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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2005 Commission File Number 0-22280 PHILADELPHIA CONSOLIDATED HOLDING CORP.  PENNSYLVANIA
    
    23-2202671(State of Incorporation)
    
    (IRS Employer Identification No.)
 One Bala Plaza, Suite 100
Bala Cynwyd, Pennsylvania 19004
(610) 617-7900    Address, including zip code and telephone number,
including area code, of registrants principal executive offices) 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:     T     NO:     £ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES:     T     NO:     £ Indicate the number of shares outstanding of each of the issuers classes of common stock as
of May 3, 2005. Common Stock, no par value, 22,927,110 shares outstanding




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIESINDEX
For the Quarterly Period Ended March 31, 2005 Part I  Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets  March 31, 2005 and
December 31, 2004
    
    
    3Consolidated Statements of Operations and Comprehensive
Income  For the three months ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Changes in Shareholders Equity  For
the three months ended March 31, 2005 and year ended
December 31, 2004
    
    
    5Consolidated Statements of Cash Flows  For the three
months ended March 31, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-14Item 2.Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15-24Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.Controls and Procedures
    
    
    26Part II  Other InformationItem 1.Legal Proceedings
    
    
    27Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3.Defaults Upon Senior Securities
    
    
    27Item 4.Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.Other Information
    
    
    27Item 6.Exhibits
    
    
    28Signatures
    
    
    29BY-LAWS OF PHILADELPHIA CONSOLIDATED HOLDING CORP.FLORIDA ONLY EXCESS CATASTROPHE REINSURANCE CONTRACT$50 MILLION EXCESS OF $90 MILLION FLORIDA ONLY CATASTROPHE REINSURANCE CONTRACT$50 MILLION EXCESS OF $140 MILLION FLORIDA ONLY CATASTROPHE EXCESS REINSURANCE$5 MILLION EXCESS OF $190 MILLION FLORIDA ONLY CATASTROPHE EXCESS REINSURANCEUNDERLYING EXCESS CATASTROPHE REINSURANCE CONTRACT EFFECTIVE JULY 1, 2004CASUALTY EXCESS OF LOSS CONTRACT EFFECTIVE JANUARY 1, 2005ADDENDUM NUMBER 2 TO THE PROPERTY EXCESS OF LOSS CONTRACT EFFECTIVE JANUARY 1, 2005PRELIMINARY ENDORSEMENT NO. 2 TO THE PROPERTY PER RISK 1ST AND 2ND EXCESS REINSURANCE CONTRACT2003 WHOLE ACCOUNT NET QUOTA SHARE REINSURANCE COMMUTATION AND RELEASE AGREEMENT2003 WHOLE ACCOUNT NET QUOTA SHARE REINSURANCE COMMUTATION AND RELEASE AGREEMENTCERTIFICATION OF THE COMPANY'S CHIEF EXECUTIVE OFFICERCERTIFICATION OF THE COMPANY'S CHIEF FINANCIAL OFFICERCERTIFICATION OF THE COMPANY'S CEO PURSUANT TO SECTION 906CERTIFICATION OF THE COMPANY'S CFO PURSUANT TO SECTION 906
   
 2




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) As ofMarch 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSINVESTMENTS:FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $1,492,743 AND $1,287,094)
    
    $
    1,483,259
    
    
    $
    1,299,704EQUITY SECURITIES AT MARKET (COST $118,830
AND $110,601)
    
    
    122,593
    
    
    
    128,447TOTAL INVESTMENTS
    
    
    1,605,852
    
    
    
    1,428,151CASH AND CASH EQUIVALENTS
    
    
    111,694
    
    
    
    195,496ACCRUED INVESTMENT INCOME
    
    
    15,903
    
    
    
    13,475PREMIUMS RECEIVABLE
    
    
    212,897
    
    
    
    229,502PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
    
    
    321,090
    
    
    
    429,850DEFERRED INCOME TAXES
    
    
    29,738
    
    
    
    14,396DEFERRED ACQUISITION COSTS
    
    
    99,650
    
    
    
    91,647PROPERTY AND EQUIPMENT, NET
    
    
    22,151
    
    
    
    21,281GOODWILL
    
    
    25,724
    
    
    
    25,724OTHER ASSETS
    
    
    26,242
    
    
    
    36,134TOTAL ASSETS
    
    $
    2,470,941
    
    
    $
    2,485,656LIABILITIES AND SHAREHOLDERS EQUITYPOLICY LIABILITIES AND ACCRUALS:UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
    
    $
    1,011,993
    
    
    $
    996,667UNEARNED PREMIUMS
    
    
    528,942
    
    
    
    531,849TOTAL POLICY LIABILITIES AND ACCRUALS
    
    
    1,540,935
    
    
    
    1,528,516FUNDS HELD PAYABLE TO REINSURER
    
    
    49,294
    
    
    
    131,119LOANS PAYABLE
    
    
    
    
    
    
    33,406PREMIUMS PAYABLE
    
    
    59,556
    
    
    
    48,111OTHER LIABILITIES
    
    
    124,948
    
    
    
    100,347TOTAL LIABILITIES
    
    
    1,774,733
    
    
    
    1,841,499COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDINGCOMMON STOCK, NO PAR VALUE,
100,000,000 SHARES AUTHORIZED, 22,921,887 AND
22,273,917 SHARES ISSUED AND OUTSTANDING
    
    
    326,996
    
    
    
    292,856NOTES RECEIVABLE FROM SHAREHOLDERS
    
    
    (9,610
    )
    
    
    (5,465
    )ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
    
    
    (3,719
    )
    
    
    19,796RETAINED EARNINGS
    
    
    382,541
    
    
    
    336,970TOTAL SHAREHOLDERS EQUITY
    
    
    696,208
    
    
    
    644,157TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,470,941
    
    
    $
    2,485,656
 The accompanying notes are an integral part of the consolidated financial statements. 3




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited) For the Three MonthsEnded March 31,2005
    
    
    2004REVENUE:NET EARNED PREMIUMS
    
    $
    236,755
    
    
    $
    171,422NET INVESTMENT INCOME
    
    
    13,491
    
    
    
    9,973NET REALIZED INVESTMENT GAIN
    
    
    10,798
    
    
    
    1,778OTHER INCOME
    
    
    480
    
    
    
    1,382TOTAL REVENUE
    
    
    261,524
    
    
    
    184,555LOSSES AND EXPENSES:LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    154,464
    
    
    
    130,686NET REINSURANCE RECOVERIES
    
    
    (27,993
    )
    
    
    (34,443
    )NET LOSS AND LOSS ADJUSTMENT EXPENSES
    
    
    126,471
    
    
    
    96,243ACQUISITION COSTS AND OTHER UNDERWRITING
EXPENSES
    
    
    63,948
    
    
    
    47,354OTHER OPERATING EXPENSES
    
    
    3,939
    
    
    
    1,769TOTAL LOSSES AND EXPENSES
    
    
    194,358
    
    
    
    145,366INCOME BEFORE INCOME TAXES
    
    
    67,166
    
    
    
    39,189INCOME TAX EXPENSE (BENEFIT):CURRENT
    
    
    24,275
    
    
    
    10,950DEFERRED
    
    
    (2,680
    )
    
    
    1,478TOTAL INCOME TAX EXPENSE
    
    
    21,595
    
    
    
    12,428NET INCOME
    
    $
    45,571
    
    
    $
    26,761OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:HOLDING GAIN (LOSS) ARISING DURING PERIOD
    
    $
    (16,496
    )
    
    $
    7,568RECLASSIFICATION ADJUSTMENT
    
    
    (7,019
    )
    
    
    (1,156
    )OTHER COMPREHENSIVE INCOME, (LOSS)
    
    
    (23,515
    )
    
    
    6,412COMPREHENSIVE INCOME
    
    $
    22,056
    
    
    $
    33,173PER AVERAGE SHARE DATA:BASIC EARNINGS PER SHARE
    
    $
    2.03
    
    
    $
    1.22DILUTED EARNINGS PER SHARE
    
    $
    1.91
    
    
    $
    1.16WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
    
    
    22,424,409
    
    
    
    22,018,270WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
    
    
    1,436,673
    
    
    
    1,082,611WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
    
    
    23,861,082
    
    
    
    23,100,881
 The accompanying notes are an integral part of the consolidated financial statements. 4




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) For the ThreeMonths EndedMarch 31, 2005
    
    
    For the Year Ended(Unaudited)
    
    
    December 31, 2004COMMON SHARES:BALANCE AT BEGINNING OF YEAR
    
    
    22,273,917
    
    
    
    22,007,552EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    156,419
    
    
    
    67,250ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET
    
    
    491,551
    
    
    
    199,115BALANCE AT END OF PERIOD
    
    
    22,921,887
    
    
    
    22,273,917COMMON STOCK:BALANCE AT BEGINNING OF YEAR
    
    $
    292,856
    
    
    $
    281,088EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    5,772
    
    
    
    2,183ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
    
    
    28,368
    
    
    
    9,585BALANCE AT END OF PERIOD
    
    
    326,996
    
    
    
    292,856NOTES RECEIVABLE FROM SHAREHOLDERS:BALANCE AT BEGINNING OF YEAR
    
    
    (5,465
    )
    
    
    (5,444
    )NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
    
    
    (4,702
    )
    
    
    (2,326
    )COLLECTION OF NOTES RECEIVABLE
    
    
    557
    
    
    
    2,305BALANCE AT END OF PERIOD
    
    
    (9,610
    )
    
    
    (5,465
    )ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:BALANCE AT BEGINNING OF YEAR
    
    
    19,796
    
    
    
    16,715OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
    
    
    (23,515
    )
    
    
    3,081BALANCE AT END OF PERIOD
    
    
    (3,719
    )
    
    
    19,796RETAINED EARNINGS:BALANCE AT BEGINNING OF YEAR
    
    
    336,970
    
    
    
    253,287NET INCOME
    
    
    45,571
    
    
    
    83,683BALANCE AT END OF PERIOD
    
    
    382,541
    
    
    
    336,970TOTAL SHAREHOLDERS EQUITY
    
    $
    696,208
    
    
    $
    644,157
 The accompanying notes are an integral part of the consolidated financial statements. 5




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited) For the Three Months Ended March 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME
    
    $
    45,571
    
    
    $
    26,761ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:NET REALIZED INVESTMENT GAIN
    
    
    (10,798
    )
    
    
    (1,778
    )DEPRECIATION AND AMORTIZATION EXPENSE
    
    
    3,902
    
    
    
    3,131DEFERRED INCOME TAX EXPENSE (BENEFIT)
    
    
    (2,680
    )
    
    
    1,478CHANGE IN PREMIUMS RECEIVABLE
    
    
    16,605
    
    
    
    14,228CHANGE IN PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES, NET OF FUNDS HELD
PAYABLE TO REINSURER
    
    
    26,935
    
    
    
    10,291CHANGE IN OTHER RECEIVABLES
    
    
    (2,428
    )
    
    
    (1,188
    )CHANGE IN DEFERRED ACQUISITION COSTS
    
    
    (8,003
    )
    
    
    (13,069
    )CHANGE IN INCOME TAXES PAYABLE
    
    
    20,885
    
    
    
    8,612CHANGE IN OTHER ASSETS
    
    
    12,176
    
    
    
    (895
    )CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES
    
    
    15,326
    
    
    
    46,449CHANGE IN UNEARNED PREMIUMS
    
    
    (2,907
    )
    
    
    11,220CHANGE IN OTHER LIABILITIES
    
    
    7,885
    
    
    
    1,753TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS
    
    
    3,365
    
    
    
    387NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    125,834
    
    
    
    107,380CASH FLOWS FROM INVESTING ACTIVITIES:PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES
    
    
    59,637
    
    
    
    17,051PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES
    
    
    50,062
    
    
    
    33,972PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES
    
    
    91,619
    
    
    
    8,853COST OF FIXED MATURITIES ACQUIRED
    
    
    (312,503
    )
    
    
    (146,682
    )COST OF EQUITY SECURITIES ACQUIRED
    
    
    (89,799
    )
    
    
    (26,889
    )PURCHASE OF PROPERTY AND EQUIPMENT, NET
    
    
    (1,876
    )
    
    
    (2,338
    )NET CASH USED FOR INVESTING ACTIVITIES
    
    
    (202,860
    )
    
    
    (116,033
    )CASH FLOWS FROM FINANCING ACTIVITIES:REPAYMENTS ON LOANS PAYABLE
    
    
    (44,787
    )
    
    
    (21,504
    )PROCEEDS FROM LOANS PAYABLE
    
    
    11,381
    
    
    
    20,084PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
    
    
    2,407
    
    
    
    432PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE
    
    
    557
    
    
    
    373PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
    
    
    23,666
    
    
    
    69NET CASH USED BY FINANCING ACTIVITIES
    
    
    (6,766
    )
    
    
    (546
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (83,802
    )
    
    
    (9,199
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    195,496
    
    
    
    73,942CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    111,694
    
    
    $
    64,743CASH PAID DURING THE PERIOD FOR:INCOME TAXES
    
    $
    
    
    
    $
    2,650INTEREST
    
    $
    165
    
    
    $
    145NON-CASH TRANSACTIONS:ISSUANCE (FORFEITURES) OF SHARES PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE
    
    $
    4,702
    
    
    $
    (25
    )
 The accompanying notes are an integral part of the consolidated financial statements. 6




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)  1.
    Basis of PresentationThe consolidated financial statements for the quarterly period ended March 31, 2005 are
unaudited, but in the opinion of management have been prepared on the same basis as the annual
audited consolidated financial statements and reflect all adjustments, consisting of normal
recurring adjustments and accruals, necessary for a fair statement of the information set forth
therein. The results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the operating results to be expected for the full year or any other
period. Certain prior years amounts have been reclassified for comparative purposes.These consolidated financial statements should be read in conjunction with the financial
statements and notes included in the Companys Annual Report on Form 10-K as of and for the year
ended December 31, 2004.2.
    Stock-Based CompensationStock-based compensation plans are accounted for under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, no compensation expense is recognized for fixed stock option grants and the
Companys stock purchase plans. The following table illustrates the effect on net income and
earnings per share as if the provisions of statement of Financial Accounting Standards (SFAS)
No. 123 (as amended by SFAS No. 148), Accounting for Stock-Based Compensation, had been
applied for the three months ended March 31, 2005 and 2004, respectively: (In thousands, except per share data)
    
    Three Months EndedMarch 31,2005
    
    
    2004Net Income As Reported
    
    $
    45,571
    
    
    $
    26,761Assumed Stock Compensation Cost
    
    
    (1,494
    )
    
    
    (794
    )Pro Forma Net Income
    
    $
    44,077
    
    
    $
    25,967Basic Earnings Per Share:As Reported
    
    $
    2.03
    
    
    $
    1.22Pro Forma
    
    $
    1.97
    
    
    $
    1.18Diluted Earnings Per Share:As Reported
    
    $
    1.91
    
    
    $
    1.16Pro Forma
    
    $
    1.85
    
    
    $
    1.12
  3.
    InvestmentsThe carrying amount for the Companys investments approximates their estimated fair value. The
Company measures the fair value of investments based upon quoted market prices or by obtaining
quotes from third party broker-dealers. Material assumptions and factors utilized by such
broker-dealers in pricing these securities include: future cash flows, constant default rates,
recovery rates and any market clearing activity that may have occurred since the prior month-end
pricing period.For mortgage and asset-backed securities (structured securities) of high credit quality,
changes in expected cash flows are recognized using the retrospective method. For structured
securities where the possibility of credit loss is other than remote, changes in expected cash
flows are recognized on the prospective method over the remaining life of the securities. Cash
flow assumptions for structured securities are obtained from broker dealer survey values or
internal estimates consistent with the current interest rate and economic environments. These
assumptions represent the Companys best estimate of the amount and timing of estimated
principal and 7




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interest cash flows based on current information and events that a market participant would use
in determining the current fair value of the security.The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security whose fair value is below its cost. Upon identification of
such securities, a detailed review is performed for such securities, excluding 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. This evaluation resulted in non-cash realized investment losses of
$0.1 million and $0 million, respectively, for the three months ended March 31, 2005 and 2004.The Companys impairment evaluation and recognition for interests in securitized assets is
conducted in accordance with the guidance provided by the Emerging Issues Task Force of the
Financial Accounting Standards Board. Under this guidance, impairment losses on securities must
be recognized if both the fair value of the security is less than its book value and the net
present value of expected future cash flows is less than the net present value of expected
future cash flows at the most recent (prior) estimation date. If these criteria are met, an
impairment charge, calculated as the difference between the current book value of the security
and its fair value, is included in earnings as a realized loss in the period the impairment
arose. Non-cash realized investment losses recorded for the three months ended March 31, 2005
and 2004 were $0 million and $1.0 million, respectively, as a result of the Companys impairment
evaluation for investments in securitized assets.The following table (in thousands) identifies the period of time securities with an unrealized
loss at March 31, 2005 have continuously been in an unrealized loss position. Included in the
amounts displayed in the table are $0.2 million of unrealized losses due to non-investment grade
fixed maturity securities having a fair value of $4.9 million. No issuer of securities or
industry represents more than 2.0% and 18.1%, respectively, of the total estimated fair value,
or 1.6% and 14.9%, respectively, of the total gross unrealized loss included in the table below.
There are certain risks and uncertainties inherent in the Companys impairment methodology,
such as the financial condition of specific industry sectors and the resultant effect on any
such 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. Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFixed Maturities:Available for Sale
    
    Fair Value
    
    
    Unrealized Losses
    
    
    Fair Value
    
    
    Unrealized Losses
    
    
    Fair Value
    
    
    Unrealized LossesU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    80,176
    
    
    $
    897
    
    
    $
    576
    
    
    $
    30
    
    
    $
    80,752
    
    
    $
    927Obligations of States andPolitical Subdivisions
    
    
    409,318
    
    
    
    6,025
    
    
    
    39,763
    
    
    
    1,028
    
    
    
    449,081
    
    
    
    7,053Corporate and Bank Debt Securities
    
    
    229,917
    
    
    
    5,292
    
    
    
    3,794
    
    
    
    141
    
    
    
    233,711
    
    
    
    5,433Asset Backed Securities
    
    
    34,921
    
    
    
    436
    
    
    
    3,926
    
    
    
    216
    
    
    
    38,847
    
    
    
    652Mortgage Pass-Through Securities
    
    
    202,218
    
    
    
    2,861
    
    
    
    6,496
    
    
    
    349
    
    
    
    208,714
    
    
    
    3,210Collateralized Mortgage Obligations
    
    
    80,263
    
    
    
    1,350
    
    
    
    3,513
    
    
    
    162
    
    
    
    83,776
    
    
    
    1,512Total Fixed MaturitiesAvailable for Sale
    
    
    1,036,813
    
    
    
    16,861
    
    
    
    58,068
    
    
    
    1,926
    
    
    
    1,094,881
    
    
    
    18,787Equity Securities
    
    
    58,831
    
    
    
    2,785
    
    
    
    
    
    
    
    
    
    
    
    58,831
    
    
    
    2,785Total Investments
    
    $
    1,095,644
    
    
    $
    19,646
    
    
    $
    58,068
    
    
    $
    1,926
    
    
    $
    1,153,712
    
    
    $
    21,572
  Based upon the Companys impairment evaluation as of March 31, 2005, it was concluded that the
remaining unrealized losses in the table above are not other than temporary. 8




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4.
    Restricted AssetsThe Insurance Subsidiaries have investments, principally U.S. Treasury securities and
Obligations of States and Political Subdivisions, on deposit with the various states in which
they are licensed insurers. At March 31, 2005 and December 31, 2004, the carrying value of the
securities on deposit totaled $14.5 million and $15.3 million, respectively.Additionally, the Companys insurance subsidiaries had investments, principally Mortgage
Pass-Through securities, which collateralized the borrowings from the Federal Home Loan Bank of
Pittsburgh, see Note 9. The carrying value of these investments was $0 million and $46.8
million as of March 31, 2005 and December 31, 2004, respectively.Certain of the Companys insurance subsidiaries are required to hold a certain minimum amount of
Federal Home Loan Bank of Pittsburgh common stock as a requirement of membership in the Federal
Home Loan Bank of Pittsburgh. The required minimum amount of common stock is based on the amount
of outstanding borrowings plus the unused maximum borrowing capacity, as defined by the Federal
Home Loan Bank of Pittsburgh. The carrying value of Federal Home Loan Bank of Pittsburgh common
stock was $0.9 million and $1.8 million as of March 31, 2005 and December 31, 2004,
respectively.5.
    Derivative InstrumentsStatement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), as amended, requires that derivatives be recorded on the
balance sheet as either assets or liabilities measured at fair value. Changes in the fair value
of derivatives are recorded either through current earnings or as other comprehensive income,
depending on the type of hedge transaction. Gains and losses on the derivative instrument
reported in other comprehensive income are reclassified into earnings in the periods in which
earnings are impacted by the variability of the cash flow of the hedged item. The ineffective
portion of all hedge transactions is recognized in current period earnings.During the first quarter of 2005, the Company was considering the issuance of a debt offering.
To manage potential interest rate risk and mitigate the impact of fluctuations in interest rates
prior to any issuance, a cash flow hedge derivative instrument was purchased. Cash flow hedges
are hedges that use simple derivatives to offset the variability of expected future cash flows.
The cash flow hedge purchased was for a notional amount of $125 million, had an interest rate of
4.557% based on the Then-Current 10-Year Treasury interest rate, and a final settlement date of
May 6, 2005. At the time of purchase, the cash flow hedge was anticipated to be highly
effective in offsetting the changes in the expected future interest rate payments on the
proposed debt offering attributable to fluctuations in the Treasury benchmark interest rate.Subsequent to the purchase of the cash flow hedge the Company decided against the issuance of a
debt offering. As a result, the cash flow hedge became an ineffective hedge and the change in
fair value of the hedge was reported as a component of earnings immediately. For the three
months ended March 31, 2005 the Company recorded the change in fair value of $0.3 million as a
reduction to net realized investment gain. Subsequently, upon
settlement, the loss in fair value increased to $3.2 million.
The $2.9 million change in fair value since March 31, 2005
will be recorded as a net realized investment loss
during the three months ended June 30, 2005. The Company does not hold any other derivative
instruments.6.
    GoodwillThe Company performs an annual impairment analysis to identify potential goodwill impairment and
measure the amount of a goodwill impairment loss to be recognized (if any). This annual test is
performed at December 31 of each year or more frequently if events or circumstance change that
require the Company to perform the impairment analysis on an interim basis.Goodwill impairment testing requires the evaluation of the fair value of each reporting unit to
its carrying value, including the goodwill, and an impairment charge is recorded if the carrying
amount of the reporting unit exceeds its estimated fair value. No change in the carrying amount
of goodwill, which arose from the purchase of Liberty American Insurance Group, Inc., was
recorded by the Company for the three months ended March 31, 2005. 9




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##### Table of Contents



7.
    Liability for Unpaid Loss and Loss Adjustment ExpensesThe liability for unpaid loss and loss adjustment expenses reflects the Companys best estimate
for future amounts needed to pay losses and related settlement expenses with respect to insured
events. The process of establishing the ultimate claims liability is necessarily a complex
imprecise process, requiring the use of informed estimates and judgments using data currently
available. The liability includes an amount determined on the basis of claim adjusters
evaluations with respect to insured events that have occurred and an amount for losses incurred
that have not been reported to the Company. In some cases significant periods of time, up to
several years or more, may elapse between the occurrence of an insured loss and the reporting of
such to the Company. Estimates for unpaid loss and loss adjustment expenses are based upon
managements assessment of known facts and circumstances, review of past loss experience and
settlement patterns and consideration of other factors such as legal, social, and economic
developments. These adjustments are reviewed regularly and any adjustments therefrom are made in
the accounting period in which the adjustment arose. If the Companys ultimate losses, net of
reinsurance, prove to differ substantially from the amounts recorded at March 31, 2005, the
related adjustments could have a material adverse impact on the Companys financial condition,
and results of operations.During the three months ended March 31, 2005, the Company increased the estimated gross and net
unpaid loss and loss adjustment expenses for accident years 1997 through 2003 and 1997 through
2001, respectively, and decreased the estimated gross and net unpaid loss and loss adjustment
expenses for accident year 2004 and accident years 2003 through 2004, respectively, by the
following amounts: (In millions)
    
    Gross Basis
    
    
    Net Basisincrease (decrease)
    
    
    increase (decrease)Accident Year 2004
    
    $
    (24.9
    )
    
    $
    (4.3
    )Accident Year 2003
    
    
    2.4
    
    
    
    (0.3
    )Accident Year 2002
    
    
    20.1
    
    
    
    Accident Years 2001-1997
    
    
    5.7
    
    
    
    5.3Total
    
    $
    3.3
    
    
    $
    0.7
  The increase in estimated gross unpaid loss and loss adjustment expenses was principally due to
increased program umbrella loss estimates for the 2002 and 2003 accident years and increased
loss estimates for general liability, professional liability, and commercial automobile policies
for the 1997 through 2001 accident years. The increase in estimated net unpaid loss and loss
adjustment expenses for accident years 1997 through 2001 was principally due to increased loss
estimates for general liability and commercial automobile policies.The decrease in estimated gross unpaid loss and loss adjustment expenses for accident year 2004
was principally due to lowering the gross loss estimate for Hurricane Jeanne losses and a lower
gross loss estimate for commercial property policies. The decrease in estimated net unpaid loss
and loss adjustment expenses was principally due to a lower net loss estimate for commercial
property policies for the 2004 accident year.8.
    Funds Held Payable To ReinsurerEffective April 1, 2003, the Company entered into a quota share reinsurance agreement. Under
this agreement, the Company ceded 22% of its net written premiums and loss and loss adjustment
expenses for substantially all of the Companys lines of business on policies effective April 1,
2003 through December 31, 2003, and 10% of its commercial and specialty lines net written
premiums and loss and loss adjustment expenses for policies incepting during 2004. 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
allows for a profit commission to be paid to the Company upon commutation. Effective January 1,
2005, the Company entered into a Reinsurance 10




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##### Table of Contents



Commutation and Release Agreement with respect to the 2003 Whole Account Net Quota Share
Reinsurance contract. As a result of this commutation, the Funds Held Payable to Reinsurer
liability was reduced by approximately $77.9 million, offset by an increase to net Unpaid Loss
and Loss Adjustment Expenses of $64.3 million, an increase to net Unearned Premiums of $0.2
million and a reduction to the profit commission receivable by approximately $13.4 million. No
gain or loss was realized as a result of this commutation.Activity for the Funds Held Payable to Reinsurer is summarized as follows (in thousands): As of and For the
    
    
    As of and For theThree Months Ended
    
    
    Year EndedMarch 31, 2005
    
    

December 31, 2004Funds Held Payable to Reinsurer Balance at Beginning of
Period
    
    $
    131,119
    
    
    $
    110,011Net Written Premiums Ceded
    
    
    57
    
    
    
    94,474Reinsurer Expense Allowance
    
    
    (2
    )
    
    
    (3,318
    )Provisional Commission
    
    
    (2,206
    )
    
    
    (48,971
    )Paid Loss and Loss Adjustment Expenses
    
    
    (2,267
    )
    
    
    (25,585
    )Interest Credit
    
    
    499
    
    
    
    4,853Commutation
    
    
    (77,906
    )
    
    
    Other
    
    
    
    
    
    
    (345
    )Subtotal Activity
    
    
    (81,825
    )
    
    
    21,108Funds Held Payable to Reinsurer Balance at End of Period
    
    $
    49,294
    
    
    $
    131,119
  The Company has also accrued a profit commission receivable based upon the experience of the
underlying business ceded to this reinsurance agreement, in the amounts of $4.3 million and $7.3
million as of March 31, 2005 and 2004, respectively. The profit commission reduces ceded
written and earned premiums and increases net written and earned premiums.9.
    Loans PayableAs of March 31, 2005 and December 31, 2004, the Company had aggregate borrowings of $0 million
and $33.4 million, respectively, from the Federal Home Loan Bank of Pittsburgh. Any outstanding
borrowings bear interest at adjusted LIBOR and mature twelve months or less from inception. The
proceeds from any outstanding borrowings are invested in asset backed and collateralized
mortgage obligation securities to achieve a positive spread between the rate of interest on
these securities and the borrowing rates. Due to declining spreads the Company prepaid all
outstanding Federal Home Loan Bank loans during the first quarter of 2005.10.
    Shareholders EquityThe Company has established stock purchase plans including an Employee Stock Purchase Plan and a
Non-Qualified Employee Stock Purchase Plan. Shares may be purchased under each of these plans
by eligible employees during designated one month offering periods established by the
Compensation Committee of the Board of Directors at a purchase price of the lesser of 85% of the
fair market value of the shares on the first business day of the offering period or the date the
shares are purchased. The Company issued 72,602 and 421,200 shares under the Employee Stock
Purchase Plan and the Non-Qualified Employee Stock Purchase Plan,
respectively, during the three
months ended March 31, 2005.11.
    Earnings Per ShareEarnings per common share have been calculated by dividing net income for the period by the
weighted average number of common shares and common share equivalents outstanding during the
period. Following is the computation of earnings per share for the three months ended March 31,
2005 and 2004, respectively (in thousands, except per share data): 11




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##### Table of Contents



As of and For the ThreeMonths Ended March 31,2005
    
    
    2004Weighted-Average Common Shares Outstanding
    
    
    22,424
    
    
    
    22,018Weighted-Average Potential Shares Issuable
    
    
    1,437
    
    
    
    1,083Weighted-Average Shares and Potential Shares
Issuable
    
    
    23,861
    
    
    
    23,101Net Income
    
    $
    45,571
    
    
    $
    26,761Basic Earnings per Share
    
    $
    2.03
    
    
    $
    1.22Diluted Earnings per Share
    
    $
    1.91
    
    
    $
    1.16
  12.
    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.13.
    ReinsuranceIn the normal course of business, the Company has entered into various reinsurance contracts
with unrelated reinsurers. The Company participates in such agreements for the purpose of
limiting loss exposure, managing capacity constraints and diversifying business. Reinsurance
contracts do not relieve the Company from its obligations to policyholders (See Note 8). The
effect of reinsurance on premiums written and earned is as follows: (In thousands) For the Three Months Ended
    
    
    For the Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect Business
    
    $
    284,067
    
    
    $
    286,772
    
    
    $
    250,861
    
    
    $
    239,087Reinsurance Assumed
    
    
    1,038
    
    
    
    1,240
    
    
    
    1,576
    
    
    
    2,130Reinsurance Ceded
    
    
    31,319
    
    
    
    51,257
    
    
    
    49,857
    
    
    
    69,795Net Premiums
    
    $
    253,786
    
    
    $
    236,755
    
    
    $
    202,580
    
    
    $
    171,422
  Certain of the Companys reinsurance contracts have provisions whereby the Company is entitled
to a return profit commission based on the ultimate experience of the underlying business ceded
to the contracts. Under the terms of these contracts, the Company accrued profit commissions of
$1.3 million and $4.1 million for the three months ended March 31, 2005 and 2004, respectively.
The profit commissions reduce ceded written and earned premiums and increase net written and
earned premiums.Approximately $16.9 million of the Companys reinsurance receivable balances at March 31, 2005
are with Converium Reinsurance North American Inc. (CRNA). During the third quarter of 2004,
Converium AG (Switzerland), CRNAs parent company, placed CRNA into an orderly runoff. Of the
$16.9 million reinsurance receivable balances with CRNA, $3.0 million are receivables on paid
losses and $13.9 million are receivables on unpaid loss and loss adjustment expense. The Company
is monitoring CRNAs ability to pay claims, and at this time, believes, that the amounts with
CRNA will be collectible. 12




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##### Table of Contents



14.
    Commitments and ContingenciesThe Company is subject to routine legal proceedings in connection with its property and casualty
insurance business. The Company is not involved in any other pending or threatened legal or
administrative proceedings which management believes can reasonably be expected to have a
material adverse effect on the Companys financial condition or results of operations.15.
    Comprehensive IncomeComponents of comprehensive income, as detailed in the Consolidated Statements of Operations and
Comprehensive Income, are net of tax. The related tax effect of Holding Gains (Losses) arising
during the three months ended March 31, 2005 and 2004 was $(8.9) million and $4.1 million,
respectively. The related tax effect of Reclassification Adjustments for the three months ended
March 31, 2005 and 2004 was $(3.8) million and $(0.6) million, respectively.16.
    Segment InformationThe Companys operations are classified into three reportable business segments which are
organized around its three underwriting divisions: The Commercial Lines Underwriting Group,
which has underwriting responsibility for the Commercial Automobile and Commercial Property and
Commercial multi-peril package insurance products; The Specialty Lines Underwriting Group, which
has underwriting responsibility for the professional liability insurance products; and The
Personal Lines Group, which designs, markets and underwrites personal property and casualty
insurance products for the Manufactured Housing and Homeowners markets. Each business segments
responsibilities include: pricing, managing the risk selection process and monitoring the loss
ratios by product and insured. The reportable segments operate solely within the United States
and have not been aggregated.The segments follow the same accounting policies used for the Companys consolidated financial
statements, as described in the summary of significant accounting policies. Management
evaluates a segments performance based upon premium production and the associated loss
experience, which includes paid losses, an amount determined on the basis of claim adjusters
evaluation with respect to insured events that have occurred and an amount for losses incurred
that have not been reported. Investments and investment performance, including investment
income and net realized investment gain (loss), acquisition costs and other underwriting
expenses, including commissions, premium taxes and other acquisition costs, and other operating
expenses are managed at a corporate level by the corporate accounting function in conjunction
with other corporate departments, and are included in Corporate.Following is a tabulation of business segment information for the three months ended March 31,
2005 and 2004. Corporate information is included to reconcile segment data to the consolidated
financial statements (in thousands): 13




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##### Table of Contents



Commercial
    
    
    Specialty
    
    
    PersonalLines
    
    
    Lines
    
    
    Lines
    
    
    Corporate
    
    
    TotalMarch 31, 2005:Gross Written Premiums
    
    $
    210,010
    
    
    $
    53,635
    
    
    $
    21,460
    
    
    $
    
    
    
    $
    285,105Net Written Premiums
    
    $
    204,323
    
    
    $
    36,301
    
    
    $
    13,162
    
    
    $
    
    
    
    $
    253,786Revenue:Net Earned Premiums
    
    $
    183,718
    
    
    $
    35,385
    
    
    $
    17,652
    
    
    $
    
    
    
    $
    236,755Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,491
    
    
    
    13,491Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,798
    
    
    
    10,798Other Income
    
    
    
    
    
    
    
    
    
    
    214
    
    
    
    266
    
    
    
    480Total Revenue
    
    
    183,718
    
    
    
    35,385
    
    
    
    17,866
    
    
    
    24,555
    
    
    
    261,524Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    90,297
    
    
    
    25,832
    
    
    
    10,342
    
    
    
    
    
    
    
    126,471Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,948
    
    
    
    63,948Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,939
    
    
    
    3,939Total Losses and Expenses
    
    
    90,297
    
    
    
    25,832
    
    
    
    10,342
    
    
    
    67,887
    
    
    
    194,358Income Before Income Taxes
    
    
    93,421
    
    
    
    9,553
    
    
    
    7,524
    
    
    
    (43,332
    )
    
    
    67,166Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,595
    
    
    
    21,595Net Income
    
    $
    93,421
    
    
    $
    9,553
    
    
    $
    7,524
    
    
    $
    (64,927
    )
    
    $
    45,571Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    169,143
    
    
    $
    2,301,798
    
    
    $
    2,470,941March 31, 2004:Gross Written Premiums
    
    $
    175,072
    
    
    $
    47,393
    
    
    $
    29,972
    
    
    $
    
    
    
    $
    252,437Net Written Premiums
    
    $
    144,742
    
    
    $
    40,050
    
    
    $
    17,788
    
    
    $
    
    
    
    $
    202,580Revenue:Net Earned Premiums
    
    $
    133,521
    
    
    $
    29,413
    
    
    $
    8,488
    
    
    $
    
    
    
    $
    171,422Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,973
    
    
    
    9,973Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,778
    
    
    
    1,778Other Income
    
    
    
    
    
    
    
    
    
    
    1,143
    
    
    
    239
    
    
    
    1,382Total Revenue
    
    
    133,521
    
    
    
    29,413
    
    
    
    9,631
    
    
    
    11,990
    
    
    
    184,555Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    73,909
    
    
    
    18,055
    
    
    
    4,279
    
    
    
    
    
    
    
    96,243Acquisition Costs and Other Underwriting
Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,354
    
    
    
    47,354Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    245
    
    
    
    1,524
    
    
    
    1,769Total Losses and Expenses
    
    
    73,909
    
    
    
    18,055
    
    
    
    4,524
    
    
    
    48,878
    
    
    
    145,366Income Before Income Taxes
    
    
    59,612
    
    
    
    11,358
    
    
    
    5,107
    
    
    
    (36,888
    )
    
    
    39,189Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,428
    
    
    
    12,428Net Income
    
    $
    $59,612
    
    
    $
    11,358
    
    
    $
    5,107
    
    
    $
    (49,316
    )
    
    $
    26,761Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    291,431
    
    
    $
    1,687,271
    
    
    $
    1,978,702
 14




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations General Although the Companys financial performance is dependent upon its own specific business
characteristics, certain risk factors can affect the profitability and/or the financial condition
of the Company. These include, but are not limited to:  
    Industry factors  Historically the financial
performance of the property and casualty insurance industry
has tended to fluctuate in cyclical patterns of soft markets
followed by hard markets. The Companys strategy is to focus
on underwriting profits, and accordingly the Companys
marketing organization is being directed into those niche
businesses that exhibit the greatest potential for
underwriting profits.
    Competition  The Company competes in the property and
casualty business with other domestic and international
insurers having greater financial and other resources than
the Company.
    Financial Strength Rating  If A.M. Best Company
downgrades the rating of the Companys insurance
subsidiaries, the Company may not be able to compete as
effectively with its commercial and specialty lines
competitors.
    Regulation  The Companys insurance subsidiaries are
subject to a substantial degree of regulatory oversight,
which generally is designed to protect the interests of
policyholders, as opposed to shareholders.
    Litigation  Adverse rulings in any material litigation
to which the Company is a party could materially affect its
financial position and results of operations.
    Inflation  Property and casualty insurance premiums are
established before the amount of losses and loss adjustment
expenses, or the extent to which inflation may affect such
amounts is known.
    Investment Risk  Substantial future increases in
interest rates could result in a decline in the market value
of the Companys investment portfolio and resulting losses
and/or reduction in shareholders equity.
    Claims development and the process of estimating loss
reserves  Estimating the Companys ultimate liability for
unpaid loss and loss adjustment expenses is necessarily a
complex and judgmental process, inasmuch as the amounts of
any ultimate liability of the Company with respect to such
claims are based on managements informed estimates and
judgments using data currently available.
    Catastrophe Exposure  The Companys insurance
subsidiaries issue insurance policies which provide coverage
for commercial and personal property and casualty risks. It
is possible that a catastrophic event could greatly increase
claims under the insurance policies the insurance
subsidiaries issue. Catastrophes may result from a variety
of events or conditions, including hurricanes, windstorms,
earthquakes, hail and other severe weather conditions and may
include terrorist events. It is possible that a catastrophic
event could adversely impact profitability.
    Reinsurance  The adequacy of reinsurance coverage which
may be obtained by the Company and the ability and
willingness of the Companys reinsurers to pay. The above risk factors should be read in conjunction with the Certain Critical Accounting Estimates
and Judgments included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2004. 15




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued) Investments  The Companys investment objective is the realization of relatively high levels of after-tax net
investment income while generating competitive after-tax total rates of return within a prudent
level of risk and within the constraints of maintaining adequate securities in amount and duration
to meet cash requirements of current operations and long-term liabilities, as well as maintaining
and improving the Companys A.M. Best rating. The Company utilizes external independent
professional investment managers for its fixed maturity and equity investments. These investments
consist of diversified issuers and issues, and as of March 31, 2005, approximately 87.5% and 7.0%
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 84.9% and 7.3%,
respectively, at December 31, 2004.Of the total investments in fixed maturity securities, asset backed, mortgage pass-through, and
collateralized mortgage obligation securities, on a cost basis, amounted to $88.1 million, $258.9
million and $99.2 million, respectively, as of March 31, 2005 and $96.0 million, $229.6 million and
$62.6 million, respectively, as of December 31, 2004. The asset backed, mortgage pass-through, and
collateralized mortgage obligation investments are amortizing securities possessing desirable
prepayment risk and/or extension profiles.The Company regularly performs various analytical procedures with respect to its investments,
including identifying any security whose fair value is below its cost. Upon identification of such
securities, a detailed review is performed for all securities, except interests in securitized
assets, meeting predetermined thresholds to determine whether such decline is other than temporary.
If the Company determines a decline in value to be other than temporary, based upon its detailed
review, or if a decline in value for an equity investment has persisted continuously for nine
months, the cost basis of the security is written down to its fair value. The factors considered
in reaching the conclusion that a decline below cost is other than temporary include, but are not
limited to: whether the issuer is in financial distress; the performance of the collateral
underlying a secured investment; whether a significant credit rating action has occurred; whether
scheduled interest payments have been delayed or missed; whether changes in laws and/or regulations
have impacted an issuer or industry; an assessment of the timing of a securitys recovery to fair
value; and an ability and intent to hold the security to recovery of fair value. 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 $0.1 million and $0 million,
respectively, for the three months ended March 31, 2005 and 2004. The Company attributes these
other than temporary declines in fair value primarily to issuer specific conditions.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 (the 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 estimation date. If these criteria are met, an
impairment charge, calculated as the difference between the current book value of the security and
its fair value, is included in earnings as a realized loss in the period the impairment arose.
This evaluation resulted in non-cash realized investment losses of $0 million and $1.0 million for
the three months ended March 31, 2005 and 2004, respectively. These non-cash realized investment
losses were from investments primarily in collateralized bond obligations which were impacted by
recent years non investment grade default rates that were higher than historic averages and from
investments in other asset backed securities which experienced extension of cash flows on the
underlying collateral.The Companys fixed maturity portfolio amounted to $1,483.3 million and $1,229.7 million, as of
March 31, 2005 and December 31, 2004, respectively, of which 99.4% and 99.3% of the portfolio as of
March 31, 2005 and December 31, 2004, respectively, was comprised of investment grade securities.
The Company had fixed maturity investments with gross unrealized losses amounting to $18.8 million
and $4.9 million as of March 31, 2005 and December 31, 2004, respectively. Of these amounts,
interests in securitized assets had gross unrealized losses amounting to $5.4 million and $1.3
million as of March 31, 2005 and December 31, 2004, respectively. The remaining unrealized losses
are attributable largely to market price changes due to interest rate increases since the
investments were purchased, and are not considered to be other than temporary impairments, given
the ability and 16




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)  intent to hold the securities to recovery. As discussed above, the Companys impairment evaluation
and recognition for interests in securitized assets is conducted in accordance with the guidance
provided by the EITF.The following table identifies the period of time securities with an unrealized loss at March 31,
2005 have continuously been in an unrealized loss position. Included in the amounts displayed in
the table are $0.2 million of unrealized losses due to non-investment grade fixed maturity
securities having a fair value of $4.9 million. No issuer of securities or industry represents
more than 2.0% and 18.1%, respectively, of the total estimated fair value, or 1.6% and 14.9%,
respectively, of the total gross unrealized loss included in the table below. There are certain
risks and uncertainties inherent in the Companys impairment methodology, including, but not
limited to, the financial condition of specific industry sectors and the resultant effect on any
such underlying security collateral values and changes in accounting, tax, and/or regulatory
requirements which may have an effect on either, or both, the investor and/or the issuer. Should
the Company subsequently determine a decline in the fair value below the cost basis to be other
than temporary, the security would be written down to its fair value and the difference would be
included in earnings as a realized loss for the period in which 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
    
    $
    5.9
    
    
    $
    2.6
    
    
    $
    8.5
    
    
    $
    2.4
    
    
    $
    10.94  6 months
    
    
    3.2
    
    
    
    1.2
    
    
    
    4.4
    
    
    
    0.2
    
    
    
    4.67  9 months
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.2
    
    
    
    0.810  12 months
    
    
    2.7
    
    
    
    0.7
    
    
    
    3.4
    
    
    
    
    
    
    
    3.413  18 months
    
    
    1.0
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.019  24 months
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.8
    
    
    
    
    
    
    
    0.8> 24 months
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Total GrossUnrealized Losses
    
    $
    13.4
    
    
    $
    5.4
    
    
    $
    18.8
    
    
    $
    2.8
    
    
    $
    21.6Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    763.6
    
    
    $
    331.3
    
    
    $
    1,094.9
    
    
    $
    58.8
    
    
    $
    1,153.7
  Based upon the Companys impairment evaluation as of March 31, 2005, it was concluded that the
remaining unrealized losses in the table above are not other than temporary.For the three months ended March 31, 2005 the Companys gross loss on the sale of fixed maturity
and equity securities amounted to $0.2 million and $1.6 million, respectively. The fair value of
the fixed maturity and equity securities at the time of sale was $18.3 million and $20.0 million,
respectively. For the three months ended March 31, 2004 the Companys gross loss on the sale of
fixed maturity and equity securities amounted to $0.2 million and $0.1 million, respectively. The
fair value of the fixed maturity and equity securities at the time of sale was $2.8 million and
$1.5 million, respectively.$1.1 million of the $1.6 million gross loss on the sale of equity securities was the result of the
liquidation of certain of the Companys equity portfolios following the Companys decision to
change three of its common stock investment managers. This $1.1 million realized gross loss was in
addition to the previously reported $1.4 million impairment loss recognized during the three months
ended December 31, 2004 upon the Companys initial decision to no longer hold the securities to
recovery. The remaining gross loss on the sale of fixed maturity and equity 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) securities resulted from the decision to sell securities based upon an assessment of economic
conditions and ongoing portfolio management objectives of maximizing the Companys after-tax net
investment income. Results of Operations (Three Months ended March 31, 2005 vs. March 31, 2004) Premiums: Premium information for the three months ended March 31, 2005 vs. March 31, 2004
for the Companys business segments is as follows (in millions): Commercial Lines
    
    
    Specialty Lines
    
    
    Personal Lines
    
    
    Total2005 Gross Written Premiums
    
    $
    210.0
    
    
    $
    53.6
    
    
    $
    21.5
    
    
    $
    285.12004 Gross Written Premiums
    
    $
    175.0
    
    
    $
    47.4
    
    
    $
    30.0
    
    
    $
    252.4Percentage Increase (Decrease)
    
    
    20.0
    %
    
    
    13.1
    %
    
    
    (28.3
    )%
    
    
    13.0
    %2005 Gross Earned Premiums
    
    $
    213.7
    
    
    $
    47.3
    
    
    $
    27.0
    
    
    $
    288.02004 Gross Earned Premiums
    
    $
    178.8
    
    
    $
    39.3
    
    
    $
    23.1
    
    
    $
    241.2Percentage Increase (Decrease)
    
    
    19.5
    %
    
    
    20.4
    %
    
    
    16.9
    %
    
    
    19.4
    %
 The overall growth in gross written premiums is primarily attributable to the following:  
    Consistent prospecting efforts by marketing personnel in conjunction with long term
relationships formed by the Companys marketing Regional Vice Presidents continue to result
in additional prospects and increased premium writings, most notably for the Companys
various commercial package and non-profit management liability product lines.
    Continued expansion of marketing efforts relating to commercial lines and specialty
lines products through the Companys field organization and preferred agents.
    In-force policy counts as of March 31, 2005 versus March 31, 2004 have increased 16.0%,
28.5%, and 2.7% for the commercial lines, specialty lines and personal lines segments,
respectively, primarily as a result of the factors discussed above with respect to the
commercial and specialty lines segment. With respect to the personal lines segment, in
force policy counts for the mobile homeowners product decreased by 10.2% and in force
policy counts for the homeowners product increased by 87.4% as a result of a planned shift
in product mix.
    Realized average rate increases on renewal business approximating 1.7%, 3.1%, and 12.0%
for the commercial, specialty and personal lines segments, respectively. This growth was offset in part due to:  
    Liberty American Insurance Group, Inc.s planned shift in product mix of reducing mobile
homeowners product policies and increasing homeowners product policies. As a result,
mobile homeowners gross written premium decreased $11.1 million and homeowners gross
written premium increased $1.6 million.
    An automobile leasing customer and an automobile excess liability customer decision to
self-insure business previously written by the Company. As a result, gross written
premiums for the commercial lines segment were reduced by $3.3 million;
    Re-underwriting the lawyers errors and omissions book of business, resulting in gross
written premiums for the specialty lines segment being reduced by $2.9 million. 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) The respective net written premium and net earned premium changes for commercial lines, specialty
lines and personal lines segments for the three months ended March 31, 2005 vs. March 31, 2004 were
(in millions): Commercial Lines
    
    
    Specialty Lines
    
    
    Personal Lines
    
    
    Total2005 Net Written Premiums
    
    $
    204.3
    
    
    $
    36.3
    
    
    $
    13.2
    
    
    $
    253.82004 Net Written Premiums
    
    $
    144.7
    
    
    $
    40.1
    
    
    $
    17.8
    
    
    $
    202.6Percentage Increase (Decrease)
    
    
    41.2
    %
    
    
    (9.5
    )%
    
    
    (25.8
    )%
    
    
    25.3
    %2005 Net Earned Premiums
    
    $
    183.7
    
    
    $
    35.4
    
    
    $
    17.7
    
    
    $
    236.82004 Net Earned Premiums
    
    $
    133.5
    
    
    $
    29.4
    
    
    $
    8.5
    
    
    $
    171.4Percentage Increase (Decrease)
    
    
    37.6
    %
    
    
    20.4
    %
    
    
    108.2
    %
    
    
    38.2
    %
 The differing percentage changes in net written premiums and/or net earned premiums versus gross
written premiums and/or gross earned premiums for the commercial lines, specialty lines and
personal lines segments during the year results primarily from the following:  
    As a result of the January 1, 2005 casualty excess of loss treaty
renewal, the reinsurance costs by product were reset by the
reinsurers to reflect their view of expected treaty experience.
Accordingly, specialty lines segment product reinsurance costs
were increased and commercial lines segment product reinsurance
costs were decreased. The overall cost of the casualty excess of
loss treaty reinsurance renewal is expected to approximate 8.1% of
gross written casualty premiums.  
    A change in the Companys reinsurance program whereby, effective
April 1, 2003, the Company entered into a Quota Share reinsurance
agreement covering substantially all of the Companys lines of
business. Under this agreement:  
    The Company ceded 22% of its net written and earned premiums and loss and loss
adjustment expenses for policies effective April 1, 2003 through December 31, 2003 and 10%
of its commercial and specialty lines net written and earned premiums and loss and loss
adjustment expenses for policies becoming effective during 2004. During the three months
ended March 31, 2005 and 2004, the Company ceded $(0.2) million and $19.8 million of net
written premiums, respectively, and $18.8 million and $40.4 million of net earned premiums,
respectively.  
    Certain of the Companys reinsurance contracts have provisions
whereby the Company is entitled to a return profit commission
based on the ultimate experience of the underlying business ceded
to the contracts. Under the terms of these contracts, the Company
accrued profit commissions of $1.3 million and $4.1 million for
the three months ended March 31, 2005 and 2004, respectively. The
profit commissions reduce ceded written and earned premiums and
increase net written and earned premiums.  
    Based upon the March 31, 2005 hurricane gross loss estimates,
approximately $1.0 million of previously accelerated reinsurance
premium expense was reversed in the first quarter 2005, reducing
ceded written and earned premiums and increasing net written and
earned premiums in the quarter by $1.0 million.  
    Certain of the Companys reinsurance contracts have reinstatement
provisions whereby the Company must pay additional reinsurance
premiums to reinstate coverage provisions upon utilization of
initial reinsurance coverage. The Company accrued $1.7 million of
reinstatement reinsurance premium under its casualty excess of
loss reinsurance treaty, during the three months ended March 31,
2005, as a result of changes in ultimate loss estimates. The
reinstatement premium increased ceded and written premiums and
reduced net written and earned premiums. 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)  
    On December 31, 2004, the Company terminated a quota share
reinsurance agreement under which it ceded 15% of its mobile
homeowners and homeowners business (personal lines segment). Upon
termination the Company increased its unearned premium reserve and
net written premium by $5.7 million. Net Investment IncomeNet investment income approximated $13.5 million for the three months
ended March 31, 2005 and $10.0 million for the same period of 2004. Total investments grew to
$1,605.9 million at March 31, 2005 from $1,298.1 million at March 31, 2004. 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 was 4.1 years at March 31, 2005 compared
to 3.9 years at March 31, 2004. The Companys taxable equivalent book yield on its fixed income
holdings approximated 4.7% at March 31, 2005, compared to 4.8% at March 31, 2004. Net investment
income was reduced by $0.5 million and $1.1 million for the three months ended March 31, 2005 and
2004, respectively, due to the interest credit on the Funds Held Account balance pursuant to the
Companys quota share reinsurance agreement (see Note 8). The total return, which includes the effects of both income and price returns on securities,
of the Companys fixed income portfolio was (0.49)% and 1.82% for the three months ended March 31,
2005 and 2004, respectively, and was similar to the Lehman Brothers Intermediate Aggregate Bond
Index (the Index) total return of (0.56)% and 2.27% for the same periods, respectively. The
Company expects some variation in its portfolios total return compared to the Index because of the
differing sector, security and duration composition of its portfolio compared to the index. Net Realized Investment Gain:Net realized investment gains were $10.8 million for the three
months ended March 31, 2005 and $1.8 million for the same period in 2004. The Company realized net
investment gains of $1.0 million and $10.2 million from the sale of fixed maturity and equity
securities, respectively, for the three months ended March 31, 2005, and $0 million and $0.1
million in non-cash realized investment losses for fixed maturity and equity securities,
respectively, as a result of the Companys impairment evaluation. Approximately $9.4 million of
the $10.2 million net realized gains from the sale of equity securities was the result of the
liquidation of certain of the Companys equity portfolios following the Companys decision to
change three of its common stock investment managers. Net realized investment gain was reduced by
$0.3 million for the three months ended March 31, 2005 due to the recognized loss of the change in
fair value of a cash flow hedge entered into by the Company for which the forecasted transaction
did not occur (see Note 5). The Company realized net investment gains of $0.5 million and $2.3 million from the sale of fixed
maturity and equity securities, respectively, for the three months ended March 31, 2004, and $1.0
million in non-cash realized investment losses for fixed maturity investments as a result of the
Companys impairment evaluation. Other Income: Other income approximated $0.5 million for the three months ended March 31,
2005 and $1.4 million for the same period of 2004. Other income primarily consists of commissions
earned on brokered personal lines business, and to a lesser extent brokered commercial lines
business. The decrease in other income is due primarily to reduced commissions earned on brokered
personal lines business due to termination of certain brokering agreements during 2004. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment expenses increased $30.3
million (31.5%) to $126.5 million for the three months ended March 31, 2005 from $96.2 million for
the same period of 2004 and the loss ratio decreased to 53.4% in 2005 from 56.1% in 2004. This
increase in net loss and loss adjustment expenses was primarily due to:  
    A 38.2% growth in net earned premiums
    A $3.0 million dollar increase in gross and net loss and loss adjustment expenses due to
estimated catastrophe losses from Florida hailstorms in March, 2005. The hailstorm losses
were incurred in the personal lines segment. 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)  
    Reserve actions taken during the three months ended March 31, 2005 wherein the estimated
gross and net unpaid loss and loss adjustment expenses for accident years 1997 through 2003
were increased by $28.2 million and $5.0 million, respectively. (In millions)
    
    Gross Basis
    
    
    Net Basisincrease
    
    
    increase (decrease)Accident Year 2003
    
    
    2.4
    
    
    
    (0.3
    )Accident Year 2002
    
    
    20.1
    
    
    
    Accident Years 2001-1997
    
    
    5.7
    
    
    
    5.3Total
    
    $
    28.2
    
    
    $
    5.0
  The increase in estimated gross unpaid loss and loss adjustment expenses was principally due
to increased program umbrella loss estimates for the 2002 and 2003 accident years and
increased loss estimates for general liability, professional liability, and commercial
automobile policies for the 1997 to 2001 accident years. The increase in estimated net loss
and loss adjustment expenses for accident years 1997 through 2001 was principally due to
increased loss estimates for general liability and commercial automobile policies.Additionally, the increase in the program umbrella loss estimates for the 2002 accident year
resulted in the Company accruing approximately $1.7 million of reinstatement reinsurance
premium under its casualty excess of loss reinsurance treaty. These increases to the loss and loss adjustment expenses were offset in part by:  
    Reserve actions taken during the three months ended March 31, 2005 wherein the estimated
gross and net unpaid loss and loss adjustment expenses for the 2004 accident year were
decreased by $24.9 million and $4.3 million, respectively. The decrease in estimated gross
loss and loss adjustment expenses was principally due to lowering the gross loss estimate
for Hurricane Jeanne losses and a lower gross loss estimate for commercial property
policies. The decrease in estimated net loss and loss adjustment expenses was principally
due to a lower loss estimate for commercial property policies for the 2004 accident year. During the three months ended March 31, 2005 and 2004, the Company also ceded $18.8 million and
$40.4 million of net earned premium, respectively, and $8.9 million and $22.8 million in net loss
and loss adjustment expenses, respectively, pursuant to quota share reinsurance agreements (see
Premiums). The Company revised its December 31, 2004 estimates for gross losses due to Hurricanes Charley,
Frances, Ivan and Jeanne as noted below (in millions): Hurricane:
    
    Charley
    
    
    Frances
    
    
    Ivan
    
    
    Jeanne
    
    
    TotalChange in gross loss estimate Increase (Decrease)
    
    $
    7.2
    
    
    $
    (6.4
    )
    
    $
    (3.2
    )
    
    $
    (22.6
    )
    
    $
    (25.0
    )
 The higher loss estimate for Hurricane Charley, which, when combined with the aggregate loss
estimates for Hurricanes Frances and Jeanne, resulted in approximately an additional $0.5 million
of Hurricane Jeanne losses in the quarter ended March 31, 2005 to be in excess of the aggregate
$80.0 million coverage limit available on the $40.0 million excess $50.0 million loss layer of the
Companys catastrophe reinsurance program. The additional $0.5 million in Hurricane Jeanne losses
reduced net income for the first quarter 2005 by $0.3 million. Based upon the current catastrophe loss estimates, recoveries for Hurricane Frances are approaching
the limit of the Companys catastrophe reinsurance program. Catastrophe reinsurance recoveries
available to the Company for development on Hurricane Frances beyond current estimates are dollar
for dollar for approximately the next $2.3 million of additional increase in catastrophe losses,
and 34% of the next $50.0 million of additional increase in catastrophe losses. Because of the
interaction of the Florida Hurricane Catastrophe Fund (FHCF) and the Companys open market
reinsurance program, development on Hurricane Charley would reduce the coverage limit 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) available from the FHCF for Hurricane Frances. Additionally since the hurricane losses currently
exceed the aggregate $80.0 million coverage limit available on the $40.0 million excess $50.0
million coverage loss layer of the Companys catastrophe reinsurance program, each dollar of
additional development on Hurricane Charley in this layer would diminish coverage available for
Hurricane Jeanne losses and result in approximately an additional $.085 of losses being retained by
the Company. The multiple hurricane events in 2004 resulted in accelerating the recognition of catastrophe
reinsurance premium expense during 2004 as a result of utilizing certain of the catastrophe
reinsurance coverages. Based upon the March 31, 2005 hurricane gross loss estimates, approximately
$1.0 million of previously accelerated reinsurance premium expense was reversed in the first
quarter 2005, increasing net income in the quarter by $0.7 million. Acquisition Costs and Other Underwriting Expenses:Acquisition costs and other underwriting
expenses increased $16.5 million (34.8%) to $63.9 million for the three months ended March 31, 2005
from $47.4 million for the same period of 2004 and the expense ratio decreased to 27.0% in 2005
from 27.6% in 2004. The increase in acquisition costs and other underwriting expenses was due
primarily to the 38.2% growth in net earned premiums. For the three months ended March 31, 2005
and 2004 the Company ceded $18.8 million and $40.4 million, respectively, of net earned premium and
earned $8.4 million and $15.3 million, respectively, in ceding commission under a quota share
agreement (see Premiums). Other Operating Expenses: Other operating expenses increased $2.1 million to $3.9 million for
the three months ended March 31, 2005 from $1.8 million for the same period of 2004. The increase
in the level of expenses is primarily due to the growth of the business, offset in part by reduced
commissions paid on brokered personal lines business (see Other Income). Income Tax Expense:The Companys effective tax rate for the three months ended March 31,
2005 and 2004 was 32.2% and 31.7%, respectively. The effective rates differed from the 35%
statutory rate principally due to investments in tax-exempt securities and the relative proportion
of tax-exempt income to total income before tax. Liquidity and Capital Resources For the three months ended March 31, 2005, the Companys investments experienced unrealized
investment depreciation of $23.5 million, net of the related deferred tax benefit of $12.7 million.
At March 31, 2005, the Company had total investments with a carrying value of $1,605.9 million, of
which 92.4% 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, mortgage pass-through
and asset backed securities. The collateralized mortgage, mortgage pass-through, and asset backed
securities consist of amortized securities possessing favorable pre-payment and/or extension risk
profiles. The remaining 7.6% of the Companys total investments consisted primarily of publicly
traded common stock securities. During 2004, the Company experienced catastrophe losses attributable to Hurricanes Charley,
Frances, Ivan, and Jeanne. The catastrophe losses primarily impacted the Companys personal lines
segment and, to a lesser extent, its commercial lines segment. The gross catastrophe loss and loss
adjustment expense estimates as a result of these hurricanes was $595.0 million for the personal
lines segment and $39.9 million for the commercial lines segment. Loss estimates may still change in the future due in part to the number of claims which have
not yet been completely remediated or for which the property covered by the claim has not been
repaired. Under the Companys catastrophe reinsurance programs in place at the time of these
hurricane events, the Company had a $3.5 million pre-tax per occurrence loss retention for its
personal lines catastrophe losses and a $7.0 million pre-tax per occurrence loss retention for its
commercial lines catastrophe losses. The Company estimates its net aggregate retention losses for
the four hurricane events is $47.1 million. 22




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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 Companys catastrophe reinsurance program consists of its open market (OM) program which
has been placed principally with large reinsurers that are rated at least A (Excellent) by A.M.
Best, a 15% quota share reinsurance arrangement, and the Florida Hurricane Catastrophe Fund
(FHCF). Certain of the Companys reinsurers have agreed to be billed and make payments to the
Company based upon expected catastrophe claims payments to be made by the Company in the near
future. Although the Company believes that it will collect all or substantially all of its
reinsurance recoverables, there can be no assurance of this. The Company believes it will have
adequate funds to pay the estimated hurricane catastrophe losses noted above. The Companys
estimated total reinsurance recoverables, reinsurance recoverables on paid losses and loss
adjustment expenses, catastrophe reinsurance billings and reinsurance collections with respect to
its catastrophe reinsurance programs as of March 31, 2005 for the above mentioned hurricane events
are summarized in the table below. TotalFHCF
    
    
    OM
    
    
    Total(In Millions)Personal Lines Segment:Total Estimated Loss and LAE Recoverables
    
    $
    168.2
    
    
    $
    404.1
    
    
    $
    572.3Recoverable on Catastrophe Loss and LAE Paid
    
    $
    161.2
    
    
    $
    379.2
    
    
    $
    540.4Catastrophe Loss and LAE Billed to Reinsurers
    
    $
    167.5
    
    
    $
    370.1
    
    
    $
    537.6Catastrophe Loss and LAE Collected from Reinsurers
    
    $
    167.5
    
    
    $
    363.8
    
    
    $
    531.3Commercial Lines Segment:Total Estimated Loss and LAE Recoverables
    
    $
    1.7
    
    
    $
    14.0
    
    
    $
    15.7Recoverable on Catastrophe Loss and LAE Paid
    
    $
    1.7
    
    
    $
    1.9
    
    
    $
    3.6Catastrophe Loss and LAE Billed to Reinsurers
    
    $
    1.7
    
    
    $
    1.9
    
    
    $
    3.6Catastrophe Loss and LAE Collected from Reinsurers
    
    $
    1.1
    
    
    $
    1.1
    
    
    $
    2.2
 The Company produced net cash from operations of $125.8 million and $107.4 million for the
three months ended March 31, 2005 and 2004, respectively. Sources of operating funds consist
primarily of net premiums written and investment income. Funds are used primarily to pay claims
and operating expenses and for the purchase of investments. The source of cash from operations for
the three months ended March 31, 2005 was primarily generated from strong premium growth during the
current year due to increases in the number of policies written and, to a lesser extent, price
increases realized on renewal business. Net loss and loss expense
payments were $75.2 million and
$64.4 million, respectively, for the three months ended March 31, 2005 and 2004. 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. The insurance subsidiaries in the
past 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. At March 31, 2005 the insurance subsidiaries unused borrowing capacity was
$317.4 million. The remaining borrowing capacity provides an immediately available line of credit.
Due to declining interest rate spreads, the Company prepaid all outstanding Federal Home Loan Bank
loans during the first quarter of 2005. The NAICs risk-based capital method is 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. 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) New Accounting Pronouncements On March 29, 2005, the Securities and Exchange Commission (the SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107), which provides guidance on accounting for share-based payments. SAB
107 summarizes the views of the SEC regarding the interaction between Statement of Financial
Accounting Standards No. 123 (revised 2004) (SFAS 123R), Share-Based Payment and certain SEC
rules and regulations and provides the SECs views regarding the valuation of share-based payment
arrangements for public companies. The Company will utilize the guidance provided by SAB 107 when
implementing SFAS 123R. On April 14, 2005 the SEC announced the adoption of a new rule that amends the compliance
dates for the adoption of SFAS 123R. Under SFAS 123R, public companies would have been required to
implement the standard as of the beginning of the first interim or annual period that begins after
June 15, 2005. The SECs new rule allows public companies to implement SFAS 123R at the beginning
of the next fiscal year after June 15, 2005. The Company intends to adopt the provisions of SFAS
123R effective January 1, 2006. 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. The Company does not intend to publicly update any forward looking statement,
except as may be required by law. 24




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk The Companys financial instruments are subject to the market risk of potential losses
from adverse changes in market rates and prices. The primary market risks to the Company are
equity price risk associated with investments in equity securities and interest rate risk
associated with investments in fixed maturities. The Company has established, among other
criteria, duration, asset quality and asset allocation guidelines for managing its investment
portfolio market risk exposure. The Companys investments are held for purposes other than trading
and consist of diversified issuers and issues. The table below provides information about the Companys financial instruments that are
sensitive to changes in interest rates and shows the effect of hypothetical changes in interest
rates as of March 31, 2005. The selected hypothetical changes do not indicate what could be the
potential best or worst case scenarios (dollars in thousands). The information is presented in
U.S. dollar equivalents, which is the Companys reporting currency. Estimated
    
    
    Hypothetical PercentageHypothetical Change
    
    
    Fair Value after
    
    
    Increase (Decrease) inEstimated
    
    
    in Interest Rates
    
    
    Hypothetical Changes
    
    
    
    
    
    
    ShareholdersFair Value
    
    
    (bp=basis points)
    
    
    in Interest Rates
    
    
    Fair Value
    
    
    EquityInvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,483,259
    
    
    200 bp decrease
    
    $
    1,603,106
    
    
    
    8.1
    %
    
    
    11.2
    %100 bp decrease
    
    $
    1,543,776
    
    
    
    4.1
    %
    
    
    5.7
    %50 bp decrease
    
    $
    1,513,665
    
    
    
    2.1
    %
    
    
    2.8
    %50 bp increase
    
    $
    1,452,407
    
    
    
    (2.1
    %)
    
    
    (2.9
    %)100 bp increase
    
    $
    1,421,407
    
    
    
    (4.2
    %)
    
    
    (5.8
    %)200 bp increase
    
    $
    1,359,555
    
    
    
    (8.3
    %)
    
    
    (11.6
    %)
 25




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Companys 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 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 this 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. (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. 26




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II  OTHER INFORMATION 
 Item 1.
    
    Legal ProceedingsNot applicable.
 
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsThe Companys purchases of its common stock during the first quarter of 2005 are shown in
the following table:
 Period
    
    (a) Total NumberofSharesPurchased
    
    
    (b) AveragePricePaid perShare
    
    
    (c) TotalNumber ofSharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms
    
    
    (d) Approximate DollarValue of Shares That MayYet Be Purchased Underthe Plans or ProgramsJanuary 1  January 31
    
    
    473
    (1)
    
    $
    47.41
    
    
    
    
    
    
    
    $
    45,000,000
    (2)February 1  February 28
    
    
    2,026
    (1)
    
    $
    37.84
    
    
    
    
    
    
    
    $
    45,000,000
    (2)March 1  March 31
    
    
    668
    (1)
    
    $
    47.41
    
    
    
    
    
    
    
    $
    45,000,000
    (2)Total
    
    
    3,167
  (1)
    Such shares were issued under the Companys Employee Stock Purchase Plan and
were repurchased by the Company upon the Employees termination.(2)
    The Companys total stock purchase authorization, which was publicly announced
in August 1998 and subsequently increased, amounted to $75.3 million, of which $30.3
million has been utilized. 
 Item 3.
    
    Defaults Upon Senior SecuritiesNot applicable.
 
 Item 4.
    
    Submission of Matters to a Vote of Security HoldersNot applicable.
 
 Item 5.
    
    Other informationNot applicable.
 27




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##### Table of Contents



Item 6.
    
    ExhibitsExhibits:
 Exhibit No.
    
    Description3.1*
    
    By-Laws of Philadelphia Consolidated Holding Corp. (as Amended
through April 29, 2005).10.1*
    
    Florida Only Excess Catastrophe Reinsurance Contract effective
June 1, 2004 with the Subscribing Reinsurers.10.2*
    
    $50 million excess of $90 million Florida Only Excess
Catastrophe Reinsurance Contract effective June 1, 2004 with
the Subscribing Reinsurers.10.3*
    
    $50 million excess of $140 million Florida Only Catastrophe
Excess Reinsurance Contract effective September 1, 2004 with
the Subscribing Reinsurers.10.4*
    
    $5 million excess of $190 million Florida Only Catastrophe
Excess Reinsurance Contract effective September 10, 2004 with
the Subscribing Reinsurers.10.5*
    
    Underlying Excess Catastrophe Reinsurance Contract effective
July 1, 2004 with the Subscribing Reinsurers.10.6*
    
    Casualty Excess of Loss Contract effective January 1, 2005
with Swiss Reinsurance America Corporation.10.7*
    
    Addendum Number 2 to the Property Excess of Loss Contract
effective January 1, 2005 with Swiss Reinsurance America
Corporation.10.8*
    
    Preliminary Endorsement No. 2 to the Property Per Risk
1st and 2nd Excess
Reinsurance Contract effective January 1, 2005 with General
Reinsurance Corporation.10.9*
    
    2003 Whole Account Net Quota Share Reinsurance Commutation and
Release agreement effective January 1, 2005 with Chubb Re,
Inc.10.10*
    
    2003 Whole Account Net Quota Share Reinsurance Commutation and
Release agreement effective January 1, 2005 with Swiss
Reinsurance America Corporation.31.1*
    
    Certification of the Companys chief executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of the Companys chief financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of the Companys chief executive officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of the Companys chief financial officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 * Filed herewith. 28




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. PHILADELPHIA CONSOLIDATED HOLDING CORP.
Registrant Date
    
    May 9, 2005
    
    James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive Officer(Principal Executive Officer)Date
    
    May 9, 2005
    
    Craig P. KellerCraig P. KellerExecutive Vice President, Secretary, Treasurer andChief Financial Officer (Principal Financial andAccounting Officer)
 29