10-Q

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 June 30, 2003

Commission File Number 0-22280

PHILADELPHIA CONSOLIDATED HOLDING CORP.

(Exact name of registrant as specified in its charter)

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:    x    NO:    o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES:    x   NO:   o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 8, 2003.

Common Stock, no par value, 21,863,147 shares outstanding

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX

For the Quarterly Period Ended June 30, 2003

Part I - Financial Information
	Item 1. Financial Statements:
		Consolidated Balance Sheets – June 30, 2003 and December 31, 2002	3
		Consolidated Statements of Operations and Comprehensive Income - For the three and six months ended June 30, 2003 and 2002	4
		Consolidated Statements of Changes in Shareholders’ Equity - For the six months ended June 30, 2003 and year ended December 31, 2002	5
		Consolidated Statements of Cash Flows - For the six months ended June 30, 2003 and 2002	6
		Notes to Consolidated Financial Statements	7-13
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-23
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
	Item 4. Controls and Procedures		25
Part II - Other Information			26-27
Signatures			28

2

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

			As of
			June 30,
			2003			December 31,
			(Unaudited)			2002
ASSETS
INVESTMENTS:
	FIXED MATURITIES AVAILABLE FOR SALE AT MARKET (AMORTIZED COST $976,289 AND $832,701)		$	1,000,641		$	854,513
	EQUITY SECURITIES AT MARKET (COST $64,464 AND $51,257)			71,101			54,346
		TOTAL INVESTMENTS		1,071,742			908,859
	CASH AND CASH EQUIVALENTS			63,986			42,002
	ACCRUED INVESTMENT INCOME			9,703			8,571
	PREMIUMS RECEIVABLE			144,886			130,007
	PREPAID REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES			233,118			151,352
	DEFERRED INCOME TAXES			13,626			7,541
	DEFERRED ACQUISITION COSTS			45,919			61,272
	PROPERTY AND EQUIPMENT, NET			14,045			12,794
	GOODWILL			25,724			25,724
	OTHER ASSETS			13,678			10,212
		TOTAL ASSETS	$	1,636,427		$	1,358,334
LIABILITIES AND SHAREHOLDERS’ EQUITY
POLICY LIABILITIES AND ACCRUALS:
	UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES		$	546,431		$	445,548
	UNEARNED PREMIUMS			357,101			306,093
		TOTAL POLICY LIABILITIES AND ACCRUALS		903,532			751,641
	FUNDS HELD PAYABLE TO REINSURER			61,923			—
	LOANS PAYABLE			48,111			39,113
	PREMIUMS PAYABLE			41,437			33,553
	PAYABLE FOR SECURITY PURCHASES			22,387			6,100
	OTHER LIABILITIES			59,551			50,104
		TOTAL LIABILITIES		1,136,941			880,511
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
	PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES AUTHORIZED, NONE ISSUED AND OUTSTANDING			—			—
	COMMON STOCK, NO PAR VALUE, 100,000,000 SHARES AUTHORIZED, 21,866,961 AND 21,868,877 SHARES ISSUED AND OUTSTANDING			276,963			276,945
	NOTES RECEIVABLE FROM SHAREHOLDERS			(5,365	)		(6,407	)
	ACCUMULATED OTHER COMPREHENSIVE INCOME			20,143			16,185
	RETAINED EARNINGS			207,960			191,100
	LESS COST OF COMMON STOCK HELD IN TREASURY, 4,042 SHARES			(215	)		—
		TOTAL SHAREHOLDERS’ EQUITY		499,486			477,823
		TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,636,427		$	1,358,334

The accompanying notes are an integral part of the consolidated financial statements.

3

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)

			For the Three Months						For the Six Months
			Ended June 30,						Ended June 30,
			2003			2002			2003			2002
REVENUE:
	NET EARNED PREMIUMS		$	121,449		$	100,273		$	269,811		$	189,517
	NET INVESTMENT INCOME			9,370			9,375			19,175			18,230
	NET REALIZED INVESTMENT LOSS			(650	)		(3,181	)		(1,783	)		(3,134	)
	OTHER INCOME			1,040			15			1,701			16
		TOTAL REVENUE		131,209			106,482			288,904			204,629
LOSSES AND EXPENSES:
	LOSS AND LOSS ADJUSTMENT EXPENSES			124,293			72,067			227,378			137,678
	NET REINSURANCE RECOVERIES			(31,267	)		(11,235	)		(43,992	)		(23,797	)
	NET LOSS AND LOSS ADJUSTMENT EXPENSES			93,026			60,832			183,386			113,881
	ACQUISITION COSTS AND OTHER UNDERWRITING EXPENSES			32,158			31,057			78,578			58,878
	OTHER OPERATING EXPENSES			1,632			1,454			3,306			2,938
		TOTAL LOSSES AND EXPENSES		126,816			93,343			265,270			175,697
INCOME BEFORE INCOME TAXES				4,393			13,139			23,634			28,932
INCOME TAX EXPENSE (BENEFIT):
	CURRENT			7,225			5,798			14,989			12,369
	DEFERRED			(6,459	)		(1,612	)		(8,215	)		(3,067	)
		TOTAL INCOME TAX EXPENSE		766			4,186			6,774			9,302
		NET INCOME	$	3,627		$	8,953		$	16,860		$	19,630
OTHER COMPREHENSIVE INCOME, NET OF TAX:
	HOLDING GAIN ARISING DURING PERIOD			6,740			5,334			2,799			1,275
	RECLASSIFICATION ADJUSTMENT			423			2,068			1,159			2,037
	OTHER COMPREHENSIVE INCOME			7,163			7,402			3,958			3,312
COMPREHENSIVE INCOME			$	10,790		$	16,355		$	20,818		$	22,942
PER AVERAGE SHARE DATA:
	BASIC EARNINGS PER SHARE		$	0.17		$	0.41		$	0.77		$	0.91
	DILUTED EARNINGS PER SHARE		$	0.16		$	0.40		$	0.75		$	0.88
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING				21,860,396			21,578,045			21,862,819			21,553,206
WEIGHTED-AVERAGE SHARE EQUIVALENTS OUTSTANDING				706,608			753,575			635,107			741,742
WEIGHTED-AVERAGE SHARES AND SHARE EQUIVALENTS OUTSTANDING				22,567,004			22,331,620			22,497,926			22,294,948

The accompanying notes are an integral part of the consolidated financial statements.

4

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

				For the Six Months
				Ended			For the Year Ended
				June 30, 2003			December 31,
				(Unaudited)			2002
COMMON SHARES:
	BALANCE AT BEGINNING OF YEAR				21,868,877			21,509,723
	EXERCISE OF EMPLOYEE STOCK OPTIONS				—			107,000
	(FORFEITURES) ISSUANCES OF SHARES PURSUANT TO STOCK PURCHASE PLANS, NET				(1,916	)		252,154
			BALANCE AT END OF PERIOD		21,866,961			21,868,877
TREASURY SHARES:
	BALANCE AT BEGINNING OF YEAR				—			—
	SHARES REPURCHASED PURSUANT TO AUTHORIZATION				10,000			75,000
	EXERCISE OF EMPLOYEE STOCK OPTIONS				(6,500	)		—
	FORFEITURES (ISSUANCES) OF SHARES PURSUANT TO STOCK PURCHASE PLANS				542			(75,000	)
			BALANCE AT END OF PERIOD		4,042			—
COMMON STOCK:
	BALANCE AT BEGINNING OF YEAR			$	276,945		$	268,509
	EXERCISE OF EMPLOYEE STOCK OPTIONS				58			2,115
	(FORFEITURES) ISSUANCES OF SHARES PURSUANT TO STOCK PURCHASE PLANS				(40	)		6,321
			BALANCE AT END OF PERIOD		276,963			276,945
NOTES RECEIVABLE FROM SHAREHOLDERS:
	BALANCE AT BEGINNING OF YEAR				(6,407	)		(3,373	)
	NOTES RECEIVABLE (ISSUED) FORFEITURES PURSUANT TO EMPLOYEE STOCK PURCHASE PLANS				90			(4,017	)
	COLLECTION OF NOTES RECEIVABLE				952			983
			BALANCE AT END OF PERIOD		(5,365	)		(6,407	)
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED INCOME TAXES:
		BALANCE AT BEGINNING OF YEAR			16,185			8,461
		OTHER COMPREHENSIVE INCOME, NET OF TAXES			3,958			7,724
			BALANCE AT END OF PERIOD		20,143			16,185
RETAINED EARNINGS:
	BALANCE AT BEGINNING OF YEAR				191,100			155,095
	NET INCOME				16,860			36,005
			BALANCE AT END OF PERIOD		207,960			191,100
COMMON STOCK HELD IN TREASURY:
	BALANCE AT BEGINNING OF YEAR				—			—
	EXERCISE OF EMPLOYEE STOCK OPTIONS				94			—
	COMMON SHARES REPURCHASED				(300	)		(2,023	)
	(FORFEITURES) ISSUANCES OF SHARES PURSUANT TO STOCK PURCHASE PLANS				(9	)		2,023
			BALANCE AT END OF PERIOD		(215	)		—
			TOTAL SHAREHOLDERS’ EQUITY	$	499,486		$	477,823

The accompanying notes are an integral part of the consolidated financial statements.

5

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)

			For the Six Months Ended June 30,
			2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
	NET INCOME		$	16,860		$	19,630
	ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
	NET REALIZED INVESTMENT LOSS			1,783			3,134
	DEPRECIATION AND AMORTIZATION EXPENSE			3,822			738
	DEFERRED INCOME TAX BENEFIT			(8,215	)		(3,067	)
	CHANGE IN PREMIUMS RECEIVABLE			(14,879	)		(13,584	)
	CHANGE IN OTHER RECEIVABLES			(82,898	)		430
	CHANGE IN INCOME TAXES PAYABLE			(6,675	)		(3,078	)
	CHANGE IN DEFERRED ACQUISITION COSTS			15,353			(7,310	)
	CHANGE IN OTHER ASSETS			1,146			5
	CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES			100,883			29,156
	CHANGE IN UNEARNED PREMIUMS			51,008			47,066
	CHANGE IN FUNDS HELD PAYABLE TO REINSURER			61,923			—
	CHANGE IN OTHER LIABILITIES			20,739			10,134
	TAX BENEFIT FROM EXERCISE OF EMPLOYEE STOCK OPTIONS			58			1,251
		NET CASH PROVIDED BY OPERATING ACTIVITIES		160,908			84,505
CASH FLOWS FROM INVESTING ACTIVITIES:
	PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES			16,412			137,290
	PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES			95,588			49,730
	PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES			8,125			12,891
	COST OF FIXED MATURITIES ACQUIRED			(243,980	)		(264,746	)
	COST OF EQUITY SECURITIES ACQUIRED			(22,109	)		(23,850	)
	PURCHASE OF PROPERTY AND EQUIPMENT, NET			(2,745	)		(1,736	)
		NET CASH USED BY INVESTING ACTIVITIES		(148,709	)		(90,421	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	REPAYMENTS ON LOANS PAYABLE			(21,841	)		(20,841	)
	PROCEEDS FROM LOANS PAYABLE			30,839			20,841
	PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS			94			864
	PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE			952			454
	PROCEEDS FROM SHARES ISSUED PURSUANT TO STOCK PURCHASE PLANS			41			399
	COST OF COMMON STOCK REPURCHASED			(300	)		—
		NET CASH PROVIDED BY FINANCING ACTIVITIES		9,785			1,717
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS				21,984			(4,199	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD				42,002			49,910
CASH AND CASH EQUIVALENTS AT END OF PERIOD			$	63,986		$	45,711
CASH PAID DURING THE PERIOD FOR:
	INCOME TAXES		$	21,212		$	13,936
	INTEREST		$	338		$	288
NON-CASH TRANSACTIONS:
	ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR NOTES RECEIVABLE		$	(90	)	$	(46	)

The accompanying notes are an integral part of the consolidated financial statements.

6

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

1.	Basis of Presentation
	The consolidated financial statements as of and for the six months ended June 30, 2003 and 2002 are unaudited, but in the opinion of management have been prepared on the same basis as the annual audited consolidated financial statements and reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of the information set forth therein. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the operating results to be expected for the full year or any other period. Certain prior years’ amounts have been reclassified for comparative purposes.
	These financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2002.
2.	Investments
	The carrying amounts for the Company’s investments approximates their estimated fair value. The Company measures the fair value of investments based upon quoted market prices or by obtaining quotes from dealers. At June 30, 2003, the Company held no derivative financial instruments or embedded financial derivatives.
	The Company performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed for such securities, except interests in securitized assets, meeting predetermined thresholds to determine whether a decline in fair value below a security’s cost basis is other than temporary. If the Company determines a decline in value to be other than temporary, the cost basis of the security is written down to its fair value with the amount of the write down included in earnings as a realized loss in the period the impairment arose. Non-cash realized investment losses recorded for the three months ended June 30, 2003 and 2002 were $0 and for the six months ended June 30, 2003 and 2002 were $0.9 million and $0 million, respectively, as a result of the Company’s other than temporary impairment evaluation.
	The Company’s impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. Non-cash realized investment losses recorded for the three and six months ended June 30, 2003 and 2002 were $1.6 million and $1.2 million, respectively, and $2.3 million and $1.2 million, respectively, as a result of the Company’s impairment evaluation for investments in securitized assets.
3.	Restricted Assets
	The Insurance Subsidiaries have investments, principally U.S. Treasury securities, on deposit with the various states in which they are licensed insurers. At June, 30, 2003 and December 31, 2002, the carrying value of the securities on deposit totaled $14.4 million and $13.5 million, respectively.
	Additionally, the Insurance Subsidiaries have investments, principally asset backed securities, which collateralize the borrowings from the Federal Home Loan Bank of Pittsburgh, see Note 7. The carrying value of these investments was $61.8 million and $49.2 million as of June 30, 2003 and December 31, 2002, respectively.

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4.	Goodwill
	The carrying amount of goodwill is subject to an annual impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). As a result of the impairment analysis, no change in the carrying amount of goodwill was recorded by the Company for the year ended December 31, 2002. No events have occurred or circumstances have arisen subsequent to December 31, 2002 that would necessitate the Company to perform an interim impairment test. Consequently no change in the carrying amount of goodwill has been recorded for the six months ended June 30, 2003.
5.	Liability for Unpaid Loss and Loss Adjustment Expenses
	The liability for unpaid loss and loss adjustment expenses reflects the Company’s best estimate for future amounts needed to pay losses and related settlement expenses with respect to insured events. Estimating the ultimate claims liability is necessarily a complex and judgmental process, inasmuch as the amounts are based on management’s informed estimates and judgments using data currently available. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid loss and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as legal, social, and economic developments. As additional experience and data become available the Company’s estimate for the liability for unpaid loss and loss adjustment expenses is revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at June 30, 2003, the related adjustments could have a material adverse impact on the Company’s results of operations.
	During the three months ended June 30, 2003, the Company increased the estimated gross and net loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2002 by $33.0 million to $59.8 million and $57.9 million, respectively. As of March 31, 2003 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for these policies of $47.4 million ($40.0 million net of reinsurance). The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination, which can be up to five years from lease inception. Adverse trends further deteriorated in both frequency and severity on leases expiring in 2003. As part of the Company’s monitoring and evaluation process, a consulting firm was engaged during the second quarter of 2003 to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the result of the subsequent evaluation by the Company and changes in the Company’s assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this deterioration to the following factors that led to a softening of prices in the used car market subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and other incentives which increased new car sales and the volume of trade-ins, daily rental units being sold into the market earlier and in greater numbers than expected further adding to the over supply of used cars; and the overall general economic conditions. As of June 30, 2003, approximately 61,000 leases were outstanding under the Company’s residual value policies. The Company is projecting a 42% loss frequency and average loss of approximately $2,300 per claim with respect to these leases.
	During the three months ended June 2003 the Company also decreased the gross and net liability for unpaid loss and loss adjustment expenses for accident year 2002, principally in the property line of its commercial package products, by approximately $9.0 million due to better than expected loss experience.
6.	Funds Held Payable To Reinsurer
	Effective April 1, 2003 the Company entered into a quota share reinsurance agreement covering all of the Company’s lines of business. Under this agreement, the Company cedes 22% of its net written premium (including 22% of net unearned premium reserves at April 1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium due the reinsurers reduced by the reinsurers’ expense allowance, and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. The interest credit (expense), which is included in net investment income, was $0.5 million for the three and six months ended June 30, 2003, respectively.

8

7.	Loans Payable
	As of June 30, 2003, the Company had aggregate borrowings of $48.1 million from the Federal Home Loan Bank. These borrowings bear interest at adjusted LIBOR and mature twelve months from inception. The proceeds from these borrowings are invested in collateralized mortgage obligation and asset backed securities to achieve a positive spread between the rate of interest on these securities and the borrowing rates.
8.	Earnings Per Share
	Earnings per common share has been calculated by dividing net income for the period by the weighted average number of common shares and common share equivalents outstanding during the period. Following is the computation of earnings per share for the three and six months ended June 30, 2003 and 2002, respectively (in thousands, except per share data):

	As of and For the Three				As of and For the Six
	Months Ended June 30,				Months Ended June 30
	2003		2002		2003		2002
Weighted-Average Common Shares Outstanding		21,860		21,578		21,863		21,553
Weighted-Average Share Equivalents Outstanding		707		754		635		742
Weighted-Average Shares and Share Equivalents Outstanding		22,567		22,332		22,498		22,295
Net Income	$	3,627	$	8,953	$	16,860	$	19,630
Basic Earnings per Share	$	0.17	$	0.41	$	0.77	$	0.91
Diluted Earnings per Share	$	0.16	$	0.40	$	0.75	$	0.88

9.	Income Taxes
	The effective tax rate differs from the 35% marginal tax rate principally as a result of tax-exempt interest income, the dividend received deduction and other differences in the recognition of revenues and expenses for tax and financial reporting purposes.

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10.

Stock-Based Compensation

Stock-based compensation plans are accounted for under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense is recognized for fixed stock option grants and the Company’s stock purchase plans. The following table illustrates the effect on net income and earnings per share as if the provisions of statement of Financial Accounting Standards (SFAS) No. 123 (as amended by SFAS No. 148), “Accounting for Stock-Based Compensation,” had been applied for the three and six months ended June 30, 2003 and 2002, respectively:

		Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)		2003		2002		2003		2002
Net Income As Reported		$	3,627	$	8,953	$	16,860	$	19,629
Assumed Stock Compensation Cost			728		505		1,422		957
Pro Forma Net Income		$	2,899	$	8,448	$	15,438	$	18,672
Basic Earnings Per Share:
	As Reported	$	0.17	$	0.41	$	0.77	$	0.91
	Pro Forma	$	0.13	$	0.39	$	0.71	$	0.87
Diluted Earnings Per Share:
	As Reported	$	0.16	$	0.40	$	0.75	$	0.88
	Pro Forma	$	0.13	$	0.38	$	0.69	$	0.84

11.	Commitments and Contingencies
	On April 30, 2002, U.S. Bank, N.A. d/b/a Firstar Bank (“Firstar”), a bank to which one of the Company’s insurance subsidiaries, Philadelphia Indemnity Insurance Company (“PIIC”), issued insurance coverages, filed a complaint against PIIC in the United States District Court for the Southern District of Ohio (Western Division). This matter was reported in Part II, Item 1 of the Company’s Form 10-Q for the period ended June 30, 2002. Firstar subsequently has requested that the court permit Firstar to amend its complaint against PIIC, which amended complaint would add a bad faith claim for compensatory damages and punitive damages in three times the amount of any compensatory damage award. Firstar’s original complaint indicated that its projected damage estimates exceed $75.0 million. The proposed amended complaint does not specify the amount of Firstar’s alleged or projected damages. The Court has not ruled on Firstar’s request to amend its complaint.
	On July 30, 2003 PIIC requested the court to allow PIIC to file a counterclaim to Firstar’s complaint against PIIC seeking money damages and equitable relief relating to certain residual value insurance policies issued by PIIC to Firstar for policy years 1994, 1995, 1996, 1997 and 1998, as a result of material misrepresentations by Firstar in its applications for residual value insurance coverage. The counterclaim seeks money damages representing the amount of claim payments to date under the policies, less the amount of premium paid by Firstar, and a declaratory judgment that PIIC has no obligation to pay pending or future claims arising under the policies. The Court has not ruled on PIIC’s request to file a counterclaim to Firstar’s complaint.
	The Company has not recorded a litigation reserve with respect to the Firstar complaint.
	The Company is subject to routine legal proceedings in connection with its property and casualty insurance business. The Company is not involved in any other pending or threatened legal or administrative proceedings which management believes can reasonably be expected to have a material adverse effect on the Company’s financial condition or results of operations.
12.	Comprehensive Income
	Components 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 arising during the three and six

10

	months ended June 30, 2003 and 2002 was $3.6 million and $2.9 million, respectively and $1.5 million and $0.7 million, respectively. The related tax effect of Reclassification Adjustments for the three and six months ended June 30, 2003 and 2002 was $0.2 million and $1.1 million, respectively and $0.6 million and $1.1 million, respectively.
13.	Segment Information
	The 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 six and three months ended June 30, 2003 and 2002. Corporate information is included to reconcile segment data to the consolidated financial statements (in thousands):

11

		Six Months Ended,
		Commercial		Specialty		Personal
		Lines		Lines		Lines		Corporate			Total
June 30, 2003:
Gross Written Premiums		$	281,702	$	71,747	$	50,740		—		$	404,189
Net Written Premiums		$	184,443	$	47,139	$	18,270		—		$	249,852
Revenue:
	Net Earned Premiums	$	199,226	$	52,335	$	18,250		—		$	269,811
	Net Investment Income		—		—		—		19,175			19,175
	Net Realized Investment Loss		—		—		—		(1,783	)		(1,783	)
	Other Income		—		—		1,554		147			1,701
	Total Revenue		199,226		52,335		19,804		17,539			288,904
Losses and Expenses:
	Net Loss and Loss Adjustment Expenses		141,080		31,993		10,313		—			183,386
	Acquisition Costs and Other Underwriting Expenses		—		—		—		78,578			78,578
	Other Operating Expenses		—		—		1,058		2,248			3,306
	Total Losses and Expenses		141,080		31,993		11,371		80,826			265,270
Income Before Income Taxes			58,146		20,342		8,433		(63,287	)		23,634
Total Income Tax Expense			—		—		—		6,774			6,774
Net Income		$	58,146	$	20,342	$	8,433	$	(70,061	)	$	16,860
Total Assets			—		—	$	251,054	$	1,385,373		$	1,636,427
June 30, 2002:
Gross Written Premiums		$	199,029	$	52,324	$	45,894		—		$	297,247
Net Written Premiums		$	161,202	$	48,488	$	25,169		—		$	234,859
Revenue:
	Net Earned Premiums	$	131,346	$	39,408	$	18,763		—		$	189,517
	Net Investment Income		—		—		—		18,230			18,230
	Net Realized Investment Loss		—		—		—		(3,134	)		(3,134	)
	Other Income		—		—		922		(906	)		16
	Total Revenue		131,346		39,408		19,685		14,190			204,629
Losses and Expenses:
	Net Loss and Loss Adjustment Expenses		81,266		23,153		9,462		—			113,881
	Acquisition Costs and Other Underwriting Expenses		—		—		—		58,878			58,878
	Other Operating Expenses		—		—		62		2,876			2,938
	Total Losses and Expenses		81,266		23,153		9,524		61,754			175,697
Income Before Income Taxes			50,080		16,255		10,161		(47,564	)		28,932
Total Income Tax Expense			—		—		—		9,302			9,302
Net Income		$	50,080	$	16,255	$	10,161	$	(56,866	)	$	19,630
Total Assets			—		—	$	193,830	$	935,640		$	1,129,470

12

		Three Months Ended,
		Commercial		Specialty		Personal
		Lines		Lines		Lines		Corporate			Total
June 30, 2003:
Gross Written Premiums		$	151,464	$	33,701	$	25,742		—		$	210,907
Net Written Premiums		$	61,944	$	11,967	$	4,292		—		$	78,203
Revenue:
	Net Earned Premiums	$	89,553	$	23,632	$	8,264		—		$	121,449
	Net Investment Income		—		—		—		9,370			9,370
	Net Realized Investment Loss		—		—		—		(650	)		(650	)
	Other Income		—		—		974		66			1,040
	Total Revenue		89,553		23,632		9,238		8,786			131,209
Losses and Expenses:
	Net Loss and Loss Adjustment Expenses		75,142		13,352		4,532		—			93,026
	Acquisition Costs and Other Underwriting Expenses		—		—		—		32,158			32,158
	Other Operating Expenses		—		—		733		899			1,632
	Total Losses and Expenses		75,142		13,352		5,265		33,057			126,816
Income Before Income Taxes			14,411		10,280		3,973		(24,271	)		4,393
Total Income Tax Expense			—		—		—		766			766
Net Income		$	14,411	$	10,280	$	3,973	$	(25,037	)	$	3,627
Total Assets			—		—	$	251,054	$	1,385,373		$	1,636,427
June 30, 2002:
Gross Written Premiums		$	108,471	$	27,895	$	24,414		—		$	160,780
Net Written Premiums		$	86,340	$	25,715	$	13,305		—		$	125,360
Revenue:
	Net Earned Premiums	$	70,275	$	20,474	$	9,524		—		$	100,273
	Net Investment Income		—		—		—		9,375			9,375
	Net Realized Investment Loss		—		—		—		(3,181	)		(3,181	)
	Other Income		—		—		352		(337	)		15
	Total Revenue		70,275		20,474		9,876		5,857			106,482
Losses and Expenses:
	Net Loss and Loss Adjustment Expenses		44,609		11,487		4,736		—			60,832
	Acquisition Costs and Other Underwriting Expenses		—		—		—		31,057			31,057
	Other Operating Expenses		—		—		43		1,411			1,454
	Total Losses and Expenses		44,609		11,487		4,779		32,468			93,343
Income Before Income Taxes			25,666		8,987		5,097		(26,611	)		13,139
Total Income Tax Expense			—		—		—		4,186			4,186
Net Income		$	25,666	$	8,987	$	5,097	$	(30,797	)	$	8,953
Total Assets			—		—	$	193,830	$	935,640		$	1,129,470

13

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

General

Although the Company’s financial performance is dependent upon its own specific business characteristics, certain risk factors can affect the profitability of the Company. These include, but are not limited to:

• Industry factors - Historically the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns of soft markets followed by hard markets. The Company’s strategy is to focus on underwriting profits, and accordingly the Company’s marketing organization is being directed into those niche businesses that exhibit the greatest potential for underwriting profits.

• Competition - The Company competes in the property and casualty business with other domestic and international insurers having greater financial and other resources than the Company.

• Regulation - The Company’s insurance subsidiaries are subject to a substantial degree of regulatory oversight, which generally is designed to protect the interests of policyholders, as opposed to shareholders.

• Inflation - Property and casualty insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such amounts is known.

• Investment Risk - Substantial future increases in interest rates could result in a decline in the market value of the Company’s investment portfolio and resulting losses and/or reduction in shareholders’ equity.

• Claims development and the process of estimating loss reserves - Estimating the Company’s ultimate liability for unpaid loss and loss adjustment expenses is necessarily a complex and judgmental process, inasmuch as the amounts of any ultimate liability of the Company with respect to such claims are based on management’s informed estimates and judgments using data currently available.

• Catastrophe Exposure - The Company’s insurance subsidiaries issue insurance policies which provide coverage for commercial and personal property and casualty risks. It is possible that a catastrophic event could greatly increase claims under the insurance policies the insurance subsidiaries issue. Catastrophes may result from a variety of events or conditions, including hurricanes, windstorms, earthquakes, hail and other severe weather conditions and may include terrorist events. It is possible that a catastrophic event could adversely impact profitability.

• Reinsurance - The adequacy of reinsurance coverage which may be obtained by the Company and the ability and willingness of the Company’s reinsurers to pay.

The above risk factors should be read in conjunction with the Certain Critical Accounting Estimates and Judgments included in the Company’s Annual Report on Form 10-K For the fiscal year ended December 31, 2002.

Investments

The Company’s investment objective is the realization of relatively high levels of investment income while generating competitive after-tax total rates of return within a prudent level of risk and within the constraints of maintaining adequate securities in amount and duration to meet cash requirements of current operations and long-term liabilities, as well as maintaining and improving the Company’s A.M. Best rating. The Company utilizes external independent professional investment managers for its fixed maturity and equity investments. These investments consist of diversified issuers and issues, and as of June 30, 2003, approximately 88.9% and 5.9% of the total invested assets (total investments plus cash equivalents) on a cost basis consisted of investments in fixed maturity and equity securities, respectively, versus 90.2% and 5.6%, respectively, at December 31, 2002.

14

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

During 2003 the relative percentage investment in tax-exempt fixed maturity securities versus taxable fixed maturity securities increased due to the Company taking advantage of the more favorable after-tax yields. As of June 30, 2003, on a cost basis, investment grade tax-exempt fixed maturity securities represented 31.2% of the total invested assets, compared to 30.3% as December 31, 2002.

Collateralized mortgage and asset backed securities, on a cost basis, amounted to $95.8 million and $311.6 million, respectively, as of June 30, 2003, and $89.2 and $284.1, respectively, as of December 31 2002. The collateralized mortgage and asset backed investments are shorter tranche securities possessing favorable prepayment risk profiles.

The Company regularly performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed for all securities, except interests in securitized assets, meeting predetermined thresholds, to determine whether such decline is other than temporary. If the Company determines a decline in value to be other than temporary, based upon its detailed review, or if a decline in value for an equity investment has persisted continuously for nine months the cost basis of the security is written down to its fair value. The factors considered in reaching the conclusion that a decline below cost is other-than-temporary include, but are not limited to, whether: the issuer is in financial distress; the investment is secured; a significant credit rating action has occurred; scheduled interest payments have been delayed or missed; or changes in laws and/or regulations have impacted an issuer or industry. The amount of any write down is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $0 million for the three months ended June 30, 2003 and 2002 and $0.9 million and $0 million, respectively, for the six months ended June 30, 2003 and 2002. The $0.9 million in non-cash realized investment losses resulted from other than temporary declines in the fair value of certain holdings in the Company’s common stock portfolio. The Company primarily attributes these other than temporary declines in fair value to an uncertain economic climate, the overhang of corporate governance issues, high profile bankruptcies and the recent war with Iraq.

Additionally, the Company conducts its impairment evaluation and recognition for interests in securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board (“EITF”). Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $1.6 million and $1.2 million, respectively, and $2.3 million and $1.2 million, respectively, for the three and six months ended June 30, 2003 and 2002, respectively. These non-cash realized investment losses were primarily due to investments in collateralized bond obligations as a result of the current historical highs in non-investment grade default rates.

The Company’s fixed maturity portfolio amounted to $1,000.6 million and $854.5 million, as of June 30, 2003 and December 31, 2002, respectively, of which 98.6% of the portfolio is comprised of investment grade securities. Since the fourth quarter of 2001, U.S. investment grade securities have experienced varying price and ratings volatility, having been affected by the uncertain economic climate following the September 11, 2001 terrorist attacks, the corporate governance issues following the Enron scandal, and the subsequent stream of corporate scandals and high profile bankruptcies. While these circumstances have the potential to impact investment grade securities, the high quality of the Company’s overall “AA+” rated fixed maturity portfolio and the decline in interest rates have mitigated potential volatility. The Company had fixed maturity investments with unrealized losses amounting to $12.8 million and $9.2 million as of June 30, 2003 and December 31, 2002, respectively. Of this amount, interests in securitized assets had unrealized losses amounting to $11.3 million and $7.3 million as of June 30, 2003 and December 31, 2002, respectively, and investments in aircraft collateralized Enhanced Equipment Trust Certificates (EETCs) had unrealized losses amounting to $0.7 and $1.3 million as of June 30, 2003 and December 31, 2002, respectively. As discussed above, the Company’s impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the EITF. With respect to the EETCs, these investments are current on interest and sinking fund payments, and are subjected to a quarterly impairment

15

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

review which includes performing a liquidation collateral analysis that incorporates various stress scenarios impacting the security’s implied loan-to-value levels.

The following table identifies the period of time securities with an unrealized loss at June 30, 2003 have continuously been in an unrealized loss position. Included in the amounts shown in the table are $9.0 million of unrealized losses due to non-investment grade fixed maturity securities having a fair value of $13.8 million. No issuer of securities or industry represents more than 5.3% and 7.8%, respectively, of the total estimated fair value, or 22.6% and 32.6%, respectively, of the total gross unrealized loss included in the table below. As previously discussed, there are certain risks and uncertainties inherent in the Company’s impairment methodology. Should the Company subsequently determine a decline in the fair value below the cost basis to be other than temporary, the security would be written down to its fair value and the difference would be included in earnings as a realized loss for the period such determination was made.

	Gross Unrealized Losses
	(in millions)
	Fixed Maturities
Continuous	Available for Sale				Total
time in unrealized	Excluding Interests		Interests in		Fixed Maturities
loss position	in Securitized Assets		Securitized Assets		Available for Sale		Equity Securities		Total Investments
0 - 3 months	$	0.3	$	1.2	$	1.5	$	0.1	$	1.6
4 - 6 months		—		—		—		0.2		0.2
7 - 9 months		—		0.2		0.2		0.2		0.4
10 - 12 months		—		1.8		1.8		—		1.8
13 - 18 months		—		6.5		6.5		—		6.5
19 - 24 months		1.2		0.1		1.3		—		1.3
> 24 months		—		1.5		1.5		—		1.5
Total Gross Unrealized Losses	$	1.5	$	11.3	$	12.8	$	0.5	$	13.3
Estimated fair value of securities with a gross unrealized loss	$	39.5	$	96.9	$	136.4	$	15.2	$	151.6

The following table presents certain information with respect to individual securities with a significant unrealized loss position as of June 30, 2003.

	Significant Unrealized Losses by Security
	(in millions)
Issuer	Security Type		Carrying Value		Unrealized Loss
Alliance CAP FDG CLO A-3 144A		Fixed Maturity - Interest in Securitized Assets	$	3.4	$	0.5
Continental Airlines 2000-1-C-2		Fixed Maturity		2.3		0.7
Conseco Fin SEC Corp 2000-4ml		Fixed Maturity - Interest in Securitized Assets		0.9		1.2
Conseco Fin SEC Corp SER 2000-4ml		Fixed Maturity - Interest in Securitized Assets		0.3		0.9
Greentree Financial Corp. 99-2 B1		Fixed Maturity - Interest in Securitized Assets		0.6		2.3
Nextcard CRCN MNT 2001-1 CLB144A		Fixed Maturity - Interest in Securitized Assets		2.0		3.0
Waterside Loan TR JR NT CLO 144A		Fixed Maturity - Interest in Securitized Assets		2.2		0.8
			$	11.7	$	9.4

For the six months ended June 30, 2003 the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.1 million and $0.7 million, respectively. The fair value of the fixed maturity and equity securities at

16

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

the time of sale was $1.5 million and $3.4 million, respectively. During the three months ended June 30, 2003 the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.1 million and $0.2 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $1.5 million and $2.0 million, respectively. The decision to sell these securities was based upon management’s assessment of economic conditions, and with respect to the equity security sales, the desire to limit investment exposure to the equity market based upon this assessment.

Results of Operations (Six Months ended June 30, 2003 vs. June 30, 2002)

          Premiums: Gross written premiums grew $107.0 million (36.0%) to $404.2 million for the six months ended June 30, 2003 from $297.2 million for the same period of 2002; gross earned premiums grew $102.7 million (41.0%) to $353.2 million for the six months ended June 30, 2003 from $250.5 million for the same period of 2002; net written premiums increased $15.0 million (6.4%) to $249.9 million for the six months ended June 30, 2003 from $234.9 million for the same period of 2002; and net earned premiums grew $80.3 million (42.4%) to $269.8 million in 2003 from $189.5 million in 2002.

The respective gross written premium increases for commercial lines, specialty lines and personal lines segments for the six months ended June 30, 2003 vs. June 30, 2002 amount to $82.7 million (41.5%), $19.4 million (37.1%) and $4.9 million (10.6%), respectively. The overall growth in gross written premiums is primarily attributable to the following:

• Further rating downgrades of certain major competitor property and casualty insurance companies have led to their diminished presence in the Company’s commercial and specialty lines business segments and continue to result in additional prospects and increased premium writings, most notably for the Company’s various commercial package and non-profit D&O product lines.

• The displacement of certain competitor property and casualty insurance companies and their independent agency relationships continues to result in new agency relationship opportunities for the Company. These relationship opportunities have resulted in additional policyholders and premium writings for the Company’s commercial and specialty lines segments.

• Continued expansion of marketing efforts relating to commercial lines and specialty lines products through the Company’s field organization and preferred agents.

• As a result of firming prices in the property and casualty industry, rate increases on renewal business have approximated 6.0%, 14.2%, and 9.0% for the commercial, specialty and the personal lines segments, respectively. Additionally, in-force policy counts have increased 27.1% and 29.3% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts have decreased approximately 1.0% for the personal lines segment as a result of restricting new business and not renewing certain business to manage overall property exposures and the related catastrophe loss considerations.

The respective net written premium increases (decreases) for commercial lines, specialty lines and personal lines segments for the six months ended June 30, 2003 vs. June 30, 2002 amount to $23.2 million (14.4%), ($1.3) million (-2.8%) and ($6.9) million (-27.4%) respectively. The differing percentage changes in net written premiums versus gross written premiums for the commercial lines segment during the period results from:

• The Company entering into a Quota Share reinsurance agreement (effective April 1, 2003) covering all of the Company’s lines of business. Under this agreement, the Company cedes 22% of its net written premium (including 22% of net unearned premium reserves at April 1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium reduced by the reinsurers’ expense allowance, and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit.

17

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

	During the six months ended June 30, 2003, the Company ceded $103.6 million of written premium, which included unearned premium reserves of $63.6 million at April 1, 2003.
•	Lower reinsurance costs (ceded premiums) as a result of increasing the Company’s loss retention from $0.5 million to $2.0 million on its commercial lines per-risk property reinsurance treaty and from $0.9 million to $1.0 million on its excess liability reinsurance treaty effective January 1, 2003.

          Net Investment Income Net investment income approximated $19.2 million for the six months ended June 30, 2003 and $18.2 million for the same period of 2002. Total investments grew to $1,071.7 million at June 30, 2003 from $768.9 million at June 30, 2002. The growth in investment income is due to investing net cash flows provided from operating activities The capital market environment during most of 2002 and 2003 (low U.S. Treasury yields) had the effect of increasing the level of prepayments in certain of the Company’s interest rate sensitive investments. The Company’s average duration of its fixed income portfolio approximated 3.2 years at June 30, 2003, compared to 3.5 years at June 30, 2002. Additionally, due to the capital market environment, the Company has invested approximately $59.7 million in overall “AAA” rated floating rate and shorter amortizing securities to reduce interest rate risk with the expectation of reinvesting these funds into longer duration investments at higher future fixed income rates. The Company’s tax equivalent book yield on its fixed income holdings was 4.8% at June 30, 2003, compared to 6.2% at June 30, 2002. Net investment income was reduced by $0.5 million due to the interest credit on the Funds Held Account balance pursuant to the Company’s quota share reinsurance agreement (see Premiums).

The total return, which includes the effect of realized and unrealized gains and losses, of the Company’s fixed income portfolio was 2.68% and 4.11% for the six months ended June 30, 2003 and 2002, respectively, versus the Lehman Brothers Intermediate Aggregate Bond Index (“the Index”) total return of 3.18% and 3.92% for the same periods, respectively. The performance during the six months ended June 30, 2003 differed from the Index primarily due to recording of non-cash realized investment losses as a result of the Company’s impairment evaluation (see Investments).

          Net Realized Investment Loss: Net realized investment losses were $1.8 million for the six months ended June 30, 2003 and $3.1 million for the same period in 2002. The Company realized net investment gains of $1.3 million and $0.1 million from the sale of fixed maturity and equity securities, respectively, for the six months ended June 30, 2003, and $2.3 million and $0.9 million in non-cash realized investment losses for fixed maturity and common stock investments, respectively, as a result of the Company’s impairment evaluation. The Company realized net investment losses of $1.9 million principally from the sales of common stock equity securities and $1.2 million in non-cash realized investment losses for fixed maturity investments as a result of the Company’s impairment evaluation during the six months ended June 30, 2002.

          Other Income: Other income approximated $1.7 million for the six months ended June 30, 2003 and $16,000 for the same period of 2002. Other income primarily consists of commissions earned on brokered personal lines business, and to a lesser extent brokered commercial lines business. The Company is seeking to increase brokering activities in its personal lines segment as it is restricting new business and not renewing certain policies in designated areas of Florida as a result of its property exposures in these areas and related catastrophe loss considerations.

          Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $69.5 million (61.0%) to $183.4 million for the six months ended June 30, 2003 from $113.9 million for the same period of 2002 and the loss ratio increased to 68.0% in 2003 from 60.0% in 2002. This increase in net loss and loss adjustment expenses was due to the 42.4% growth in net earned premiums, and to the Company increasing the estimated gross and net loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2002 by $33.0 million to $59.8 million and $57.9 million, respectively. As of March 31, 2003 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for these policies of $47.4 million ($40.0 million net of reinsurance). The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination, which can be up to five years from lease inception. Adverse

18

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

trends further deteriorated in both frequency and severity on leases expiring in 2003. As part of the Company’s monitoring and evaluation process, a consulting firm was engaged during the second quarter of 2003 to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the result of the indications and subsequent evaluation by the Company and changes in the Company’s assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this deterioration to the following factors that led to a softening of prices in the used car market subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and other incentives which increased new car sales and the volume of trade-ins, daily rental units being sold into the market earlier and in greater numbers than expected further adding to the oversupply of used cars; and the overall general economic conditions. As of June 30, 2003, approximately 61,000 leases were outstanding under the Company’s residual value policies. The Company is projecting a 42% loss frequency and average loss of approximately $2,300 per claim with respect to these leases.

Additionally, during the period the Company ceded $19.0 million in net loss and loss adjustment expenses pursuant to the quota share reinsurance agreement (see Premiums) and decreased the gross and net liability for unpaid loss and loss adjustment expenses for accident year 2002, principally in the property line of its commercial package products, by approximately $9.0 million due to better than expected loss experience.

          Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $19.7 million (33.4%) to $78.6 million for the six months ended June 30, 2003 from $58.9 million for the same period of 2002. This increase was due primarily to the 42.4% growth in net earned premiums. During the period the Company ceded $34.8 million of net earned premium and earned $13.3 million in ceding commission under the quota share reinsurance agreement (see Premiums).

          Other Operating Expenses: Other operating expenses increased $0.4 million to $3.3 million for the six months ended June 30, 2003 from $2.9 million for the same period of 2002 as the Company continues to control its expenses.

          Income Tax Expense: The Company’s effective tax rate for the six months ended June 30, 2003 and 2002 was 28.7% and 32.2%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities. The decrease in the effective tax rate is principally due to a greater investment of cash flows in tax-exempt securities relative to taxable securities.

Results of Operations (Three Months ended June 30, 2003 vs. June 30, 2002)

          Premiums: Gross written premiums grew $50.1 million (31.2%) to $210.9 million for the three months ended June 30, 2003 from $160.8 million for the same period of 2002; gross earned premiums grew $48.9 million (37.2%) to $180.2 million for the three months ended June 30, 2003 from $131.3 million for the same period of 2002; net written premiums decreased $47.2 million (37.6%) to $78.2 million for the three months ended June 30, 2003 from $125.4 million for the same period of 2002; and net earned premiums grew $21.1 million (21.0%) to $121.4 million in 2003 from $100.3 million in 2002.

The respective gross written premium increases for commercial lines, specialty lines and personal lines segments for the three months ended June 30, 2003 vs. June 30, 2002 amount to $43.0 million (39.6%), $5.8 million (20.8%) and $1.3 million (5.4%), respectively. The overall growth in gross written premiums is primarily attributable to the following:

• Further rating downgrades of certain major competitor property and casualty insurance companies have led to their diminished presence in the Company’s commercial and specialty lines business segments and continue to result in additional prospects and increased premium writings, most notably for the Company’s various commercial package and non-profit D&O product lines.

• The displacement of certain competitor property and casualty insurance companies and their independent agency relationships continues to result in new agency relationship opportunities for the Company. These

19

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

	relationship opportunities have resulted in additional policyholders and premium writings for the Company’s commercial and specialty lines segments.
•	Continued expansion of marketing efforts relating to commercial lines and specialty lines products through the Company’s field organization and preferred agents.
•	As a result of firming prices in the property and casualty industry, rate increases on renewal business have approximated 5.9%, 15.6%, and 7.7% for the commercial, specialty and the personal lines segments, respectively. Additionally, in force policy counts have increased 27.1% and 29.3% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts have decreased approximately 1.0% for the personal lines segment as a result of restricting new business and not renewing certain business to manage overall property exposures and the related catastrophe loss considerations.

Additionally, the respective net written premium decreases for commercial lines, specialty lines and personal lines segments for the three months ended June 30, 2003 vs. June 30, 2002 amount to $24.5 million (28.3%), $13.7 million (53.5%) and $9.0 million (67.7%) respectively. The differing percentage changes in net written premiums versus gross written premiums during the period results from:

• The Company entering into a Quota Share reinsurance agreement (effective April 1, 2003) covering all of the Company’s lines of business. Under this agreement, the Company cedes 22% of its net written premium (including 22% of net unearned premium reserves at April 1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional commission of 33.0%, adjusted prorata based upon the ratio of losses incurred to premiums earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium reduced by the reinsurers’ expense allowance, and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. During the three months ended June 30, 2003, the Company ceded $103.6 million of written premium which included unearned premium reserves of $63.6 million at April 1, 2003.

• Lower reinsurance costs (ceded premiums) as a result of increasing the Company’s loss retention from $0.5 million to $2.0 million on its commercial lines per-risk property reinsurance treaty, and from $0.9 million to $1.0 million on its excess liability reinsurance treaty effective January 1, 2003.

          Net Investment Income Net investment income approximated $9.4 million for the three months ended June 30, 2003 and 2002. Total investments grew to $1,071.7 million at June 30, 2003 from $768.9 million at June 30, 2002. The capital market environment during most of 2002 and 2003 (low U.S. Treasury yields) had the effect of increasing the level of prepayments in certain of the Company’s interest rate sensitive investments. The Company’s average duration of its fixed income portfolio approximated 3.2 years at June 30, 2003, compared to 3.5 years at June 30, 2002. Additionally, due to the capital market environment, the Company has invested approximately $59.7 million in overall “AAA” rated floating rate and shorter amortizing securities to reduce interest rate risk with the expectation of reinvesting these funds into longer duration investments at higher future fixed income rates. The Company’s tax equivalent book yield on its fixed income holdings was 4.8% at June 30, 2003, compared to 6.2% at June 30, 2002. Net investment income was reduced by $0.5 million due to the interest credit on the Funds Held to Reinsurer Account balance pursuant to the Company’s quota share reinsurance agreement (see Premiums).

          The total return, which includes the effect of realized and unrealized gains and losses, of the Company’s fixed income portfolio was 1.69% and 3.45% for the three months ended June 30, 2003 and 2002, respectively, versus the Lehman Brothers Intermediate Aggregate Bond Index (“the Index”) total return of 1.89% and 3.59% for the same periods, respectively. While the performance during the three months ended June 30, 2003 and 2002 was similar to the total return of the Index, performance differed from the Index primarily due to recording of non-cash realized investment losses as a result of the Company’s impairment evaluation (see Investments).

          Net Realized Investment Loss: Net realized investment losses were $0.7 million for the three months ended June 30, 2003 and $3.2 million for the same period in 2002. The Company realized net investment gains of $0.9

20

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

million and $0.1 million from the sale of fixed maturity and equity securities, respectively, for the three months ended June 30, 2003, and $1.7 million in non-cash realized investment losses for fixed maturity investments as a result of the Company’s impairment evaluation. The Company realized net investment losses of $2.0 million, principally from the sales of common stock equity securities and $1.2 million in non-cash realized investment losses for fixed maturity investments as a result of the Company’s impairment evaluation during the three months ended June 30, 2002.

     Other Income: Other income approximated $1.0 million for the three months ended June 30, 2003 and $15,000 for the same period of 2002. Other income primarily consists of commissions earned on brokered personal lines business, and to a lesser extent brokered commercial lines business. The Company is seeking to increase brokering activities in its personal lines segment as it is restricting new business and not renewing certain policies in designated areas of Florida as a result of its property exposures in these areas and related catastrophe loss considerations.

     Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $32.2 million (53.0%) to $93.0 million for the three months ended June 30, 2003 from $60.8 million for the same period of 2002 and the loss ratio increased to 76.6% in 2003 from 60.7% in 2002. This increase in net loss and loss adjustment expenses was due to the 21.0% growth in net earned premiums, and to the Company increasing the estimated gross and net loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2002 by $33.0 million to $59.8 million and $57.9 million, respectively. As of March 31, 2003 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for these policies of $47.4 million ($40.0 million net of reinsurance). The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination, which can be up to five years from lease inception. Adverse trends further deteriorated in both frequency and severity on leases expiring in 2003. As part of the Company’s monitoring and evaluation process, a consulting firm was engaged during the second quarter of 2003 to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the result of the indications and subsequent evaluation by the Company and changes in the Company’s assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this deterioration to the following factors that led to a softening of prices in the used car market subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and other incentives which increased new car sales and the volume of trade-ins, daily rental units being sold into the market earlier and in greater numbers than expected further adding to the oversupply of used cars; and the overall general economic conditions. As of June 30, 2003, approximately 61,000 leases were outstanding under the Company’s residual value policies. The Company is projecting a 42% loss frequency and average loss of approximately $2,300 per claim with respect to these leases.

Additionally, during the period the Company ceded $19.0 million in net loss and loss adjustment expenses pursuant to the quota share reinsurance agreement (see Premiums) and decreased the gross and net liability for unpaid loss and loss adjustment expenses for accident year 2002, principally in the property line of its commercial package products, by approximately $9.0 million due to better than expected loss experience.

     Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $1.1 million (3.6%) to $32.2 million for the three months ended June 30, 2003 from $31.1 million for the same period of 2002. This increase was due primarily to the 21.0% growth in net earned premiums. During the period the company ceded $34.8 million in net earned premiums and earned $13.3 million in ceding commission under the quota share reinsurance agreement (see Premiums).

     Other Operating Expenses: Other operating expenses increased $0.1 million to $1.6 million for the three months ended June 30, 2003 from $1.5 million for the same period of 2002 as the Company continues to control its expenses.

     Income Tax Expense: The Company’s effective tax rate for the three months ended June 30, 2003 and 2002 was 17.4% and 31.9%, respectively. The effective rates differed from the 35% statutory rate principally due to

21

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

investments in tax-exempt securities. The decrease in the effective tax rate is principally due to a greater investment of cash flows in tax-exempt securities relative to taxable securities.

Liquidity and Capital Resources

     For the six months ended June 30, 2003, the Company’s investments experienced unrealized investment appreciation of $4.0 million, net of the related deferred tax expense of $2.2 million. At June 30, 2003, the Company had total investments with a carrying value of $1,071.7 million, of which 93.4% 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 securities and asset backed securities. The collateralized mortgage securities and asset backed securities consist of short tranche securities possessing favorable pre-payment risk profiles. The remaining 6.6% of the Company’s total investments consisted primarily of publicly traded common stock securities.

     The Company produced net cash from operations of $160.9 million and $84.5 million, respectively, for the six months ended June 30, 2003 and 2002. 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 six months ended June 30, 2003 was primarily generated from strong premium growth during the current year due to increases in the number of policies written and price increases realized on renewal business. Net loss and loss expense payments were $96.4 million and $76.1 million, respectively, for the six months ended June 30, 2003 and 2002. Management believes that the Company has adequate liquidity to pay all claims and meet all other cash needs.

     Two of the Company’s insurance subsidiaries are members of the Federal Home Loan Bank of Pittsburgh (“FHLB”). A primary advantage of FHLB membership is the ability of members to access credit products from a reliable capital markets provider. The availability of any one member’s access to credit is based upon its FHLB eligible collateral. At June 30, 2003 the insurance subsidiaries’ borrowing capacity was $70.5 million. The insurance subsidiaries have utilized a portion of their borrowing capacity to purchase a diversified portfolio in investment grade floating rate securities. These purchases were funded by floating rate FHLB borrowings to achieve a positive spread between the rate of interest on these securities and borrowing rates. The remaining borrowing capacity will provide an immediately available line of credit. Borrowings aggregated $48.1 million at June 30, 2003, bear interest at adjusted LIBOR, mature twelve months from inception and are collateralized by $61.8 million of the Company’s fixed maturity securities. The weighted-average interest rate on borrowings outstanding as of June 30, 2003 was 1.3%.

     Risk-based capital is a method developed by the NAIC designed to measure the acceptable amount of capital and surplus an insurer should have based on the inherent specific risks of each insurer. The adequacy of a company’s actual capital and surplus is evaluated by a comparison to the risk-based capital results. Insurers failing to meet minimum risk-based capital requirements may be subject to scrutiny by the insurer’s domiciliary insurance department and ultimately rehabilitation or liquidation. Based on the standards currently adopted, the Company’s insurance subsidiaries capital and surplus is in excess of the prescribed risk-based capital requirements.

Forward-Looking Information

     Certain information included in this report and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company’s business, and the other matters referred to above include, but are not limited to: (i) changes in the business environment in which

22

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

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.

23

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk

          The Company’s financial instruments are subject to the market risk of potential losses from adverse changes in market rates and prices. The primary market risks to the Company are equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. The Company has established, among other criteria, duration, asset quality and asset allocation guidelines for managing its investment portfolio market risk exposure. The Company’s investments are held for purposes other than trading and consist of diversified issuers and issues.

     The table below provides information about the Company’s financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in U.S. dollar equivalents.

	JUNE 30, 2003
	EXPECTED MATURITY DATES																					TOTAL
	(In thousands, except average interest rate)																					FAIR
	2003			2004			2005			2006			2007			Thereafter			TOTAL			VALUE
FIXED MATURITIES AVAILABLE FOR SALE:
Principal Amount	$	28,050		$	139,981		$	190,869		$	132,536		$	100,663		$	374,401		$	966,500		$	977,261
Book Value	$	28,086		$	141,673		$	196,667		$	134,444		$	102,819		$	369,433		$	973,122			—
Average Interest Rate		5.21	%		3.74	%		3.70	%		3.77	%		4.36	%		4.55	%		4.15	%		3.60	%
PREFERRED:
Principal Amount	$	4,750		$	1,500		$	1,000		$	3,500			—		$	125		$	10,875		$	11,560
Book Value	$	4,883		$	1,489		$	1,040		$	3,666			—		$	126		$	11,204			—
Average Interest Rate		5.91	%		6.06	%		6.84	%		6.33	%		—			6.20	%		6.20	%		6.01	%
SHORT-TERM INVESTMENTS:
Principal Amount	$	56,834			—			—			—			—			—		$	56,834		$	56,834
Book Value	$	56,857			—			—			—			—			—		$	56,857			—
Average Interest Rate		1.22	%		—			—			—			—			—			1.22	%		1.22	%
LOANS PAYABLE:
Principal Amount	$	17,272		$	30,839			—			—			—			—		$	48,111			—
Average Interest Rate		1.45	%		1.18	%		—			—			—			—			1.31	%		—

24

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

     (a)  Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) have concluded that, as of the end of the period covered by this report on Form 10-Q, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within such entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

     (b)  Changes in Internal Controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date, including any corrective actions with regard to deficiencies and material weaknesses in such controls.

25

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION

Item 1.	Legal Proceedings
	On April 30, 2002, U.S. Bank, N.A. d/b/a Firstar Bank (“Firstar”), a bank to which one of the Company’s insurance subsidiaries, Philadelphia Indemnity Insurance Company (“PIIC”), issued insurance coverages, filed a complaint against PIIC in the United States District Court for the Southern District of Ohio (Western Division). This matter was reported in Part II, Item 1 of the Company’s Form 10-Q for the period ended June 30, 2002. Firstar subsequently has requested that the court permit Firstar to amend its complaint against PIIC, which amended complaint would add a bad faith claim for compensatory damages and punitive damages in three times the amount of any compensatory damage award. Firstar’s original complaint indicated that its projected damage estimates exceed $75.0 million. The proposed amended complaint does not specify the amount of Firstar’s alleged or projected damages. The Court has not ruled on Firstar’s request to amend its complaint.
	On July 30, 2003 PIIC requested the court to allow PIIC to file a counterclaim to Firstar’s complaint against PIIC seeking money damages and equitable relief relating to certain residual value insurance policies issued by PIIC to Firstar for policy years 1994, 1995, 1996, 1997 and 1998, as a result of material misrepresentations by Firstar in its applications for residual value insurance coverage. The counterclaim seeks money damages representing the amount of claim payments to date under the policies, less the amount of premium paid by Firstar, and a declaratory judgment that PIIC has no obligation to pay pending or future claims arising under the policies. The Court has not ruled on PIIC’s request to file a counterclaim to Firstar’s complaint.
Item 2.	Changes in Securities and Use of Proceeds
	Not applicable.
Item 3.	Defaults Upon Senior Securities
	Not applicable.
Item 4.	Submission of Matters to a Vote of Security Holders
	At the Company’s annual meeting of shareholders held on May 1, 2003 the following nominees were elected to the Board of Directors:

	Votes For		Votes Withheld
Michael J. Cascio		19,913,821		141,317
Elizabeth H. Gemmill		19,913,821		141,317
William J. Henrich, Jr.		19,913,821		141,317
Paul R. Hertel, Jr.		19,894,476		160,662
James J. Maguire		19,910,821		144,317
James J. Maguire, Jr.		19,191,993		863,145
Margaret M. Mattix		19,913,821		141,317
Maureen H. McCullough		19,913,821		141,317
Michael J. Morris		19,913,821		141,317
Sean S. Sweeney		19,169,648		885,940
J. Eustace Wolfington		19,913,821		141,317

26

The following other matters were approved at the Annual Meeting:

	Votes For		Votes Against		Abstentions		Broker Non Votes
Approval of the Appointment of PricewaterhouseCoopers LLP as Independent Auditors for the Fiscal Year Ending December 31, 2003		19,883,225		171,693		220		0

Item 5.	Other information
	Not applicable.
Item 6.	Exhibits and Reports on Form 8-K
	a.     Exhibits:

Exhibit No.	Description
10.1 *	Florida Hurricane Catastrophe Fund reimbursement contract effective June 1, 2003
31.1 *	Certification of the Company’s chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *	Certification of the Company’s chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *	Certification of the Company’s chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 *	Certification of the Company’s chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*     Filed herewith.

b.     The Company filed the following report on Form 8-K during the quarterly period ended June 30, 2003:

Date of Report	Item Reported
April 21, 2003	First Quarter Conference Call Presentation
April 23, 2003	First Quarter Results March 31, 2003 and Regulation FD Disclosure

27

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    August 8, 2003	James J. Maguire, Jr.
	James J. Maguire, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)
Date    August 8, 2003	Craig P. Keller
	Craig P. Keller
	Executive Vice President, Secretary,
	Treasurer and Chief Financial Officer
	(Principal Financial and Accounting
	Officer)

28 EX-10.1 3 w89051exv10w1.htm FLORIDA HURRICANE CATASTROPHE FUND CONTRACT

Exhibit 10.1

STATE BOARD OF ADMINISTRATION
OF FLORIDA

1801 Hermitage Boulevard-Suite 100
Tallahassee, Florida 32308
(850) 488-4406

Post Office Box 13300
32317-3300 JEB BUSH
GOVERNOR
AS CHAIRMAN

TOM CALLAGHER
CHIEF FINANCIAL OFFICER
AS TREASURER

CHARLIE CRIST
ATTORNEY GENERAL
AS SECRETARY

COLEMAN STIPANOVICH
EXECUTIVE DIRECTOR

REIMBURSEMENT CONTRACT
Effective: June 1, 2003
(Contract)

between

PHILADELPHIA INDEMNITY INSURANCE COMPANY
Bala Cynwyd, PA
(Company)

NAIC # 18058

and

THE STATE BOARD OF ADMINISTRATION OF THE STATE OF FLORIDA (SBA) WHICH ADMINISTERS THE FLORIDA HURRICANE CATASTROPHE FUND (FHCF)

PREAMBLE

The Legislature of the State of Florida has enacted Section 215.555, Florida Statutes “Statute”, which directs the SBA to administer the FHCF. This Contract is subject to the Statute and to any administrative rule adopted pursuant thereto, and is not intended to be in conflict therewith.

In consideration of the promises set forth in this Contract, the parties agree as follows:

ARTICLE I - SCOPE OF AGREEMENT

As a condition precedent to the SBA’s obligations under this Contract, the Company, an Authorized Insurer or an entity writing Covered Policies under Section 627.351, Florida Statutes, in the State of Florida, shall report to the SBA in a specified format the business it writes which is described in this Contract as Covered Policies.

The terms of this Contract shall determine the rights and obligations of the parties. This Contract provides reimbursement to the Company under certain circumstances, as described herein, and does not provide or extend insurance or reinsurance coverage to any person, firm, corporation or other entity. The SBA shall reimburse the Company for its Ultimate Net Loss on Covered Policies in excess of the Company’s Retention as a result of each Loss Occurrence commencing during the Contract Year, to the extent funds are available, all as hereinafter defined.

FHCF-2003K

1

ARTICLE II - PARTIES TO THE CONTRACT

This Contract is solely between the Company and the SBA which administers the FHCF. In no instance shall any insured of the Company or any claimant against an insured of the Company, or any other third party, have any rights under this Contract, except as provided in Article XIV. The SBA will only disburse funds to the Company, except as provided for in Article XIV of this Contract.

ARTICLE III - TERM

This Contract shall apply to Loss Occurrences which commence during the period from 12:01 a.m., Eastern Time, June 1, 2003, to 12:01 a.m., Eastern Time, June 1, 2004 (Contract Year).

The Company must designate a coverage level, make any required selections within this Contract, and return this fully executed Contract (two originals) to the FHCF Administrator so that the Contract, including schedules, is received by the FHCF Administrator no later than 5 p.m., Central Time, June 2, 2003 (the first business day following June 1, 2003). Failure to do so will result in a referral to the Office of Insurance Regulation within the Department of Financial Services for administrative action. Furthermore, the Company’s coverage level under this Contract will be deemed as follows:

(1)	For Companies that are a member of a National Association of Insurance Commissioners (NAIC) group, the same coverage level selected by the other Companies of the same NAIC group shall be deemed. If executed Contracts for none of the members of an NAIC group have been received by the FHCF Administrator, the coverage level from the prior Contract Year shall be deemed.
(2)	For Companies that are not a member of an NAIC group under which other Companies are active participants in the FHCF, the coverage level from the prior Contract Year shall be deemed.
(3)	For New Participants that are a member of an NAIC group, the same coverage level selected by the other Companies of the same NAIC group shall be deemed.
(4)	For New Participants, as that term is defined in Article V(21) herein, that are not a member of an NAIC group under which other Companies are active participants in the FHCF, the 45% coverage level shall be deemed.

The SBA shall not be liable for Loss Occurrences which commence after the effective time and date of expiration or termination. Should this Contract expire or terminate while a Loss Occurrence covered hereunder is in progress, the SBA shall be responsible for such Loss Occurrence in progress in the same manner and to the same extent it would have been responsible had the Contract expired the day following the conclusion of the Loss Occurrence in progress.

ARTICLE IV - LIABILITY OF THE FHCF

(1)	The SBA shall reimburse the Company, with respect to each Loss Occurrence commencing during the Contract Year for the “Reimbursement Percentage” elected, this percentage times the amount of Ultimate Net Loss paid by the Company in excess of the Company’s Retention, plus 5% of the reimbursed losses for Loss Adjustment Expense Reimbursement.
(2)	The Reimbursement Percentage will be 45% or 75% or 90%, at the Company’s option as elected under Schedule A attached to and forming part of this Contract, unless it must be adjusted for some or all Companies in the FHCF as provided in (3) below.
(3)	In determining reimbursements under this Article, the SBA shall:

(a) First, reimburse Companies qualified as limited apportionment companies under Section 627.351(2)(b)3., Florida Statutes, for the amount (if any) of reimbursement due under the individual Company’s Contract, but not to exceed the lesser of $10 million or an amount equal to 10 times the individual Company’s Reimbursement Premium for the Contract Year. This provision does not apply if the projected Balance of the Fund as of December 31 of the

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	Contract Year, exclusive of any bonding capacity of the FHCF, exceeds $2 billion. Further, if the Company is a member of an NAIC group, the Company may not receive reimbursement under this provision if any other member of the NAIC group has received reimbursement under this provision.
(b)	Next, reimburse each of the Companies for the amount (if any) of reimbursement due under the individual Company’s Contract, but not to exceed an amount equal to the Projected Payout Multiple times the individual Company’s Reimbursement Premium for the Contract Year, provided, however, that entities created under Section 627.351, Florida Statutes, shall be further reimbursed in accordance with subsection (c) below. If the Company qualifies as a limited apportionment company under Section 627.351(2)(b)3., Florida Statutes, any amount payable under this provision shall be reduced by the amount (if any) payable under (a) above.
(c)	Thereafter, reimburse each entity created by Section 627.351, Florida Statutes, for a pro rata share of any remaining Actual Claims-Paying Capacity of the FHCF based on the proportion determined by dividing such entity’s remaining reimbursable losses under Covered Policies from Covered Events for the Contract Year by the total remaining reimbursable losses under Covered Policies from Covered Events for the Contract Year, for which any remaining FHCF balance or bond proceeds are sufficient, up to a limit of $11 billion for any one Contract Year, in accordance with Section 215.555(4)(c)1., Florida Statutes.

(4)	Reimbursement amounts shall not be reduced by reinsurance paid or payable to the Company from other sources; however, the Company shall not allow recoveries from such other sources, except reinsurance recoveries from affiliated Companies and/or reinsurers, taken together with reimbursements under this Contract, to exceed 100% of the Company’s losses under Covered Policies from Covered Events. If such recoveries and reimbursements exceed 100% of the Company’s losses under Covered Policies from Covered Events, and if there is no agreement between the Company and its reinsurer(s) to the contrary, any amount in excess of 100% of the Company’s losses under Covered Policies from Covered Events shall be returned to the SBA.
(5)	The SBA shall notify the Company of the FHCF’s estimated Borrowing Capacity, the projected Balance of the Fund as of December 31, and the Company’s estimated share of total Reimbursement Premium to be paid to the FHCF for the Contract Year. In May and October of each year, the SBA shall publish in the Florida Administrative Weekly a statement of the FHCF’s estimated Borrowing Capacity and the Balance of the Fund as of December 31.
(6)	The obligation of the SBA with respect to all Contracts covering a particular Contract Year shall not exceed the Balance of the Fund as of December 31 of that Contract Year, together with the maximum amount the SBA is able to raise through the issuance of revenue bonds or other means available to the SBA under Section 215.555, Florida Statutes, up to a limit of $11 billion for any one Contract Year in accordance with Section 215.555(4)(c)1., Florida Statutes. The obligations and the liability of the SBA are more fully described in Rule 19-8.013, Florida Administrative Code (F.A.C.). If Reimbursement Premiums are used for debt service in the event of a temporary shortfall in the collection of emergency assessments, then the amount of the Premiums so used will be reimbursed to the SBA when sufficient emergency assessments are received.

ARTICLE V - DEFINITIONS

(1)	Actual Claims-Paying Capacity of the FHCF
	This term means the sum of the Balance of the Fund as of December 31 of a Contract Year, plus any reinsurance purchased by the FHCF, plus the amount the SBA is able to raise through the issuance of revenue bonds up to a limit of $11 billion pursuant to Section 215.555(4)(c)1. and (6), Florida Statutes.

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(2)	Actuarially Indicated
	This term means, with respect to Premiums paid by Companies for reimbursement provided by the FHCF, an amount determined in accordance with the definition provided in Section 215.555(2)(a), Florida Statutes.
(3)	Additional Living Expense (ALE)
	ALE losses covered by the FHCF are not to exceed 20 percent of the insured value of mobile homes or personal Residential Structures or 40 percent of the insured value of contents covered under a tenants policy or a condominium unit owner’s policy. ALE losses do not include losses for fair rental value, loss of rents, or business interruption.
(4)	Administrator
	This term means the entity with which the SBA contracts to perform administrative tasks associated with the operations of the FHCF. The present Administrator is Paragon Reinsurance Risk Management Services, Inc., 3600 West 80th Street, Minneapolis, Minnesota 55431. The telephone number is (800) 689-3863, and the facsimile number is (800) 264-0492.
(5)	Authorized Insurer
	This term is defined in Section 624.09(1), Florida Statutes.
(6)	Borrowing Capacity
	This term means the amount of funds which are able to be raised by the issuance of revenue bonds or through other financing mechanisms, less bond issuance expenses and reserves.
(7)	Citizens Property Insurance Corporation (Citizens)
	This term means an entity formed under Section 627.351, Florida Statutes and refers to both Citizens Property Insurance Corporation High Risk Account (formerly the FWUA) and Citizens Property Insurance Corporation Personal Lines and Commercial Lines Accounts (formerly the FRPCJUA).
(8)	Contract
	This term means this Reimbursement Contract for the current Contract Year.
(9)	Covered Event
	This term means any one storm declared to be a hurricane by the National Hurricane Center, which causes insured losses in Florida, both while it is still a hurricane and throughout any subsequent downgrades in storm status by the National Hurricane Center. Any storm, including a tropical storm, which does not become a hurricane is not a Covered Event.
(10)	Covered Policy

(a)	Covered Policy, as defined in Section 215.555(2)(c), Florida Statutes, is further clarified to mean only that portion of a binder, policy or contract of insurance (Policy Contract) that insures real or personal property located in the State of Florida to the extent such Policy Contract insures a Residential Structure, as defined in definition (27) herein, or the contents of a Residential Structure, located in the State of Florida, or ALE coverage as defined in definition (3) herein.
(b)	Due to the specialized nature of the definition of Covered Policies, Covered Policies are not limited to only one line of business in the Company’s annual statement required to be filed by Section 624.424, Florida Statutes. Instead, Covered Policies are found in several lines of business on the Company’s annual statement. Covered Policies will at a minimum be reported in the Company’s statutory annual statement as:
	- Fire
	- Allied Lines
	- Farmowners Multiple Peril
	- Homeowners Multiple Peril
	- Commercial Multiple Peril (non liability portion, covering condominiums and apartments)
	- Inland Marine
(c)	Note that where particular insurance exposures are reported on an annual statement is not dispositive of whether or not the exposure is a Covered Policy. This definition applies only to

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	the first-party property section of Policy Contracts pertaining strictly to the structure, its contents, or ALE coverage.
(d)	Covered Policy also includes any collateral protection insurance policy covering personal residences which protects both the borrower’s and the lender’s financial interest, in an amount at least equal to the coverage for the dwelling in place under the lapsed homeowner’s policy, if such policy can be accurately reported as required in Section 215.555(5), Florida Statutes. A Company will be deemed to be able to accurately report data if the required data, as specified in the Premium Formula adopted in Section 215.555(5), Florida Statutes, is available.
(e)	See Article VI of this Contract for specific exclusions.

(11)	Estimated Claims-Paying Capacity of the FHCF
	This term means the sum of the projected Balance of the Fund as of December 31 of a Contract Year, plus any reinsurance purchased by the FHCF, plus the most recent estimate of the Borrowing Capacity of the FHCF, determined pursuant to Section 215.555(4)(c), Florida Statutes.
(12)	Excess Insurance
	This term, for the purposes of the FHCF, means insurance protection for large commercial property risks that provides a layer of coverage above a primary layer that acts much the same as a very large deductible. The primary layer is insured through another policy. The excess policy does not reimburse losses unless the losses exceed the primary layer. Several excess policies may be used to cover high value properties, each with different but coordinating primary layers. Excess Insurance policies that include coverage for non-habitational property or non-Florida property are not covered by the FHCF. As a result of the application of Rule 19-8.029(5)(c), F.A.C., exposure under an Excess Insurance policy that would otherwise be reportable to the FHCF, but does not exceed the attachment point of the Excess Insurance policy, would never trigger a reimbursement from the FHCF, and is therefore not covered by the FHCF.
(13)	Florida Department of Financial Services (Department )
	This term means that Florida regulatory agency charged with regulating the Florida insurance market and administering the Florida Insurance Code.
(14)	Florida Insurance Code
	This term means those chapters in Section 624.01, Florida Statutes, which are designated as the Florida Insurance Code.
(15)	Formula or the Premium Formula
	This term means the Formula approved by the SBA for the purpose of determining the Actuarially Indicated Premium to be paid to the FHCF. The Premium Formula is defined as an approach or methodology which leads to the creation of premium rates. The resulting rates are therefore incorporated as part of the Premium Formula and are the result of the approach or methodology employed.
(16)	Fund Balance or Balance of the Fund as of December 31
	These terms mean the “Net assets: Unrestricted” as indicated on the unconsolidated FHCF Statement of Net Assets for the then current Contract Year, to which is added: reported FHCF losses (including Loss Adjustment Expense) for the then current Contract Year, whether paid or unpaid by FHCF, as of December 31, and from which is subtracted: any reinsurance recovered prior to, or recoverable as of, December 31; any obligations paid or expected to be paid with bonding proceeds or receipts from emergency assessments; amounts needed for administration for the then current State of Florida fiscal year which have not been spent and which are not reflected on the FHCF Statement of Net Assets; and the amount of mitigation funds appropriated for the then current State of Florida fiscal year.
(17)	Ground-up or Gross Direct Losses
	These terms mean all losses under the Covered Policy definition prior to the application of the Company’s FHCF Retention and FHCF reimbursement percentage.

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(18)	Insurer Group
	For purposes of the coverage option election in Section 215.555(4)(b), Florida Statutes, Insurer Group means the group designation assigned by the National Association of Insurance Commissioners (NAIC) for purposes of filing consolidated financial statements. A Company is a member of a group as designated by the NAIC until such Company is assigned another group designation or is no longer a member of a group recognized by the NAIC.
(19)	Loss Occurrence
	This term means the sum of individual insured losses incurred under Covered Policies resulting from the same Covered Event. “Losses” means direct incurred losses under Covered Policies and excludes Loss Adjustment Expenses.
(20)	Loss Adjustment Expense Reimbursement

(a)	Loss Adjustment Expense Reimbursement shall be 5% of the reimbursed losses under this Contract as provided in Article IV, pursuant to Section 215.555(4)(b)1., Florida Statutes.
(b)	To the extent that loss reimbursements are limited to the Payout Multiple applied to each Company, the 5% Loss Adjustment Expense is included in the total Payout Multiple applied to each Company.

(21)	New Participant(s)
	This term means all Companies which are granted a certificate of authority by the Department after the beginning of the FHCF’s Contract Year on June 1 and begin writing Covered Policies on or after the beginning of the Contract Year, or which already have a certificate of authority and begin writing Covered Policies on or after the beginning of the Contract Year. A Company that removes exposure from either Citizens entity, as that term is defined in (7) above, pursuant to an assumption agreement effective after June 1 and had written no other Covered Policies on or before June 1 is also considered a New Participant.
(22)	Office of Insurance Regulation means that office within the Department of Financial Services and which was created in Section 20.121(3), Florida Statutes.
(23)	Payout Multiple
	This term means the multiple derived by dividing the Claims-Paying Capacity of the FHCF by the total industry Reimbursement Premium for the FHCF for the Contract Year billed as of December 31 of the Contract Year. The multiple is finally determined once Reimbursement Premiums have been billed as of December 31 and the amount of bond proceeds has been determined.
(24)	Premium
	This term means the same as Reimbursement Premium.
(25)	Projected Payout Multiple
	The Projected Payout Multiple is used to calculate a Company’s projected payout pursuant to Section 215.555(4)(d)2.b., Florida Statutes. The Projected Payout Multiple is derived by dividing the estimated single season Claims-Paying Capacity of the FHCF by the estimated total industry Reimbursement Premium for the FHCF for the Contract Year. The Company’s Reimbursement Premium as paid to the SBA for the Contract Year is multiplied by the Projected Payout Multiple to estimate the Company’s coverage from the FHCF for the Contract Year.
(26)	Reimbursement Premium
	Reimbursement Premium is the Premium determined by multiplying each $1,000 of insured value reported by the Company in accordance with Section 215.555(5)(b), Florida Statutes, by the rate as derived from the Premium Formula, as described in Rule 19-8.028, F.A.C.
(27)	Residential Structures
	This term means personal lines residential, commercial lines residential, and mobile home dwelling units used as a home or residence for other than transient occupancy, as that term is defined in Section 83.43(10), Florida Statutes. These include the primary structure and appurtenant structures insured under the same policy and any other structures covered under endorsements associated with a policy covering a residential structure, the principal function of which at the time of loss was as a

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	primary or secondary residence. Covered Residential Structures do not include: hotels, motels, timeshares, or other similar structures that are rented out daily, weekly, or monthly; homeowner associations, if no habitational structures are insured under the policy; shelters, camps, or retreats; commercial health care facilities and nursing homes, unless the facility is part of a structure primarily consisting of other residences or the facility is a separate structure that is used solely by the occupants (or their guests) of a habitational structure covered under the same policy; or boats insured under a separate policy or endorsement.
(28)	Retention
	The Company’s Retention means the amount of hurricane losses incurred by the Company below which the Company is not entitled to reimbursement from the FHCF. The Company is eligible for reimbursement only after its paid covered losses exceed its Retention level. The Company’s Retention level is established in accordance with the provisions of Section 215.555(2)(e), Florida Statutes. The Company’s Retention shall be determined by multiplying the Retention Multiple by the Company’s Reimbursement Premium for the Contract Year.
(29)	Retention Multiple

(a)

The Retention Multiple is applied to the Company’s Reimbursement Premium to determine the Company’s Retention. The Retention Multiple for the Contract Year shall be equal to $3 billion, adjusted to reflect the percentage growth in FHCF exposure for Covered Policies since 1998, divided by the estimated total industry Reimbursement Premium at the 90% Reimbursement Percentage level for the Contract Year as determined by the SBA.

(b)

The Retention Multiple as determined under (29)(a) above shall be adjusted to reflect the Reimbursement Percentage elected by the Company under this Contract as follows:

1.	If the Company elects a 90% Reimbursement Percentage, the adjusted Retention Multiple is 100% of the amount determined under (29)(a) above;
2.	If the Company elects a 75% Reimbursement Percentage, the adjusted Retention Multiple is 120% of the amount determined under (29)(a) above; or
3.	If the Company elects a 45% Reimbursement Percentage, the adjusted Retention Multiple is 200% of the amount determined under (29)(a) above.

(30) Ultimate Net Loss

(a)	This term means the Company’s actual loss (excluding loss adjustment expense) arising from each Loss Occurrence during the Contract Year, provided, however, that the Company’s loss shall be determined in accordance with the deductible levels reported to the FHCF for the exposure sustaining the loss.
(b)	Salvages and all other recoveries, excluding reinsurance recoveries, shall be first deducted from such loss to arrive at the amount of liability attaching hereunder.
(c)	All salvages, recoveries or payments recovered or received subsequent to a loss settlement under this Contract shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto.
(d)	Nothing in this clause shall be construed to mean that losses under this Contract are not recoverable until the Company’s Ultimate Loss has been ascertained.
(e)	The SBA shall be subrogated to the rights of the Company to the extent of its reimbursement of the Company. The Company agrees to assist and cooperate with the SBA in all respects as regards such subrogation. The Company further agrees to undertake such actions as may be necessary to enforce its rights of salvage and subrogation, and its rights, if any, against other insurers as respects any claim, loss, or payment arising out of a Covered Event.

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ARTICLE VI – EXCLUSIONS

This Contract does not provide reimbursement for:

(1)	Any losses not defined as being within the scope of a Covered Policy.
(2)	Any policy which excludes wind or hurricane coverage.
(3)	Any Excess Insurance policy that contains coverage for non-habitational property or non-Florida property.
(4)	Any liability of the Company attributable to losses for fair rental value, loss of rents, or business interruption.
(5)	Any collateral protection policy that does not meet the definition of Covered Policy as defined in Article V(10) herein.
(6)	Any reinsurance assumed by the Company.
(7)	Any exposure for: hotels, motels, timeshares, or other similar structures that are rented out daily, weekly, or monthly; homeowner associations, if no habitational structures are insured under the policy; shelters, camps or retreats; and boats insured under a separate policy or endorsement.
(8)	Commercial healthcare facilities and nursing homes, unless the facility is part of a structure primarily consisting of other residences.
(9)	Any exposure under commercial policies covering only appurtenant structures or structures that do not function as a habitational structure (e.g. a policy covering only the pool of an apartment complex).
(10)	Any liability of the Company for extra contractual obligations and excess of original policy limits liabilities.
(11)	Losses in excess of the sum of the Balance of the Fund as of December 31 of the Contract Year and the amount the SBA is able to raise through the issuance of revenue bonds or by the use of other financing mechanisms, up to the limit pursuant to Section 215.555(4)(c), Florida Statutes.
(12)	Any liability assumed by the Company from Pools, Associations, and Syndicates. Exception: Covered Policies assumed from Citizens Property Insurance Corporation High Risk Account or Citizens Property Insurance Corporation Personal Lines and Commercial Lines Accounts under the terms and conditions of an executed assumption agreement between the Authorized Insurer and either Citizens entity is covered by this Contract.
(13)	All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.
(14)	Any liability of the Company for loss or damage caused by or resulting from nuclear reaction, nuclear radiation, or radioactive contamination from any cause, whether direct or indirect, proximate or remote, and regardless of any other cause or event contributing concurrently or in any other sequence to the loss.
(15)	The FHCF does not provide coverage for water damage which is generally excluded under property insurance contracts and has been defined to mean flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind.

ARTICLE VII - MANAGEMENT OF CLAIMS AND LOSSES

The Company shall investigate and settle or defend all claims and losses. All payments of claims or losses by the Company within the terms and limits of the appropriate coverage parts of Covered Policies

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shall be binding on the SBA, subject to the terms of this Contract, including the provisions in Article XIII relating to inspection of records and audits.

ARTICLE VIII – PAYMENT ADJUSTMENTS

(1)	Offsets
	Section 215.555(4)(d)1., Florida Statutes, provides the SBA with the right to offset amounts due and payable to the SBA from the Company against any reimbursement amounts due and payable to the Company from the SBA as a result of the liability of the SBA.
(2)	Reimbursement Adjustments
	Section 215.555(4)(d) and (e), Florida Statutes, provides the SBA with the right to seek the return of excess loss reimbursements or advances which have been paid to the Company along with interest thereon. Excess loss reimbursements or advances are those payments or advances made to the Company by the SBA on the basis of incorrect exposure submissions or resubmissions, incorrect calculations of Reimbursement Premiums or Retentions, payments in excess of the projected payout, incorrect proof of loss reports, incorrect calculation of reinsurance recoveries, or subsequent readjustment of policyholder claims, including subrogation and salvage, or any combination of the foregoing. The Company will be sent an invoice showing the due date for adjustments along with the interest due thereon through the due date. Interest will continue to accrue if not paid by the due date.

ARTICLE IX - REIMBURSEMENT PREMIUM

(1)

The Company shall, in a timely manner, pay the SBA its Reimbursement Premium for the Contract Year. The annual Reimbursement Premium for the Contract Year shall be calculated in accordance with Section 215.555, Florida Statutes, with any rules promulgated thereunder, and with Article X(2).

(2)

Since the calculation of the Actuarially Indicated Premium assumes that the Companies will pay their Reimbursement Premiums timely, interest charges will accrue under the following circumstances. A Company may choose to estimate its own Premium installments. However, if the Company’s estimation is less than the provisional Premium billed, an interest charge will accrue on the difference between the estimated Premium and the final Premium. If a Company estimates its first installment, the Administrator shall bill that estimated Premium as the second installment as well, which will be considered as an estimate by the Company. No interest will accrue regarding any provisional Premium if paid as billed by the FHCF’s Administrator, except in the case of an estimated second installment as set forth in this Article. Also, if a Company makes an estimation that is higher than the provisional Premium billed but is less than the final Premium, interest will not accrue. However, if the Premium payment is not received from a Company when it is due, an interest charge will accrue on a daily basis until the payment is received. Interest will also accrue on Premiums resulting from submissions or resubmissions finalized after December 1 of the Contract Year. An interest credit will be applied for any Premium which is overpaid as either an estimate or as a provisional Premium. Interest shall not be credited past December 1 of the Contract Year. The applicable interest rate for interest credits will be the projected average rate earned by the SBA for the FHCF for the first six months of the Contract Year. The applicable interest rate for interest charges will accrue at this rate plus 3%.

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ARTICLE X - REPORTS AND REMITTANCES

(1) Exposures

(a)	If the Company writes Covered Policies on or before June 1 of the Contract Year, the Company shall report to the SBA, unless otherwise provided in Rule 19-8.029, F.A.C., no later than the statutorily required date of September 1 of the Contract Year, by ZIP Code or other limited geographical area as specified by the SBA, its insured values under Covered Policies as of June 30 of the Contract Year as outlined in the Data Call adopted for the Contract Year under Rule 19-8.029, F.A.C., and other data or information in the format specified by the SBA.
(b)	If the Company first begins writing Covered Policies after June 1 but prior to December 1 of the Contract Year, the Company shall report to the SBA, no later than March 1 of the Contract Year, by ZIP Code or other limited geographical area as specified by the SBA, its insured values under Covered Policies as of December 31 of the Contract Year as outlined in the Supplemental Instructions for New Participants section of the Data Call adopted for the Contract Year under Rule 19-8.029, F.A.C., and other data or information in the format specified by the SBA.
(c)	If the Company first begins writing Covered Policies on or after December 1 but through and including May 31 of the Contract Year, the Company shall not report its exposure data for the Contract Year to the SBA.
(d)	The requirements in (a) and (b), above, that reports are due on September 1 and March 1, as applicable, means that the report shall be in the physical possession of the FHCF’s Administrator in Minneapolis no later than 5 p.m., Central Time, on September 1 or March 1, as applicable. If September 1 or March 1 is a Saturday, Sunday or legal holiday, then the applicable due date will be the day immediately following September 1 or March 1, as applicable, which is not a Saturday, Sunday or legal holiday. For purposes of the timeliness of the submission, neither the United States Postal Service postmark nor a postage meter date is in any way determinative. Reports sent to the SBA in Tallahassee, Florida, will be returned to the sender. Reports not in the physical possession of the FHCF’s Administrator by 5 p.m., Central Time, on the applicable due date are late.
(e)	Confidentiality of exposure reports. Pursuant to the provisions of Section 215.557, Florida Statutes, the reports of insured values under Covered Policies by ZIP Code submitted to the SBA pursuant to Section 215.555, Florida Statutes, are confidential and exempt from the provisions of Section 119.07(1), Florida Statutes, and Section 24(a), Art. I of the State Constitution.

(2) Reimbursement Premium

(a)

If the Company writes Covered Policies on or before June 1 of the Contract Year, the Company shall pay the FHCF its Reimbursement Premium in installments due on or before August 1, October 1 and December 1 of the Contract Year in amounts to be determined by the FHCF. However, if the Company’s Reimbursement Premium for the prior Contract Year was less than $5,000, the Company’s full provisional Reimbursement Premium, in an amount equal to the Reimbursement Premium paid in the prior year, shall be due in full on or before August 1 of the Contract Year. The Company will be invoiced for amounts due, if any, beyond the provisional Reimbursement Premium payment, on or before December 1 of the Contract Year. In addition, the full annual provisional Reimbursement Premium as billed and any outstanding balances will be due on August 1, or the date that control is transferred if after August 1, for any Company where control of the Company has been transferred through any legal or regulatory proceeding to a state regulator or court appointed receiver or rehabilatator prior to December 1 of the Contract Year.

(b)

If the Company first begins writing Covered Policies after June 1 but prior to December 1 of the Contract Year, the Company shall pay the FHCF a provisional Reimbursement Premium of $1,000 upon execution of this Contract. The Administrator shall calculate the Company’s actual

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	Reimbursement Premium for the period based on its actual exposure as of December 31 of the Contract Year, as reported on or before March 1. To recognize that New Participants have limited exposure during this period, the actual Premium as determined by processing the Company’s exposure data shall then be divided in half, the provisional Premium shall be credited, and the resulting amount shall be the total Premium due for the Company for the remainder of the Contract Year. However, if that amount is less than $1,000, then the Company shall pay $1,000. The Premium payment is due no later than May 1 of the Contract Year. The Company’s Retention and coverage will be determined based on the total Premium due as calculated above.
(c)	If the Company first begins writing Covered Policies on or after December 1 but through and including May 31 of the Contract Year, the Company shall pay the FHCF a Reimbursement Premium of $1,000 upon execution of this Contract. The Company shall pay no other Reimbursement Premium for the Contract Year.
(d)	The requirement that the Reimbursement Premium is due on a certain date means that the Premium shall be in the physical possession of the FHCF no later than 5 p.m., Eastern Time, on the due date applicable to the particular installment. If remitted by check to the FHCF’s Post Office Box, the check shall be physically in the Post Office Box 550261, Tampa, FL 33655-0261, as set out on the invoice sent to the Company. If remitted by check by hand delivery, the check shall be physically on the premises of the FHCF’s bank in Tampa, Florida, as set out on the invoice sent to the Company. If remitted electronically, the wire transfer shall have been completed to the FHCF’s account at its bank in Tampa, Florida, as set out on the invoice sent to the Company. If the applicable due date is a Saturday, Sunday or legal holiday, then the applicable due date will be the day immediately following the applicable due date which is not a Saturday, Sunday or legal holiday. For purposes of the timeliness of the remittance, neither the United States Postal Service postmark nor a postage meter date is in any way determinative. Premium checks sent to the SBA in Tallahassee, Florida, or to the FHCF’s Administrator in Minneapolis, Minnesota, will be returned to the sender. Reimbursement Premiums not in the physical possession of the FHCF by 5 p.m., Eastern Time, on the applicable due date are late.

(3) Claims and Losses

(a) In General

1. Claims and losses resulting from Loss Occurrences commencing during the Contract Year shall be reported by the Company and reimbursed by the FHCF as provided herein and in accordance with the Statute, this Contract, and any rules adopted pursuant to the Statute. For a Company participating in a quota share primary insurance agreement(s) with Citizens Property Insurance Corporation High Risk Account, Citizens and the Company shall report only their respective portion of losses under the quota share primary insurance agreement(s). Pursuant to Section 215.555(4)(c), Florida Statutes, the SBA is obligated to pay for losses not to exceed the Actual Claims-Paying Capacity of the FHCF, up to a limit of $11 billion for any one Contract Year in accordance with Section 215.555(4)(c)1., Florida Statutes.

(b) Loss Reports

1.	At the direction of the SBA, the Company shall report its Ground-up Losses for Covered Policies from each Covered Event to provide information to the SBA in determining any potential liability for possible reimbursable losses under the Contract on the Interim Loss Report, Form FHCF-L1A, as adopted in Rule 19-8.029, F.A.C.
2.	No later than December 31 of the Contract Year, the Company shall report to the FHCF its Ultimate Net Loss with respect to each Loss Occurrence from the beginning of the Contract Year on the Proof of Loss Report, Form FHCF-L1B, as adopted in Rule 19-8.029, F.A.C.
3.	Quarterly thereafter until all claims and losses resulting from Loss Occurrences commencing during the Contract Year are fully discharged, the Company shall render to the FHCF revised reports of the actual amount of Ultimate Net Loss incurred and paid to

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	date by the Company with respect to each Loss Occurrence commencing during the Contract Year. If the Company’s Retention must be recalculated as the result of an exposure resubmission, and if the recalculated Retention changes the FHCF’s reimbursement obligations, then the Company shall submit additional reports of claims and losses for recalculation of the FHCF’s obligations.
4.	Such reports shall include the actual or anticipated reinsurance recoveries from non-affiliated insurers and/or reinsurers on the Company’s Ultimate Net Loss, and a certification that such recoveries, together with the actual or anticipated reimbursement from the FHCF, shall not exceed 100% of the Company’s losses under Covered Policies from Covered Events.
5.	The SBA will determine and pay, as soon as practicable after receiving Proof of Loss Reports described and adopted in Rule 19-8.029, F.A.C. the reimbursement amount due based on losses paid by the Company to date and adjustments to this amount based on subsequent quarterly information. The adjustments to reimbursement amounts shall require the SBA to pay, or the Company to return, amounts reflecting the most recent determination of losses.
6.	Initial or quarterly reports received on or before the due date for that report will be reimbursed within 30 days following the due date or as soon as practicable after the receipt of the report and verification of the reported losses. Those received after the initial or quarterly reporting due date will be reimbursed within 30 days following the due date or as soon as practicable after the receipt of the report and verification of the reported losses.
7.	If a Covered Event occurs during the Contract Year, but after December 31, Companies shall report their losses as soon as practicable thereafter and the FHCF shall begin to reimburse Companies for paid losses as soon as the losses are reported and the FHCF has established the availability of the moneys to pay the reimbursements. The FHCF shall determine the schedule for reporting losses for Covered Events after December 31 by taking into consideration the date or dates of the Covered Event’s occurrence; its size; severity; wind speeds; forward track; occurrence of tornadoes or flooding as a result of the Covered Event; geographical area impacted; and ability of adjusters to assess the damage.
8.	All loss reports received will be compared with the FHCF’s exposure data to establish the facial reasonableness of the reports. Preliminarily, the FHCF will examine the reported losses to determine whether reported losses exceed reported exposure in the affected counties; whether the Company has reported a low concentration of exposure in the affected counties; and whether the Ground-up Loss as a percentage of exposure in affected counties is significantly higher than the average. Companies meeting these tests for reasonableness will be scheduled for reimbursement. Companies not meeting these tests for reasonableness will be handled on a case-by-case basis and will be contacted to provide specific information regarding their individual book of business.

(c) Loss Reimbursement Calculations

1.

In General. The Company’s covered paid losses must exceed its FHCF Retention as determined in accordance with Section 215.555(2)(e), Florida Statutes, before any reimbursement is payable from the FHCF. If more than one Covered Event occurs in any one Contract Year, any reimbursements due from the FHCF shall take into account the separate Retention requirement for each Company for each Covered Event, as that term is defined in Section 215.555(2)(b), Florida Statutes.

2.

Depletion of Claims-Paying Capacity. This section of Article X provides procedures for reimbursing Companies for losses from Covered Events in those situations in which the SBA determines, pursuant to Section 215.555(6)(a), Florida Statutes, and Rule 19-8.013, F.A.C., that reimbursable losses from a Covered Event are likely to exhaust the available Claims-Paying Capacity of the FHCF. In that situation, each Company sustaining reimbursable losses will receive the amount of reimbursement due under the Contract up to

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	the amount of the Company’s payout, based on the Payout Multiple, as calculated in accordance with Section 215.555(4)(c) and (4)(d)2.b., Florida Statutes, and as defined in Article V(23) of this Contract. For purposes of the projected payout calculation, the “actual Premium paid for that Contract Year,” as referenced in Section 215.555(4)(d)2.b., Florida Statutes, shall be the Premium billed by the FHCF as of December 31 of the Contract Year. Thereafter, payments for additional reimbursable losses will be available only to entities created under Section 627.351, Florida Statutes, and will be based on a pro rata share of the outstanding losses to the extent of any funds available up to the $11 billion limitation. In order to determine the amount available for payment of reimbursable losses on a pro rata basis for entities created under Section 627.351, Florida Statutes, the SBA will review reported loss information from all Companies and determine that all Companies which received payments for reimbursable losses but which did not exceed their projected payout have settled all, or substantially all, of their claims eligible for reimbursement. The SBA will then determine the remaining amount of Claims-Paying Capacity and will pay entities created under Section 627.351, Florida Statutes, on a pro rata basis, up to the $11 billion limitation. Reimbursements for all Covered Events occurring during the same Contract Year will be made in accordance with this section (3)(c)2. of Article X.
3.	Depletion of cash, but not of Claims-Paying Capacity. This section of Article X provides procedures for reimbursing Companies for losses from Covered Events in those situations in which the SBA determines, pursuant to Section 215.555(6)(a), Florida Statutes, and Rule 19-8.013, F.A.C., that reimbursable losses for Covered Events will exhaust the Balance of the Fund as of December 31 of the Contract Year in which the Covered Event has occurred but will not exceed the amount the SBA is able to raise through the issuance of bonds, reinsurance purchased, or the incurrence of other indebtedness. In that situation, each Company sustaining reimbursable losses will receive the amount of reimbursement due under the Contract up to the amount of the Company’s projected payout, as calculated in accordance with Section 215.555(4)(c) and (4)(d)2.b, Florida Statutes, and as defined in Article V(25) of this Contract. Thereafter, payments for additional reimbursable losses will continue to be made based on the loss reports required pursuant to this Contract from entities created under Section 627.351, Florida Statutes.
4.	Losses payable from cash. This section of Article X provides procedures for reimbursing Companies for losses from Covered Events in those situations in which the SBA determines that the reimbursable losses will not exhaust the Balance of the Fund as of December 31 of the Contract Year in which the Covered Event has occurred. In that situation, each Company sustaining reimbursable losses will receive the amount of reimbursement due under the Contract. Thereafter, payments for additional reimbursable losses will continue to be made based on the loss reports required pursuant to this Contract from entities created under Section 627.351, Florida Statutes.
5.	Reserve established. When a Covered Event occurs in a subsequent Contract Year when reimbursable losses are still being paid for a Covered Event in a previous Contract Year, the SBA will establish a reserve for the outstanding reimbursable losses for the previous Contract Year, based on the length of time the losses have been outstanding, the amount of losses already paid, the percentage of incurred losses still unpaid, and any other factors specific to the loss development of the Covered Events involved.

(d) Commutation

1. Not less than 36 months or more than 60 months after the end of the Contract Year, the Company shall report to the FHCF all claims and losses, both reported and unreported, for the Contract Year which are not finally settled and which may be reimbursable losses under this Contract. The Company and the SBA or their respective representatives may, by mutual agreement, determine the capitalized value of all claims and losses, both reported and unreported, resulting from Loss Occurrences commencing during the Contract Year,

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	and the Company shall provide the SBA with a copy of a written opinion on such capitalized value by the Company’s certifying actuary. Payment by the SBA of its proportion of any amount or amounts so mutually agreed and certified by the Company’s certifying actuary shall constitute a complete and final release of the SBA in respect of all claims and losses, both reported and unreported, under this Contract.
2.	If agreement on capitalized value cannot be reached within 60 days after the Company reports its claims and losses to the FHCF, the Company and the SBA may mutually appoint an actuary or appraiser to investigate, determine and capitalize such claims or losses. If both parties then agree, the SBA shall pay its proportion of the amount so determined to be the capitalized value of such claims or losses.
3.	If the parties fail to agree, then any difference shall be settled by a panel of three actuaries, one to be chosen by each party and the third by the two so chosen. If either party does not appoint an actuary within 30 days, the other party may appoint two actuaries. If the two actuaries fail to agree on the selection of a third actuary within 30 days of their appointment, each of them shall name two, of whom the other shall decline one and the decision shall be made by drawing lots. All the actuaries shall be regularly engaged in the valuation of property claims and losses and shall be members of the Casualty Actuarial Society and of the American Academy of Actuaries. None of the actuaries shall be under the control of either party to this Contract. Each party shall submit its case to its actuary within 30 days of the appointment of the third actuary. The decision in writing of any two actuaries, when filed with the parties hereto, shall be final and binding on both parties.
4.	The reasonable and customary expense of the actuaries and of the commutation (as a result of 2. and 3. above) shall be equally divided between the two parties. Said commutation shall take place in Tallahassee, Florida, unless some other place is mutually agreed upon by the Company and the SBA.

(4) Advances

(a) The SBA may make advances for loss reimbursements as defined herein, at market interest rates, to the Company in accordance with Section 215.555(4)(e), Florida Statutes. The market interest rate shall be determined with reference to the then current interest rate earned on the FHCF’s investments on the date an advance is made. All interest charged will commence on the date the SBA issues a check for an advance and will cease at midnight on the date upon which the FHCF has received the Company’s loss reimbursement report for the Covered Event for which the advance was issued qualifying the Company for reimbursement equal to or exceeding the amount(s) of the advance(s). If, upon audit, it is determined that the Company received funds in excess of those to which it was entitled, the interest as to those sums will not cease on the date of the receipt of the loss reimbursement report but will continue until the Company reimburses the FHCF for the overpayment. The Company’s final reimbursement shall be reduced by an amount equal to the amount of the advance(s) and the interest thereon. The specific type of advances enumerated in the Statute follow.

1. Advances to Companies to prevent insolvency.

a.

Section 215.555(4)(e)1., Florida Statutes, provides that the SBA shall advance to the Company amounts necessary to maintain the solvency of the Company, up to 50 percent of the SBA’s estimate of the reimbursement due to the Company. In determining insolvency for this advance, a Company will be considered insolvent if it is unable to pay its policyholders for justifiable claims.

b.

The requirements for an advance to a Company to prevent insolvency are that the Company demonstrates that it is likely to qualify for reimbursement, that the Company demonstrates that the immediate receipt of moneys from the SBA is likely to prevent the Company from becoming insolvent, and that the Company provides the information in (4)(b) below to aid in the SBA’s determination to grant an advance.

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c. The SBA’s final decision regarding an application for an advance to prevent insolvency shall be based on whether or not, considering the totality of the circumstances, including the SBA’s obligations to provide reimbursement for all Covered Events occurring during the Contract Year, granting an advance is essential to allowing the entity to continue to pay additional claims for a Covered Event in a timely manner.

2. Advances to entities created pursuant to Section 627.351, Florida Statutes.

a.	Section 215.555(4)(e)2., Florida Statutes, provides that the SBA may advance to an entity created pursuant to Section 627.351, Florida Statutes, up to 90% of the lesser of the SBA’s estimate of the reimbursement due or the entity’s share of the actual aggregate Reimbursement Premium for that Contract Year, multiplied by the current available liquid assets of the FHCF.
b.	The requirements for an advance to entities created pursuant to Section 627.351, Florida Statutes are that the entity must demonstrate to the SBA that the advance is essential to allow the entity to pay claims for a Covered Event and that the entity provides the information in (4)(b) below to aid in the SBA’s determination to grant an advance.
c.	The SBA must determine that its assets are sufficient and sufficiently liquid to fulfill its obligations to other Companies under the Contract prior to granting an advance.

3. Advances to limited apportionment companies.

a.	Section 215.555(4)(e)3., Florida Statutes, provides that the SBA may advance the amount of estimated reimbursement payable to limited apportionment companies.
b.	The requirement for an advance to limited apportionment companies is that they make an application to the SBA and provide the SBA with a report of their exposures and losses in order to determine Retention levels and loss reimbursements payable.
c.	The SBA must determine that its assets are sufficient and sufficiently liquid to fulfill its obligations to other Companies under the Contract prior to granting an advance.

(b) Companies shall request a specific amount for the advance from the SBA and, for those Companies or entities designated in (4)(a)1. and (4)(a)2. above, shall provide the SBA with the following information, determined in accordance with statutory accounting principles, which are the rules and procedures governing insurer financial reporting for regulatory purposes:

1.	Current assets;
2.	Current liabilities other than liabilities due to the Covered Event;
3.	Current liabilities due to the Covered Event, paid and unpaid, submitted on the Proof of Loss Report, Form FHCF-L1B, as adopted in Rule 19-8.029, F.A.C.;
4.	Evidence of estimated Retention breached by payment of paid losses from the Covered Event;
5.	Current surplus as to policyholders;
6.	Estimate of expected liabilities due to the Covered Event;
7.	Estimate of other expected liabilities not due to the Covered Event;
8.	Amount of reinsurance available to pay claims for the Covered Event under other reinsurance treaties;
9.	Estimated amount of payout from the FHCF, determined in accordance with Section 215.555(4)(b), Florida Statutes. This estimate is necessarily predicated on the Company’s Premium which in turn is predicated on its exposure. Therefore, if the Covered Event occurs in June, July, or August, the Company will need to provide its exposure data prior to September 1 in order that the appropriate calculations may be made.

(c)	The information outlined herein shall be supplied in the form of a letter, signed by two executive officers of the Company, with the supporting information attached.
(d)	In determining whether or not to grant an advance, the SBA shall:

1. Carefully review and consider all the information submitted by such Companies;

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2.	Consult with all relevant regulatory agencies seeking all relevant information about the Company’s financial and solvency condition;
3.	Carefully review its currently available liquid assets; and
4.	Review the damage caused by the Covered Event and when that Covered Event occurred.

(e) Any amount advanced by the SBA shall be used by the Company only to pay claims of its policyholders for the Covered Event or Covered Events which have precipitated the immediate need to continue to pay additional claims as they become due. The advance is a reimbursement which allows the Company to continue to pay claims in a timely manner.

(5)	Delinquent Premium Payments
	Failure to submit a Premium or Premium installment when due is a violation of the terms of this Contract and Section 215.555, Florida Statutes. Interest on late payments shall be due as set forth in Article IX(2) of this Contract. In addition, the SBA will refer any Company failing to submit such payments to the Department for administrative action or will take other action as appropriate pursuant to Section 215.555(10) and (11), Florida Statutes.
(6)	Inadequate Data Submissions
	If exposure data or other information required to be reported by the Company under the terms of this Contract is not received by the FHCF in the format specified by the FHCF and is inadequate to the extent that the FHCF requires resubmission of data, the Company will be required to pay the FHCF a resubmission fee of $1,000. The $1,000 fee is also applicable to exposure resubmissions made as a result of audits of the Company’s exposure and of audits of the Company’s claims data.
(7)	Delinquent Submissions
	Failure to submit an exposure submission or resubmission by the due date is a violation of the terms of this Contract and of the Statute. The SBA will refer any Company failing to submit such submissions or resubmissions to the Department for administrative action or will take other action as appropriate pursuant to Section 215.555(10) and (11), Florida Statutes.

ARTICLE XI - TAXES

In consideration of the terms under which this Contract is issued, the Company agrees to make no deduction in respect of the Premium herein when making premium tax returns to the appropriate authorities. Should any taxes be levied on the Company in respect of the Premium herein, the Company agrees to make no claim upon the SBA for reimbursement in respect of such taxes.

ARTICLE XII - ERRORS AND OMISSIONS

Any inadvertent delay, omission, or error on the part of the SBA shall not be held to relieve the Company from any liability which would attach to it hereunder if such delay, omission, or error had not been made.

ARTICLE XIII - INSPECTION OF RECORDS

The Company shall allow the SBA to inspect, examine, and audit, at reasonable times, all records of the Company relating to the Covered Policies under this Contract, including Company files concerning claims, losses, or legal proceedings regarding subrogation or claims recoveries which involve this Contract, including premium, loss records and reports involving exposure data on Covered Policies and applicable ceded reinsurance contracts. All discovered errors, inadvertent omissions, and typographical errors associated with the data reporting of insured values shall be corrected to reflect the proper values. This right shall survive the termination of this Contract. The Company shall retain its records in accordance with the requirements for records retention regarding exposure reports and claims reports outlined herein, and in any administrative rules adopted pursuant to Section 215.555, Florida Statutes. Companies writing covered collateral protection policies, as defined in definition (10) of Article V herein, must be able to provide documentation that the policy covers personal residences, protects both the

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borrower’s and lender’s interest, and that the coverage is in an amount at least equal to the coverage for the dwelling in place under the lapsed homeowner’s policy. Failure to provide any of the information required for audits, constitutes a violation of Section 215.555, Florida Statutes, and shall result in a referral to the Department.

(1)	Auditing Requirements for Exposure Audits
	The Company shall retain complete and accurate records, in policy level detail, of all exposure data submitted to the SBA in any Contract Year until the SBA has completed its audit of the Company’s exposure submissions. The Company shall also retain complete and accurate records of any completed exposure audit for any Contract Year in which the Company incurred losses until the completion of the loss reimbursement audit for that Contract Year. The records to be retained shall include the audit file which supports the exposure reported to the SBA and any other information which would allow for a complete audit of the Company’s reported exposure data. The audit file shall be prepared according to the SBA Audit File Specifications outlined in the Data Call. The Company must also have available, at the time of the audit, a copy of its underwriting manual, a copy of its rating manual, and staff to respond to the questions of the SBA or its agents. The Company is also required to retain declarations pages and policy applications to support reported exposure. To meet the requirement that the application must be retained, the Company may retain either the actual application or may retain the actual application in an electronic format.
(2)	Auditing Requirements for Loss Reports
	The Company shall retain complete and accurate records of all reported losses and/or advances                      submitted to the SBA until the SBA has completed its audit of the Company’s reimbursable losses. The records to be retained are set forth as part of the Proof of Loss Report, Form FHCF-L1B, adopted in Rule 19-8.029, F.A.C. The Company must also retain the required exposure audit file for the Contract Year in which the loss occurred, and must have available any other information which would allow for a complete audit of the Company’s losses.
(3)	Audit Procedures

(a)	The FHCF will send an audit notice to the Company providing the commencement date of the audit, the site of the audit, any accommodation requirements of the auditor, and the reports and data which must be assembled by the Company and forwarded to the FHCF upon request. The Company shall be prepared to choose one location in which to be audited, unless otherwise specified by the SBA.
(b)	The reports and data are required to be forwarded to the FHCF as set forth in an audit notice letter. The information is then forwarded to the auditor. If the FHCF receives accurate and complete records as requested, the auditor will contact the Company to inform the Company as to what policies or other documentation will be required once the auditor is on site. Any records not required to be provided to the auditor in advance shall be made available at the time the auditor arrives on site.
(c)	At the conclusion of the auditor’s audit and the management review of the auditor’s report, findings, recommendations, and work papers, the FHCF will forward a preliminary draft of the audit report to the Company and require a response from the Company by a date certain as to the audit findings and recommendations.
(d)	If the Company accepts the audit findings and recommendations, and there is no recommendation for resubmission of the Company’s exposure data, the audit report will be finalized and the audit file closed.
(e)	If the Company disputes the audit’s findings, the areas in dispute will be resolved by a meeting or a conference call between the Company and FHCF management.
(f) 1.	The recommendation of a loss reimbursement audit could require the Company to resubmit its loss reports or exposure data.
2.	If the recommendation of the audit is to resubmit the Company’s exposure data for the Contract Year in question, then the FHCF will send the Company a letter outlining the process for resubmission and including a deadline to resubmit. The resubmission will include a data

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	file to be submitted to the FHCF’s Administrator and an audit file to be submitted to the offices of the SBA. The resubmission is also required to be accompanied by a detailed written description of the specific changes made to the resubmitted data. Once the resubmission is received by the FHCF’s Administrator, the FHCF’s Administrator calculates a revised Reimbursement Premium for the Contract Year which has been audited. The SBA shall then review the resubmission with respect to the audit’s findings, and accept the resubmission or contact the Company with any questions regarding the resubmission. Once the SBA has accepted the resubmission as a sufficient response to the audit findings, the FHCF’s Administrator will send the Company an invoice for any Reimbursement Premium and interest due or to refund Reimbursement Premium, as the case may be. Once the resubmission has been approved, the audit file is closed.
3.	If the recommendation of the audit is either to resubmit the Company’s exposure data for the Contract Year in question or giving the option to pay the estimated Premium difference, then the FHCF will send the Company a letter outlining the process for resubmission or for paying the estimated Premium difference and including a deadline for the resubmission or the payment to be received by the FHCF’s Administrator. If the Company chooses to resubmit, the same procedures outlined in Article XIII(3)(f)2. apply.
(g)	If the Company continues to dispute the audit’s findings and/or recommendations and no resolution of the disputed matters is obtained through discussions between the Company and FHCF management, then the process within the SBA is at an end and further administrative remedies may be obtained under Chapter 120, Florida Statutes.
(h)	The auditor’s list of errors is made available in the audit report sent to the Company. Given that the audit was based on a sample of the Company’s policies rather than the whole universe of the Company’s Covered Policy exposure, the error list is not intended to provide a complete list of errors but is intended to indicate what Covered Policy information needs to be reviewed and corrected throughout the Company’s book of Covered Policy business to ensure more complete and accurate reporting in the resubmission if required and for any future submissions.

(4)

Costs of the Audits

The costs of the audits shall be borne by the SBA. However, in order to remove any incentive for a Company to delay preparations for an audit, the SBA shall be reimbursed by the Company for any audit expenses incurred in addition to the usual and customary costs of the audits, which additional expenses were incurred as a result of the Company’s failure, despite proper notice, to be prepared for the audit or as a result of a Company’s failure to provide requested information for the audit. All requested information must be complete and accurate. The Company shall be notified of any administrative remedies which may be obtained under Chapter 120, Florida Statutes.

ARTICLE XIV - INSOLVENCY OF THE COMPANY

In the event of the insolvency of the Company, the SBA shall pay directly to the Florida Insurance Guaranty Association for the benefit of Florida policyholders of the Company the net amount of all reimbursement moneys owed to the Company. As used in this Article, the “net amount of all reimbursement moneys” means that amount which remains after any offsets as specified in Article VIII herein and after reimbursement for (1) preliminary or duplicate payments owed to private reinsurers or other inuring reinsurance payments to private reinsurers that satisfy statutory or contractual obligations of the insolvent Company attributable to Covered Events to such reinsurers; or (2) funds owed to a bank or other financial institution to cover obligations of the insolvent Company under a credit agreement that assists the insolvent Company in paying claims attributable to Covered Events. Such private reinsurers or banks or other financial institutions shall be reimbursed or otherwise paid prior to payment to the Florida Insurance Guaranty Association, notwithstanding any law to the contrary. The Florida Insurance Guaranty Association shall pay all claims up to the maximum amount permitted by Chapter 631, Laws of

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Florida; thereafter, any remaining moneys shall be paid pro rata to claims not fully satisfied. This Article does not apply to a joint underwriting association, a risk apportionment plan, or any other entity created under Section 627.351, Florida Statutes.

ARTICLE XV - TERMINATION

The FHCF and the obligations of both parties under this Contract can be terminated only as may be provided by law or applicable rules.

ARTICLE XVI - VIOLATIONS

Pursuant to the provisions of Section 215.555(10), Florida Statutes, any violation of the terms of this Contract by the Company constitutes a violation of the Insurance Code of the State of the Florida. Pursuant to the provisions of Section 215.555(11), Florida Statutes, the SBA is authorized to take any action necessary to enforce any administrative rules adopted pursuant to Section 215.555, Florida Statutes, and the provisions and requirements of this Contract.

ARTICLE XVII - APPLICABLE LAW

(1)	Applicable Law: This Contract shall be governed by and construed according to the laws of the State of Florida in respect of any matter relating to or arising out of this Contract.
(2)	Notice of Rights: Pursuant to Chapter 120, Florida Statutes, and the Uniform Rules of Procedure, codified as Chapters 28-101 through 28-110, F.A.C., a person whose substantial interests are affected by a decision of the SBA regarding the FHCF may request a hearing with the SBA by filing a petition within 21 days of receipt of the written notice of the decision. Any person who fails to file a petition within 21 days shall have waived his or her right to a hearing. The hearing may be a formal hearing or an informal hearing pursuant to the provisions of Sections 120.569 and 120.57, Florida Statutes. The petition must be filed (received) in the office of the Senior FHCF Officer-Florida Hurricane Catastrophe Fund, State Board of Administration, P.O. Box 13300, Tallahassee, FL 32317-3300, within the 21day period.
	All petitions shall contain:

(a)	The name, address, and telephone number of the petitioner or petitioners;
(b)	An explanation of how each petitioner’s substantial interests will be affected by the SBA’s decision;
(c)	A statement of when and how the petitioner received notice of the decision;
(d)	A statement of all disputed issues of material fact. If there are none, the petition must so indicate;
(e)	A concise statement of the facts which the petitioner believes entitle the petitioner to the relief sought as well as the statutes and rules which support the petitioner’s claim for relief;
(f)	A statement of the relief sought, stating precisely the action the petitioner wants the SBA to take;
(g)	Any other information which the petitioner contends is material.

Upon receipt of a petition, the SBA shall review the petition for compliance with the SBA’s requirements and timeliness. The petition will be denied for lack of compliance and for failure to timely file. If the SBA elects to request that an administrative law judge of the Division of Administrative Hearings be assigned to conduct the hearing, the SBA will forward the petition and all materials filed with the SBA to the Division and shall notify the petitioner or petitioners of its action. Once this decision becomes final, the petitioner’s rights to appeal will be governed by Section 120.68, Florida Statutes.

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Approved by:

Florida Hurricane Catastrophe Fund
By: State Board of Administration of the State of Florida

By:	Linda Lettera/for	7.9.03
	Coleman Stipanovich	Date
	Executive Director
Approved as to legality:
By:	Thomas A. Beenck/for	July 9, 2003
	Linda Lettera	Date
	General Counsel
	FL Bar ID#311911
PHILADELPHIA INDEMNITY INSURANCE COMPANY
	Company
By:	Christopher J. Maguire, EVP	5/30/03
	Christopher J. Maguire	Date
	Executive Vice President

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Schedule A

to the

REIMBURSEMENT CONTRACT
Effective: June 1, 2003
(Contract)

between

PHILADELPHIA INDEMNITY INSURANCE COMPANY
Bala Cynwyd, PA
(Company)

and

THE STATE BOARD OF ADMINISTRATION OF THE STATE OF FLORIDA (SBA)
WHICH ADMINISTERS THE FLORIDA HURRICANE CATASTROPHE FUND (FHCF)

Contract Year

This Schedule A shall be applicable for the Contract Year from 12:01 a.m., Eastern Time, June 1, 2003, to 12:01 a.m., Eastern Time, June 1, 2004.

Reimbursement Percentage

For purposes of determining reimbursement (if any) due the Company under this Contract and in accordance with the Statute, the Company has the option to elect a 45% or 75% or 90% Reimbursement Percentage under this Contract. The Reimbursement Percentage elected by the Company for the Contract Year from 12:01 a.m., Eastern Time, June 1, 2002, to 12:01 a.m., Eastern Time, June 1, 2003, was as follows:

The Company hereby elects the following Reimbursement Percentage for the Contract Year from 12:01 a.m., Eastern Time, June 1, 2003, to 12:01 a.m., Eastern Time, June 1, 2004, (the individual executing this Contract on behalf of the Company shall place his or her initials in the box to the left of the percentage elected for the Company):

[  ]     45%     OR [  ]     75%     OR [CJM]     90%

Note that the choice indicated immediately above is for the 2003-2004 Contract Year.

If the Company is a member of an NAIC group, all members of the group must elect the same Reimbursement Percentage. If the Company is a member of an NAIC group, the individual executing this Contract on behalf of the Company, by placing his or her initials in the box below, affirms that the Company has elected the same Reimbursement Percentage as all members of the NAIC group:

[CJM]

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The Company shall not be permitted to change its Reimbursement Percentage during the Contract Year. The Company shall, however, be permitted to change its Reimbursement Percentage election at the beginning of a new Contract Year, except that:

(1)	The Company shall not be permitted to reduce its Reimbursement Percentage if a Covered Event required the issuance of revenue bonds, until the bonds have been fully repaid;
(2)	If the Company is a member of a group, all members of the NAIC group must continue to elect the same Reimbursement Percentage;
(3)	If the Company is a joint underwriting association or an assigned risk plan under Section 627.351, Florida Statutes, the Company must elect the 90% Reimbursement Percentage.

Reporting Exposure for a Single Structure, with a Mix of Commercial Habitational and Commercial Non-Habitational Exposure, Written on a Commercial Policy

The following section is applicable to all Companies with exposure for single structures with a mix of commercial habitational and commercial non-habitational exposure written under a Commercial Policy. If the Company does not write this type of exposure and this section does not apply, please initial the N/A box below which completes this section of Schedule A. If the Company does write this type of exposure, please read below and initial the appropriate box on the next page to complete this section of Schedule A.

[    ]

N/A

Commercial-Residential Class Code

If a single structure is used for both habitational and non-habitational purposes and the structure has a commercial-residential class code (based on a classification plan on file with and reviewed by the Administrator), the entire exposure for the structure should be reported to the FHCF under the Data Call, and the FHCF will reimburse losses for the entire structure as well.

Commercial Non-Residential/Business Class Code

If a single structure is used for both habitational and non-habitational purposes and the structure has a commercial non-residential or business class code (based on a classification plan on file with and reviewed by the Administrator), the habitational portion of that structure should be identified and reported to the FHCF under the Data Call. Initial the CARVING box on the next page if the Company will be able to carve out and report its incidental habitational exposure and the Company agrees to report losses on such incidental habitational exposure.

However, in recognition of the unusual nature of commercial structures with incidental habitational exposure and the undue hardship some companies may face in having to carve out such incidental habitational exposure, as well as the losses to such structures, the FHCF will accommodate these companies by allowing them to exclude the entire exposure for the single structure from their Data Call submission, providing the following three conditions are met:

(1)	The decision to not carve out and report the incidental habitational exposure shall apply to all such structures insured by the Company;
(2)	If the incidental habitational exposure is not reported to the FHCF, the Company will not report losses to the structure and the FHCF will not reimburse any losses to the structure; and

FHCF-2003K

2

(3) The Company must communicate its decision to not carve out and report the incidental exposure by the individual executing this Contract on behalf of the Company placing his or her initials in the NOT CARVING box below.

[  ]	OR	[CJM]
CARVING		NOT CARVING

By initialing the CARVING or NOT CARVING box above, the Company is making an irrevocable decision for the corresponding Contract Year Data Call submission and any subsequent resubmissions.

Important Note: Since this will impact your Data Call submission, please share this decision with
the individual(s) responsible for compiling your Data Call submission.

FHCF-2003K

3 EX-31.1 4 w89051exv31w1.htm CERTIFICATION OF CEO PURSUANT TO SECTION 302

Exhibit 31.1

CERTIFICATION

I, James J. Maguire, Jr., Chief Executive Officer of Philadelphia Consolidated Holding Corp., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Philadelphia Consolidated Holding Corp.
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

James J. Maguire, Jr.

James J. Maguire, Jr.

Chief Executive Officer
August 8, 2003

EX-31.2 5 w89051exv31w2.htm CERTIFICATION OF CFO PURSUANT TO SECTION 302

Exhibit 31.2

CERTIFICATION

I, Craig P. Keller, Chief Financial Officer of Philadelphia Consolidated Holding Corp., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Philadelphia Consolidated Holding Corp.
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Craig P. Keller

Craig P. Keller
Chief Financial Officer
August 8, 2003

EX-32.1 6 w89051exv32w1.htm SECTION 906 CERTIFICATION FOR CEO

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Philadelphia Consolidated Holding Corp. (the “Company”) on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James J. Maguire, Jr., chief executive officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)     the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)     the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

James J. Maguire, Jr.

James J. Maguire, Jr.
President and Chief Executive Officer
August 8, 2003

EX-32.2 7 w89051exv32w2.htm SECTION 906 CERTIFICATION FOR CFO

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Philadelphia Consolidated Holding Corp. (the “Company”) on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Craig P. Keller, chief financial officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)     the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)     the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Craig P. Keller

Craig P. Keller
Chief Financial Officer
August 8, 2003

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EX-31.1

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EX-32.1

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EX-32.2

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