditions. As of September 30, 2003, approximately 48,000 leases were
outstanding under the Companys residual value policies. Acquisition Costs and Other Underwriting Expenses:Acquisition costs and
other underwriting expenses increased $28.9 million (31.7%) to $120.1 million
for the nine months ended September 30, 2003 from $91.2 million for the same
period of 2002. This increase was due primarily to the 43.2% growth in net
earned premiums and in part to the Company establishing a $1.4 million
allowance for doubtful reinsurance receivables based upon its review of
collectibility from its reinsurers. During the period the Company ceded $71.5
million of net earned premium and earned $29.6 million in ceding commission
under the quota share reinsurance agreement (see Premiums). Other Operating Expenses: Other operating expenses increased $1.4 million
to $6.0 million for the nine months ended September 30, 2003 from $4.6 million
for the same period of 2002 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 nine months
ended September 30, 2003 and 2002 was 30.8% and 31.1%, 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. 22




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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) Results of Operations (Three Months ended September 30, 2003 (Restated) vs.
September 30, 2002) Premiums:Gross written premiums grew $75.9 million (36.1%) to $286.4
million for the three months ended September 30, 2003 from $210.5 million for
the same period of 2002; gross earned premiums grew $62.4 million (41.8%) to
$211.7 million for the three months ended September 30, 2003 from $149.3
million for the same period of 2002; net written premiums increased $39.2
million (24.3%) to $200.4 million for the three months ended September 30, 2003
from $161.2 million for the same period of 2002; and net earned premiums grew
$40.6 million (38.3%) to $146.7 million in 2003 from $106.1 million in 2002. The respective gross written premium increases for commercial lines, specialty
lines and personal lines segments for the three months ended September 30, 2003
vs. September 30, 2002 amount to $69.9 million (43.5%), $5.0 million (16.5%)
and $1.0 million (5.0%), respectively. 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.  
    
    In force policy counts have increased 22.6% and 37.6% for the
commercial and specialty lines segments, respectively, primarily as a
result of the factors discussed above. Policy counts have decreased
approximately 1.0% 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. Rate increases on renewal business have approximated
3.7%, 7.4%, and 11.7% for the commercial, specialty and the personal
lines segments, respectively. As a result of recent increased
competition in the Companys commercial and specialty lines segment
price increases have moderated. The Company anticipates this trend of
moderating price increases to continue for the foreseeable future. Additionally, the respective net written premium changes for commercial lines,
specialty lines and personal lines segments for the three months ended
September 30, 2003 vs. September 30, 2002 amount to $41.7 million (32.9%),
($2.4) million (-8.4%) and ($0.2) million (-2.5%) respectively. The differing
percentage changes in net written premiums versus gross written premiums during
the period results from:  
    
    The Company entering into a Quota Share reinsurance agreement
(effective April 1, 2003) covering all of the Companys lines of
business. Under this agreement, the Company cedes 22% of its net
written premium (including 22% of net unearned premium reserves at
April 1, 2003) and loss and loss adjustment expenses. The Company
also receives a provisional commission of 33.0%, adjusted prorata
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. In addition, the
agreement provides that a profit commission will be paid to the
Company upon commutation equal to the positive balance in the Funds
Held Payable to Reinsurer account. During the three months ended
September 30, 2003, the Company ceded $53.6 million of written
premium. 23




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)  
    
    Relatively lower reinsurance costs (ceded premiums) as a result of
increasing the Companys loss retention from $0.5 million to $2.0
million on its commercial lines per-risk property reinsurance treaty,
and from $0.9 million to $1.0 million on its excess liability
reinsurance treaty effective January 1, 2003. Net Investment IncomeNet investment income approximated $9.2 million for
the three months ended September 30, 2003 and $9.5 million for the same period
of 2002. Total investments grew to $1,161.0 million at September 30, 2003 from
$859.6 million at September 30, 2002. The Companys average duration of its
fixed income portfolio approximated 4.0 years at September 30, 2003, compared
to 3.3 years at September 30, 2002 as a result of investing in intermediate to
long tax exempt fixed income securities due to perceived value. Additionally,
the Company has invested approximately $57.5 million in overall AAA rated
floating rate and shorter amortizing securities to reduce interest rate risk
with the expectation of reinvesting these funds into longer duration
investments at higher future fixed income rates. The Companys tax equivalent
book yield on its fixed income holdings was 5.0% at September 30, 2003,
compared to 5.7% at September 30, 2002 as a result of investing in the capital
market environment which has existed during most of 2002 and 2003 (low vs.
treasury yields). Net investment income was reduced by $0.8 million due to the
interest credit on the Funds Held to Reinsurer Account balance pursuant to the
Companys quota share reinsurance agreement (see Premiums). The total return, which includes the effect of realized and unrealized gains
and losses, of the Companys fixed income portfolio was 0.58% and 3.72% for the
three months ended September 30, 2003 and 2002, respectively, was similar to
the Lehman Brothers Intermediate Aggregate Bond Index (the Index) total
return of 0.18% and 3.79% for the same periods, respectively. Net Realized Investment Gain (Loss):Net realized investment gains were
$0.5 million for the three months ended September 30, 2003 and $0.2 million for
the same period in 2002. The Company realized net investment gains of $0.3
million and $0.6 million from the sale of fixed maturity and equity securities,
respectively, for the three months ended September 30, 2003, and $0.4 million
in non-cash realized investment losses for fixed maturity investments as a
result of the Companys impairment evaluation. The Company realized net investment losses of $0.3 million, from the sales of
common stock equity securities and $0.8 million in net investment gains from
the sales of fixed maturity securities during the three months ended September
30, 2002. Additionally, $0.3 million in non-cash realized investment losses
were recorded for fixed maturity investments as a result of the Companys
impairment evaluation during the three months ended September 30, 2002. Other Income: Other income approximated $2.0 million for the three months
ended September 30, 2003 and $0.4 million for the same period of 2002. Other
income primarily consists of commissions earned on brokered personal lines
business, and to a lesser extent brokered commercial lines business. The
Company is seeking to increase brokering activities in its personal lines
segment as it is restricting new business and not renewing certain policies in
designated areas of Florida as a result of its property exposures in these
areas and related catastrophe loss considerations. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $1.1 million (1.4%) to $79.4 million for the three months
ended September 30, 2003 from $78.3 million for the same period of 2002 and the
loss ratio decreased to 54.1% in 2003 from 73.8% in 2002. This increase in net
loss and loss adjustment expenses was due to the 38.3% growth in net earned
premiums, partially offset by 2002 and 2003 price increases which have exceeded
loss trends and the Company increasing loss and loss adjustment expenses
incurred by $27.0 million ($15.0 million net of reinsurance recoverables) for
the three months ended September 30, 2002 as a result of changes in estimates
of insured events in prior years. Such adverse loss development was due to
losses emerging at a higher rate on automobile leases expiring on residual
value policies than had been originally anticipated when the reserves were
estimated, primarily as a result of the deterioration in the value of used
cars. 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
(Continued) Additionally, during the period the Company ceded $21.3 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 $9.2 million (28.5%) to $41.5 million for
the three months ended September 30, 2003 from $32.3 million for the same
period of 2002. This increase was due primarily to the 38.3% growth in net
earned premiums and in part to the Company establishing a $1.4 million
allowance for doubtful reinsurance receivables based upon its review of
collectibility from its reinsurers. During the period the company ceded $38.4
million in net earned premiums and earned $16.3 million in ceding commission
under the quota share reinsurance agreement (see Premiums). Other Operating Expenses: Other operating expenses increased $1.1 million
to $2.7 million for the three months ended September 30, 2003 from $1.6 million
for the same period of 2002. The increase in other operating expenses was
primarily due to the increase in brokering activities resulting in an increase
in the amount of broker commissions paid (see Other Income above). Income Tax Expense:The Companys effective tax rate for the three months
ended September 30, 2003 and 2002 was 32.1% and 26.5%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities. The lower effective tax rates are
principally due to the relative proportion of tax exempt income to total income
before tax. Liquidity and Capital Resources For the nine months ended September 30, 2003, the Companys investments
experienced unrealized investment appreciation of $2.1 million, net of the
related deferred tax expense of $1.1 million. At September 30, 2003, the
Company had total investments with a carrying value of $1,161.0 million, of
which 92.6% consisted of investments 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 7.4% of the Companys total investments consisted
primarily of publicly traded common stock securities. The Company produced net cash from operations of $253.0 million and $163.5
million, respectively, for the nine months ended September 30, 2003 and 2002.
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 nine months ended September 30, 2003 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 $148.7 million and $115.6 million,
respectively, for the nine months ended September 30, 2003 and 2002.
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 September 30, 2003 the insurance
subsidiaries borrowing capacity was $73.2 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 $49.7 million at September 30, 2003, bear interest at
adjusted LIBOR, mature twelve months from inception and are collateralized by
$62.2 million of the Companys fixed maturity securities. The weighted-average
interest rate on borrowings outstanding as of September 30, 2003 was 1.2%. 25




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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) 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. 26




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Item 4. Controls and Procedures
 (a) Evaluation
of Disclosure Controls and Procedures. The Companys disclosure
controls and procedures, as that term is defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), are designed with the
objective of providing reasonable assurance that information required
to be disclosed in the Companys reports filed or submitted
under the Exchange Act, such as this report, is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission (the
SEC). In designing and evaluating the Companys
disclosure controls and procedures, management recognizes that any
disclosure controls and procedures, no matter how well designed and
operated, can provide only reasonable, rather than absolute, assurance
of achieving the desired control objectives. An evaluation was performed in October 2003 by management, with the
participation of the Companys chief executive officer (CEO) and chief
financial officer (CFO), of the effectiveness of the design and operation of
the Companys disclosure controls and procedures as of the end of the period
covered by the Companys previously filed Quarterly Report on
Form 10-Q for the Quarterly Period Ended September 30, 2003. Based on this evaluation, the CEO and CFO had
concluded that, as of the end of the period covered by such Quarterly
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 such Quarterly Report on Form 10-Q was
being prepared. In connection with the Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2004, an evaluation was performed by
management, with the participation of the Companys chief executive officer
(CEO) and chief financial officer (CFO), of the effectiveness of the design
and operation of the Companys disclosure controls and procedures as of the end
of the period covered by such Quarterly Report. Based on this evaluation, the
CEO and CFO have concluded that, as of the end of such period, the Companys
disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules
and forms, subject to the matters set forth in the following paragraph. As a result of the Companys restatement of certain of its financial
statements, as referred to in Item 2  Restatement of Financial Statements of
this report, to include a portion of its revenue and net income in prior
periods arising from profit commissions under two reinsurance contracts, the
Company has determined that it should enhance its documentation and research as
to its understanding of appropriate accounting for reinsurance transactions. In
connection therewith, the Company:  1.
    
    Formed a new reinsurance contract subcommittee with senior members from
appropriate departments within the Company to review, discuss and make
appropriate conclusions with respect to the documentation requirements
and the accounting for the Companys reinsurance contracts;2.
    
    Will, as promptly as practicable, add an additional accounting professional
to its staff whose responsibility will be to spend substantially all of
his or her working time researching and documenting technical accounting
matters (including reinsurance matters), as well as supporting other
members of the Companys accounting staff and the reinsurance contract
subcommittee. The Companys independent auditors, PricewaterhouseCoopers LLP, have
advised the Company that there is a material weakness in the Companys internal
controls over the accounting and reporting for reinsurance contracts. The
Company anticipates that its implementation of the matters set forth in the
immediately preceding paragraph will correct the material weakness. (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. 27




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
  
 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 2002,
dated August 19, 200431.2*
    
    Certification of the Companys chief financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated August 19, 200432.1*
    
    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 2002, dated
August 19, 200432.2*
    
    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, dated August
19, 2004
  *
    
    Filed herewith.b.
    
    The Company did not file any reports on Form 8-K during the
quarterly period ended September 30, 2003 but did furnish the
following report: Date of Report
    
    Item ReportedJuly 15, 2003
    
    Second Quarter Results June 30, 2003 and Regulation FD Disclosure
 28




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SIGNATURE 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.RegistrantDate August 19, 2004
    
    
    
    Craig P. KellerCraig P. KellerExecutive Vice President, Secretary,Treasurer and Chief Financial Officer(Principal Financial and AccountingOfficer)
 29