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FORM 10-K/A

Amendment No. 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 0-22280

PHILADELPHIA CONSOLIDATED HOLDING CORP.

(Exact name of registrant as specified in its charter)


PENNSYLVANIA		23-2202671

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


One Bala Plaza, Suite 100 Bala Cynwyd, Pennsylvania		19004

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (610) 617-7900

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value

(Title of Class)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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

YES: x NO: o

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 10, 2004 as reported on the NASDAQ National Market System, was $510,690,534. Shares of Common Stock held by each executive officer and director and by each person who is known by the Registrant to beneficially own 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 10, 2004, Registrant had outstanding 22,033,824 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the definitive Proxy Statement for Registrant’s 2004 Annual Meeting of Shareholders to be held April 29, 2004 are incorporated by reference in Part III.

EXPLANATORY NOTE

The Company has included its restated consolidated balance sheet as of December 31, 2003 (the restatement does not affect the Company’s consolidated balance sheet as of December 31, 2002) and the restated consolidated statements of operations and comprehensive income, of changes in shareholders’ equity and of cash flows for the years ended December 31, 2003, December 31, 2002 and December 31, 2001 in this Form 10-K/A. The restatement records in prior periods a portion of the revenue and net income arising from profit commissions under three reinsurance contracts, one of which originally had been recorded in the second quarter 2002, another of which originally had been recorded in the fourth quarter 2003, and another of which should have been recorded in previous periods. These profit commissions were due to the Company from reinsurers under a 2001 accident year aggregate stop loss reinsurance contract effective during the period January 1, 2001 through December 31, 2001, a quota share reinsurance contract effective during the period April 1, 2003 through December 31, 2003, and an excess catastrophe reinsurance contract effective during the period June 1, 2003 through May 31, 2004. The restatement is more fully described herein under “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 8-Financial Statements and Supplementary Data” — Note 2. Any amounts shown herein as restated are the restated amounts.

This Amendment No. 1 to Annual Report on Form 10-K/A amends Part I, Item 1, Part II, Items 6, 7, 8 and 9A and Part IV, Item 15 of the Company’s previously filed Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2003 to reflect the aforementioned restatement and related changes. The applicable rules require that each of these Items be entirely restated upon amendment. Items other than those listed above have not been changed and therefore have not been included in this amendment No. 1 to Annual Report on Form 10-K/A.

In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by the Company’s principal executive officer and principal financial officer are being filed with this Form 10-K/A.

TABLE OF CONTENTS


PART I
	Item 1. BUSINESS
	Item 6. SELECTED FINANCIAL DATA
	Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CHANGES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to Consolidated Financial Statements
	Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	Item 9A. CONTROLS AND PROCEDURES
PART IV
	Item 15. — EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
COMPUTATION OF EARNINGS PER SHARE
CONSENT OF INDEPENDENT ACCOUNTANTS
CERTIFICATION OF CEO PURSUANT TO SECTION 302
CERTIFICATION OF CFO PURSUANT TO SECTION 302
CERTIFICATION OF CEO PURSUANT TO SECTION 906
CERTIFICATION OF CFO PURSUANT TO SECTION 906
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

PART I

Item 1. BUSINESS

GENERAL

As used in this Amendment No. 1 to Annual Report on Form 10-K/A, (i) “Philadelphia Insurance” refers to Philadelphia Consolidated Holding Corp., (ii) the “Company” refers to Philadelphia Insurance and its subsidiaries, doing business as Philadelphia Insurance Companies; (iii) the “Insurance Subsidiaries” refers to Philadelphia Indemnity Insurance Company (“PIIC”), Philadelphia Insurance Company (“PIC”), Mobile USA Insurance Company (“MUSA”) and Liberty American Insurance Company (“LAIC”), collectively; (iv) “MIA” refers to Maguire Insurance Agency, Inc., a captive underwriting manager; (v) “MHIA” refers to Mobile Homeowners Insurance Agencies, Inc., a managing general agency; (vi) “Premium Finance” refers to Liberty American Premium Finance Company; and (vii) “PCHC Investment” refers to PCHC Investment Corp., an investment holding company. Philadelphia Insurance was incorporated in Pennsylvania in 1984 as an insurance holding company. Liberty American Insurance Group, Inc., a Delaware insurance holding company, and its subsidiaries MUSA, LAIC, MHIA and Premium Finance, are sometimes referred to herein collectively as “Liberty”.

During 2003, the Company continued its growth through adherence to its core philosophies of specialization, mixed marketing and profitable underwriting. 2003 gross written premiums increased 36.5% to $906.0 million. Premium growth was primarily attributable to the Company capitalizing on continuing turmoil in the property and casualty market, as well as better “brand” recognition with agents and brokers. The turmoil created a general environment of rate increases and reduced capacity in the marketplace. The Company’s GAAP basis combined ratio (the sum of the net loss and loss adjustment expenses and acquisition costs and other underwriting expenses divided by net earned premiums) was 91.3%, which was substantially lower than the property and casualty industry as a whole. Total assets increased to $1.9 billion, and shareholders’ equity increased to $545.6 million (Restated).

INDUSTRY TRENDS

During the 1990s and into 2000, the insurance industry maintained excess capacity, creating highly competitive market conditions, as evidenced by declining premium rates and, in many cases, policy terms less favorable to the insurer. As a result, the industry suffered from reduced profitability and a contraction of capacity as insurers chose or were forced to exit the marketplace. Subsequently, a tumultus environment has emerged in the property and casualty insurance industry in large part due to: the significant losses caused by the terrorist events of September 11, 2001; continued rating downgrades and insolvencies; and lower interest rates resulting in reduced investment income. These factors have resulted in a general environment of rate increases and conservative risk selection. Industry participants expect a moderation in rate increases for the foreseeable future. Increased reinsurance costs, to some extent, offset the benefits of these trends to the Company and to insurance companies in general.

During 2003, the Company’s rate increases on renewal business approximated 4.3%, 10.2% and 9.4% for the commercial, specialty and personal lines segments, respectively. There can be no assurance, however, that these favorable trends will continue or that these rate increases can be sustained.

BUSINESS OVERVIEW AND STRATEGY

The Company designs, markets and underwrites specialty commercial and personal property and casualty insurance products incorporating value-added coverages and services for select target markets or niches. Insurance products are distributed through a diverse multi-channel delivery system centered around the Company’s direct production underwriting organization. A select group of 105 “preferred agents” and a broader network of approximately 8,500 independent agents supplement the production underwriting organization, which consisted of 204 professionals located in 36 regional and field offices across the United States as of December 31, 2003.

The Company’s commercial products include commercial multi-peril package insurance targeting specialized niches, including, among others, non-profit organizations, health and fitness organizations, homeowners’ associations, condominium associations, specialty schools and day care facilities; commercial automobile insurance targeting the leasing and rent-a-car industries; property insurance for large commercial accounts such as shopping centers, business parks, hotels and medical facilities; and inland marine products targeting larger risks such as new builders’ risk and miscellaneous property floaters.

The Company also writes select classes of professional liability and directors’ and officers’ liability products, as well as personal property and casualty products for the manufactured housing and homeowners’ markets.

The Company maintains detailed systems, records and databases that enable the continuous monitoring of its book of business in order to identify and react swiftly to positive or negative developments and trends. The Company is able to track performance, including loss ratios, by segment, product, region, state, producer and policyholder. Detailed profitability reports are produced and reviewed on a routine (primarily monthly) basis as part of the policy of regularly analyzing and reviewing the Company’s book of business.

The Company maintains a local presence to more effectively serve its producer and customer base, operating through 12 regional offices and 24 field offices throughout the country, which report to the regional offices. These offices are staffed with field underwriters, marketers, accounts receivable and, in some cases, claim personnel, who interact closely with home office management in making key decisions. This approach allows the Company to adapt its underwriting and marketing strategies to local conditions and build value-added relationships with its customers and producers.

The Company selects and targets industries and niches that present specialized areas of expertise where it believes it can grow business through creatively developing insurance products with innovative features specially designed to meet those areas of demand. The Company believes that these features are not included in typical property and casualty policies, enabling it to compete based on the unique or customized nature of the coverage provided.

Business Segments

The Company’s operations are classified into three reportable business segments:

• Commercial Lines Underwriting Group, which has underwriting responsibility for the commercial multi-peril package, commercial automobile and specialty property and inland marine insurance products;

• Specialty Lines Underwriting Group, which has underwriting responsibility for the professional liability and directors’ and officers’ liability insurance products; and

• Personal Lines Underwriting Group, which has underwriting responsibility for personal property and casualty insurance products for the manufactured housing and homeowners’ markets, principally in Florida.

The following table sets forth, for the years ended December 31, 2003, 2002 and 2001, the gross written premiums for each of the Company’s business segments and the relative percentages that such premiums represented.


	For the Years Ended December 31,
	2003					2002					2001
	Dollars		Percentage			Dollars		Percentage			Dollars		Percentage
						(dollars in thousands)
Commercial Lines	$	662,339		73.1	%	$	473,100		71.3	%	$	315,948		66.7	%
Specialty Lines		154,105		17.0			110,176		16.6			79,317		16.7
Personal Lines		89,549		9.9			80,463		12.1			78,300		16.6

Total	$	905,993		100.0	%	$	663,739		100.0	%	$	473,565		100.0	%

Commercial Lines:

Commercial Package: The Company has provided commercial multi-peril package policies to targeted niche markets for over 15 years. The primary customers for these policies include:

• non-profit and social service organizations;

• health and fitness organizations;

• homeowners’ associations;

• condominium associations;

• specialty schools;

• boat dealerships;

• mobile home parks;

• day care facilities; and

• mental health facilities.

The package policies provide a combination of comprehensive liability, property and automobile coverage with limits up to $1.0 million for casualty, $50.0 million for property, and umbrella limits on an optional basis up to $10.0 million. The Company believes its ability to provide professional liability and general liability coverages in one policy is advantageous and convenient to producers and policyholders.

Commercial Automobile and Commercial Excess: The Company has provided primary, excess, contingent, interim and garage liability; physical damage; property; and Guaranteed Asset Protection (GAP) to targeted markets for over 35 years. The primary customers for these policies include:

• rental car companies

• leasing companies

• banks

• credit unions

Specialty Property & Inland Marine: The Company has provided property and inland marine coverage to targeted markets for the past 5 years. The primary customers for these policies include:

• shopping centers

• business parks

• medical facilities

• hotels and motels

• new construction (inland marine)

Specialty Lines:

The Company has provided errors and omissions (professional) and directors and officers (D&O) liability to targeted classes of business for approximately 14 years. The professional liability products provide errors and omissions coverage primarily for:

• lawyers

• accountants

• miscellaneous (marketing, management, computer, marriage/family counseling) consultants

• excess liability

The directors’ and officers’ product, with an emphasis on non-profit institutions and private companies, are offered to:

• non-profit (501(c)(3) companies)

• for-profit public and private companies.

Personal Lines:

The Company entered the personal lines property and casualty business through the acquisition of Liberty American Insurance Group, Inc. (“Liberty”) in 1999. This personal lines platform produces and underwrites specialized manufactured housing and homeowners’ property and casualty business principally in Florida, and to a lesser extent, in California, Arizona and Nevada. Liberty also produces and services federal flood insurance under the National Flood Insurance Program for both personal and commercial policyholders.

Products offered include manufactured housing insurance for senior citizen retirees in “preferred” parks, a program for newly constructed manufactured homes on private property; a preferred homeowners’ program that targets newer homes valued between $100,000 and $375,000 in gated retiree communities, and a homeowners’ program excluding wind exposure in Florida coastal counties for the in-park manufactured housing business. As a result of Florida’s increased seasonal residents during the winter months, approximately 50% of the in-park manufactured housing business is written in the first four calendar months of the year.

Geographic Distribution

The following table provides the geographic distribution for all reportable business segments of the Company’s risks insureds as represented by direct earned premiums for the year ended December 31, 2003. No other state accounted for more than 2% of total direct earned premiums for the year ended December 31, 2003 (dollars in thousands).


State	Direct Earned Premiums		Percent of Total
Florida	$	154,277		19.7	%
California		89,442		11.4
New York		58,743		7.5
Texas		42,508		5.4
Illinois		34,513		4.4
Pennsylvania		32,447		4.1
Massachusetts		32,272		4.1
New Jersey		31,850		4.1
Ohio		29,335		3.7
Minnesota		16,850		2.1
Other		262,208		33.5

Total Direct Earned Premiums	$	784,445		100.0	%

See Note 20 to the Company’s financial statements included with this Form 10-K/A for information concerning the revenues, net income and assets of the Company’s business segments.

Underwriting and Pricing

The Company’s business segments are organized around its three underwriting divisions: Commercial Lines, Specialty Lines, and Personal Lines. Each underwriting division’s responsibilities include: pricing, managing the risk selection process, and monitoring loss ratios by product insured.

The Company attempts to adhere to conservative underwriting and pricing practices. The Company’s underwriting strategy is detailed in a document which is signed by each underwriting professional. Written underwriting guidelines are maintained and updated regularly for all classes of business underwritten and adherence to these underwriting guidelines is maintained through underwriting audits conducted by the Company. Product pricing levels are monitored utilizing a system which measures the aggregate price level of a book of business. This system assists management and underwriters to promptly recognize and respond to price deterioration. When necessary, the Company is willing to re-underwrite, sharply curtail or discontinue a product deemed to present unacceptable risks.

The Commercial Lines Underwriting Group has underwriting responsibility for the Company’s commercial multi-peril package, commercial automobile and large property and inland marine products. The Group currently consists of 58 home office and 59 regional office underwriters which are supported by underwriting assistants, raters, and other policy administration personnel. The Commercial Lines home office underwriting unit is responsible for underwriting, auditing, and servicing renewal business, as well as an authority referral for the regional office underwriters for quoting new business. The regional office underwriters have the responsibility for pricing, underwriting, and policy issuance for new business. The commercial lines underwriting group is under the immediate direction of Underwriter Managers who report to the Vice Presidents of Commercial Lines Underwriting. Overall management responsibility of the book of business resides in the home office with the senior underwriting officers. The Company believes that its ability to deliver excellent service and build long lasting relationships is enhanced through its management structure.

The Specialty Lines Underwriting Group has the underwriting responsibility for the errors and omissions and directors and officers liability products. The Group consists of 20 home office underwriters and underwriter trainees and 27 regional underwriters. These underwriters and underwriter trainees are supported by underwriting assistants and other policy

administration personnel. The home office underwriting unit is responsible for underwriting, auditing and servicing renewal business, as well as an authority referral for the regional office underwriters for quoting new business. The regional office underwriters have the responsibility for pricing, underwriting, and policy issuance of new business. The Specialty Lines Group is managed by three Assistant Vice Presidents who report directly to the Chief Underwriting Officer.

The Personal Lines Underwriting Group is located in Pinellas Park, Florida. The underwriting staff consists of 14 professionals who are under the direction of the Personal Lines Underwriting Vice President. Much of the underwriting function is automated through internet accessed rating software. Underwriting guidelines are embedded within this software which prohibit binding of accounts if a risk does not meet the underwriting guidelines. The Company has a proactive exposure distribution management system in place to aid in portfolio optimization. The risk portfolio is managed at a zip code level through the use of in-house software and external modeling tools. The Company inspects all risks on its new preferred homeowners program and manufactured homes on private property.

The Company uses a combination of Insurance Services Office, Inc. (“ISO”) coverage forms and rates and independently filed forms and rates. Coverage forms and rates are independently developed for situations where the line of business is not supported by ISO or where management believes the ISO forms and rates do not adequately address the risk. Departures from ISO forms are also used to differentiate the Company’s products from its competitors.

Reinsurance

The Company has entered into various reinsurance agreements for the purpose of limiting loss exposure. The Company’s casualty excess of loss reinsurance agreement provides that the Company bears the first $1.0 million layer of liability on each occurrence. Casualty, fidelity, professional liability and/or fiduciary liability risks in excess of $1.0 million up to $11.0 million are reinsured under a casualty treaty (“Excess Treaty”) placed through a reinsurance broker with Converium Reinsurance North America Inc., American Reinsurance Company, Endurance Specialty Insurance LTD, and Liberty Mutual Insurance Company, with a pro rata participation of 35%, 25%, 20% and 20%, respectively. Facultative reinsurance (reinsurance which is provided on an individual risk basis) is placed for each casualty risk in excess of $11.0 million. Effective January 1, 2004 the Company’s casualty excess of loss reinsurance agreement provides that the Company bears the first $1.0 million layer of liability on umbrella risks for policies where the Company provides the first $1.0 million primary layer of coverage.

The Company’s property excess of loss reinsurance treaty provides that the Company bears the first $2.0 million of loss on each risk with its reinsurers bearing two layers of loss up to $15.0 million on each risk (General Reinsurance Corporation provides limits of $8.0 million in excess of $2.0 million, and Swiss Reinsurance American Corporation, provides limits of $5.0 million in excess of $10.0 million). The Company also has automatic facultative excess of loss reinsurance with General Reinsurance Corporation for each property loss in excess of $15.0 million up to $50.0 million. To mitigate potential exposures to losses arising from terrorist acts, the Company has purchased per risk reinsurance coverage for terrorism with a $13.0 million aggregate policy limit for 2003. Under this reinsurance coverage the Company bears the first $2.0 million layer of loss on each risk and coverage.

Effective April 1, 2003, the Company entered into a quota share reinsurance agreement covering substantially all of the Company’s lines of business. Under this agreement, the Company cedes 22% of its net written premium (including 22% of net unearned premium reserves at April 1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional ceding 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 in a Funds Held Payable to Reinsurer account. In addition, the agreement provides that a profit commission will be paid to the Company upon commutation equal to the positive balance in the Funds Held Payable to Reinsurer account.

The Company has also purchased property catastrophe reinsurance covering both its commercial and personal lines losses. For catastrophe losses occurring in the State of Florida the Company’s reinsurance coverage is approximately $289.0 million in excess of the Company’s $4.0 million per occurrence retention. For catastrophe property losses occurring outside the State of Florida the Company’s reinsurance coverage is approximately $46.0 million for commercial lines catastrophe losses and $6.0 million for personal lines catastrophe losses in excess of the Company’s $4.0 million retention. Based upon the various modeling methods utilized by the Company to estimate its probable maximum loss, the Company currently maintains catastrophe reinsurance coverage for the 250 year storm event on its personal lines business in Florida.

The Company also has an excess casualty reinsurance agreement which provides an additional $5.0 million of coverage for protection from exposures such as extra-contractual obligations and judgments in excess of policy limits.

Additionally, an errors and omissions insurance policy provides an additional $10.0 million of coverage with respect to these exposures.

The Company seeks to limit the risk of a reinsurer’s default in a number of ways. First, the Company principally contracts with large reinsurers that are rated at least “A” (Excellent) by A.M. Best. Secondly, the Company seeks to collect the obligations of its reinsurers on a timely basis. This collection effort is supported through the regular monitoring of reinsurance receivables. Finally, the Company typically does not write casualty policies in excess of $11.0 million or property policies in excess of $25.0 million. Although the Company purchases reinsurance to limit its loss exposure by transferring the risk to its reinsurers, reinsurance doesn’t relieve the Company of its liability to policyholders.

The Company regularly assesses its reinsurance needs and seeks to improve the terms of its reinsurance arrangements as market conditions permit. Such improvements may involve increases in retentions, modifications in premium rates, changes in reinsurers and other matters.

Marketing and Distribution

Proactive risk selection based on sound underwriting criteria and relationship selling in clearly defined target markets continues to be the foundation of the Company’s marketing plan. Within this framework, the Company’s marketing effort is designed to promote a systematic and disciplined approach to developing business which is anticipated to be profitable.

The Company distributes its products through its direct production underwriting organization, an extensive network of approximately 8,500 independent brokers’ and its “preferred agent” program. The Company’s most important distribution channel is its production underwriting organization. Although the Company has always written business directly, the production underwriting organization was established by the Company to stimulate new sales through independent agents. The production underwriting organization is currently comprised of 204 professionals located in 36 offices in major markets across the country. The field offices are focused daily on interacting with prospective and existing insureds. In addition to this direct prospecting, relationships with approximately 8,500 brokers have been formed, either because the broker has a preexisting relationship with the insured or has sought the Company’s expertise in one of its specialty products. This mixed marketing concept provides the Company with the flexibility to respond to changing market conditions and, when appropriate, shift its emphasis to different product lines to take advantage of opportunities as they arise. In addition, the production underwriting organization’s ability to gather market intelligence enables the rapid identification of soft markets and redeployment to firmer markets, from a product line or geographic perspective. The Company believes that its mixed marketing platform provides a competitive edge in stable market conditions, the strengths of which are all the more evident during periods of dislocation or consolidation.

The Company’s preferred agent program, in which business relationships are formed with brokers specializing in certain of the Company’s business niches, consisted of 105 preferred agents at year-end 2003. Preferred agents are identified by the Company based on productivity and loss experience, and receive additional benefits from the Company in exchange for meeting defined production and profitability criteria.

The Company supplements its marketing efforts through affinity programs, trade shows, direct mailings and national advertisements placed in trade magazines serving industries in which the Company specializes, as well as links to industry web sites. The Company has also enhanced its marketing with Internet-based initiatives, such as the Personal Lines Division’s “Liberty American In Touch^SM” real-time policy inquiry system, which allows agents to view account data, process non-dollar endorsements, rate, quote and issue a policy over the Internet.

Product Development

The Company continually evaluates new product opportunities, consistent with its strategic focus on selected market niches. Direct contacts between the Company’s field and home office personnel, preferred agent council and its customers have produced a number of new product ideas. All new product ideas are presented to the Product Development Committee for consideration. Such Committee, currently composed of the Company’s President and members of senior management, meets regularly to review the feasibility of products from a variety of perspectives, including profitability, underwriting risk, marketing and distribution, reinsurance, long-term viability and consistency with the Company’s culture and philosophy. For each new product, an individualized test market plan is prepared, addressing such matters as the appropriate distribution channel (e.g., a limited number of selected production underwriters), an appropriate cap on premiums to be generated during the test market phase and reinsurance requirements for the test market phase. Test market products may involve lower

retentions than customarily utilized. After a new product is approved for test marketing, the Company monitors its success based on specified criteria (e.g., underwriting results, sales success, product demand and competitive pressures). If expectations are not realized, the Company either moves to improve results by initiating adjustments or abandons the product.

Claims Management and Administration

In accordance with its emphasis on underwriting profitability, the Company actively manages claims under its policies in an effort to investigate reported incidents at an early stage, service insureds and reduce fraud. Claim files are regularly audited by claims supervisors in an attempt to ensure that claims are being processed properly and that reserves are being set at appropriate levels.

The Company’s experienced staff of claims management professionals are assigned to dedicated claim units within specific niche markets. Each of these units receive supervisory direction and news, legislative and product development updates from the unit director. Claims management personnel have an average of approximately twenty years of experience in the industry. The dedicated claim units meet regularly to communicate findings of change within their assigned specialty. Staff within the dedicated claim units have an average of ten years experience in the industry.

The claims department also maintains a Special Investigations Unit to investigate suspicious claims and to serve as a clearinghouse for information concerning fraudulent practices, primarily within the rental car industry. The Special Investigations Unit works closely with a variety of industry contacts, including attorneys, investigators and rental car company fraud units to identify fraudulent claims.

Loss and Loss Adjustment Expenses

The Company is liable for losses and loss adjustment expenses under its insurance policies and reinsurance treaties. While the Company’s professional liability policies are written on claims-made forms, and while claims on its other policies are generally reported promptly after the occurrence of an insured loss, in many cases several years may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the Company’s payment of the loss. The Company reflects its liability for the ultimate payment of all incurred losses and loss adjustment expenses by establishing loss and loss adjustment expense reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events that have occurred.

When a claim involving a probable loss is reported, the Company establishes a case reserve for the estimated amount of the Company’s ultimate loss and loss adjustment expense. This estimate reflects an informed judgment, based on the Company’s reserving practices and the experience of the Company’s claims staff. Management also establishes reserves on an aggregate basis to provide for losses incurred but not reported (“IBNR”), as well as future development on claims reported to the Company.

As part of the reserving process, historical data are reviewed and consideration is given to the anticipated effect of various factors, including known and anticipated legal developments, changes in societal attitudes, inflation and economic conditions. Reserve amounts are necessarily based on management’s estimates and judgments; as new data become available and are reviewed, these estimates and judgments are revised, resulting in increases or decreases to existing reserves. The Insurance Subsidiaries’ actuary provides the Company’s with an annual statement of opinion for its statutory filings with regulators.

The following table sets forth a reconciliation of beginning and ending reserves for unpaid loss and loss adjustment expenses, net of amounts for reinsured losses and loss adjustment expenses, for the years indicated.


	As of and For the Years Ended December 31,
	2003		2002		2001
	(Dollars in Thousands)
Unpaid loss and loss adjustment expenses at beginning of year	$	359,711	$	250,134	$	195,464

Provision for losses and loss adjustment expenses for current year claims		314,609		239,834		166,220
Increase in estimated ultimate losses and loss adjustment expenses for prior year claims		44,568		27,599		13,435

Total incurred losses and loss adjustment expenses		359,177		267,433		179,655

Loss and loss adjustment expense payments for claims attributable to:
Current year		69,905		58,530		54,228
Prior years		167,488		99,326		70,757

Total payments		237,393		157,856		124,985

Unpaid loss and loss adjustment expenses at end of year ⁽¹⁾	$	481,495	$	359,711	$	250,134

During 2003 the Company increased the liability for unpaid loss and loss adjustment expenses by $51.7 million ($44.6 million net of reinsurance recoverables), primarily for accident years 1997 through 2001. This increase in the liability for unpaid loss and loss adjustment expense, net of reinsurance recoverables, was primarily due to the following:

• 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 $38.8 million. As of December 31, 2003 the Company’s total liability for gross and net unpaid loss and loss adjustment expenses for these policies is estimated to be $30.3 million. 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. The increase in the estimated gross and net loss was a result of:

• Adverse trends further deteriorating in both claims frequency and severity for leases expiring in 2003. During the second quarter of 2003, the Company engaged a consulting firm to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the study and subsequent evaluation by the Company the Company changed its assumptions relating to future frequency and severity of losses, and increased the estimate for unpaid loss and loss adjustment expenses by $33.0 million. 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 uncertain economic conditions.

• The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank (“Firstar”) for residual value insurance policies purchased by Firstar. Under the terms of the agreement, the Company paid Firstar $27.5 million in satisfaction of any and all claims made or which could have been made by Firstar under the residual value policies. The Company increased the gross and net reserves for loss and loss adjustment expenses from $21.7 million to $27.5 million pursuant to this agreement.

• The Company increased its estimate for unpaid loss and loss adjustment expenses for non residual value policies by $43.5 million ($30.8 million net of reinsurance recoverables) primarily for accident years 1999 to 2001 and decreased its estimate of the unpaid loss and loss adjustment expenses by $30.6 million ($25.0 million net of reinsurance recoverables) for the 2002 accident year. The increase in accident years 1999 to 2001 is principally attributable to:

• $19.6 million ($13.7 million net of reinsurance recoverables) of development in claims made professional liability products as a result of case reserves developing greater than anticipated from the year-end 2002

ultimate loss estimate; $18.1 million ($11.1 million net of reinsurance recoverables) of development in the automobile and general liability coverages for commercial package products due to the frequency and severity of the losses developing beyond the underlying pricing assumptions; and $5.8 million ($6.0 million net of reinsurance recoverables) of development in the commercial automobile excess liability insurance and GAP commercial automobile products due to losses developing beyond the underlying pricing assumptions.

• The decrease in unpaid loss and loss adjustment expenses in accident year 2002 is principally attributable to:

• $4.2 million ($4.7 million net of reinsurance recoverables) and $26.4 million ($20.3 million net of reinsurance recoverables) of favorable development in professional liability products and commercial package products, respectively, due to favorable loss experience as a result of favorable product pricing.

The following table presents the development of unpaid loss and loss adjustment expenses, net of amounts for reinsured losses and loss adjustment expenses, from 1993 through 2003. The top line of the table shows the estimated reserve for unpaid loss and loss adjustment expenses at the balance sheet date for each of the indicated years. These figures represent the estimated amount of unpaid loss and loss adjustment expenses for claims arising in the current year and all prior years that were unpaid at the balance sheet date, including IBNR losses. The table also shows the re-estimated amount of the previously recorded unpaid loss and loss adjustment expenses based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years.

AS OF AND FOR THE YEARS ENDED DECEMBER 31,
(Dollars in Thousands)


	1993			1994			1995			1996			1997			1998			1999			2000			2001			2002			2003
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, AS STATED	$	38,714		$	53,595		$	68,246		$	85,723		$	108,928		$	136,237		$	161,353		$	195,464		$	250,134		$	359,711		$	481,496
Cumulative Paid as of:
1 year later		10,792			12,390			15,214			22,292			26,870			43,769			60,922			70,757			99,325			167,489
2 years later		19,297			23,139			31,410			38,848			56,488			84,048			109,092			131,649			211,851
3 years later		24,991			33,511			40,637			52,108			80,206			115,900			144,435			213,286
4 years later		28,903			38,461			47,994			63,738			95,047			131,062			201,779
5 years later		30,558			42,366			51,806			69,116			99,755			151,753
6 years later		32,748			43,860			53,198			70,779			106,915
7 years later		32,929			44,243			53,701			73,939
8 years later		33,102			44,627			55,541
9 years later		33,721			45,902
10 years later		33,923
Unpaid Loss and Loss Adjustment Expenses re-estimated as of End of Year:
1 year later		38,603			52,671			67,281			84,007			105,758			135,983			163,896			208,899			277,733			404,279
2 years later		38,016			52,062			66,061			81,503			103,513			138,245			177,782			232,582			334,802
3 years later		37,184			51,149			63,872			76,348			104,712			146,679			196,735			274,166
4 years later		36,272			49,805			59,085			73,992			109,061			151,077			228,082
5 years later		35,783			47,366			56,673			75,672			107,796			163,657
6 years later		34,509			45,797			55,861			74,645			110,845
7 years later		33,799			45,245			55,439			75,272
8 years later		33,695			44,878			55,606
9 years later		33,622			45,764
10 years later		33,782
Cumulative Redundancy (Deficiency)
Dollars	$	4,932		$	7,831		$	12,640		$	10,451		$	(1,917	)	$	(27,420	)	$	(66,729	)	$	(78,702	)	$	(84,668	)	$	(44,568	)
Percentage		12.7	%		14.6	%		18.5	%		12.2	%		(1.8	)%		(20.1	)%		(41.4	)%		(40.3	)%		(33.8	)%		(12.4	%)

(1) Unpaid loss and loss adjustment expenses differ from the amounts reported in the Consolidated Financial Statements because of the inclusion therein of reinsurance receivables of $145,591, $85,837, $52,599, $42,030, $26,710, $16,120, $13,502, $10,919, $9,440, $5,580, and $5,539 at December 31, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994, and 1993, respectively.

(2) 1998 Unpaid Loss and Loss Adjustment Expenses, as stated, adjusted to include $1,207 unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date.

(3) The Company maintains its historical loss records net of reinsurance, and therefore is unable to conform the presentation of this table to the financial statements.

The cumulative redundancy (deficiency) represents the aggregate change in the reserve estimated over all prior years, and does not present accident year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years.

The unpaid loss and loss adjustment expense of the Insurance Subsidiaries, as reported in their Annual Statements prepared in accordance with statutory accounting practices and filed with state insurance departments, differ from those reflected in the Company’s financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) with respect to recording the effects of reinsurance. Unpaid loss and loss adjustment expenses under statutory accounting practices are reported net of the effects of reinsurance, whereas under GAAP these amounts are reported without giving effect to reinsurance. Under GAAP, reinsurance receivables, with a corresponding increase in unpaid loss and loss adjustment expense, have been recorded. (See footnote (1) on Page 10 for amounts). There is no effect on net income or shareholders’ equity due to the difference in reporting the effects of reinsurance between statutory accounting practices and GAAP as discussed above.

Operating Ratios

Statutory Combined Ratio

The statutory combined ratio, which is the sum of (a) the ratio of loss and loss adjustment expenses incurred to net earned premiums (loss ratio) and (b) the ratio of policy acquisition costs and other underwriting expenses to net written premiums (expense ratio), is the traditional measure of underwriting experience for insurance companies. If the combined ratio is below 100%, an insurance company has an underwriting profit, and if it is above 100%, the insurer has an underwriting loss.

The following table reflects the consolidated loss, expense and combined ratios of the Insurance Subsidiaries, together with the property and casualty industry-wide combined ratios after policyholders’ dividends.


	For the Years Ended December 31,
	2003			2002			2001			2000			1999
Loss Ratio		63.1	%		63.5	%		60.7	%		57.8	%		59.7	%
Expense Ratio		27.2	%		28.0	%		31.2	%		31.3	%		33.6	%

Combined Ratio		90.3	%		91.5	%		91.9	%		89.1	%		93.3	%

Industry Statutory Combined Ratio, after Policyholders’ Dividends		101.1	%		107.4	%		115.9	%		110.4	%		108.1	%

		(1	)		(2	)		(2	)		(2	)		(2	)

(1) Source: Best’s Special Report “Keeping Pace” February 9, 2004 (Estimated 2003).

(2) Source: Best’s Special Report “Keeping Pace” February 9, 2004

Premium-to-Surplus Ratio:

While there are no statutory provisions governing premium-to-surplus ratios, regulatory authorities regard this ratio as an important indicator as to an insurer’s ability to withstand abnormal loss experience. Guidelines established by the National Association of Insurance Commissioners (the “NAIC”) provide that an insurer’s net premium-to-surplus ratio is satisfactory if it is below 3 to 1.

The following table sets forth, for the periods indicated, net written premiums to surplus as regards policyholders’ for the Insurance Subsidiaries (statutory basis):


	As of and For the Years Ended December 31,
	2003		2002		2001		2000		1999
	(Dollars in Thousands)
Net Written Premiums	$	601,253	$	523,962	$	333,817	$	263,637	$	195,258
Surplus as regards Policyholders	$	415,900	$	312,626	$	280,960	$	193,292	$	179,341
Premium to Surplus Ratio		1.5 to 1.0		1.7 to 1.0		1.2 to 1.0		1.4 to 1.0		1.1 to 1.0

Investments

At December 31, 2003, the Company had total investments with a carrying value of $1,172.1 million, and 92.3% of the Company’s total investments were 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, asset backed securities, mortgage pass-through securities and collateralized mortgage obligations, with a weighted average rating of “AA+”. The asset backed, mortgage pass-through and collateralized mortgage obligation securities amortizing securities possessing favorable prepayment risk and/or extension profiles. The remaining 7.7% of the Company’s total investments consisted primarily of publicly-traded common stocks.

The following table sets forth information concerning the composition of the Company’s total investments at December 31, 2003:


			Estimated				Percent of
			Market		Carrying		Carrying
	Amortized Cost		Value		Value		Value
	(Dollars in Thousands)
Fixed Maturities:
Obligations of States and Political Subdivisions	$	476,762	$	488,976	$	488,976		41.7	%
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies		51,480		51,918		51,918		4.4
Corporate and Bank Debt Securities		142,264		147,054		147,054		12.6
Asset Backed Securities		183,065		177,675		177,675		15.1
Mortgage Pass-Through Securities		159,160		162,529		162,529		13.9
Collateralized Mortgage Obligations		53,792		53,542		53,542		4.6
Equity Securities		79,813		90,358		90,358		7.7

Total Investments	$	1,146,336	$	1,172,052	$	1,172,052		100.0	%

At December 31, 2003, approximately 98.7% of the Insurance Subsidiaries’ fixed maturity securities (cost basis) consisted of U.S. government securities or securities rated “1” (“highest quality”) or “2” (“high quality”) by the NAIC.

The cost and estimated market value of fixed maturity securities at December 31, 2003, by remaining original contractual maturity, is set forth below. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations, with or without call or prepayment penalties:


	Amortized Cost		Estimated Market Value
	(Dollars in Thousands)
Due in one year or less	$	53,845	$	54,545
Due after one year through five years		223,676		229,476
Due after five years through ten years		177,412		182,132
Due after ten years		215,573		221,795
Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities		396,017		393,746

Total	$	1,066,523	$	1,081,694

Investments of the Insurance Subsidiaries must comply with applicable laws and regulations which prescribe the type, quality and diversification of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, real estate mortgages and real estate.

Regulation

General: The Company is subject to extensive supervision and regulation in the states in which it operates. Such supervision and regulation relate to numerous aspects of the Company’s business and financial condition. The primary purpose of the supervision and regulation is the protection of insurance policyholders and not the Company’s investors. The extent of regulation varies but generally is governed by state statutes. These statutes delegate regulatory, supervisory and administrative authority to state insurance departments. This system of regulation covers, among other things:

• issuance, renewal, suspension and revocation of licenses to engage in the insurance business;

• standards of solvency, including risk-based capital measurements;

• restrictions on the nature, quality and concentration of investments;

• restrictions on the types of terms that the Company can include in the insurance policies it offers;

• certain required methods of accounting;

• maintenance of reserves for unearned premiums, losses and other purposes; and

• potential assessments for the provision of funds necessary for the settlement of covered claims under certain insurance policies provided by impaired, insolvent or failed insurance companies.

The regulations or the state insurance departments may affect the cost or demand for the Company’s products and may present impediments to obtaining rate increases or taking other actions to increase profitability. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If the Company does not have the requisite licenses and approvals, or does not comply with applicable regulatory requirements, the insurance regulatory authorities could stop or temporarily suspend the Company from carrying on some or all of its activities. In light of several recent significant property and casualty insurance company insolvencies, it is possible that assessments paid to state guaranty funds may increase. Because the Insurance Subsidiaries are domiciled in Pennsylvania and Florida, the Pennsylvania Department of Insurance and the Florida Office of Insurance Regulation have primary authority over the Company.

Regulation of Insurance Holding Companies: Pennsylvania and Florida, like many other states, have laws governing insurance holding companies (such as Philadelphia Insurance). Under these laws, a person generally must obtain the applicable Insurance Department’s approval to acquire, directly or indirectly, 5% to 10% or more of the outstanding voting securities of Philadelphia Insurance or the Insurance Subsidiaries. Such Department’s determination of whether to approve any such acquisition would be based on a variety of factors, including an evaluation of the acquirer’s financial stability, the competence of its management, the effect of rates on coverages provided, if any, and whether competition in Pennsylvania or Florida would be reduced.

The Pennsylvania and Florida statutes require every Pennsylvania and Florida domiciled insurer which is a member of an insurance holding company system to register with Pennsylvania or Florida, respectively, by filing and keeping current a registration statement on a form prescribed by the NAIC.

The Pennsylvania statute also specifies that at least one-third of the board of directors, and each committee thereof, of either the domestic insurer or its publicly owned holding company (if any), must be comprised of outsiders (i.e., persons who are neither officers, employees nor controlling shareholders of the insurer or any affiliate). In addition, the domestic insurer or its publicly held holding company must establish one or more committees comprised solely of outside directors, with responsibility for recommending the selection of independent certified public accountants; reviewing the insurer’s financial condition, the scope and results of the independent audit and any internal audit; nominating candidates for director; evaluating the performance of principal officers; and recommending to the board the selection and compensation of principal officers.

Under the Florida statute, a majority of the directors must be citizens of the United States. In addition, no Florida insurer may make any contract whereby any person is granted or is to enjoy in fact the management of the insurer to the substantial exclusion of its board of directors or to have the controlling or preemptive right to produce substantially all insurance business for the insurer, unless the contract is filed with and approved by the Florida Office of Insurance

Regulation. An insurer must give the Department written notice of any change of personnel among the directors or principal officers of the insurer within 45 days of such change. The written notice must include all information necessary to allow the Department to determine that the insurer will be in compliance with state statutes.

Dividend Restrictions: As an insurance holding company, Philadelphia Insurance will be largely dependent on dividends and other permitted payments from the Insurance Subsidiaries to pay any cash dividends to its shareholders. The ability of the Insurance Subsidiaries to pay dividends to the Company is subject to certain restrictions imposed under Pennsylvania and Florida insurance laws. Accumulated statutory profits of the Insurance Subsidiaries from which dividends may be paid totaled $179.2 million at December 31, 2003. Of this amount, the Insurance Subsidiaries are entitled to pay a total of approximately $50.7 million of dividends in 2004 without obtaining prior approval from the Pennsylvania Insurance Department or Florida Office of Insurance Regulation. During 2003 the insurance subsidiaries paid dividends of $4.0 million to Liberty American Insurance Group, Inc., a subsidiary of Philadelphia Insurance.

The National Association of Insurance Commissioners: In addition to state-imposed insurance laws and regulations, the Insurance Subsidiaries are subject to Statutory Accounting Principles (“SAP”) as codified by the NAIC in the “Accounting Practices and Procedures Manual” which was adopted by the Pennsylvania Insurance Department and Florida Office of Insurance Regulation effective January 1, 2001. The NAIC also promulgates model insurance laws and regulations relating to the financial and operational regulation of insurance companies. These model laws and regulations generally are not directly applicable to an insurance company unless and until they are adopted by applicable state legislatures or departments of insurance. However, NAIC model laws and regulations have become increasingly important in recent years, due primarily to the NAIC’s state regulatory accreditation program. Under this program, states which have adopted certain required model laws and regulations and meet various staffing and other requirements are “accredited” by the NAIC. Such accreditation is the cornerstone of an eventual nationwide regulatory network, and there is a certain degree of political pressure on individual states to become accredited by the NAIC. Because the adoption of certain model laws and regulations is a prerequisite to accreditation, the NAIC’s initiatives have taken on a greater level of practical importance in recent years. The NAIC accredited both Pennsylvania and Florida under the NAIC Financial Regulation Standards.

All the states have adopted the NAIC’s financial reporting form, which is typically referred to as the NAIC “Annual Statement”, and most states, including Pennsylvania and Florida, generally defer to the NAIC with respect to SAP. In this regard, the NAIC has a substantial degree of practical influence and is able to accomplish certain quasi-legislative initiatives through amendments to the NAIC annual statement and applicable accounting practices and procedures. For instance, the NAIC requires all insurance companies to have an annual statutory financial audit and an annual actuarial certification as to loss reserves by including such requirements within the annual statement instructions.

Capital and Surplus Requirements: PIC’s eligibility to write insurance on a surplus lines basis in most jurisdictions is dependent on its compliance with certain financial standards, including the maintenance of a requisite level of capital and surplus and the establishment of certain statutory deposits. In recent years, many jurisdictions have increased the minimum financial standards applicable to surplus lines eligibility. For example, California and certain other states have adopted regulations which require surplus lines companies operating therein to maintain minimum capital of $15 million, calculated as set forth in the regulations. PIC maintains capital to meet these requirements.

Risk-Based Capital: Risk-based capital is designed to measure the acceptable amount of capital an insurer should have, based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark capital level may be subject to scrutiny by the insurer’s domiciliary insurance department, and ultimately rehabilitation or liquidation. Based on the standards currently adopted, the policyholders’ surplus of each of the Insurance Subsidiaries at December 31, 2003 is in excess of the minimum prescribed risk-based capital requirements.

Insurance Guaranty Funds: The Insurance Subsidiaries are subject to guaranty fund laws which can result in assessments, up to prescribed limits, for losses incurred by policyholders as a result of the impairment or insolvency of unaffiliated insurance companies. Typically, an insurance company is subject to the guaranty fund laws of the states in which it conducts insurance business; however, companies which conduct business on a surplus lines basis in a particular state are generally exempt from that state’s guaranty fund laws.

Shared Markets: As a condition of its license to do business in various states, PIIC, MUSA and LAIC are required to participate in mandatory property-liability shared market mechanisms or pooling arrangements which provide various insurance coverages to individuals or other entities that otherwise are unable to purchase coverage voluntarily provided by private insurers. In addition, some states require automobile insurers to participate in reinsurance pools for claims that exceed a certain amount. PIIC’s, MUSA’s and LAIC’s participation in such shared markets or pooling mechanisms is

generally in proportion to the amount of their direct writings for the type of coverage written by the specific pooling mechanism in the applicable state.

Mold Contamination: The property-casualty insurance industry experienced an increase in claim activity in the last few years pertaining to mold contamination. Significant plaintiffs’ verdicts and increased media attention to the subject have caused insurers to develop and/or refine relevant insurance policy language that excludes mold coverage. The insurance industry foresees increased state legislative activity pertaining to mold contamination in 2004. The Company will closely monitor litigation trends in 2004, and continue to review relevant insurance policy exclusion language. There were few insurance laws or regulations enacted in 2003 regarding mold coverages. The regulatory emphasis appears to focus on personal lines rather than commercial lines. The Company has experienced an immaterial impact from mold claims and attaches a mold exclusion to policies where applicable.

Health Insurance Portability and Accessibility Act: Regulations under the Health Insurance Portability and Accessibility Act of 1996 (HIPAA) were adopted on April 14, 2003 to protect the privacy of individual health information. While property/casualty insurers are not required to comply with the various administrative requirements of the act, the regulations have an impact on obtaining information within the context of claims information. The Company continues to monitor regulatory developments under HIPAA.

Certain Legislative Initiatives and Developments: A number of new, proposed or potential legislative or industry developments could further increase competition in the insurance industry. These developments include:

• the enactment of the Gramm-Leach-Bliley Act of 1999 (which permits financial services companies such as banks and brokerage firms to engage in the insurance business), which could result in increased competition from new entrants to the Company’s markets;

• the formation of new insurers and an influx of new capital in the marketplace as existing companies attempt to expand their business as a result of better pricing and/or terms;

• programs in which state-sponsored entities provide property insurance in catastrophe-prone areas;

• changing practices caused by the Internet, which have led to greater competition in the insurance business.

These developments could make the property and casualty insurance marketplace more competitive by increasing the supply of insurance capacity. In that event, recent favorable industry trends that have reduced insurance and reinsurance supply and increased demand could be reversed and may negatively influence the Company’s ability to maintain or increase rates. Accordingly, these developments could have an adverse effect on the Company’s earnings.

The federal Terrorism Risk Insurance Act of 2002 (the “Act”) established a temporary federal program that provides for a system of shared public and private compensation for insured commercial property and casualty losses resulting from acts of terrorism, as defined in the Act. The Terrorism Insurance Program (the “Program”) requires all commercial property and casualty insurers licensed in the United States to participate. The Program provides that in the event of a terrorist attack, as defined, resulting in insurance industry losses exceeding $5 million, the U.S. government will provide funding to the insurance industry on an annual aggregate basis of 90% of covered losses up to $100 billion. Each insurance company is subject to a deductible based upon a percentage of the previous year’s direct earned premium, with the percentage increasing each year. The Program requires that insurers notify in-force commercial policyholders by February 24, 2003 that coverage for terrorism acts is provided and the cost for this coverage. It also requires notices to be given at certain specified times to insureds to which policies are issued after the date of the Act’s enactment. Policyholders have the option to accept or decline the coverage, or negotiate other terms. Property and casualty insurers, including the Company, are required to offer this coverage at each subsequent renewal even if the policyholder elected to exclude this coverage in the previous policy period. The Program became effective upon enactment and runs through December 31, 2005. With the signing of the Act, all previously approved exclusions for terrorism in any contract for property and casualty insurance in force as of November 26, 2002 are excluded. However, an insurer may reinstate a preexisting provision in a contract for property and casualty insurance that is in force on the date of enactment and that excludes coverage for an act of terrorism only:

(1) if the insurer has received a written statement from the insured that affirmatively authorizes such reinstatement; or

(2) if

(A) the insured fails to pay any increased premium charged by the insurer for providing such terrorism coverage; and

(B) the insurer provided notice, at least 30 days before any such reinstatement, of (i) the increased premium for such terrorism coverage; and (ii) the rights of the insured with respect to such coverage, including any date upon which the exclusion would be reinstated if no payment is received.

Sarbanes-Oxley Act of 2002: The Sarbanes-Oxley Act of 2002, enacted on July 30, 2002, presents a significant expansion of securities law regulation of corporate governance, accounting practices, reporting and disclosure that affects publicly traded companies. The act, in part, sets forth requirements for certification by company CEOs and CFOs of certain reports filed with the SEC, disclosures pertaining to the adoption of a code of ethics applicable to certain management personnel, and safeguards against actions to fraudulently influence, manipulate or mislead independent public or certified accountants of the issuer’s financial statements. It also requires stronger guidance for development and evaluation of internal control procedures, as well as provisions pertaining to a company’s audit committee of the board of directors. The Company continues its efforts toward compliance with the act, particularly related to Section 404 dealing with our system of internal controls.

Competition

The Company competes with a large number of other companies in its selected line of business, including major U.S. and non-U.S. insurers and other regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies and diversified financial services companies. Some of these competitors have greater financial and marketing resources than the Company. Profitability could be adversely affected if business is lost due to competitors offering similar or better products at or below the Company’s prices. In addition, a number of new, proposed or potential legislative or industry developments could further increase competition. New competition from these developments could cause the demand for the Company’s products to fall, which could adversely affect profitability.

The current business climate remains competitive from a solicitation standpoint. The Company will “walk away”, if necessary, from writing business that does not meet established underwriting standards and pricing guidelines. Management believes though that the Company’s mixed marketing strategy is a strength in that it provides the flexibility to quickly deploy the marketing efforts of the Company’s direct production underwriters from soft market segments to market segments with emerging opportunities. Additionally, through the mixed marketing strategy, the Company’s production underwriters have established relationships with approximately 8,500 brokers, thus facilitating a regular flow of submissions.

Employees

As of February 25, 2004, the Company had 876 full-time employees and 30 part-time employees. The Company actively encourages its employees to continue their educational efforts and aids in defraying their educational costs (including 100% of education costs related to the insurance industry). Management believes that the Company’s relations with its employees are generally excellent.

Company Website and Availability of Securities and Exchange Commission (“SEC”) Filings

The Company’s Internet website is www.phly.com. Information on the Company’s website is not a part of this Form 10-K. The Company makes available free of charge on its website, or provides a link to, the Company’s Forms 10-K, 10-Q and 8-K filed or furnished on or after May 14, 1996, and any amendments to these Forms, that have been filed with the SEC on or after May 14, 1996 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to the SEC. To access these filings, go to the Company’s website and click on “Investor Relations”, then click on “SEC Filings.”

Item 6. SELECTED FINANCIAL DATA


	As of and For the Years Ended December 31,
	(In Thousands, Except Share and Per Share Data)
	2003 (Restated)			2002 (Restated)			2001 (Restated)			2000			1999
Operations and Comprehensive Income Statement Data:
Gross Written Premiums	$	905,993		$	663,739		$	473,565		$	361,872		$	274,918
Gross Earned Premiums	$	789,498		$	555,485		$	421,063		$	328,350		$	245,978
Net Written Premiums	$	602.300		$	519,707		$	337,281		$	263,429		$	184,071
Net Earned Premiums	$	574,518		$	417,722		$	299,557		$	227,292		$	164,915
Net Investment Income		38,806			37,516			32,426			25,803			20,695
Net Realized Investment Gain (Loss)		794			(3,371	)		3,357			11,718			5,700
Other Income		5,519			911			587			8,981			4,722

Total Revenue		619,637			452,778			335,927			273,794			196,032

Net Loss and Loss Adjustment Expenses		359,177			267,433			179,655			131,304			99,410
Acquisition Costs and Other Underwriting Expenses		162,912			129,918			97,020			75,054			53,793
Other Operating Expenses		7,822			6,372			6,841			14,679			8,939

Total Losses and Expenses		529,911			403,723			283,516			221,037			162,142

Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust		—			—			2,749			7,245			7,245

Income Before Income Taxes		89,726			49,055			49,662			45,512			26,645
Total Income Tax Expense		27,539			15,302			16,851			14,742			7,802

Net Income	$	62,187		$	33,753		$	32,811		$	30,770		$	18,843

Weighted-Average Common Shares Outstanding		21,908,788			21,611,053			16,528,601			12,177,989			12,501,165
Weighted-Average Share Equivalents Outstanding		751,600			682,382			656,075			2,411,552			2,614,399

Weighted-Average Shares and Share Equivalents Outstanding		22,660,388			22,293,435			17,184,676			14,589,541			15,115,564

Basic Earnings Per Share	$	2.84		$	1.56		$	1.99		$	2.53		$	1.51

Diluted Earnings Per Share	$	2.74		$	1.51		$	1.91		$	2.11		$	1.25

Year End Financial Position:
Total Investments and Cash and Cash Equivalents	$	1,245,994		$	950,861		$	723,318		$	487,028		$	420,016
Total Assets		1,870,941			1,358,334			1,019,974			730,464			599,051
Unpaid Loss and Loss Adjustment Expenses		627,086			445,548			302,733			237,494			188,063
Minority Interest in Consolidated Subsidiaries		—			—			—			98,905			98,905
Total Shareholders’ Equity		545,646			477,823			430,944			182,325			161,440
Common Shares Outstanding		22,007,552			21,868,877			21,509,723			13,431,408			12,590,908

Insurance Operating Ratios
(Statutory Basis):
Net Loss and Loss Adjustment Expenses to Net Earned Premiums		63.1	%		63.5	%		60.7	%		57.8	%		59.7	%
Underwriting Expenses to Net Written Premiums		27.2	%		28.0	%		31.2	%		31.3	%		33.6	%

Combined Ratio		90.3	%		91.5	%		91.9	%		89.1	%		93.3	%

		A+			A+			A+			A+			A+
A.M. Best Rating	(Superior)			(Superior)			(Superior)			(Superior)			(Superior)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatement of Financial Statements

The Company’s previously issued financial statements for the years ended December 31, 2003, December 31, 2002 and December 31, 2001 have been restated to record a portion of the revenue and net income arising from profit commissions under three reinsurance contracts, one of which originally had been recorded in the second quarter 2002, another of which had originally been recorded in the fourth quarter 2003, and another of which should have been recorded in previous periods. These profit commissions were due to the Company from reinsurers under a 2001 aggregate stop loss reinsurance contract effective during the period January 1, 2001 through December 31, 2001, a quota share reinsurance contract effective during the period April 1, 2003 through December 31, 2003, and an excess catastrophe reinsurance contract effective during the period June 1, 2003 through May 31, 2004. See Note 2 of Notes to Consolidated Financial Statements for more information on these matters.

The impact of this restatement on the previously reported results of operations for the years ended December 31, 2003, December 31, 2002 and December 31, 2001 was to increase net income by $1.9 million ($0.08 diluted earnings per share), decrease net income by $2.3 million ($0.11 diluted earnings per share), and increase net income by $2.3 million ($0.13 diluted earnings per share), respectively. The restatement also resulted in an increase (decrease) to net earned premiums in the amount of $2.9 million, ($3.5) million, and $3.5 million for the years ended December 31, 2003, December 31, 2002 and December 31, 2001, respectively, and an increase to the previously reported retained earnings balance as of December 31, 2003 and December 31, 2001 in the amount of $1.9 million, and $2.3 million, respectively. The restatement does not affect the Company’s retained earnings balance as of December 31, 2002. Any amounts shown herein as restated are the restated amounts.

GENERAL

Overview

The Company designs, markets, and underwrites specialty commercial and personal property and casualty insurance products for select target industries or niches. 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 has responsibility for personal property and casualty insurance products for the Manufactured Housing and Homeowners markets. The company operates solely within the United States through its 12 regional and 24 field offices.

The Company generates its revenues through the sale of commercial property and casualty insurance policies. The insurance policies are sold through the Company’s five distribution channels which include direct sales, retail insurance agents/open brokerage, wholesalers, preferred agents and the internet. The Company believes that consistency in its field office representation has created excellent relationships with local insurance agencies across the country.

The Company also generates revenue from its investment portfolio, which approximated $1.2 billion at December 31, 2003 and generated $43.4 million in gross pretax investment income during 2003. The Company utilizes external independent professional investment managers with the objective of realizing relatively high levels of investment income while generating competitive after tax total rates of return within duration and credit quality targets.

Management measures the results of operations through monitoring certain measures of growth and profitability, including, but not limited to: number of policies written, pricing, risk selection, loss ratio (sum of net loss and loss adjustment expenses divided by net earned premiums) and expense levels.

During 2003, the prior year market trends of premium rate increases and turmoil in the property and casualty insurance market continued. Although further premium rate increases were realized during 2003, the increases moderated from those realized in 2002. The increases have primarily arisen due to the significant property and casualty industry losses as a result of the tragic terrorist attacks of September 11, 2001, lower interest rates, and diminished risk capacity. Rating agency downgrades, insolvencies and consolidations in the industry also continued to be market factors during 2003.

In this environment, the Company continued its strong growth, with gross written premiums increasing 36.5% to $906.0 million. Gross written premium growth was strong across all the Company’s business segments with in-force policy counts increasing 22.8% and 39.7% for the commercial and specialty lines segments, respectively, remaining flat for the personal lines segment, and weighted average premium rate increases on renewal business approximating 4.3%, 10.2% and 9.4% for the commercial, specialty and personal lines segments, respectively.


	Commercial			Specialty			Personal
($’s in millions)	Lines			Lines			Lines			Total
2003 Gross Written Premium	$	662.4		$	154.1		$	89.5		$	906.0
2002 Gross Written Premium	$	473.1		$	110.2		$	80.5		$	663.8
Percentage Increase		40.0	%		39.9	%		11.3	%		36.5	%
2003 Weighted Average Premium Rate Increase on Renewal Business		4.3	%		10.2	%		9.4	%
2002 Weighted Average Premium Rate Increase on Renewal Business		10.0	%		26.0	%		8.0	%

The Company also believes its core strategy of adhering to an underwriting philosophy of sound risk selection and pricing discipline, the mixed marketing platform for its product distribution and the creation of value added features not typically found in property and casualty products have also contributed to generating premium growth above industry averages, as well as enabling the Company to produce combined ratios (the sum of net loss and loss adjustment expenses and acquisition costs and other underwriting expenses, divided by net earned premiums) well below industry averages.

The GAAP combined ratio for the year ended December 31, 2003 was 90.9%, which, once again, was substantially lower than the property and casualty industry as a whole. Included in the 2003 calendar year net loss and loss adjustment expenses was $44.6 million of prior accident year development, of which, $38.8 million was attributable to the Company’s run-off residual value line of business. The following table illustrates the 2003 calendar year and accident year loss ratios by segment.


	Commercial			Specialty			Personal
	Lines			Lines			Lines			Total
2003 calendar year loss and loss adjustment expense ratio (Restated)		63.4	%		59.8	%		60.3	%		62.5	%
2003 accident year loss and loss adjustment expense ratio (Restated)		54.9	%		53.4	%		57.3	%		54.8	%

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 December 31, 2003, approximately 87.8% and 6.6% of the total invested assets (total investments plus cash equivalents) on a cost basis consisted of investments in fixed maturity and equity securities, respectively, versus 90.2% and 5.6%, respectively, at December 31, 2002.

During 2003 the relative percentage investment in tax-exempt fixed maturity securities versus taxable fixed maturity securities increased, due to the Company taking advantage of the more favorable after-tax yields. At the end of 2003, on a cost basis, investment grade tax-exempt fixed maturity securities represented 39.2% of the total invested assets, compared to 30.3% as of the end of 2002.

Asset backed, mortgage pass through, and collateralized mortgage obligation securities, on a cost basis, amounted to $183.0 million, $159.2 million and $53.8 million, respectively, as of December 31, 2003 and $202.8 million, $81.3 million and $89.2 million, respectively, as of December 31, 2002. The asset backed, mortgage pass through, and collateralized mortgage obligation investments are amortizing securities possessing favorable prepayment risk and/or extension profiles.

The Company regularly performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed for all securities, except interests in securitized assets, meeting predetermined thresholds to determine whether such decline is other than temporary. If the Company determines a decline in value to be other than temporary, based upon its detailed review, or if a decline in value for an equity investment has persisted continuously for nine months, the cost basis of the security is written down to its fair value. The factors considered in reaching the conclusion that a decline below cost is other than temporary include, but are not limited to, whether: the issuer is in financial distress; the investment is secured; a significant credit rating

action has occurred; scheduled interest payments have been delayed or missed; or changes in laws and/or regulations have impacted an issuer or industry. The amount of any write down is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $1.0 million and $2.1 million for the years ended December 31, 2003 and 2002, respectively. Such non-cash realized investment losses resulted from other than temporary declines in the fair value of certain holdings in the Company’s common stock portfolio occurring primarily in the fourth quarter of 2002 and the first quarter of 2003. The Company primarily attributes these other than temporary declines in fair value to the uncertain economic climate, the overhang of corporate governance issues, and the high profile bankruptcies occurring during 2002 into early 2003.

Additionally, the Company conducts its impairment evaluation and recognition for interests in securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board (“EITF”) in EITF 99-20. Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $9.3 million and $1.6 million for the years ended December 31, 2003 and 2002, respectively. These non-cash realized investment losses were primarily due to investments in collateralized bond obligations as a result of the non investment grade default rates which remain higher than historic averages.

The Company’s fixed maturity portfolio amounted to $1,081.7 million and $854.5 million, as of December 31, 2003 and December 31, 2002, respectively, of which 98.6% of the portfolio for both years was comprised of investment grade securities. From the fourth quarter of 2001 into early 2003 following the war in Iraq, U.S. investment grade securities experienced varying price and ratings volatility, having been affected by the uncertain economic climate, corporate governance issues, and the subsequent stream of corporate scandals and high profile bankruptcies. More recently certain sectors of the investment grade security market have continued to lag despite a return to a more favorable economic climate. However, the high quality of the Company’s overall “AA+” rated fixed maturity portfolio, has mitigated potential volatility. The Company had fixed maturity investments with unrealized losses amounting to $10.6 million and $9.2 million as of December 31, 2003 and December 31, 2002, respectively. Of these amounts, interests in securitized assets had unrealized losses amounting to $9.2 million and $7.3 million as of December 31, 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. Investments in aircraft collateralized Enhanced Equipment Trust Certificates (EETCs) had unrealized losses amounting to $0 and $1.3 million as of December 31, 2003 and December 31, 2002, respectively.

The following table identifies the period of time securities with an unrealized loss at December 31, 2003 have continuously been in an unrealized loss position. Included in the amounts displayed in the table are $6.5 million of unrealized losses due to non-investment grade fixed maturity securities having a fair value of $15.6 million. No issuer of securities or industry represents more than 4.4% and 15.5%, respectively, of the total estimated fair value, or 18.1% and 39.7%, respectively, of the total gross unrealized loss included in the table below. As previously discussed, there are certain risks and uncertainties inherent in the Company’s impairment methodology, such as the financial condition of specific industry sectors and the resultant effect on underlying security collateral values. Should the Company subsequently determine a decline in the fair value below the cost basis to be other than temporary, the security would be written down to its fair value and the difference would be included in earnings as a realized loss for the period such determination was made.


	Gross Unrealized Losses
	(in millions)
	Fixed Maturities
Continuous	Available for Sale				Total
time in unrealized loss	Excluding Interests		Interests in		Fixed Maturities
position	in Securitized Assets		Securitized Assets		Available for Sale		Equity Securities		Total Investments
0 - 3 months	$	0.2	$	0.3	$	0.5	$	1.5	$	2.0
>3 - 6 months		0.3		0.5		0.8		0.1		0.9
>6 - 9 months		0.5		0.6		1.1		—		1.1
>9 - 12 months		—		—		—		—		—
>12 - 18 months		—		1.9		1.9		—		1.9
>18 - 24 months		—		3.4		3.4		—		3.4
> 24 months		0.4		2.5		2.9		—		2.9

Total Gross Unrealized Losses	$	1.4	$	9.2	$	10.6	$	1.6	$	12.2

Estimated fair value of securities with a gross unrealized loss	$	101.9	$	96.9	$	198.8	$	6.8	$	205.6

The following table presents certain information with respect to individual securities with a significant unrealized loss position as of December 31, 2003.

Significant Unrealized Losses by Security
(in millions)


Issuer	Security Type	Carrying Value		Unrealized Loss
Batterson Park CBO I CLC 144A	Equity Security-Equity Tranche of Securitized Asset	$	0.0	$	1.2
Conseco Fin SEC Corp 2000-4 M1	Fixed Maturity - Interest in Securitized Assets		0.5		1.6
Conseco Fin SEC Corp SER 2000-4 M2	Fixed Maturity - Interest in Securitized Assets		0.1		1.0
Greentree Financial Corp. 99-2 B1	Fixed Maturity - Interest in Securitized Assets		0.3		2.2
Nextcard CRCN MNT 2001-1 CLB144A	Fixed Maturity - Interest in Securitized Assets		3.7		1.3

		$	4.6	$	7.3

During 2003 the Company recorded impairment losses of $1.1 million, $0.1 million, $0.5 million for the Batterson Park CBO I CLC 144A, Conseco Fin SEC Corp SER 2000-4M2, and Greentree Financial Corp 99-2-B1 securities, respectively. Based upon the Company’s impairment evaluation as of December 31, 2003 utilizing cash flow assumptions of the supporting collateral, estimated default and recovery rates it was concluded that the remaining unrealized losses in the significant unrealized losses by security table are not other than temporary.

During 2003 the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.7 million and $0.8 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $20.1 million and $4.4 million, respectively. During 2002 the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.3 million and $3.2 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $31.6 million and $14.1 million, respectively. The decision to sell these securities was based upon management’s assessment of economic conditions.

Market Risk of Financial Instruments

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.


	DECEMBER 31, 2003
	EXPECTED MATURITY DATES
	(In thousands, except average interest rate)																					TOTAL FAIR
	2004			2005			2006			2007			2008			Thereafter			TOTAL			VALUE
FIXED MATURITIES AVAILABLE FOR SALE:
Principal Amount	$	119,372		$	150,850		$	128,609		$	106,668		$	127,667		$	412,502		$	1,045,668		$	1,078,394
Book Value	$	120,047		$	153,444		$	130,874		$	107,360		$	129,818		$	421,813		$	1,063,356
Average Interest Rate		4.03	%		3.80	%		3.59	%		4.78	%		4.27	%		4.11	%		4.08	%		4.29	%
PREFERRED:
Principal Amount	$	1,500		$	1,000		$	3,625			—			—			—		$	6,125		$	6,572
Book Value	$	1,489		$	1,040		$	3,792			—			—			—		$	6,321
Average Interest Rate		6.06	%		6.84	%		6.46	%		—			—			—			6.43	%		6.18	%
SHORT-TERM INVESTMENTS:
Principal Amount	$	68,469			—			—			—			—			—		$	68,469		$	68,469
Book Value	$	68,469			—			—			—			—			—		$	68,469			—
Average Interest Rate		1.24	%		—			—			—			—			—			1.24	%		1.24	%
LOANS PAYABLE:
Principal Amount	$	48,482			—			—			—			—			—		$	48,482			—
Average Interest Rate		1.23	%		—			—			—			—			—			1.23	%		—

Certain Critical Accounting Estimates and Judgments

• Investments

• Fair values

The carrying amount for the Company’s investments approximates their estimated fair value. The Company measures the fair value of investments based upon quoted market prices or by obtaining quotes from third party broker-dealers. Material assumptions and factors utilized by such broker-dealers in pricing these securities include: future cash flows, constant default rates, recovery rates and any market clearing activity that may have occurred since the prior month-end pricing period. The Company’s total investments include $13.7 million in securities for which there is no readily available independent market price.

• Other than temporary impairment, excluding interests in securitized assets

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, 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; 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 (see Investments).

• Impairment recognition for investments in securitized assets

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. 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 (see Investments).

• Liability for Unpaid Loss and Loss Adjustment Expenses:

The liability for unpaid loss and loss adjustment expenses ($627.1 million and $445.6 million as of December 31, 2003 and 2002, respectively) reflects the Company’s best estimate for future amounts needed to pay losses and related settlement expenses with respect to insured events. Based upon past experience this estimate has been redundant by as much as 18.5% and deficient by as much as 41.4%. The process of establishing the liability for property and casualty unpaid loss and loss adjustment expenses is a complex and imprecise process, requiring the use of informed estimates and judgments. This liability includes an amount determined on the basis of claim adjusters’ evaluations with respect to insured events that have occurred and an amount for losses incurred that have not been reported to the Company. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid loss and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as legal, social, and economic developments. The methods of making such estimates and establishing the resulting liabilities are regularly reviewed and updated, and any adjustments resulting therefrom are made in the accounting period in which the adjustment arose.

During 2003 the Company increased the liability for unpaid loss and loss adjustment expenses by $51.7 million ($44.6 million net of reinsurance recoverables), primarily for accident years 1997 through 2001. This increase in the liability for unpaid loss and loss adjustment expense, net of reinsurance recoverables, was primarily due to the following:

• 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 $38.8 million. As of December 31, 2003 the Company’s total liability for gross and net unpaid loss and loss adjustment expenses for these policies is estimated to be $30.3 million. 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. The increase in the estimated gross and net loss was a result of:

• Further deterioration in both claims frequency and severity for leases expiring in 2003. During the second quarter of 2003, the Company engaged a consulting firm to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the study and the subsequent evaluation by the Company, the Company changed its assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses by $33.0 million. 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 uncertain economic conditions.

• The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank (“Firstar”) for residual value insurance policies purchased by Firstar. Under the terms of the agreement, the Company paid Firstar $27.5 million in satisfaction of any and all claims made or which could have been made by Firstar under the residual value policies. The Company increased the gross and net reserves for loss and loss adjustment expenses from $21.7 million to $27.5 million.

• $19.6 million ($13.7 million net of reinsurance recoverables) of development in professional liability products as a result of case reserves developing greater than anticipated from the year-end 2002 ultimate loss estimate; $18.1 million ($11.1 million net of reinsurance recoverables) of development in the automobile and general liability coverages for commercial package products due to losses developing beyond the underlying pricing assumptions; and $5.8 million ($6.0 million net of reinsurance recoverables) of development in the commercial automobile excess liability insurance and GAP commercial automobile products due to losses developing beyond the underlying pricing assumptions.

• The decrease in unpaid loss and loss adjustment expenses in accident year 2002 is principally attributable to:

• $4.2 million ($4.7 million net of reinsurance recoverables) and $26.4 million ($20.3 million net of reinsurance recoverables) of favorable development in professional liability products and commercial package products, respectively, due to conservative initial loss estimates combined with favorable product pricing.

The method for determining reinsurance recoverables and estimated recoverability are regularly reviewed and adjustments resulting from this review are included in earnings in the period the adjustment arose.

• Deferred Acquisition Costs:

Policy acquisition costs ($56.3 million and $61.3 million as of December 31, 2003 and 2002, respectively) which include commissions (net of ceding commissions), premium taxes, fees, and certain other costs of underwriting policies, are deferred and amortized over the same period in which the related premiums are earned. Deferred acquisition costs are limited to the estimated amounts recoverable after providing for losses and expenses that are expected to be incurred, based upon historical and current experience. Anticipated investment income is considered in determining whether a premium deficiency exists. The methods of making such estimates and establishing the deferred costs are continually reviewed by the Company, and any adjustments therefrom are made in the accounting period in which the adjustment arose.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements (as that term is defined in Item 303(a) (4) of Regulation S-K) that have or are reasonably likely to have a current or as of December 31, 2003, future effect on it financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors as of December 31, 2003.

RESULTS OF OPERATIONS
(2003 (Restated) versus 2002 (Restated))

Premiums: Premium information relating to the Company’s business segments is as follows (in millions):


	Commercial Lines			Specialty Lines			Personal Lines			Total
2003 Gross Written Premiums	$	662.4		$	154.1		$	89.5		$	906.0
2002 Gross Written Premiums	$	473.1		$	110.2		$	80.4		$	663.7
Percentage Increase (Decrease)		40.0	%		39.9	%		11.3	%		36.5	%
2003 Gross Earned Premiums	$	566.1		$	138.3		$	85.1		$	789.5
2002 Gross Earned Premiums	$	384.4		$	93.9		$	77.2		$	555.5
Percentage Increase (Decrease)		47.3	%		47.2	%		10.2	%		42.1	%

The overall growth in gross written premiums is primarily attributable to the following:

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

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

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

• In-force policy counts have increased 22.8% and 39.7% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts were approximately the same for the personal lines segment as a result of restricting new business and not renewing certain business to manage overall property exposures and the related catastrophe loss considerations. Firming prices in the property and casualty industry resulted in weighted average rate increases on renewal business approximating 4.3%, 10.2%, and 9.4% for the commercial, specialty and personal lines segments, respectively.

The respective net written premium changes for commercial lines, specialty lines and personal lines segments for the year ended December 31, 2003 vs. December 31, 2002 were (in millions):


	Commercial Lines			Specialty Lines			Personal Lines			Total
2003 Net Written Premiums (Restated)	$	463.9		$	107.9		$	30.5		$	602.3
2002 Net Written Premiums (Restated)	$	381.0		$	101.6		$	37.1		$	519.7
Percentage Increase (Decrease)		21.8	%		6.2	%		(17.8	%)		15.9	%
2003 Net Earned Premiums (Restated)	$	431.5		$	108.8		$	34.2		$	574.5
2002 Net Earned Premiums (Restated)	$	297.6		$	85.0		$	35.1		$	417.7
Percentage Increase (Decrease)		45.0	%		28.0	%		(2.6	%)		37.5	%

The differing percentage changes in net written premiums versus gross written premiums for the commercial lines, specialty lines and personal lines segments during the year results from:

• The Company entering into a Quota Share reinsurance agreement (effective April 1, 2003) covering all of the Company’s lines of business. Under this agreement, the Company cedes 22% of its net written premium (including 22% of the net unearned premium reserves at April 1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums

earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium reduced by the reinsurers’ expense allowance and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. In addition, the agreement provides that a profit commission will be paid to the Company, upon commutation equal to the positive balance in the Funds Held Payable to Reinsurers account. During the year ended December 31, 2003, the Company ceded $194.0 million of written premium, which included unearned premium reserves of $63.6 million at April 1, 2003.

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

Net Investment Income Net investment income approximated $38.8 in 2003 and $37.5 million in 2002. Total investments grew to $1,172.1 million at December 31, 2003 from $908.9 million at December 31, 2002. The growth in investment income is due to investing net cash flows provided from operating activities. The Company’s average duration of its fixed income portfolio increased to approximately 4.0 years at December 31, 2003, compared to 3.2 years at December 31, 2002 as a result of investing in overall “AAA” rated intermediate to longer tax exempt fixed income securities due to their perceived relative value to taxable alternatives. The Company’s taxable equivalent book yield on its fixed income holdings declined to 4.9% at December 31, 2003, from 5.2% at December 31, 2002, as a result of investing strong cash inflows due to premium increases at relatively low interest rates during the Federal Reserve’s latest easing cycle. Net investment income was reduced by $2.3 million due to the interest credit on the Funds Held Account balance pursuant to the Company’s quota share reinsurance agreement (see Premiums).

The total return, which includes the effects of both income and price returns on securities, of the Company’s fixed income portfolio was 4.36% and 9.09% for the years ended December 31, 2003 and 2002, respectively, and was similar to the Lehman Brothers Intermediate Aggregate Bond Index (“the Index”) total return of 3.81% and 9.51% for the same periods, respectively. The Company expects some variation in its portfolio’s total return compared to the index because of the differing sector, security and duration composition of its portfolio compared to the index.

Net Realized Investment Gain (Loss): Net realized investment gains (losses) were $0.8 million for the year ended December 31, 2003 and ($3.4) million for the same period in 2002. The Company realized net investment gains of $7.1 million and $4.0 million from the sale of fixed maturity and equity securities, respectively, for the year ended December 31, 2003, and $4.0 million and $6.3 million in non-cash realized investment losses for fixed maturity and common stock investments, respectively, as a result of the Company’s impairment evaluations.

The Company realized $3.4 million in net investment gains from the sale of fixed maturity securities and $3.1 million in net investment losses from the sale of common stock equity securities for the year ended December 31, 2002. Additionally, $2.1 million and $1.6 million in non-cash realized investment losses were recorded for common stock and fixed maturity investments, respectively as a result of the Company’s impairment evaluations.

Other Income: Other income approximated $5.5 million for the year ended December 31, 2003 and $0.9 million for the same period of 2002. Other income primarily consists of commissions earned on brokered personal lines business, and to a lesser extent brokered commercial lines business. The Company is seeking to increase brokering activities in its personal lines segment as it is restricting new business and not renewing certain policies in designated areas of Florida as a result of its property exposures in these areas and related catastrophe loss considerations.

Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $91.8 million (34.3%) to $359.2 million for the year ended December 31, 2003 from $267.4 million for the same period of 2002 and the loss ratio decreased to 62.5% in 2003 from 64.0% in 2002. This increase in net loss and loss adjustment expenses was due to the 37.5% growth in net earned premiums, a $38.8 million increase in the estimated gross and net loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2002, and a $5.8 million net increase in the estimated gross and net loss reserves for loss and loss adjustment expenses primarily for claims made professional liability and commercial automobile lines of business in prior accident years. Additionally, during the year the Company ceded $111.5 million of net earned premium and $62.7 million in net loss and loss adjustment expenses pursuant to the quota share reinsurance agreement (see Premiums).

As of December 31, 2003, the Company has estimated a total liability for gross and net unpaid loss and loss adjustment expenses for the residual value policies of $30.3 million. The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination, which can be up to five years from lease inception. As

part of the Company’s monitoring and evaluation process, a consulting firm was engaged during the second quarter of 2003 to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the result of the indications and subsequent evaluation by the Company and changes in the Company’s assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased by $33.0 million. 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 December 31, 2003, approximately 22,000 leases were outstanding under the Company’s residual value policies.

Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $33.0 million (25.4%) to $162.9 million for the year ended December 31, 2003 from $129.9 million for the same period of 2002. This increase was due primarily to the 37.5% growth in net earned premiums and in part to the Company establishing a $1.4 million allowance for doubtful reinsurance receivables based upon its review of collectibility from its reinsurers. During the year the Company ceded $111.5 million of net earned premium and earned $46.7 million in ceding commission under the quota share reinsurance agreement (see Premiums).

Other Operating Expenses: Other operating expenses increased $1.4 million to $7.8 million for the year ended December 31, 2003 from $6.4 million for the same period of 2002 as the Company continues to control its expenses during this period of premium growth.

Income Tax Expense: The Company’s effective tax rate for the years ended December 31, 2003 and 2002 was 30.7% and 31.2%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities and the relative proportion of tax exempt income to total income before tax.

RESULTS OF OPERATIONS
(2002 (Restated) versus 2001 (Restated))

Premiums: Gross written premiums grew $190.1 million (40.1%) to $663.7 million in 2002 from $473.6 million in 2001; gross earned premiums grew $134.4 million (31.9%) to $555.5 million in 2002 from $421.1 million in 2001; net written premiums increased $182.4 million (54.1%) to $519.7 million in 2002 from $337.3 million in 2001; and net earned premiums grew $118.1 million (39.4%) to $417.7 million in 2002 from $299.6 million in 2001.

The respective gross written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2002 vs. December 31, 2001 amount to $157.9 million (50.0%), $30.0 million (37.8%) and $2.2 million (2.8%), 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 continued consolidation of certain competitor property and casualty insurance companies has led to the displacement of certain of their independent agency relationships. This consolidation continues to result in new agency relationship opportunities for the Company, which have resulted in additional prospects 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 16.0%, 26.0%, and 8.0% for the commercial, specialty and the personal lines segments, respectively. Additionally, in force policy counts have increased 43.0% and 13.0% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts have decreased approximately 7.0% 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.

Overall premium growth has been offset in part by the following factors:

• Specialty Lines Segment — The Company’s decision not to renew approximately 2,000 policies in the professional liability product lines due to inadequate pricing levels being experienced as a result of market conditions and/or an unacceptable underwriting risk profile.

• Personal Lines Segment — The Company’s decision to restrict new business and not renew approximately 9,000 policies in designated areas of Florida in the Company’s manufactured housing and homeowners product lines, based on an evaluation of property exposures and the related catastrophe loss considerations.

Pursuant to a routine underwriting review which focused on pricing adequacy and loss experience, as well as other underwriting criteria, the Company cancelled a Commercial Automobile Excess Liability Insurance customer (Commercial Lines Underwriting Group) effective October 22, 2002 as a result of an unacceptable underwriting risk profile. Such customer’s gross written premium and net written premium amounted to $36.7 million and $10.9 million, respectively, for the year ended December 31, 2002.

Additionally, the respective net written premium increases (decreases) for commercial lines, specialty lines and personal lines segments for the year ended December 31, 2002 vs. December 31, 2001 amount to $155.0 million (68.6%), $31.1 million (44.0%) and ($3.7) million (9.0%) respectively. The differing percentage increases (decreases) in net written premiums versus gross written premiums for the year is primarily due to the Company commuting a 2001 accident year aggregate stop loss reinsurance program during the quarter ended June 30, 2002 whereby net written and net earned premiums increased by $3.5 million ($2.3 million Commercial Lines, $0.8 million Specialty Lines, $0.4 million Personal Lines), and in part to other various changes in, or pricing of, the Company’s reinsurance program.

Net Investment Income: Net investment income approximated $37.5 million in 2002 and $32.4 million in 2001. Total investments grew to $908.9 million at December 31, 2002 from $673.4 million at December 31, 2001. The growth in investment income is due to investing net cash flows provided from operating activities and the proceeds of the Company’s fourth quarter 2001 equity offering. The capital market environment during 2001 and most of 2002 (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 December 31, 2002, compared to 2.7 years at December 31, 2001. Additionally, due to the capital market environment, the Company has invested approximately $75.1 million in overall “AAA” rated floating rate and shorter amortizing securities to reduce interest rate risk with the expectation of reinvesting these funds into longer duration investments at higher future fixed income rates. The Company’s tax equivalent book yield on its fixed income holdings was 5.2% at December 31, 2002, compared to 6.0% at December 31, 2001.

The total return, which includes the effect of realized and unrealized gains and losses, of the Company’s fixed income portfolio was 9.09% and 7.30% for the years ended December 31, 2002 and 2001, respectively versus the Lehman Brothers US Aggregate Bond Index (“the Index”) total return of 9.51% and 8.67% for the same periods, respectively. While the performance during 2002 and 2001 was similar to the total return of the Index, performance differed from the Index due primarily to the following factors:

• the Company’s fixed income portfolio is overweighted in the spread sectors, versus the Index, to capture the incremental spread available in non-Treasury securities consistent with its investment objective of achieving the highest after-tax risk adjusted yields;

• the Company maintains a higher level of credit quality in the portfolio versus the Index; and

• the Company maintains a shorter portfolio duration versus the Index.

Net Realized Investment Gain (Loss): Net realized investment gains (losses) were ($3.4) million for the year ended December 31, 2002 and $3.4 million for the same period in 2001. The Company realized net investment losses of $3.1 million from the sales of common stock equity securities and $3.4 million in net investment gains from the sale of fixed maturity securities during the year ended December 31, 2002. Additionally, $2.1 million and $1.6 million in non-cash realized investment losses were recorded for common stock and fixed maturity investments, respectively, as a result of the Company’s impairment evaluation (see Investments). The Company realized net investment gains of $8.3 million from the sales of common stock equity securities and $0.9 million from the sales of fixed maturity securities during the year ended December 31, 2001. These realized net investment gains were offset by $5.8 million in non-cash realized investment losses experienced on certain securities as a result of the Company’s impairment evaluation (see Investments). The proceeds from the sales were reinvested in fixed maturity securities to increase current investment income and decrease the overall percentage of investments in common stock securities.

Other Income: Other income approximated $0.9 million for the year ended December 31, 2002 and $0.6 million for the same period of 2001. 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 the related catastrophe loss considerations.

Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $87.7 million (48.8%) to $267.4 million for the year ended December 31, 2002 from $179.7 million for the same period of 2001 and the loss ratio increased to 64.0% in 2002 from 60.0% in 2001. This increase in net loss and loss adjustment expenses was due principally to the 39.4% growth in net earned premiums, and in part to the Company increasing loss and loss adjustment expenses incurred as a result of changes in estimates of insured events in prior years by: $27.6 million ($68.0 million gross of reinsurance) due to deterioration in frequency and severity trends on automobile leases currently expiring on residual value policies issued during the years 1998 through 2001 (see Certain Critical Accounting Estimates and Judgments — Liability for Unpaid Loss and Loss Adjustment Expense); and by $4.9 million ($6.9 million gross of reinsurance) due to adverse loss experience on the Commercial Automobile Excess Liability Insurance product (see Certain Critical Accounting Estimates and Judgments — Liability for Unpaid Loss and Loss Adjustment Expense). The Company also commuted a 2001 accident year aggregate stop loss reinsurance program in the second quarter of 2002, resulting in net written and net earned premium increasing by $3.6 million. The Company had not ceded any losses to the 2001 accident year aggregate stop loss reinsurance program. The year ended December 31, 2001 included a $4.0 million increase to unpaid loss and loss adjustment expenses arising from business interruption, business personal property, business property and workers’ compensation exposures relating to the September 11, 2001 terrorist attacks. The Company has entered into various reinsurance agreements for the purpose of limiting its loss exposure. Net reinsurance recoveries as a percentage of loss and loss adjustment expenses may vary considerably from period to period based upon the number and/or severity of our individual losses in excess of the amount retained under the Company’s reinsurance agreements in any one period.

Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $32.9 million (33.9%) to $129.9 million for the year ended December 31, 2002 from $97.0 million for the same period of 2001. This increase was due primarily to the 39.4% growth in net earned premiums, offset in part by:

• A lower weighted average effective commission rate incurred on the commercial and specialty lines segment products of approximately 12.7% for the year ended December 31, 2002 compared to a weighted average effective commission rate of approximately 13.9% for the year ended December 31, 2001. The Company has been able to incur a relatively lower commission rate on business produced by independent agents in the current market environment.

• Incremental written premium growth without a corresponding incremental increase in operating costs.

Other Operating Expenses: Other operating expenses decreased $0.4 million to $6.4 million for the year ended December 31, 2002 from $6.8 million for the same period of 2001. The decrease in other operating expenses was primarily due to the discontinuance of goodwill amortization effective January 1, 2002, which amounted to $1.5 million for the year ended December 31, 2001. This decrease has been partially offset by an increase in expenses attributable to increased operating activities.

Income Tax Expense: The Company’s effective tax rate for the year ended December 31, 2002 and 2001 was 31.2% and 33.9%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities and in part due to the discontinuance of goodwill amortization. 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

Philadelphia Consolidated Holding Corp. (PCHC) is a holding company whose principal assets currently consist of 100% of the capital stock of its subsidiaries. PCHC’s primary sources of funds are dividends from its subsidiaries and payments received pursuant to tax allocation agreements with the insurance subsidiaries. For the year ended December 31, 2003, payments to PCHC pursuant to such tax allocation agreements totaled $36.3 million. The payment of dividends to PCHC from the insurance subsidiaries is subject to certain limitations imposed by the insurance laws of the Commonwealth of Pennsylvania and State of Florida. Accumulated statutory profits or policyholders’ surplus of the insurance subsidiaries from which dividends may be paid totaled $179.2 million at December 31, 2003. Of this amount, the insurance subsidiaries are

entitled to pay a total of approximately $50.7 million of dividends in 2004 without obtaining prior approval from the Insurance Commissioner of the Commonwealth of Pennsylvania or State of Florida. During 2003 the insurance subsidiaries paid dividends of $4.0 million to Liberty American Insurance Group, Inc., a subsidiary of PCHC. During 2003 PCHC repurchased 10,000 shares of its common stock for approximately $0.3 million under the stock repurchase authorization. At December 31, 2003 the remaining stock repurchase authorization is $24.7 million.

The Company produced net cash from operations of $298.5 million in 2003, $205.0 million in 2002 and $115.1 million in 2001. 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. Cash from operations in 2003 was primarily generated from strong premium growth during such year due to increases in the number of policies written and price increases realized on renewal business. Net loss and loss expense payments were $237.4 million in 2003, $157.9 million in 2002, and $125.0 million in 2001. Net cash from operations also included cash provided from tax savings as a result of the exercise of employee stock options amounting to $0.9 million, $1.3 million and $25.8 million for 2003, 2002 and 2001, respectively. 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 December 31, 2003, the Insurance Subsidiaries’ borrowing capacity with FHLB was $124.8 million. The Insurance Subsidiaries have utilized a portion of its borrowing capacity to purchase a diversified portfolio of 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 FHLB borrowing rates. The remaining unused borrowing capacity provides an immediately available line of credit. Borrowings aggregated $48.5 million at December 31, 2003, bear interest at adjusted LIBOR and mature twelve months from inception. The weighted-average interest rate on borrowings outstanding as of December 31, 2003 was 1.23% per annum. These borrowings are collateralized by investment securities, principally asset backed securities, with a carrying value of $59.1 million.

In the normal course of business, the Company has entered into various reinsurance contracts with unrelated reinsurers. The Company participates in such agreements for the purpose of limiting loss exposure and diversifying business. Reinsurance contracts do not relieve the Company from its obligations to policyholders. To reduce the potential for a write-off of amounts due from reinsurers, the Company: evaluates the financial condition of its reinsurers, principally contracts with large reinsurers that are rated at least “A” (Excellent) by A.M. Best Company, regularly monitors its reinsurance receivables and attempts to collect the obligations of its reinsurers on a timely basis.

Under certain reinsurance agreements, the Company is required to maintain investments in trust accounts to secure its reinsurance obligations (primarily the payment of losses and loss adjustment expenses on business it does not write directly). At December 31, 2003, the investment and cash balances in such trust accounts totaled approximately $1.7 million. In addition, various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 2003, the balance on deposit for the benefit of such policyholders totaled approximately $15.5 million.

The Insurance Subsidiaries, which operate under an intercompany reinsurance pooling agreement, must have certain levels of surplus to support premium writings. Guidelines of the National Association of Insurance Commissioners (the “NAIC”) suggest that a property and casualty insurer’s ratio of annual statutory net premium written to policyholders’ surplus should not exceed 3-to-1. The ratio of combined annual statutory net premium written by the insurance subsidiaries to their combined policyholders’ surplus was 1.5-to-1.0 and 1.7-to-1.0 for 2003 and 2002, respectively.

The NAIC’s risk-based capital method is designed to measure the acceptable amount of capital and surplus an insurer should have based on the inherent specific risks of each insurer. The adequacy of a company’s actual capital and surplus is evaluated by a comparison to the risk-based capital results. Insurers failing to meet minimum risk-based capital requirements may be subject to scrutiny by the insurer’s domiciliary insurance department and ultimately rehabilitation or liquidation. As of December 31, 2003, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based capital requirements of $107.6 million, $13.1 million, $15.3 million and $14.9 million, respectively, by 218%, 134%, 40% and 48%, respectively.

CONTRACTUAL OBLIGATIONS

The Company has certain contractual obligations and commitments as of December 31, 2003 which are summarized below:


	Payments Due by Period
	(in thousands)
			Less than 1						More Than
	Total		year		1-3 years		4-5 years		5 years
Certain Contractual Obligations ⁽¹⁾
Long-Term Debt Obligations ⁽²⁾	$	48,482	$	48,482	$	—	$	—	$	—
Operating Leases		17,602		4,611		11,753		1,238		—
Other Long-Term Commercial Commitments ⁽³⁾		2,252		2,252		—		—		—

Total	$	68,336	$	55,345	$	11,753	$	1,238	$	—

⁽¹⁾ Unpaid loss and loss adjustment expenses are not included in the above table as there is no related contractual maturity for such obligations.

⁽²⁾ Represents 12 month collateralized borrowings from the Federal Home Loan Bank of Pittsburgh.

⁽³⁾ Represents open commitments under certain limited partnership and information technology development agreements.

INFLATION

Property and casualty insurance premiums are established before the amount of losses and loss adjusted expenses, or the extent to which inflation may affect such amounts, is known. The Company attempts to anticipate the potential impact of inflation in establishing its premiums and reserves. Substantial future increases in inflation could result in future increases in interest rates, which, in turn, are likely to result in a decline in the market value of the Company’s investment portfolio and resulting unrealized losses and/or reductions in shareholders’ equity.

NEW ACCOUNTING PRONOUNCEMENTS

FASB Interpretation 46 “Consolidation of Variable Interest Entities” was issued in January 2003 and is effective at various dates for various requirements. This interpretation addresses consolidation of variable interest entities (formerly known as special purpose entities). Management has determined that this interpretation will have no effect on the Company’s consolidated financial statements.

In May 2003, the Financial Accounting Standards Board “FASB” issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments With Characteristics of both Liabilities and Equity”, which establishes standards for how an issuer classifies and measures financial instruments characteristics of both liabilities and equity. With the exception of certain financial measurement criteria deferred indefinitely by the FASB, SFAS No. 150 was adopted in fiscal 2003. The implementation of SFAS No. 150 had no impact on the Company’s financial condition or results of operations.

FORWARD-LOOKING INFORMATION

Certain information included in this report and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company’s business, and the other matters referred to above include, but are not limited to: (i) changes in the business environment in which the Company operates, including inflation and interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii) competitive product and pricing activity; (iv) difficulties of managing growth profitably; (v) claims development and the adequacy of our liability for unpaid loss and loss adjustment expenses; (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.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Philadelphia Consolidated Holding Corp. and Subsidiaries
Index to Financial Statements and Schedules


		Page

Financial Statements
Report of Independent Registered Public Accounting Firm		37
Consolidated Balance Sheets - As of December 31, 2003 (Restated) and 2002 (Restated)		38
Consolidated Statements of Operations and Comprehensive Income - For the Years Ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)		39
Consolidated Statements of Changes in Shareholders’ Equity - For the Years Ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)		40
Consolidated Statements of Cash Flows - For the Years Ended December 31, 2003 (Restated), 2002 (Restated), and 2001 (Restated)		41
Notes to Consolidated Financial Statements		42-64
Financial Statement Schedules:
Schedule
I	Summary of Investments - Other Than Investments in Related Parties As of December 31, 2003	S-1
II	Condensed Financial Information of Registrant As of December 31, 2003 (Restated) and 2002 and For Each of the Three Years in the Period Ended December 31, 2003 (Restated)	S-2 — S-4
III	Supplementary Insurance Information As of and For the Years Ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)	S-5
IV	Reinsurance For the Years ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)	S-6
VI	Supplementary Information Concerning Property-Casualty Insurance Operations As of and For the Years Ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)	S-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Philadelphia Consolidated Holding Corp.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Philadelphia Consolidated Holding Corp. and Subsidiaries (the “Company”) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill to conform with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

As described in Note 2, the Company has restated its 2003, 2002 and 2001 consolidated financial statements in order to properly recognize profit commissions under three of its reinsurance contracts.

PricewaterhouseCoopers LLP
February 11, 2004, except for Note 2
as to which the Date is August 19, 2004

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)


	As of December 31,
	2003 (Restated)			2002
ASSETS
Investments:
Fixed Maturities Available for Sale at Market (Amortized Cost $1,066,523 and $832,701)	$	1,081,694		$	854,513
Equity Securities at Market (Cost $79,813 and $51,257)		90,358			54,346

Total Investments		1,172,052			908,859
Cash and Cash Equivalents		73,942			42,002
Accrued Investment Income		11,008			8,571
Premiums Receivable		179,509			130,007
Prepaid Reinsurance Premiums and Reinsurance Receivables		292,157			151,352
Deferred Income Taxes		18,147			7,541
Deferred Acquisition Costs		56,288			61,272
Property and Equipment, Net		16,821			12,794
Goodwill		25,724			25,724
Other Assets		25,293			10,212

Total Assets	$	1,870,941		$	1,358,334

LIABILITIES and SHAREHOLDERS’ EQUITY
Policy Liabilities and Accruals:
Unpaid Loss and Loss Adjustment Expenses	$	627,086		$	445,548
Unearned Premiums		422,589			306,093

Total Policy Liabilities and Accruals		1,049,675			751,641
Funds Held Payable to Reinsurer		110,011			—
Loans Payable		48,482			39,113
Premiums Payable		35,044			33,553
Other Liabilities		82,083			56,204

Total Liabilities		1,325,295			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, 22,007,552 and 21,868,877 Shares Issued and Outstanding		281,088			276,945
Notes Receivable from Shareholders		(5,444	)		(6,407	)
Accumulated Other Comprehensive Income		16,715			16,185
Retained Earnings		253,287			191,100

Total Shareholders’ Equity		545,646			477,823

Total Liabilities and Shareholders’ Equity	$	1,870,941		$	1,358,334

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

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


	For the Years Ended December 31,
	2003 (Restated)			2002 (Restated)			2001 (Restated)
Revenue:
Net Earned Premiums	$	574,518		$	417,722		$	299,557
Net Investment Income		38,806			37,516			32,426
Net Realized Investment Gain (Loss)		794			(3,371	)		3,357
Other Income		5,519			911			587

Total Revenue		619,637			452,778			335,927

Losses and Expenses:
Loss and Loss Adjustment Expenses		469,547			361,154			222,581
Net Reinsurance Recoveries		(110,370	)		(93,721	)		(42,926	)

Net Loss and Loss Adjustment Expenses		359,177			267,433			179,655
Acquisition Costs and Other Underwriting Expenses		162,912			129,918			97,020
Other Operating Expenses		7,822			6,372			6,841

Total Losses and Expenses		529,911			403,723			283,516

Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust		—			—			2,749

Income Before Income Taxes		89,726			49,055			49,662

Income Tax Expense (Benefit):
Current		38,430			22,018			18,216
Deferred		(10,891	)		(6,716	)		(1,365	)

Total Income Tax Expense		27,539			15,302			16,851

Net Income	$	62,187		$	33,753		$	32,811

Other Comprehensive Income (Loss), Net of Tax:
Holding Gain (Loss) Arising during Year	$	1,046		$	5,533		$	(2,851	)
Reclassification Adjustment		(516	)		2,191			(2,182	)

Other Comprehensive Income (Loss)		530			7,724			(5,033	)

Comprehensive Income	$	62,717		$	41,477		$	27,778

Per Average Share Data:
Basic Earnings Per Share	$	2.84		$	1.56		$	1.99

Diluted Earnings Per Share	$	2.74		$	1.51		$	1.91

Weighted-Average Common Shares Outstanding		21,908,788			21,611,053			16,528,601
Weighted-Average Share Equivalents Outstanding		751,600			682,382			656,075

Weighted-Average Shares and Share Equivalents Outstanding		22,660,388			22,293,435			17,184,676

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

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY

(IN THOUSANDS, EXCEPT SHARE DATA)


	For the Years Ended December 31,
	2003 (Restated)			2002 (Restated)			2001 (Restated)
Common Shares:
Balance at Beginning of Year		21,868,877			21,509,723			13,431,408
Issuance of Shares Pursuant to Public Offering		—			—			3,600,000
Issuance of Shares Pursuant to Stock Purchase Contracts		—			—			3,993,006
Exercise of Employee Stock Options		99,875			107,000			391,083
Issuance of Shares Pursuant to Stock Purchase Plans, net		38,800			252,154			94,226

Balance at End of Year		22,007,552			21,868,877			21,509,723

Treasury Shares:
Balance at Beginning of Year		—			—			—
Exercise of Employee Stock Options		(6,500	)		—			—
Issuance of Shares Pursuant to Stock Purchase Plans, net		(3,500	)		(75,000	)		—
Shares Repurchased Pursuant to Authorization		10,000			75,000			—

Balance at End of Year		—			—			—

Common Stock:
Balance at Beginning of Year	$	276,945		$	268,509		$	46,582
Issuance of Shares Pursuant to Public Offering		—			—			114,518
Issuance of Shares Pursuant to Stock Purchase Contracts		—			—			98,905
Exercise of Employee Stock Options		2,852			2,115			6,437
Issuance of Shares Pursuant to Stock Purchase Plans		1,291			6,321			2,067

Balance at End of Year		281,088			276,945			268,509

Notes Receivable from Shareholders:
Balance at Beginning of Year		(6,407	)		(3,373	)		(2,287	)
Notes Receivable Issued Pursuant to Employee Stock Purchase Plans		(1,065	)		(4,017	)		(2,158	)
Collection of Notes Receivable		2,028			983			1,072

Balance at End of Year		(5,444	)		(6,407	)		(3,373	)

Accumulated Other Comprehensive Income, Net of Deferred Income Taxes:
Balance at Beginning of Year		16,185			8,461			13,494
Other Comprehensive Income (Loss), Net of Taxes		530			7,724			(5,033	)

Balance at End of Year		16,715			16,185			8,461

Retained Earnings:
Balance at Beginning of Year		191,100			157,347			124,536
Net Income		62,187			33,753			32,811

Balance at End of Year		253,287			191,100			157,347

Common Stock Held in Treasury:
Balance at Beginning of Year		—			—			—
Common Shares Repurchased		(300	)		(2,023	)		—
Exercise of Employee Stock Options		94			—			—
Issuance of Shares Pursuant to Stock Purchase Plans		206			2,023			—

Balance at End of Year		—			—			—

Total Shareholders’ Equity	$	545,646		$	477,823		$	430,944

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

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)


	For the Years Ended December 31,
	2003 (Restated)			2002 (Restated)			2001 (Restated)
Cash Flows from Operating Activities:
Net Income	$	62,187		$	33,753		$	32,811
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Net Realized Investment (Gain) Loss		(794	)		3,371			(3,357	)
Depreciation and Amortization Expense		8,097			2,142			2,528
Deferred Income Tax Benefit		(10,891	)		(6,716	)		(1,365	)
Change in Premiums Receivable		(49,502	)		(33,982	)		(26,648	)
Change in Other Receivables		(143,242	)		(53,740	)		(26,944	)
Change in Deferred Acquisition Costs		4,984			(19,746	)		(8,202	)
Change in Income Taxes Payable		513			367			(6,083	)
Change in Other Assets		(14,721	)		(2,438	)		(840	)
Change in Unpaid Loss and Loss Adjustment Expenses		181,538			142,815			65,239
Change in Unearned Premiums		116,496			108,254			52,355
Change in Funds Held Payable to Reinsurer		110,011			—			—
Change in Other Liabilities		32,958			26,173			13,320
Tax Benefit from Exercise of Employee Stock Options		889			1,251			25,799

Net Cash Provided by Operating Activities		298,523			204,968			115,149

Cash Flows from Investing Activities:
Proceeds from Sales of Investments in Fixed Maturities		184,082			226,981			112,676
Proceeds from Maturity of Investments in Fixed Maturities		202,284			147,850			72,650
Proceeds from Sales of Investments in Equity Securities		23,992			18,546			20,864
Cost of Fixed Maturities Acquired		(628,879	)		(576,564	)		(424,852	)
Cost of Equity Securities Acquired		(54,956	)		(36,421	)		(22,529	)
Purchase of Property and Equipment, Net		(6,692	)		(5,191	)		(1,808	)

Net Cash Used for Investing Activities		(280,169	)		(224,799	)		(242,999	)

Cash Flows from Financing Activities:
Net Proceeds from Public Offering of Common Stock		—			—			114,518
Proceeds from Loans Payable		62,340			9,923			31,341
Repayments on Loans Payable		(52,971	)		(2,151	)		(22,000	)
Proceeds from Exercise of Employee Stock Options		2,057			864			3,041
Proceeds from Collection of Notes Receivable		2,028			983			1,072
Proceeds from Shares Issued Pursuant to Stock Purchase Plans		432			4,327			46
Cost of Common Stock Repurchased		(300	)		(2,023	)		—

Net Cash Provided by Financing Activities		13,586			11,923			128,018

Net Increase (Decrease) in Cash and Cash Equivalents		31,940			(7,908	)		168
Cash and Cash Equivalents at Beginning of Year		42,002			49,910			49,742

Cash and Cash Equivalents at End of Year	$	73,942		$	42,002		$	49,910

Cash Paid During the Year for:
Income Taxes	$	36,319		$	20,110		$	7,023
Interest		638			616			689
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase Plans in Exchange for Notes Receivable	$	1,065		$	4,017		$	2,158

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

Philadelphia Consolidated Holding Corp. and Subsidiaries

Notes to Consolidated Financial Statements

1. General Information and Significant Accounting Policies

Philadelphia Consolidated Holding Corp. (“Philadelphia Insurance”), and its subsidiaries (collectively the “Company”) doing business as Philadelphia Insurance Companies, include four property and casualty insurance companies, Philadelphia Indemnity Insurance Company (“PIIC”) and Philadelphia Insurance Company (“PIC”), which are domiciled in Pennsylvania; and Mobile USA Insurance Company (“MUSA”) and Liberty American Insurance Company (“LAIC”), which are domiciled in Florida (collectively the “Insurance Subsidiaries”); an underwriting manager, Maguire Insurance Agency, Inc.; a managing general agency, Mobile Homeowners Insurance Agencies, Inc; a premium finance company Liberty American Premium Finance Company; and an investment subsidiary, PCHC Investment Corp. The Company designs, markets, and underwrites specialty commercial and personal property and casualty insurance products for select target industries or niches including, among others, nonprofit organizations; the health, fitness and wellness industry; select classes of professional liability; the rental car industry; automobile leasing industry; and personal property and casualty insurance products for the manufactured housing and homeowners markets. All marketing, underwriting, claims management, investment, and general administration is provided by the underwriting manager and managing general agency.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior years’ amounts have been reclassified for comparative purposes.

The Consolidated Financial Statements for the year ended December 31, 2003 have been restated, as further described in Note 2.

(a) Investments

Fixed maturity investments, classified as Available for Sale, are carried at market value with the change in unrealized appreciation (depreciation) credited or charged directly to shareholders’ equity, net of applicable deferred income taxes. Income on fixed maturities is recognized on the accrual basis.

The carrying amount for the Company’s investments approximates their estimated fair value. The Company measures the fair value of investments based upon quoted market prices or by obtaining quotes from third party broker-dealers. Material assumptions and factors utilized by such broker-dealers in pricing these securities include: future cash flows, constant default rates, recovery rates and any market clearing activity that may have occurred since the prior month-end pricing period. The Company’s total investments include $13.7 million in securities for which there is no readily available independent market price.

The decision to purchase or sell investments is based on management’s assessment of various factors such as foreseeable economic conditions, including current interest rates and the interest rate risk, and the liquidity and capital positions of the Company.

Investments in fixed maturities are adjusted for amortization of premiums and accretion of discounts to maturity date, except for asset backed, mortgage pass-through and collateralized mortgage obligation securities which are adjusted for amortization of premiums and accretion of discounts over their estimated lives. Certain asset backed, mortgage pass-through and collateralized mortgage obligation security repayment patterns will change based on interest rate movements and, accordingly, could impact future investment income if the reinvestment of the repayment amounts are at lower interest rates than the underlying securities. Asset backed, mortgage pass-through and collateralized mortgage obligation securities amounted to $177.7 million, $162.5 million and $53.5 million, respectively, at December 31, 2003 and $200.0 million, $86.1 million and $90.7 million, respectively, at December 31, 2002. The asset backed, mortgage pass-through and collateralized mortgage obligation securities held as of December 31, 2003 and 2002 are shorter tranche securities possessing favorable prepayment risk profiles.

Equity securities are carried at market value with the change in unrealized appreciation (depreciation) credited or charged directly to shareholders’ equity, net of applicable deferred income taxes.

Realized investment gains and losses are calculated on the specific identification basis and recorded as income when the securities are sold.

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, the cost basis of the security is written down to its fair value with the amount of the write down included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $1.0 million and $2.1 million for the years ended December 31, 2003 and December 31, 2002, respectively. No impairment losses were recorded for the year ended December 31, 2001.

Additionally, 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. This re-evaluation resulted in non-cash realized investment losses of $9.3 million, $1.6 million and $5.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.

The Company held no derivative financial instruments, nor embedded financial derivatives, as of December 31, 2003 and 2002.

(b) Cash and Cash Equivalents

Cash equivalents, consisting of fixed maturity investments with maturities of three months or less when purchased and money market funds, are stated at market value.

(c) Deferred Acquisition Costs

Policy acquisition costs, which include commissions (net of ceding commissions), premium taxes, fees, and certain other costs of underwriting policies, are deferred and amortized over the same period in which the related premiums are earned. Deferred acquisition costs are limited to the estimated amounts recoverable from future income, including anticipated investment income, after providing for losses and expenses included in future income that are expected to be incurred, based upon historical and current experience. If such costs are estimated to be unrecoverable, they are expensed.

(d) Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Costs incurred in developing information systems technology are capitalized and included in property and equipment. These costs are amortized over their useful lives from the dates the systems technology becomes operational. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in earnings. The carrying value of property and equipment is reviewed for recoverability including an evaluation of the estimated useful lives of such assets.

(e) Goodwill

The Company adopted the provisions of Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets” on January 1, 2002. SFAS No. 142 eliminates the practice of amortizing goodwill through periodic charges to earnings and establishes a two-step 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, which arose from the purchase of Liberty, was recorded by the Company for the years ended December 31, 2003 and December 31, 2002, respectively. Goodwill amortization was $1.5 million for the year ended December 31, 2001.

(f) 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. The process of establishing the ultimate claims liability is necessarily a complex imprecise process, requiring the use of informed estimates and judgments using data currently available. The liability includes an amount determined on the basis of claim adjusters’ evaluations with respect to insured events that have occurred and an amount for losses incurred that have not been reported to the Company. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid loss and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as legal, social, and economic developments. The methods of making such estimates and establishing the resulting liabilities are regularly reviewed and updated and any adjustments therefrom are made in the accounting period in which the adjustment arose. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at December 31, 2003, the related adjustments could have a material adverse impact on the Company’s financial condition, and results of operations.

(g) Premiums

Premiums are generally earned on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of the policies in-force are reported as unearned premiums. The Company records an allowance for doubtful accounts for premiums receivable balances estimated to be uncollectible. At December 31, 2003 and 2002 the allowance for doubtful accounts amounted to $2.2 million and $1.7 million, respectively.

(h) Reinsurance Ceded

In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. At December 31, 2003 and 2002 the allowance for uncollectible reinsurance amounted to $1.2 million and $0, respectively. Amounts for reinsurance assets and liabilities are reported gross.

(i) Assessments

The Insurance Subsidiaries are subject to state guaranty fund assessments, which provide for the payment of covered claims or meet other insurance obligations from insurance company insolvencies, and other assessments related to its insurance activities. Each state has enacted legislation establishing guaranty funds and other insurance activity related assessments resulting in a variety of assessment methodologies. Expense for guaranty fund and insurance activity related assessments are recognized when it is probable that an assessment will be imposed, the obligatory event has occurred and the amount of the assessment is reasonably estimatable. As of December 31, 2003 and 2002, included in Other Liabilities in the Consolidated Balance Sheets were $10.3 million and $6.1 million, respectively, of liabilities for state guarantee fund and other assessments. As of December 31, 2003 and 2002, included in other assets were $0.1 million and $1.8 million, respectively, of related assets for premium tax offsets or policy surcharges. The related asset is limited to the amount that is determined based upon future premium collections or policy surcharges from policies in force.

(j) Income Taxes

The Company files a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date.

(k) Earnings Per Share

Basic earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding and the weighted-average share equivalents outstanding.

(l) 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 (Losses) arising during the year was $0.6 million, $3.0 million and ($1.5) million in 2003, 2002 and 2001, respectively. The related tax effect of Reclassification Adjustments was $0.3 million, ($1.2) million, and $1.2 million in 2003, 2002 and 2001, respectively.

(m) Stock Based Compensation Plans

The Company continues to maintain its accounting for stock-based compensation in accordance with APB No. 25, but has adopted the disclosure provisions of SFAS No. 148. The following represents pro forma information as if the Company recorded compensation costs using the fair value of the issued compensation instruments (the results may not be indicative of the actual effect on net income in future years) (in thousands, except per average common share data):


	2003		2002		2001
	(Restated)		(Restated)		(Restated)
Net Income As Reported	$	62,187	$	33,753	$	32,811
Assumed Stock Compensation Cost		3,029		2,254		1,543

Pro Forma Net Income	$	59,158	$	31,499	$	31,268

Diluted Earnings Per Average Common Share as Reported	$	2.74	$	1.51	$	1.91

Pro Forma Diluted Earnings Per Average Common Share	$	2.61	$	1.41	$	1.82

(n) New Accounting Pronouncements

2. Restatement of Financial Statements

The Company’s previously issued consolidated balance sheets as of December 31, 2003 and December 31, 2001 (the restatement does not affect the Company’s consolidated balance sheet as of December 31, 2002) and consolidated statements of operations and comprehensive income, changes in shareholders’ equity and cash flows for the years ended December 31, 2003, December 31, 2002, and December 31, 2001, respectively, have been restated to record a portion of the revenue and net income arising from profit commissions under three reinsurance contracts. The revenue and net income of one of the contracts had originally been recorded in the second quarter of 2002 and portions of such revenue and net income should have been recorded during each quarter of 2001. The revenue and net income of another contract had originally been fully recorded in the fourth quarter 2003 although portions of such revenue and net income should have been recorded in the quarters ended June 30, 2003, September 30, 2003 and March 31, 2004. Portions of the revenue and net income for the other contract should have been recorded in the quarters ended June 30, 2003, September 30, 2003, December 31, 2003 and March 31, 2004. These profit commissions were due to the Company from reinsurers under a 2001 aggregate stop loss reinsurance contract effective during the period January 1, 2001 through December 31, 2001, a quota share reinsurance contract effective during the period April 1, 2003 through December 31, 2003 and an excess catastrophe reinsurance contract effective during the period June 1, 2003 through May 31, 2004.

The decision to restate resulted from an analysis of the accounting effect at the expiration of one of these reinsurance contracts. Based upon the provisions of Emerging Issues Task Force No. 93-6, “Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises”, the Company determined that under generally acceptable accounting principles there was an error in the prior period financial statements and it should have been accruing a profit commission for each period since the inception of the contracts based on the actual experience of the underlying business. As a result, the Company has restated its aforementioned previously issued financial statements to include a portion of the revenue and net income arising from the profit commissions in each of the prior quarters that the contracts were in effect.

The effect of this restatement on the consolidated statement of operations and comprehensive income for the year ended December 31, 2003, December 31, 2002 and December 31, 2001 and on the consolidated balance sheets as of December 31, 2003 and December 31, 2001 are shown in the tables below (in thousands, except per share amounts):

Consolidated Statements of Operations and Comprehensive Income Data


	Year Ended December 31, 2003
	As Previously			Restatement		As
	Reported			Adjustment		Restated
Net earned premiums	$	571,579		$	2,939	$	574,518
Total revenue	$	616,698		$	2,939	$	619,637
Income before income taxes	$	86,787		$	2,939	$	89,726
Income tax expense: deferred	$	(11,920	)	$	1,029	$	(10,891	)
Total income tax expense	$	26,510		$	1,029	$	27,539
Net income	$	60,277		$	1,910	$	62,187
Basic earnings per share	$	2.75		$	0.09	$	2.84
Diluted earnings per share	$	2.66		$	0.08	$	2.74


	Year Ended December 31, 2002
	As Previously			Restatement			As
	Reported			Adjustment			Restated
Net earned premiums	$	421,186		$	(3,464	)	$	417,722
Total revenue	$	456,242		$	(3,464	)	$	452,778
Income before income taxes	$	52,519		$	(3,464	)	$	49,055
Income tax expense: deferred	$	(5,504	)	$	(1,212	)	$	(6,716	)
Total income tax expense	$	16,514		$	(1,212	)	$	15,302
Net income	$	36,005		$	(2,252	)	$	33,753
Basic earnings per share	$	1.67		$	(0.11	)	$	1.56
Diluted earnings per share	$	1.62		$	(0.11	)	$	1.31


	Year Ended December 31, 2001
	As Previously			Restatement		As
	Reported			Adjustment		Restated
Net earned premiums	$	296,093		$	3,464	$	299,557
Total revenue	$	332,463		$	3,464	$	335,927
Income before income taxes	$	46,198		$	3,464	$	49,662
Income tax expense: deferred	$	(2,577	)	$	1,212	$	(1,365	)
Total income tax expense	$	15,639		$	1,212	$	16,851
Net income	$	30,559		$	2,252	$	32,811
Basic earnings per share	$	1.85		$	0.14	$	1.99
Diluted earnings per share	$	1.78		$	0.13	$	1.91

Consolidated Balance Sheet Data


	As of December 31, 2003
	As Previously		Restatement			As
	Reported		Adjustment			Restated
Deferred income taxes	$	19,176	$	(1,029	)	$	18,147
Other assets	$	22,354	$	2,939		$	25,293
Total assets	$	1,869,031	$	1,910		$	1,870,941
Retained earnings	$	251,377	$	1,910		$	253,287
Total shareholders’ equity	$	543,736	$	1,910		$	545,646
Total liabilities and shareholders’ equity	$	1,869,031	$	1,910		$	1,870,941


	As of December 31, 2001
	As Previously		Restatement			As
	Reported		Adjustment			Restated
Deferred income taxes	$	6,916	$	(1,212	)	$	4,984
Other assets	$	8,668	$	3,464		$	12,132
Total assets	$	1,017,722	$	2,252		$	1,019,974
Retained earnings	$	155,095	$	2,252		$	157,347
Total shareholders’ equity	$	428,692	$	2,252		$	430,944
Total liabilities and shareholders’ equity	$	1,017,722	$	2,252		$	1,019,974

3. Statutory Information

Accounting Principles: GAAP differs in certain respects from Statutory Accounting Principles (“SAP”) prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania and/or the State of Florida. The principal differences between SAP and GAAP are as follows:

• Under SAP, investments in debt securities are carried at amortized cost, while under GAAP, investments in debt securities classified as Available for Sale are carried at fair value.

• Under SAP, policy acquisition costs, such as commissions, premium taxes, fees, and other costs of underwriting policies are charged to current operations as incurred, while under GAAP, such costs are deferred and amortized on a pro rata basis over the period covered by the policy.

• Under SAP, certain assets, designated as “Non-admitted Assets” (such as prepaid expenses) are charged against surplus.

• Under SAP, net deferred income tax assets are admitted following the application of certain criteria, with the resulting admitted deferred tax amount being credited directly to policyholder surplus.

• Under SAP, premiums receivable are considered nonadmitted if determined to be uncollected based upon aging criteria as defined in SAP.

• Under SAP, the costs and related recoverables for guaranty funds and other assessments are recorded based on management’s estimate of the ultimate liability and related recoverable settlement, while under GAAP, such costs are accrued when the liability is probable and reasonably estimatable and the related recoverable amount is based on future premium collections or policy surcharges from in-force policies.

• Under SAP, unpaid losses and loss adjustment expenses and unearned premiums are reported net of the effects of reinsurance transactions, whereas under GAAP, unpaid loss and loss adjustment expenses and unearned premiums are reported gross of reinsurance.

Financial Information: The combined statutory capital and surplus of the Insurance Subsidiaries as of December 31, 2003 and 2002 was $415.9 million and $312.6 million, respectively. Combined statutory net income for the years ended December 31, 2003, 2002 and 2001 was $49.9 million, $14.5 million, and $28.3 million, respectively. The Company made capital contributions of $47.0 million and $20.0 million to the Insurance Subsidiaries for the years ended December 31, 2003 and 2002, respectively.

Dividend Restrictions: The Insurance Subsidiaries are subject to various regulatory restrictions which limit the maximum amount of annual shareholder dividends allowed to be paid. The maximum dividend which the Insurance Subsidiaries may pay to Philadelphia Insurance during 2004 without prior approval is $50.7 million. Dividends paid for the years ended December 31, 2003 and 2002 were $4.0 million and $5.1 million, respectively.

Risk-Based Capital: Risk-based capital is a method developed by the National Association of Insurance Commissioners (“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. As of December 31, 2003, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based capital requirement of $107.6 million, $13.1 million, $15.3 million and $14.9 million, respectively, by 218%, 134%, 40% and 48%, respectively.

4. Investments

The Company invests primarily in investment grade fixed maturities which possessed an average quality rating of AA+ at December 31, 2003. The cost, gross unrealized gains and losses and estimated market value of investments as of December 31, 2003 and 2002 are as follows (in thousands):


			Gross		Gross		Estimated
			Unrealized		Unrealized		Market
	Cost ⁽¹⁾		Gains		Losses		Value ⁽²⁾
December 31, 2003
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies	$	51,480	$	456	$	18	$	51,918
Obligations of States and Political Subdivisions		476,762		12,876		662		488,976
Corporate and Bank Debt Securities		142,264		5,558		768		147,054
Asset Backed Securities		183,065		2,688		8,078		177,675
Mortgage Pass-Through Securities		159,160		3,692		323		162,529
Collateralized Mortgage Obligations		53,792		454		704		53,542

Total Fixed Maturities Available for Sale		1,066,523		25,724		10,553		1,081,694

Equity Securities		79,813		12,148		1,603		90,358

Total Investments	$	1,146,336	$	37,872	$	12,156	$	1,172,052

December 31, 2002
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies	$	9,754	$	433	$	1	$	10,186
Obligations of States and Political Subdivisions		279,397		10,600		7		289,990
Corporate and Bank Debt Securities		170,222		9,283		1,919		177,586
Asset Backed Securities		202,779		4,234		7,037		199,976
Mortgage Pass-Through Securities		81,360		4,726		—		86,086
Collateralized Mortgage Obligations		89,189		1,771		271		90,689

Total Fixed Maturities Available for Sale		832,701		31,047		9,235		854,513

Equity Securities		51,257		4,679		1,590		54,346

Total Investments	$	883,958	$	35,726	$	10,825	$	908,859

(1) Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. All amounts are shown net of impairment losses.

(2) Estimated market values have been based on quoted market prices or quotes from third party broker-dealers.

The following table (in thousands) identifies the period of time securities with an unrealized loss at December 31, 2003 have continuously been in an unrealized loss position. Included in the amounts displayed in the table are $6.5 million of unrealized losses due to non-investment grade fixed maturity securities having a fair value of $15.6 million. No issuer of securities or industry represents more than 4.4% and 15.5%, respectively, of the total estimated fair value, or 18.1% and 39.7%, respectively, of the total gross unrealized loss included in the table below. As previously discussed, there are certain risks and uncertainties inherent in the Company’s impairment methodology, such as the financial condition of specific industry sectors and the resultant effect on underlying security collateral values. Should the Company subsequently determine a decline in the fair value below the cost basis to be other than temporary, the security would be written down to its fair value and the difference would be included in earnings as a realized loss for the period such determination was made.


	Less Than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies	$	1,948	$	18	$	—	$	—	$	1,948	$	18
Obligations of States and Political Subdivisions		71,439		662		—		—		71,439		662
Corporate and Bank Debt Securities		26,781		333		1,670		435		28,451		768
Asset Backed Securities		28,671		494		24,344		7,584		53,015		8,078
Mortgage Pass-Through Securities		13,508		323		—		—		13,508		323
Collateralized Mortgage Obligations		29,467		546		933		158		30,400		704

Total Fixed Maturities Available for Sale		171,814		2,376		26,947		8,177		198,761		10,553

Equity Securities		6,778		1,603		—		—		6,778		1,603

Total Investments	$	178,592	$	3,979	$	26,947	$	8,177	$	205,539	$	12,156

Based upon the Company’s impairment evaluation as of December 31, 2003, it was concluded that the remaining unrealized losses in the table above are not other than temporary.

The Company had no debt or equity investments in a single issuer totaling in excess of 10% of shareholders’ equity at December 31, 2003.

The cost and estimated market value of fixed maturity securities at December 31, 2003, by remaining contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


			Estimated
			Market
	Cost ⁽¹⁾		Value ⁽²⁾
Due in One Year or Less	$	53,845	$	54,545
Due After One Year Through Five Years		223,676		229,476
Due After Five Years through Ten Years		177,412		182,132
Due After Ten Years		215,573		221,795
Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities		396,017		393,746

	$	1,066,523	$	1,081,694

(1) Original cost adjusted for amortization of premiums and accretion of discounts. All amounts are shown net of impairment losses.

(2) Estimated market values have been based on quoted market prices or quotes from third party broker-dealers.

The sources of net investment income for the years ended December 31, 2003, 2002, and 2001 are as follows (in thousands):


	2003			2002			2001
Fixed Maturities	$	41,393		$	37,959		$	30,962
Equity Securities		1,373			706			1,343
Cash and Cash Equivalents		656			1,113			1,908

Total Investment Income		43,422			39,778			34,213
Fund Held Credit		(2,318	)		—			—
Investment Expense		(2,298	)		(2,262	)		(1,787	)

Net Investment Income	$	38,806		$	37,516		$	32,426

There was one fixed maturity security with a carrying value of $0.6 million which was non-income producing for the year ended December 31, 2003. Investment expense includes $15,400, $77,000, and $107,000, in investment management fees paid to a director of the Company in 2003, 2002, and 2001, respectively. These transactions are in the ordinary course of business at negotiated prices comparable to those of transactions with other investment advisors.

Realized pre-tax gains (losses) on the sale of investments for the years ended December 31, 2003, 2002, and 2001 are as follows (in thousands):


	2003			2002			2001
Fixed Maturities
Gross Realized Gains	$	7,832		$	3,771		$	5,023
Gross Realized Losses		(4,718	)		(1,952	)		(9,979	)

Net Gain (Loss)		3,114			1,819			(4,956	)

Equity Securities
Gross Realized Gains		4,903			177			10,259
Gross Realized Losses		(7,223	)		(5,367	)		(1,946	)

Net Gain (Loss)		(2,320	)		(5,190	)		8,313

Total Net Realized
Investment Gain (Loss)	$	794		$	(3,371	)	$	3,357

5. 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 December 31, 2003 and 2002, the carrying value of the securities on deposit totaled $15.5 million.

Additionally, the Insurance Subsidiaries have investments, principally asset backed securities, which collateralize the borrowings from the Federal Home Loan Bank of Pittsburgh, see Note 10. The carrying value of these investments was $59.1 million and $49.2 million as of December 31, 2003 and 2002, respectively.

6. Trust Accounts

The Company maintains investments in trust accounts under reinsurance agreements with unrelated insurance companies. These investments collateralize the Company’s obligations under the reinsurance agreements. The Company possesses sole responsibility for investment and reinvestment of the trust account assets. All dividends, interest and other income, resulting from investment of these assets are distributed to the Company on a monthly basis. At December 31, 2003 and 2002 the carrying value of these trust fund investments were $1.7 million.

The Company’s share of the investments in the trust accounts is included in investments and cash equivalents, as applicable, in the accompanying consolidated balance sheets.

7. Property and Equipment

The following table summarizes property and equipment at December 31, 2003 and 2002 (dollars in thousands):


							Estimated Useful
	December 31,						Lives (Years)
	2003			2002
Furniture, Fixtures and Automobiles	$	5,225		$	4,491			5
Software, Computer Hardware and Telephone Equipment		24,296			18,755			3 - 7
Land and Building		3,598			3,588			40
Leasehold Improvements		2,186			1,881			10 -12

		35,305			28,715
Accumulated Depreciation and Amortization		(18,484	)		(15,921	)

Property and Equipment	$	16,821		$	12,794

Included in property and equipment are costs incurred in developing or purchasing information systems technology of $13.3 million and $8.2 million in 2003 and 2002, respectively. At December 31, 2003, costs incurred for Property and Equipment not yet placed in service was $4.0 million. Amortization of these costs was $1.1 million, $1.0 million and $0.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. Depreciation expense, excluding amortization of capitalized information systems technology costs, was $1.6 million, $1.5 million and $1.4 million, for the years ended December 31, 2003, 2002, and 2001, respectively.

8. Goodwill

The following table provides a reconciliation of the prior three year’s ended December 31 reported net income to adjusted net income had SFAS No. 142 been applied at the beginning of fiscal 2001 (in thousands, except per share amounts):


	For the Year Ended December 31,
	2003 (Restated)		2002 (Restated)		2001 (Restated)
Reported net income	$	62,187	$	33,753	$	32,811
Adjustment for goodwill amortization		—		—		1,500

Adjusted net income	$	62,187	$	33,753	$	34,311

Reported basic earnings per share	$	2.84	$	1.56	$	1.99
Adjustment for goodwill amortization		—		—		0.09

Adjusted basic earnings per share	$	2.84	$	1.56	$	2.08

Reported diluted earnings per share	$	2.74	$	1.51	$	1.91
Adjustment for goodwill amortization		—		—		0.09

Adjusted diluted earnings per share	$	2.74	$	1.51	$	2.00

9. Liability for Unpaid Loss and Loss Adjustment Expenses

Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is summarized as follows (in thousands):


	2003		2002		2001
Balance at January 1,	$	445,548	$	302,733	$	237,494
Less Reinsurance Recoverables		85,837		52,599		42,030

Net Balance at January 1,		359,711		250,134		195,464

Incurred related to:
Current Year		314,609		239,834		166,220
Prior Years		44,568		27,599		13,435

Total Incurred		359,177		267,433		179,655

Paid related to:
Current Year		69,905		58,530		54,228
Prior Years		167,488		99,326		70,757

Total Paid		237,393		157,856		124,985

Net Balance at December 31,		481,495		359,711		250,134
Plus Reinsurance Recoverables		145,591		85,837		52,599

Balance at December 31,	$	627,086	$	445,548	$	302,733

automobile and general liability coverages for commercial package products due to losses developing beyond the underlying pricing assumptions; and $5.8 million ($6.0 million net of reinsurance recoverables) of development in the commercial automobile excess liability insurance and GAP commercial automobile products due to losses developing beyond the underlying pricing assumptions.

• The decrease in unpaid loss and loss adjustment expenses in accident year 2002 is principally attributable to:

• $4.2 million ($4.7 million net of reinsurance recoverables) and $26.4 million ($20.3 million net of reinsurance recoverables) of favorable development in professional liability products and commercial package products, respectively, due to conservative initial loss estimates combined with favorable product pricing.

During 2002, the Company increased the estimated loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2001 by $30.2 million ($20.7 million net of reinsurance). As of December 31, 2001 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for these policies of $14.5 million ($8.7 million net of reinsurance recoverables). During 2002 adverse trends further deteriorated in both frequency and severity on leases expiring in 2002. As part of the Company’s monitoring and evaluation process, consulting firms were engaged during the third quarter of 2002 to aid in evaluating this deterioration and the ultimate potential loss exposure under these policies. As a 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 over supply of used cars; and the overall uncertain economic conditions.

The Company also increased the liability for unpaid loss and loss adjustment expenses on the Commercial Automobile Excess Liability Insurance (“Excess Liability”) product sold to rental car companies (Commercial Lines Underwriting Segment) primarily for the 2000 and 2001 accident years by $6.9 million ($4.9 million net of reinsurance). As of December 31, 2001 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for the Excess Liability policies issued in these years of $23.0 million ($21.6 million net of reinsurance). Excess Liability provides automobile liability coverage in excess of the state mandated limits which are provided by the rental car company. During the third quarter of 2002, pursuant to a routine underwriting review focusing on price adequacy and loss experience, the Company non-renewed a significant Excess Liability customer as a result of an unacceptable underwriting risk profile. This adverse loss development was primarily due to pricing inadequacy and the adverse loss experience of this customer. Additionally, the Company has experienced a delay in both the reporting of claims and the claim litigation discovery process as a result of this policyholder and another Excess Liability policyholder filing for Chapter 11 during the third quarter 2002 and fourth quarter 2001, respectively.

During 2001, as a result of changes in estimates of insured events in prior years, the Company increased losses and loss adjustment expenses incurred by $13.4 million. Such development was primarily due to losses emerging at a higher rate on automobile leases expiring in 2001 on residual value policies underwritten in prior years than had been originally anticipated when the initial reserves were estimated.

10. Funds Held Payable to Reinsurer

Effective April 1, 2003, the Company entered into a quota share reinsurance agreement. Under this agreement, the Company ceded 22% of its net written premiums and loss and loss adjustment expenses for substantially all of the Company’s lines of business on policies effective April 1, 2003 through December 31, 2003, and 10% of its commercial and specialty lines net written premiums and loss and loss adjustment expenses for policies effective January 1, 2004 and thereafter. The Company receives a provisional commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium due the reinsurers reduced by the reinsurers’ expense allowance, and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. In addition, the agreement provides that a profit commission will be paid to the Company upon commutation equal to the positive balance in the Funds Held Payable to Reinsurer account.

Pursuant to the quota share reinsurance agreement, the Company ceded $199.4 million of net written premiums, $116.8 million of net earned premiums, $62.7 million in net loss and loss adjustment expenses, and earned $46.7 million in ceding

commissions, for the year ended December 31, 2003. In addition, the interest credit (expense), which is included in net investment income, for the year ended December 31, 2003 was $2.3 million. The Company has also accrued a profit commission based upon the experience of the underlying business ceded to this reinsurance agreement, in the amount of $5.4 million for the year ended December 31, 2003. The profit commission reduces ceded written and earned premiums.

11. Loans Payable

The Company had aggregate borrowings of $48.5 million and $39.1 million as of December 31, 2003 and 2002, respectively, from the Federal Home Loan Bank of Pittsburgh. These borrowings bear interest at adjusted LIBOR and mature twelve months from inception. The proceeds from these borrowings were invested in asset backed securities and collateralized mortgage obligations to achieve a positive spread between the rate of interest on these securities and the borrowing rates. The weighted-average interest rate on borrowings outstanding as of December 31, 2003 was 1.23%.

In November 2000 the Company, pursuant to a Board of Directors authorization, entered into an unsecured revolving credit facility for aggregate borrowings of up to $22.0 million at any one time outstanding with a maturity date of 364 days after closing. During 2000, $22.0 million of the facility was utilized by the Company to pay a withholding tax liability as a result of the CEO electing to have shares otherwise issuable withheld in satisfaction of the minimum withholding tax attributable to the exercise of stock options. Borrowings under the facility bore interest at adjusted LIBOR and unused commitments under the facility were subject to a fee of 20 basis points per annum. Interest expense amounted to $0.1 million and $0.2 million for the years ended December 31, 2001 and 2000, respectively. During the first quarter 2001 the Company repaid all aggregate borrowings and cancelled the commitment under this revolving credit facility.

12. Income Taxes

The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2003 and 2002 are as follows (in thousands):


	December 31,
	2003		2002
Assets:
Excess of Tax Over Financial Reporting Earned Premium	$	21,142	$	18,838
Loss Reserve Discounting		19,868		16,461
Excess of Financial Reporting Over Tax Net Realized Investment Losses		6,720		3,315
Deferred Compensation		471		282
Other Assets		666		345

Total Assets		48,867		39,241

Liabilities:
Deferred Acquisition Costs		19,701		21,445
Unrealized Appreciation of Securities		9,001		8,715
Property and Equipment Basis		985		803
Excess of Financial Reporting Over Tax Net Investment Income		892		624
Other Liabilities		141		113

Total Liabilities		30,720		31,700

Net Deferred Income Tax Asset	$	18,147	$	7,541

The following table summarizes the differences between the Company’s effective tax rate for financial statement purposes and the federal statutory rate (dollars in thousands):


	Amount of Tax			Percent
For the year ended December 31, 2003 (Restated):
Federal Tax at Statutory Rate	$	31,404			35	%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion		(4,522	)		(5	)
Other, Net		657			1

Income Tax Expense	$	27,539			31	%

For the year ended December 31, 2002 (Restated):
Federal Tax at Statutory Rate	$	17,170			35	%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion		(2,525	)		(5	)
Other, Net		657			1

Income Tax Expense	$	15,302			31	%

For the year ended December 31, 2001 (Restated):
Federal Tax at Statutory Rate	$	17,381			35	%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion		(1,456	)		(3	)
Nondeductible Goodwill Amortization		523			1
Other, Net		403			1

Income Tax Expense	$	16,851			34	%

Philadelphia Insurance has entered into tax sharing agreements with each of its subsidiaries. Under the terms of these agreements, the income tax provision is computed as if each subsidiary were filing a separate federal income tax return, including adjustments for the income tax effects of net operating losses and other special tax attributes, regardless of whether those attributes are utilized in the Company’s consolidated federal income tax return.

13. Minority Interest in Consolidated Subsidiaries

During 1998, the Company issued 10.350 million FELINE PRIDESSM at $10.00 per security and PCHC Financing I, the Company’s business trust subsidiary, issued 1,000,000 7.0% Trust Originated Preferred Securities with a stated liquidation amount per trust preferred security equal to $10.00. The 10.350 million FELINE PRIDESSM consisted of 9.350 million units referred to as Income Prides and 1.000 million units referred to as Growth Prides. Each Income Prides consisted of a unit comprised of (a) a purchase contract under which the holder purchased a number of shares of Philadelphia Consolidated Holding Corp. common stock on May 16, 2001 (equal to .3858 shares per FELINE PRIDESSM) under the terms specified in the stock purchase contract and (b) beneficial ownership of a 7.0% Trust Originated Preferred Security issued by PCHC Financing I and representing an undivided beneficial ownership in the assets of PCHC Financing I. Each holder received aggregate cumulative cash distributions at the annual rate of 7.00% of the $10.00 stated amount for the security, payable quarterly in arrears. Each Growth Prides consisted of a unit with a face amount of $10.00 comprised of (a) a purchase contract under which (i) the holder purchased a number of shares of Philadelphia Consolidated Holding Corp. common stock on May 16, 2001 (equal to .3858 shares per FELINE PRIDESSM) under the terms specified in the stock purchase contract and (ii) the Company paid the holder contract adjustment payments at the rate of .50% of the stated amount per annum and (b) a 1/100 undivided beneficial ownership interest in a treasury security having a principal amount at maturity equal to $1,000 and maturing on May 15, 2001.

On May 16, 2001, the Company issued 4.0 million common shares to satisfy the stock purchase contract obligation from the Company’s 1998 FELINE PRIDESSM offering. The issuance of such shares resulted in a $98.9 million increase in Shareholders’ Equity and a corresponding decrease in the Minority Interest In Consolidated Subsidiaries balance.

14. Shareholders’ Equity

Basic and diluted earnings per share are calculated as follows (dollars and share data in thousands, except per share data):


	As of and For the Years Ended December 31,
	2003 (Restated)		2002 (Restated)		2001 (Restated)
Weighted-Average Common Shares Outstanding		21,909		21,611		16,529
Weighted-Average Share Equivalents Outstanding		751		682		656

Weighted-Average Shares and Share Equivalents Outstanding		22,660		22,293		17,185

Net Income		62,187	$	33,753	$	32,811

Basic Earnings Per Share	$	2.84	$	1.56	$	1.99

Diluted Earnings Per Share	$	2.74	$	1.51	$	1.91

The number of weighted share equivalents not included in the weighted-average share equivalents outstanding calculation amounted to 2,730, 9,620 and 122 for the years ended December 31, 2003, 2002 and 2001, respectively.

During the fourth quarter of 2001, the Company closed on its public offering of an aggregate of 3.6 million shares of its common stock. Proceeds from the offering amounted to $114.5 million (after underwriting and associated costs). The Company contributed $70.0 million of the net proceeds to its subsidiaries in 2001, of which $60.0 million was contributed to the Insurance Subsidiaries. The remaining proceeds are presently being held for general corporate purposes.

Under the Company’s stock option plan, stock options may be granted for the purchase of common stock at a price not less than the fair market value on the date of grant. Options are primarily exercisable after the expiration of five years following the grant date. Under this plan, as amended, the Company has reserved 3,500,000 shares of common stock for issuance pursuant to options granted under the plan. As of December 31, 2003, 119,725 shares of common stock remain reserved for future issuance pursuant to options granted under this plan.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS No. 148”) which amends SFAS Statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). The objective of SFAS No. 148 is to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 does not change the provisions of SFAS No. 123 that permit entities to continue to apply the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company continues to maintain its accounting for stock-based compensation in accordance with APB No. 25, but has adopted the disclosure provisions of SFAS No. 148.

The following table presents certain information regarding the Company’s stock option plan.


	2003					2002					2001
				Exercise					Exercise					Exercise
				Price					Price					Price
	Options			Per Option⁽¹⁾		Options			Per Option⁽¹⁾		Options			Per Option⁽¹⁾
Outstanding at beginning of year		1,890,075		$	24.82		1,453,075		$	19.32		1,330,075		$	12.68
Granted		484,000		$	36.60		549,500		$	36.14		572,500		$	27.09
Exercised		(106,375	)	$	19.34		(107,000	)	$	8.07		(392,000	)	$	8.09
Canceled		(33,000	)	$	30.68		(5,500	)	$	29.60		(57,500	)	$	19.68

Outstanding at end of year		2,234,700		$	27.55		1,890,075		$	24.82		1,453,075		$	19.32

Exercisable at end of year		323,200					194,950					296,950
Weighted-average fair value of options granted during the year ⁽²⁾				$	11.27				$	14.46				$	10.99


	Outstanding		Exercise		Remaining		Exercisable		Exercise
	At		Price		Contractual		at		Price
	December		Per		Life		December		Per
Range of Exercise Prices	31, 2003		Option⁽¹⁾		(Years)⁽¹⁾		31, 2003		Option⁽¹⁾
$8.13 to $9.31		188,450	$	8.99		2.4		188,450	$	8.99
$13.88 to $19.75		390,000	$	15.47		5.6		90,000		18.63
$20.50 to $27.00		531,250	$	25.23		6.9		3,750		21.96
$27.31 to $34.63		397,500	$	30.60		8.6		41,000		29.80
$36.05 to $42.49		727,500	$	39.15		9.0		—		—

		2,234,700	$	27.55				323,200	$	14.46

(1) Weighted Average.

(2) The Company uses the Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant.

The Company has established the following stock purchase plans:

Employee Stock Purchase Plan (the “Stock Purchase Plan”): The aggregate maximum number of shares that may be issued pursuant to the Stock Purchase Plan as amended is 1,000,000. Shares may be purchased under the Stock Purchase Plan by eligible employees during designated one-month offering periods established by the Compensation Committee of the Board of Directors at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. The purchase price of shares may be paid by the employee over six years pursuant to the execution of a promissory note. The promissory note(s) are collateralized by such shares purchased under the Stock Purchase Plan and are interest free. Under the Stock Purchase Plan, the Company issued 36,265 and 77,730 shares in 2003 and 2002, respectively. The weighted-average fair value of those purchase rights granted in 2003 and 2002 was $6.00 and $4.47, respectively.

The Nonqualified Employee Stock Purchase Plan (the “Nonqualified Stock Plan”): The aggregate maximum number of shares that may be issued pursuant to the Nonqualified Stock Plan is 1,000,000. Shares may be purchased under the Nonqualified Stock Plan by eligible employees during designated one-month offering periods established by the Compensation Committee of the Board of Directors at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. The purchase price of shares may be paid by the employee over nine years pursuant to the execution of a promissory note. The promissory note(s) are collateralized by such shares purchased under the Nonqualified Stock Plan and are interest free. Under the Nonqualified Stock Plan, the Company issued 5,939 and 242,444 shares in 2003 and 2002, respectively. The weighted-average fair value of those purchase rights granted in 2003 and 2002 was $6.00 and $4.47, respectively.

Directors Stock Purchase Plan (“Directors Plan”): The Directors Plan has been established for the benefit of non-employee Directors. The aggregate maximum number of shares that may be issued pursuant to the Directors Plan is 50,000. Non-employee Directors, during monthly offerings periods, may designate a portion of his or her fees to be used for the purchase of

shares under the terms of the Directors Plan at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. Under the Directors Plan, the Company issued 3,325 and 2,237 shares in 2003 and 2002, respectively. The weighted-average fair value of those purchase rights granted in 2003 and 2002 was $5.96 and $5.63, respectively.

Preferred Agents Stock Purchase Plan (“Preferred Agents Plan”): The Preferred Agents Plan has been established for the benefit of eligible Preferred Agents. The aggregate maximum number of shares that may be issued pursuant to the Preferred Agents Plan is 200,000. Eligible Preferred Agents during designated offering periods may either remit cash or have the Company withhold from commissions or other compensation amounts to be used for the purchase of shares under the terms of the Preferred Agents Plan at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. Under the Preferred Agents Plan, the Company issued 7,056 and 10,966 shares in 2003 and 2002, respectively. The weighted-average fair value of those purchase rights granted in 2003 and 2002 was $6.00 and $6.07, respectively.

The fair value of options at date of grant was estimated using the Black-Scholes valuation model with the following weighted-average assumptions:


	2003			2002			2001
Expected Stock Volatility		23.2	%		33.0	%		32.0	%
Risk-Free Interest Rate		3.1	%		4.1	%		4.7	%
Expected Option Life (Years)		6.0			6.0			6.0
Expected Dividends		0.0	%		0.0	%		0.0	%

15. Stock Repurchase Authorization

During the three years ended December 31, 2003, the Company repurchased 0.1 million shares for approximately $2.5 million under its stock repurchase authorization. At December 31, 2003, $24.7 million remains under a $55.0 million stock purchase authorization.

16. Reinsurance

The loss and loss adjustment expense reserves ceded under such arrangements were $145.6 million and $85.8 million at December 31, 2003 and 2002, respectively. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The percentage of ceded reinsurance reserves (excluding reserves ceded to voluntary and mandatory pool mechanisms) that are with companies rated “A” (Excellent) or better by A.M. Best Company is 99.3% and 97.0% as of December 31, 2003 and 2002, respectively. Additionally, approximately 1%, 1% and 3% of the Company’s net written premiums for the years ended December 31, 2003, 2002, and 2001, respectively, were assumed from an unrelated reinsurance company.

The effect of reinsurance on premiums written and earned is as follows (in thousands):


	Written			Earned
For the Year Ended December 31, 2003 (Restated):
Direct Business	$	898,170		$	784,445
Reinsurance Assumed		7,823			5,053
Reinsurance Ceded		303,693			214,980

Net Premiums	$	602,300		$	574,518

Percentage Assumed of Net		1.3	%		0.9	%

For the Year Ended December 31, 2002 (Restated):
Direct Business	$	660,789		$	550,443
Reinsurance Assumed		2,950			5,042
Reinsurance Ceded		144,032			134,299

Net Premiums	$	519,707		$	421,186

Percentage Assumed of Net		0.6	%		1.2	%

For the Year Ended December 31, 2001 (Restated):
Direct Business	$	464,491		$	409,814
Reinsurance Assumed		9,074			11,249
Reinsurance Ceded		136,284			124,970

Net Premiums	$	337,281		$	296,093

Percentage Assumed of Net		2.7	%		3.8	%

Certain of the Company’s reinsurance contracts have provisions whereby the Company is entitled to a return profit commission based on the ultimate experience of the underlying business ceded to the contracts. Under the terms of these contracts, the Company accrued profit commissions of $10.5 million, $0 million and $3.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. The profit commissions reduce ceded written and earned premiums.

17. Compensation Plans

The Company has a defined contribution Profit Sharing Plan, which includes a 401K feature, covering substantially all employees. Under the plan, employees may contribute up to an annual maximum of the lesser of 15% of eligible compensation or the applicable Internal Revenue Code limit in a calendar year. The Company makes a matching contribution in an amount equal to 75% of the participant’s pre-tax contribution, subject to a maximum of 6% of the participant’s eligible compensation. The Company may also make annual discretionary profit sharing contributions at each plan year end. Participants are fully vested in the Company’s contribution upon completion of four years of service. The Company’s total contributions to the plan were $0.9 million, $0.8 million and $0.6 million in 2003, 2002, and 2001, respectively.

The Company sponsors an unfunded nonqualified key employee deferred compensation plan. Under the plan deferred compensation benefits are provided through deferrals of base salary and bonus compensation (“Employee Deferrals”) and discretionary contributions by the Company (“Employer Contributions”) for a select group of management and highly compensated employees of the Company and its subsidiaries. Each participant is permitted to specify an investment or investments from among permissible investments which shall be the basis for determining the gain or loss adjustment applicable to such participant’s plan deferral account. A participant’s interest in the portion of his or her plan deferral account that is attributable to Employee Deferrals are fully vested at all times. That portion of a participant’s plan deferral account attributable to Employer Contributions generally will vest over the course of a five year period beginning on the last day of the first year after the plan year for which the Employer Contribution was made. The amounts in each participant’s plan deferral account represent an obligation of the Company to pay the participant at some time in the future. The Company had a deferred compensation obligation pursuant to the plan amounting to $1.8 million and $0.7 million as of December 31, 2003 and 2002, respectively.

The Company also sponsors an unfunded nonqualified executive deferred compensation plan. Under the plan deferred compensation benefits are provided by the Company through deferrals of base salary and bonus compensation for management and highly compensated executives designated by the Board of Directors. Each participant is permitted to specify an investment or investments from among permissible investments which shall be the basis for determining the gain or loss adjustment applicable to such participant’s plan deferral account. A participant’s benefit under the plan is the amount

of such participant’s plan deferral amount. The Company had a deferred compensation obligation pursuant to the plan amounting to $0.8 million and $0.5 million as of December 31, 2003 and 2002, respectively.

18. Commitments and Contingencies

The Company is subject to routine legal proceedings in connection with its property and casualty insurance business. The Company also is not involved in any 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.

The Company currently leases office space to serve as its headquarters location and 36 field offices for its production underwriters. In addition, the Company leases certain computer equipment. Rental expense for these operating leases was $3.5 million, $3.1 million and $2.6 million for the years ended December 31, 2003, 2002, and 2001, respectively.

The future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2003 were as follows (in thousands):


Year Ending December 31:
2004	$	4,611
2005		4,307
2006		3,952
2007		3,494
2008 and Thereafter		1,238

Total Minimum Payments Required	$	17,602

At December 31, 2003 the Company has open commitments of $2.3 million under certain limited partnership and information technology development agreements.

19. Summary of Quarterly Financial Information — Unaudited

The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 2003 and 2002 is unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals and adjustments necessary to reflect the restatement discussed in Note 2) necessary to present fairly the results of operations for such periods, have been made for a fair presentation of the results shown (in thousands, except share and per share data):


	Three Months Ended
				June 30,			September 30,		December 31,
	March 31,			2003 ⁽¹⁾⁽²⁾			2003 ⁽¹⁾⁽²⁾		2003 ⁽¹⁾⁽²⁾
	2003 ⁽¹⁾			(Restated)			(Restated)		(Restated)
Net Earned Premiums	$	148,362		$	123,349		$	146,676	$	156,131
Net Investment Income	$	9,805		$	9,370		$	9,173	$	10,458
Net Realized Investment Gain (Loss)	$	(1,133	)	$	(650	)	$	474	$	2,103
Net Loss and Loss Adjustment Expenses	$	90,360		$	93,026		$	79,405	$	96,386
Acquisition Costs and Other Underwriting Expenses	$	46,420		$	32,158		$	41,542	$	42,792
Net Income	$	13,233		$	4,863		$	23,575	$	20,517
Basic Earnings Per Share	$	0.61		$	0.22		$	1.08	$	0.93
Diluted Earnings Per Share	$	0.59		$	0.22		$	1.04	$	0.89
Weighted-Average Common Shares Outstanding		21,865,269			21,860,396			21,913,053		21,994,960
Weighted-Average Share Equivalents Outstanding		562,552			706,608			787,627		981,017

Weighted-Average Shares and Share Equivalents Outstanding		22,427,821			22,567,004			22,700,680		22,975,977


			June 30,
	March 31,		2002⁽³⁾⁽⁴⁾			September 30,		December 31,
	2002⁽⁴⁾		(Restated)			2002⁽⁴⁾		2002⁽⁴⁾
Net Earned Premiums	$	89,244	$	96,809		$	106,146	$	125,523
Net Investment Income	$	8,855	$	9,375		$	9,497	$	9,789
Net Realized Investment Gain (Loss)	$	47	$	(3,181	)	$	199	$	(436	)
Net Loss and Loss Adjustment Expenses	$	53,049	$	60,832		$	78,349	$	75,203
Acquisition Costs and Other Underwriting Expenses	$	27,821	$	31,057		$	32,343	$	38,697
Net Income	$	10,677	$	6,701		$	2,892	$	13,483
Basic Earnings Per Share	$	0.50	$	0.31		$	0.13	$	0.62
Diluted Earnings Per Share	$	0.48	$	0.30		$	0.13	$	0.61
Weighted-Average Common Shares Outstanding		21,528,091		21,578,045			21,625,799		21,710,121
Weighted-Average Share Equivalents Outstanding		724,311		753,575			636,828		558,100

Weighted-Average Shares and Share Equivalents Outstanding		22,252,402		22,331,620			22,262,627		22,268,221

(1) Net Realized Investment (Gain) Loss for the three months ended March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003 includes non-cash realized losses of $1.5 million, $1.7 million, $0.4 million and $6.7 million, respectively, as a result of impairment evaluations.

(2) The three months ended June 30, September 30, and December 31, 2003 have been restated, as described in Note 2, to accrue profit commissions under two reinsurance contracts. The impact of this restatement on the previously reported results of operations for the three months ended June 30, September 30, and December 31, 2003 was to increase (decrease) net earned premiums by $1.9 million, $4.0 million and ($2.9) million, respectively, and net income by $1.2 million, $2.6 million, and ($1.9) million, respectively.

(3) The three months ended June 30, 2002 has been restated, as described in Note 2, for a profit commission under a 2001 accident year aggregate stop loss reinsurance contract. The impact of this restatement on the previously reported results of operations for the three months ended June 30, 2002 was to decrease net earned premiums by $3.5 million and net income by $2.3 million.

(4) Net Realized Investment Gain (Loss) for the three months ended June 30, 2002, September 30, 2002 and December 31, 2002 includes non-cash realized losses of $1.2 million, $0.3 million, and $2.2 million, respectively, as a result of impairment evaluations.

20. 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 each of the past three years. Corporate information is included to reconcile segment data to the consolidated financial statements (in thousands):


	Commercial		Specialty		Personal
	Lines		Lines		Lines		Corporate			Total
2003 (Restated):
Gross Written Premiums	$	662,339	$	154,105	$	89,549	$	—		$	905,993

Net Written Premiums	$	463,853	$	107,911	$	30,536	$	—		$	602,300

Revenue:
Net Earned Premiums	$	431,535	$	108,809	$	34,174	$	—		$	574,518
Net Investment Income		—		—		—		38,806			38,806
Net Realized Investment Gain		—		—		—		794			794
Other Income		—		—		5,092		427			5,519

Total Revenue		431,535		108,809		39,266		40,027			619,637

Losses and Expenses:
Net Loss and Loss Adjustment Expenses		273,487		65,075		20,615		—			359,177
Acquisition Costs and Other Underwriting Expenses		—		—		—		162,912			162,912
Other Operating Expenses		—		—		4,050		3,772			7,822

Total Losses and Expenses		273,487		65,075		24,665		166,684			529,911

Income Before Income Taxes		158,048		43,734		14,601		(126,657	)		89,726
Total Income Tax Expense		—		—		—		27,539			27,539

Net Income	$	158,048	$	43,734	$	14,601	$	(154,196	)	$	62,187

Total Assets	$	—	$	—	$	148,409	$	1,722,532		$	1,870,941

2002 (Restated):
Gross Written Premiums	$	473,100	$	110,176	$	80,463	$	—		$	663,739

Net Written Premiums	$	380,991	$	101,623	$	37,093	$	—		$	519,707

Revenue:
Net Earned Premiums	$	297,635	$	85,030	$	35,057	$	—		$	417,722
Net Investment Income		—		—		—		37,516			37,516
Net Realized Investment Loss		—		—		—		(3,371	)		(3,371	)
Other Income		—		—		645		266			911

Total Revenue		297,635		85,030		35,702		34,411			452,778

Losses and Expenses:
Net Loss and Loss Adjustment Expenses		202,604		43,310		21,519		—			267,433
Acquisition Costs and Other Underwriting Expenses		—		—		—		129,918			129,918
Other Operating Expenses		—		—		130		6,242			6,372

Total Losses and Expenses		202,604		43,310		21,649		136,160			403,723

Income Before Income Taxes		95,031		41,720		14,053		(101,749	)		52,519
Total Income Tax Expense		—		—		—		15,302			15,302

Net Income	$	95,031	$	41,720	$	14,053	$	(117,051	)	$	33,753

Total Assets	$	—	$	—	$	135,753	$	1,222,581		$	1,358,334

2001 (Restated):
Gross Written Premiums	$	315,948	$	79,317	$	78,300	$	—		$	473,565

Net Written Premiums	$	225,964	$	70,572	$	40,745	$	—		$	337,281

Revenue:
Net Earned Premiums	$	192,099	$	68,956	$	38,502	$	—		$	299,557
Net Investment Income		—		—		—		32,426			32,426
Net Realized Investment Gain		—		—		—		3,357			3,357
Other Income		—		—		2,964		(2,377	)		587

Total Revenue		192,099		68,956		41,466		33,406			335,927

Losses and Expenses:
Net Loss and Loss Adjustment Expenses		117,429		42,840		19,386		—			179,655
Acquisition Costs and Other Underwriting Expenses		—		—		—		97,020			97,020
Other Operating Expenses		—		—		1,546		5,295			6,841

Total Losses and Expenses		117,429		42,840		20,932		102,315			283,516

Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust		—		—		—		2,749			2,749

Income Before Income Taxes		74,670		26,116		20,534		(71,658	)		46,198
Total Income Tax Expense		—		—		—		16,851			16,851

Net Income	$	74,670	$	26,116	$	20,534	$	(88,509	)	$	32,811

Total Assets	$	—	$	—	$	168,200	$	851,774		$	1,019,974

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

Item 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. The Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are designed with the objective of providing reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). In designing and evaluating the Company’s disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.

An evaluation was performed in February 2004 by management, with the participation of the Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2003. Based on this evaluation, the CEO and CFO had concluded that, as of the end of the period covered by such Annual Report on Form 10-K, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within such entities, particularly during the period in which such Annual Report on Form 10-K was being prepared.

In connection with the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, an evaluation was performed by management, with the participation of the Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by such Quarterly Report. Based on this evaluation, the CEO and CFO have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, subject to the matters set forth in the following paragraph.

As a result of the Company’s restatement of certain of its financial statements, as referred to in Item 7 – Restatement of Financial Statements to the Consolidated Financial Statements of the Company contained in Item 8 of Part II, to include a portion of its revenue and net income in prior periods arising from profit commissions under two reinsurance contracts, the Company has determined that it should enhance its documentation and research as to its understanding of appropriate accounting for reinsurance transactions. In connection therewith, the Company:

1. Formed a new reinsurance contract subcommittee with senior members from appropriate departments within the Company to review, discuss and make appropriate conclusions with respect to the documentation requirements and the accounting for the Company’s reinsurance contracts;

2. Will, as promptly as practicable, add an additional accounting professional to its staff whose responsibility will be to spend substantially all of his or her working time researching and documenting technical accounting matters (including reinsurance matters), as well as supporting other members of the Company’s accounting staff and the reinsurance contract subcommittee.

The Company’s independent auditors, PricewaterhouseCoopers, LLP, have advised the Company that there is a material weakness in the Company’s internal controls over the accounting and reporting for reinsurance contracts. The Company anticipates that its implementation of the matters set forth in the immediately preceding paragraph will correct the material weakness.

(b) Changes in Internal Controls. There has been no change in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART IV

Item 15. — EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements and Exhibits

1. The Financial Statements and Financial Statement Schedules listed in the accompanying index on page 38 are filed as part of this Report.

2. Exhibits: The Exhibits listed below are filed as part of, or incorporated by reference into, this Report.


Exhibit No.		Description
3.1	A	Articles of Incorporation of Philadelphia Insurance, as amended to date.

3.1.1	A	Amendment to Articles of Incorporation of Philadelphia Insurance.

3.1.2	L	Amendment to Articles of Incorporation, Philadelphia Consolidated Holding Corp.

3.2	A	By-laws of Philadelphia Insurance, as amended to date.

10.1	A⁽¹⁾	Amended and Restated Key Employees’ Stock Option Plan.

10.1.1	H⁽¹⁾	Amended and Restated Key Employees’ Stock Option Plan.

10.2	A⁽¹⁾	Key Employees’ Stock Bonus Plan.

10.2.1	A ⁽¹⁾	Excerpt of Board of Directors and Shareholders Resolution amending Key Employees’ Stock Bonus Plan.

10.6	A	Casualty Excess of Loss Reinsurance Agreement No. 14P-106,401,402, effective January 1, 1990, with Swiss Re, as amended to date.

10.7	A	Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989, with Swiss Re, as amended to date.

10.8	A	Casualty Quota Share Reinsurance Agreement No. 14P-201, effective January 1, 1989, with Swiss Re, as amended to date.

10.9	A	Retrocession Contract No. 80101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. X21-201, as amended to date.

10.10	A	Retrocession Contract No. 81100/81101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Property Quota Share Reinsurance Agreement No. DP2AB, effective October 1, 1990, as amended to date.

10.11	A	Retrocession Contract No. 80100/80103, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. DC2ABC, effective October 1, 1990, as amended to date.

10.12	A	Agreement of Reinsurance no. B367, dated June 11, 1991, with General Reinsurance Corporation, as amended to date.

10.13	A	Agreement of Reinsurance No. A271, dated July 2, 1993, with General Reinsurance Corporation.

10.14	A	General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington Insurance Company, as amended to date, together with related Quota Share Reinsurance Agreements, as amended to date.

10.15	A	E & O Insurance Policy effective July 20, 1993.

10.15.1	G	E & O Insurance Policy effective July 20, 1996.

10.15.2	I	E & O Insurance Policy effective July 20, 1997.

10.16	A	Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from the Minutes of the Board of Directors Meeting dated November 16, 1992.

10.17	A⁽¹⁾	Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements concerning options.

10.18	A⁽¹⁾	James J. Maguire Stock Option Agreements.

10.18.1	C⁽¹⁾	Amendment to James J. Maguire Stock Option Agreements.

10.19	A⁽¹⁾	Wheelways Salary Savings Plus Plan Summary Plan Description.

10.20	A	Key Man Life Insurance Policies on James J. Maguire

10.21	A	Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC.

10.22	A	Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date.

10.23	A	Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to date.

10.24	A⁽¹⁾	Management Agreement dated May 20, 1991, between PIIC and MIA, as amended to date.


Exhibit No.		Description
10.24.1	G⁽¹⁾	Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996.

10.25	A⁽¹⁾	Management Agreement dated October 23, 1991, between PIC and MIA, as amended to date.

10.25.1	G⁽¹⁾	Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996.

10.26	A	General Mutual Release and Settlement of All Claims dated July 2, 1993, with the Liquidator of Integrity Insurance Company.

10.27	A	Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18, 1993.

10.28	B	Lease tracking portfolio assignment agreement.

10.29	D⁽¹⁾	James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and Joint and Last Survivor Flexible Premium Adjustable Life Insurance Policy Survivorship Life.

10.30	E	Allenbrook Software License Agreement, dated September 26, 1995.

10.31	E	Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A.

10.32	E	Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America.

10.33	F⁽¹⁾	Employee Stock Purchase Plan.

10.34	F⁽¹⁾	Cash Bonus Plan.

10.35	F⁽¹⁾	Executive Deferred Compensation Plan.

10.36	H⁽¹⁾	Directors Stock Purchase Plan

10.37	I	Lease Agreement dated May 8, 1997 with Bala Plaza, Inc.

10.38	I	Casualty Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Property Per Risk Excess of Loss Reinsurance Agreement effective January 1, 1997 and Property Facultative Excess of Loss Automatic Reinsurance Agreement effective January 1, 1997.

10.39	I	Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Second Casualty Excess of Loss Reinsurance Agreement, effective January 1, 1997.

10.40	J	Inspire Software License Agreement, dated December 31, 1998.

10.41	J	Lease Agreement dated July 6, 1998 with Bala Plaza, Inc.

10.42	K	Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc.

10.43	L	Philadelphia Insurance Companies Non Qualified Employee Stock Purchase Plan – incorporated by reference to Exhibit 4 to Registration Statement on Form S-8 (file no. 333-91216) filed with the Securities and Exchange Commission on June 26, 2002.

10.44	L	Philadelphia Consolidated Holding Corp. Employee’s Stock Option Plan (Amended and Restated Effective March 24, 2002) — incorporated by reference to Exhibit 4 to Registration Statement on Form S-8 (file no. 333-91218) filed with the Securities and Exchange Commission on June 26, 2002.

10.45	L	Philadelphia Insurance Companies Key Employee Deferred Compensation Plan — incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 (file no. 333-90534) filed with the Securities and Exchange Commission on June 14, 2002.

10.46	L⁽¹⁾	Employment Agreement with James J. Maguire, Jr. effective June 1, 2002.

10.47	L⁽¹⁾	Employment Agreement with Sean S. Sweeney effective June 1, 2002.

10.48	L⁽¹⁾	Employment Agreement with Craig P. Keller effective June 1, 2002.

10.49	M⁽¹⁾	Employment Agreement with James J. Maguire effective June 1, 2002.

10.50	M⁽¹⁾	Employment Agreement with Christopher J. Maguire effective June 1, 2002.

10.51	N	AQS, Inc. Software License Agreement, dated October 1, 2002.

10.52	N⁽¹⁾	Employment Agreement with P. Daniel Eldridge effective October 1, 2002.

10.53	O	Florida Hurricane Catastrophe Fund Reimbursement Contract Effective June 1, 2003.

10.54	P	Quota Share Reinsurance Contract with Swiss Reinsurance America Corporation effective May 15, 2003 covering policies within the Custom Harvest Program.

10.55	P	Excess of Loss Agreement of Reinsurance No. 9034 with General Reinsurance Corporation effective January 1, 2003.

10.56	P	Addendum No. 3 to the Casualty Excess of Loss Reinsurance Agreement No. TC988A, B with Swiss Reinsurance American Corporation effective January 1, 2003.

10.57	P	Property Excess of Loss Agreement of Reinsurance No. TP1600E with Swiss Reinsurance America Corporation effective January 1, 2003.

10.58	P	Casualty Excess of Loss Reinsurance Contract with American Re-Insurance Company, Converium Reinsurance (North America) Inc., Endurance Specialty Insurance Limited, Liberty Mutual Insurance Company effective January 1, 2003.


Exhibit No.		Description
10.59	Q	Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd. effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015555 and Philadelphia Indemnity Insurance Company Master Policy PHUB015555-01.

10.60	Q	Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd. effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015557 and Philadelphia Indemnity Insurance Company Master Policy PHUB015557-01.

10.61	Q	Non Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing Reinsurer (s) Executing the Interests and Liabilities Agreement (s) effective June 1, 2003.

10.62	Q	Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing Reinsurer (s) Executing the Interests and Liabilities Agreement (s) effective June 1, 2003.

10.63	Q	Excess Catastrophe Reinsurance Contract with Federal Insurance Company through Chubb Re, Inc. effective June 1, 2003.

10.64	Q	Whole Account Net Quota Share Reinsurance Contract with Federal Insurance Company through Chubb Re, Inc. and Swiss Reinsurance America Corporation effective April 1, 2003.

11	R	Statement regarding computation of earnings per share.

21	Q	List of Subsidiaries of the Registrant.

23	R	Consent of PricewaterhouseCoopers LLP.

24	A	Power of Attorney

31.1	R	Certification of the Company’s chief executive officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 dated August 19, 2004.

31.2	R	Certification of the Company’s chief financial officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 dated August 19, 2004.

32.1	R	Certification of the Company’s chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated August 19, 2004.

32.2	R	Certification of the Company’s chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated August 19, 2004.

99.1	R	Report of Independent Registered Public Accounting Firm of PricewaterhouseCoopers LLP on Financial Statement Schedules.


A		Incorporated by reference to the Exhibit filed with the Registrant’s Form S-1 Registration Statement under the Securities Act of 1933 (Registration No. 33-65958).

B		Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference.

C		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated by reference.

D		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated by reference.

E		Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference.

F		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated by reference.

G		Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference.

H		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference.

I		Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.

J		Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.

K		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999.

L		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 and incorporated by reference.

M		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 and incorporated by reference.

N		Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

O		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 and incorporated by reference.


P		Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 and incorporated by reference.

Q		Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

R		Filed herewith.

⁽¹⁾ Compensatory Plan or Arrangement, or Management Contract.

(b) Reports on Form 8-K:

The Company filed or furnished the following reports on Form 8-K during the quarterly period ended December 31, 2003:


Date of Report		Item Reported
October 23, 2003		Clarification of statement made during October 23, 2003 quarterly earnings conference call (filed Form 8-K).

October 23, 2003		Third quarter results September 30, 2003 and Regulation FD disclosure (furnished Form 8-K).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

		By: Craig P. Keller

		Craig P. Keller
		Executive Vice President,
		Secretary, Treasurer & CFO
		August 19, 2004

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule I — Summary of Investments — Other than Investments in Related Parties
As of December 31, 2003
(Dollars in Thousands)


COLUMN A		COLUMN B	COLUMN C		COLUMN D
			Estimated		Amount at which
			Market		shown in the
Type of Investment	Cost *		Value		Balance Sheet
Fixed Maturities:
Bonds:
United States Government and Government Agencies and Authorities	$	210,640	$	214,447	$	214,447
States, Municipalities and Political Subdivisions		476,762		488,976		488,976
Public Utilities		26,747		27,461		27,461
All Other Corporate Bonds		349,207		347,511		347,511
Redeemable Preferred Stock		3,167		3,299		3,299

Total Fixed Maturities		1,066,523		1,081,694		1,081,694

Equity Securities:
Common Stocks:
Public Utilities		217		276		276
Banks, Trust and Insurance Companies		20,589		23,749		23,749
Industrial, Miscellaneous and all other		55,854		63,060		63,060
Non-redeemable Preferred Stocks		3,153		3,273		3,273

Total Equity Securities		79,813		90,358		90,358

Total Investments	$	1,146,336	$	1,172,052	$	1,172,052

* Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. All amounts are shown net of impairment losses.

S-1

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(In Thousands, Except Share Data)


	As of December 31,
	2003 (Restated)			2002
ASSETS
Cash and Cash Equivalents	$	125		$	124
Equity in and Advances to Unconsolidated Subsidiaries (a)		547,229			479,560
Other Assets		1			1

Total Assets	$	547,355		$	479,685

LIABILITIES AND SHAREHOLDERS’ EQUITY
Income Taxes Payable	$	1,282		$	1,247
Other Liabilities		427			615

Total Liabilities		1,709			1,862

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, 22,007,552 and 21,868,877 Shares Issued and Outstanding		281,088			276,945
Notes Receivable from Shareholders		(5,444	)		(6,407	)
Accumulated Other Comprehensive Income		16,715			16,185
Retained Earnings		253,287			191,100

		545,646			477,823

Total Liabilities and Shareholders’ Equity	$	547,355		$	479,685

(a) This item has been eliminated in the Company’s Consolidated Financial Statements.

See Notes to Consolidated Financial Statements included in Item 8, pages 42-64.

S-2

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Operations
(In Thousands)


	For the Years Ended December 31,
	2003 (Restated)			2002 (Restated)			2001 (Restated)
Revenue:
Dividends from Subsidiaries ^(a)	$	61,348		$	27,804		$	21,074

Total Revenue		61,348			27,804			21,074

Other Expenses		778			1,062			1,248

Total Expenses		778			1,062			1,248

Minority Interest: Distributions on Company Mandatorily Redeemable Preferred Securities of Subsidiary Trust		—			—			2,749

Income, Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries		60,570			26,742			17,077
Income Tax Benefit		(272	)		(372	)		(1,399	)

Income, Before Equity in Earnings of Unconsolidated Subsidiaries		60,842			27,114			18,476
Equity in Earnings of Unconsolidated Subsidiaries		1,345			6,639			14,335

Net Income	$	62,187		$	33,753		$	32,811

(a) This item has been eliminated in the Company’s Consolidated Financial Statements.

See Notes to Consolidated Financial Statements included in Item 8, pages 42-64.

S-3

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Cash Flows
(In Thousands)


	For the Years Ended December 31,
	2003 (Restated)			2002 (Restated)			2001 (Restated)
Cash Flows From Operating Activities:
Net Income	$	62,187		$	33,753		$	32,811
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Equity in Earnings of Unconsolidated Subsidiaries		(1,345	)		(6,639	)		(14,335	)
Change in Other Liabilities		(188	)		39			(611	)
Change in Other Assets		—			—			3
Change in Income Taxes Payable		35			1,936			(20,911	)
Tax Benefit from Exercise of Employee Stock Options		889			1,251			25,799

Net Cash Provided by Operating Activities		61,578			30,340			22,756

Cash Flows Used by Investing Activities:
Net Transfers to Subsidiaries ^(a)		(65,794	)		(34,367	)		(119,679	)

Net Cash Used by Investing Activities		(65,794	)		(34,367	)		(119,679	)

Cash Flows From Financing Activities:
Net Proceeds From Public Offering of Common Stock		—			—			114,518
Repayments on Loans Payable		—			—			(22,000	)
Proceeds from Exercise of Employee Stock Options		2,057			864			3,041
Proceeds from Collection of Notes Receivable		2,028			983			1,072
Proceeds from Shares Issued Pursuant to Stock Purchase Plans		432			4,327			46
Cost of Common Stock Repurchased		(300	)		(2,023	)		—

Net Cash Provided by Financing Activities		4,217			4,151			96,677

Net Increase (Decrease) in Cash and Equivalents		1			124			(246	)
Cash and Cash Equivalents at Beginning of Year		124			—			246

Cash and Cash Equivalents at End of Year	$	125		$	124		$	—

Cash Dividends Received From Unconsolidated Subsidiaries	$	61,348		$	27,804		$	21,074

Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for Notes Receivable	$	1,065		$	4,017		$	2,158

(a) This item has been eliminated in the Company’s Consolidated Financial Statements.

See Notes to Consolidated Financial Statements included in Item 8, pages 42-64.

S-4

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule III – Supplementary Insurance Information
As of and For the Year Ended December 31, 2003, 2002 and 2001
(In Thousands)


COLUMN A	COLUMN B		COLUMN C		COLUMN D		COLUMN E	COLUMN F
			Future Policy
			Benefits,				Other Policy
	Deferred Policy		Losses, Claims				Claims and
	Acquisition		and Loss		Unearned		Benefits	Premium
Segment	Costs		Expenses		Premiums		Payable	Revenue
2003 (Restated):
Commercial Lines	$	—	$	477,483	$	309,596		$	431,535
Specialty Lines		—		136,000		71,743			108,809
Personal Lines		—		13,603		41,250			34,174
Corporate		56,288		—		—			—

Total	$	56,288	$	627,086	$	422,589		$	574,518

2002 (Restated):
Commercial Lines	$	—	$	337,791	$	214,021		$	297,635
Specialty Lines		—		96,837		55,251			85,030
Personal Lines		—		10,920		36,821			35,057
Corporate		61,272		—		—			—

Total	$	61,272	$	445,548	$	306,093		$	417,722

2001 (Restated):
Commercial Lines	$	—	$	212,134	$	124,522		$	192,099
Specialty Lines		—		82,735		39,725			68,956
Personal Lines		—		7,864		33,592			38,502
Corporate		41,526		—		—			—

Total	$	41,526	$	302,733	$	197,839		$	299,557

[Additional columns below]

[Continued from above table, first column(s) repeated]


COLUMN A	COLUMN G		COLUMN H		COLUMN I		COLUMN J		COLUMN K
			Benefits,		Amortization of
			Claims, Losses,		Deferred Policy
	Net Investment		and Settlement		Acquisition		Other Operating		Premiums
Segment	Income		Expenses		Costs		Expenses		Written
2003 (Restated):
Commercial Lines	$	—	$	273,487	$	—	$	—	$	463,853
Specialty Lines		—		65,075		—		—		107,911
Personal Lines		—		20,615		—		—		30,536
Corporate		38,806		—		109,888		53,024		—

Total	$	38,806	$	359,177	$	109,888	$	53,024	$	602,300

2002 (Restated):
Commercial Lines	$	—	$	202,604	$	—	$	—	$	380,991
Specialty Lines		—		43,310		—		—		101,623
Personal Lines		—		21,519		—		—		37,093
Corporate		37,516		—		108,097		21,821		—

Total	$	37,516	$	267,433	$	108,097	$	21,821	$	519,707

2001 (Restated):
Commercial Lines	$	—	$	117,429	$	—	$	—	$	225,964
Specialty Lines		—		42,840		—		—		70,572
Personal Lines		—		19,386		—		—		40,745
Corporate		32,426		—		80,239		16,781		—

Total	$	32,426	$	179,655	$	80,239	$	16,781	$	337,281

S-5

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule IV — Reinsurance
Earned Premiums
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)


COLUMN A	COLUMN B		COLUMN C		COLUMN D		COLUMN E		COLUMN F
			Ceded to		Assumed				Percentage of
	Gross		Other		from Other				Amount
	Amount		Companies		Companies		Net Amount		Assumed to Net
2003 (Restated)
Property and Casualty Insurance	$	784,445	$	214,980	$	5,053	$	574,518		0.9	%

2002 (Restated)
Property and Casualty Insurance	$	550,443	$	137,763	$	5,042	$	417,722		1.2	%

2001 (Restated)
Property and Casualty Insurance	$	409,814	$	121,506	$	11,249	$	299,557		3.8	%

S-6

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule VI — Supplemental Information Concerning Property — Casualty Insurance Operations
As of and For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)


			Reserve for
			Unpaid
	Deferred		Claims and
	Policy		Claim		Discount if				Net		Net
Affiliation with	Acquisition		Adjustment		any deducted		Unearned		Earned		Investment
Registrant	Costs		Expenses		in Column C		Premiums		Premiums		Income
COLUMN A	COLUMN B		COLUMN C		COLUMN D		COLUMN E		COLUMN F		COLUMN G
Consolidated Property — Casualty Entities
December 31, 2003 (Restated)	$	56,288	$	627,086	$	0	$	422,589	$	574,517	$	38,806
December 31, 2002 (Restated)	$	61,272	$	445,548	$	0	$	306,093	$	417,722	$	37,516
December 31, 2001 (Restated)	$	41,526	$	302,733	$	0	$	197,839	$	299,557	$	32,426

[Additional columns below]

[Continued from above table, first column(s) repeated]


	Claims and Claims Adjustment
	Expenses Incurred Related to
							Paid Claims
	(1)		(2)		Amortization of		and Claim
Affiliation with	Current		Prior		deferred policy		Adjustment		Net Written
Registrant	Year		Year		acquisition costs		Expenses		Premiums
COLUMN A	COLUMN H				COLUMN I		COLUMN J		COLUMN K
Consolidated Property — Casualty Entities
December 31, 2003 (Restated)	$	314,609	$	44,568	$	109,888	$	237,393	$	602,300
December 31, 2002 (Restated)	$	239,834	$	27,599	$	108,097	$	157,856	$	519,707
December 31, 2001 (Restated)	$	166,220	$	13,435	$	80,239	$	124,985	$	337,281

S-7

	•		Commercial Lines Underwriting Group, which has underwriting responsibility for the commercial multi-peril package, commercial automobile and specialty property and inland marine insurance products;

	•		Specialty Lines Underwriting Group, which has underwriting responsibility for the professional liability and directors’ and officers’ liability insurance products; and

	•		Personal Lines Underwriting Group, which has underwriting responsibility for personal property and casualty insurance products for the manufactured housing and homeowners’ markets, principally in Florida.

	•		non-profit and social service organizations;

	•		health and fitness organizations;

	•		homeowners’ associations;

	•		condominium associations;

	•		specialty schools;

	•		boat dealerships;

	•		mobile home parks;

	•		day care facilities; and

	•		mental health facilities.

	•		rental car companies

	•		leasing companies

	•		banks

	•		credit unions

	•		shopping centers

	•		business parks

	•		medical facilities

	•		hotels and motels

	•		new construction (inland marine)

	•		lawyers

	•		accountants

	•		miscellaneous (marketing, management, computer, marriage/family counseling) consultants

	•		excess liability

	•		non-profit (501(c)(3) companies)

	•		for-profit public and private companies.

	•		Adverse trends further deteriorating in both claims frequency and severity for leases expiring in 2003. During the second quarter of 2003, the Company engaged a consulting firm to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the study and subsequent evaluation by the Company the Company changed its assumptions relating to future frequency and severity of losses, and increased the estimate for unpaid loss and loss adjustment expenses by $33.0 million. 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 uncertain economic conditions.

	•		The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank (“Firstar”) for residual value insurance policies purchased by Firstar. Under the terms of the agreement, the Company paid Firstar $27.5 million in satisfaction of any and all claims made or which could have been made by Firstar under the residual value policies. The Company increased the gross and net reserves for loss and loss adjustment expenses from $21.7 million to $27.5 million pursuant to this agreement.

(1)		Unpaid loss and loss adjustment expenses differ from the amounts reported in the Consolidated Financial Statements because of the inclusion therein of reinsurance receivables of $145,591, $85,837, $52,599, $42,030, $26,710, $16,120, $13,502, $10,919, $9,440, $5,580, and $5,539 at December 31, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994, and 1993, respectively.

(2)		1998 Unpaid Loss and Loss Adjustment Expenses, as stated, adjusted to include $1,207 unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date.

(3)		The Company maintains its historical loss records net of reinsurance, and therefore is unable to conform the presentation of this table to the financial statements.

	•		issuance, renewal, suspension and revocation of licenses to engage in the insurance business;

	•		standards of solvency, including risk-based capital measurements;

	•		restrictions on the nature, quality and concentration of investments;

	•		restrictions on the types of terms that the Company can include in the insurance policies it offers;

	•		certain required methods of accounting;

	•		maintenance of reserves for unearned premiums, losses and other purposes; and

	•		potential assessments for the provision of funds necessary for the settlement of covered claims under certain insurance policies provided by impaired, insolvent or failed insurance companies.

	•		the enactment of the Gramm-Leach-Bliley Act of 1999 (which permits financial services companies such as banks and brokerage firms to engage in the insurance business), which could result in increased competition from new entrants to the Company’s markets;

	•		the formation of new insurers and an influx of new capital in the marketplace as existing companies attempt to expand their business as a result of better pricing and/or terms;

	•		programs in which state-sponsored entities provide property insurance in catastrophe-prone areas;

	•		changing practices caused by the Internet, which have led to greater competition in the insurance business.

	•		Fair values

			The carrying amount for the Company’s investments approximates their estimated fair value. The Company measures the fair value of investments based upon quoted market prices or by obtaining quotes from third party broker-dealers. Material assumptions and factors utilized by such broker-dealers in pricing these securities include: future cash flows, constant default rates, recovery rates and any market clearing activity that may have occurred since the prior month-end pricing period. The Company’s total investments include $13.7 million in securities for which there is no readily available independent market price.

	•		Other than temporary impairment, excluding interests in securitized assets

			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, 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

	•		Impairment recognition for investments in securitized assets

			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. 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 (see Investments).

•		Liability for Unpaid Loss and Loss Adjustment Expenses:

		The liability for unpaid loss and loss adjustment expenses ($627.1 million and $445.6 million as of December 31, 2003 and 2002, respectively) reflects the Company’s best estimate for future amounts needed to pay losses and related settlement expenses with respect to insured events. Based upon past experience this estimate has been redundant by as much as 18.5% and deficient by as much as 41.4%. The process of establishing the liability for property and casualty unpaid loss and loss adjustment expenses is a complex and imprecise process, requiring the use of informed estimates and judgments. This liability includes an amount determined on the basis of claim adjusters’ evaluations with respect to insured events that have occurred and an amount for losses incurred that have not been reported to the Company. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid loss and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as legal, social, and economic developments. The methods of making such estimates and establishing the resulting liabilities are regularly reviewed and updated, and any adjustments resulting therefrom are made in the accounting period in which the adjustment arose.

		During 2003 the Company increased the liability for unpaid loss and loss adjustment expenses by $51.7 million ($44.6 million net of reinsurance recoverables), primarily for accident years 1997 through 2001. This increase in the liability for unpaid loss and loss adjustment expense, net of reinsurance recoverables, was primarily due to the following:

		The method for determining reinsurance recoverables and estimated recoverability are regularly reviewed and adjustments resulting from this review are included in earnings in the period the adjustment arose.

•		Deferred Acquisition Costs:

		Policy acquisition costs ($56.3 million and $61.3 million as of December 31, 2003 and 2002, respectively) which include commissions (net of ceding commissions), premium taxes, fees, and certain other costs of underwriting policies, are deferred and amortized over the same period in which the related premiums are earned. Deferred acquisition costs are limited to the estimated amounts recoverable after providing for losses and expenses that are expected to be incurred, based upon historical and current experience. Anticipated investment income is considered in determining whether a premium deficiency exists. The methods of making such estimates and establishing the deferred costs are continually reviewed by the Company, and any adjustments therefrom are made in the accounting period in which the adjustment arose.

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

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

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

•		In-force policy counts have increased 22.8% and 39.7% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts were approximately the same for the personal lines segment as a result of restricting new business and not renewing certain business to manage overall property exposures and the related catastrophe loss considerations. Firming prices in the property and casualty industry resulted in weighted average rate increases on renewal business approximating 4.3%, 10.2%, and 9.4% for the commercial, specialty and personal lines segments, respectively.

		earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium reduced by the reinsurers’ expense allowance and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. In addition, the agreement provides that a profit commission will be paid to the Company, upon commutation equal to the positive balance in the Funds Held Payable to Reinsurers account. During the year ended December 31, 2003, the Company ceded $194.0 million of written premium, which included unearned premium reserves of $63.6 million at April 1, 2003.

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

•		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 continued consolidation of certain competitor property and casualty insurance companies has led to the displacement of certain of their independent agency relationships. This consolidation continues to result in new agency relationship opportunities for the Company, which have resulted in additional prospects 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 16.0%, 26.0%, and 8.0% for the commercial, specialty and the personal lines segments, respectively. Additionally, in force policy counts have increased 43.0% and 13.0% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts have decreased approximately 7.0% 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.

•		Specialty Lines Segment — The Company’s decision not to renew approximately 2,000 policies in the professional liability product lines due to inadequate pricing levels being experienced as a result of market conditions and/or an unacceptable underwriting risk profile.

•		Personal Lines Segment — The Company’s decision to restrict new business and not renew approximately 9,000 policies in designated areas of Florida in the Company’s manufactured housing and homeowners product lines, based on an evaluation of property exposures and the related catastrophe loss considerations.

•		the Company’s fixed income portfolio is overweighted in the spread sectors, versus the Index, to capture the incremental spread available in non-Treasury securities consistent with its investment objective of achieving the highest after-tax risk adjusted yields;

•		the Company maintains a higher level of credit quality in the portfolio versus the Index; and

•		the Company maintains a shorter portfolio duration versus the Index.

•		A lower weighted average effective commission rate incurred on the commercial and specialty lines segment products of approximately 12.7% for the year ended December 31, 2002 compared to a weighted average effective commission rate of approximately 13.9% for the year ended December 31, 2001. The Company has been able to incur a relatively lower commission rate on business produced by independent agents in the current market environment.

•		Incremental written premium growth without a corresponding incremental increase in operating costs.

⁽¹⁾		Unpaid loss and loss adjustment expenses are not included in the above table as there is no related contractual maturity for such obligations.

⁽²⁾		Represents 12 month collateralized borrowings from the Federal Home Loan Bank of Pittsburgh.

⁽³⁾		Represents open commitments under certain limited partnership and information technology development agreements.

•		Under SAP, investments in debt securities are carried at amortized cost, while under GAAP, investments in debt securities classified as Available for Sale are carried at fair value.

•		Under SAP, policy acquisition costs, such as commissions, premium taxes, fees, and other costs of underwriting policies are charged to current operations as incurred, while under GAAP, such costs are deferred and amortized on a pro rata basis over the period covered by the policy.

•		Under SAP, certain assets, designated as “Non-admitted Assets” (such as prepaid expenses) are charged against surplus.

•		Under SAP, net deferred income tax assets are admitted following the application of certain criteria, with the resulting admitted deferred tax amount being credited directly to policyholder surplus.

•		Under SAP, premiums receivable are considered nonadmitted if determined to be uncollected based upon aging criteria as defined in SAP.

•		Under SAP, the costs and related recoverables for guaranty funds and other assessments are recorded based on management’s estimate of the ultimate liability and related recoverable settlement, while under GAAP, such costs are accrued when the liability is probable and reasonably estimatable and the related recoverable amount is based on future premium collections or policy surcharges from in-force policies.

(1)		Original cost adjusted for amortization of premiums and accretion of discounts. All amounts are shown net of impairment losses.

(2)		Estimated market values have been based on quoted market prices or quotes from third party broker-dealers.

	(1)		Weighted Average.

	(2)		The Company uses the Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant.

(1)		Net Realized Investment (Gain) Loss for the three months ended March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003 includes non-cash realized losses of $1.5 million, $1.7 million, $0.4 million and $6.7 million, respectively, as a result of impairment evaluations.

(2)		The three months ended June 30, September 30, and December 31, 2003 have been restated, as described in Note 2, to accrue profit commissions under two reinsurance contracts. The impact of this restatement on the previously reported results of operations for the three months ended June 30, September 30, and December 31, 2003 was to increase (decrease) net earned premiums by $1.9 million, $4.0 million and ($2.9) million, respectively, and net income by $1.2 million, $2.6 million, and ($1.9) million, respectively.

(3)		The three months ended June 30, 2002 has been restated, as described in Note 2, for a profit commission under a 2001 accident year aggregate stop loss reinsurance contract. The impact of this restatement on the previously reported results of operations for the three months ended June 30, 2002 was to decrease net earned premiums by $3.5 million and net income by $2.3 million.

1.		Formed a new reinsurance contract subcommittee with senior members from appropriate departments within the Company to review, discuss and make appropriate conclusions with respect to the documentation requirements and the accounting for the Company’s reinsurance contracts;

2.		Will, as promptly as practicable, add an additional accounting professional to its staff whose responsibility will be to spend substantially all of his or her working time researching and documenting technical accounting matters (including reinsurance matters), as well as supporting other members of the Company’s accounting staff and the reinsurance contract subcommittee.