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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


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

For the Fiscal Year Ended December 31, 2005


o		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		(IRS Employer Identification No )
incorporation or organization)

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 is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).

YES: R NO: £

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

YES: £ NO: R

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: R NO: £

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer: R Accelerated Filer: £ Non-accelerated Filer: £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

YES: £ NO: R

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 6, 2006 as reported on the NASDAQ National Market System, was $1,187,545,580. 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 6, 2006, Registrant had outstanding 69,777,852 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

(1)

Portions of the definitive Proxy Statement for Registrant’s 2006 Annual Meeting of Shareholders to be held April 26, 2006 are incorporated by reference in Part III.

TABLE OF CONTENTS


PART I
	Item 1. BUSINESS
	Item 1A. RISK FACTORS
	Item 1B. UNRESOLVED STAFF COMMENTS
	Item 2. PROPERTIES
	Item 3. LEGAL PROCEEDINGS
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	Item 6. SELECTED FINANCIAL DATA
	Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	Item 9A. CONTROLS AND PROCEDURES
	Item 9B. OTHER INFORMATION
PART III
	Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	Item 11. EXECUTIVE COMPENSATION
	Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	Item 15. — EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
SIGNATURES
CASUALTY EXCESS OF LOSS
REINSTATEMENT PREMIUM PROTECTION
PROFESSIONAL LIABILITY INSURANCE QUOTA SHARE CONTRACT
LIST OF SUBSIDIARIES OF THE REGISTRANT
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CERTIFICATION
CERTIFICATION
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

PART I

Item 1. BUSINESS

GENERAL

As used in this Annual Report on Form 10-K, (i) “Philadelphia Insurance” refers to Philadelphia Consolidated Holding Corp., (ii) the “Company”, “we”, “us”, and “our” 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) “LAIS” refers to Liberty American Insurance Services, 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, LAIS and Premium Finance, are sometimes referred to herein collectively as “Liberty”.

The Company’s core strategy consists of three major principles:

	•		Adhering to an underwriting philosophy aimed at consistently generating underwriting profits through sound risk selection and pricing discipline.

	•		Distributing products through a “mixed” marketing platform, combining direct policyholder prospecting with an extensive network of independent agents and a subset of this network, known as “preferred agents”, with whom the Company has established special distribution arrangements.

	•		Seeking to create value-added coverage and service features not found in typical property and casualty policies that the Company believes differentiates and enhances the marketability and appeal of its products relative to its competitors.

During 2005, the Company continued its growth through adherence to its core principles of profitable underwriting, mixed marketing and specialization. 2005 gross written premiums increased 8.0% to $1,264.9 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, its A+ (“Superior”) A.M. Best Company rating (for PIIC and for PIC), differentiated policy forms and the introduction of a number of new products. 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 78.6%, which was substantially lower than the combined ratio of the property and casualty industry as a whole. The Company’s combined ratio is inclusive of $24.7 million in net catastrophe losses ($126.8 million gross catastrophe losses) it experienced from the four hurricanes which made landfall in Florida and the southern United States during 2005. During 2005 total assets increased to $2.9 billion, and shareholders’ equity increased to $816.5 million.

INDUSTRY TRENDS

The industry appears to have rebounded during 2004 and 2005 from the contraction of capacity caused by significant losses that resulted from the increased frequency of catastrophe events. The 2005 Florida and southern United States hurricanes, although significant, have not appeared to alter this trend. Industry loss ratios have improved to a level that has caused increased competition. Despite improved industry loss ratios, the current low interest rate environment limiting the investment income realized by insurance companies has mitigated the severity of price declines historically experienced by the industry in past transitions from hard markets to soft markets.

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. The Company targets markets and niches with specialized areas of demand, designing innovative policy features. The Company believes this approach allows it to compete on coverage and customized solutions, rather than just price. Insurance products are distributed through a diverse multi-channel delivery system centered around the Company’s production underwriting organization. A select group of 146 “preferred agents” and a broader

network of approximately 9,500 independent agents supplement the production underwriting organization, which consisted of 318 professionals located in 38 regional and field offices across the United States as of December 31, 2005.

The Company’s commercial products include commercial multi-peril package insurance targeting specialized niches, including, among others, non-profit organizations, sports and recreation centers, homeowners’ associations, condominium associations, private, vocational and specialty schools, mental health facilities 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 management liability products, as well as personal property and casualty products for the homeowners’ and manufactured housing markets.

The Company maintains detailed systems, records and databases that enable the 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 (independent agents and brokers) and customer base, operating through 13 regional offices and 25 field offices throughout the country, which report to the regional offices. These offices are staffed with marketers, field underwriters, 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 marketing and underwriting strategies to local conditions and build value-added relationships with its customers and producers.

The Company selects and targets industries and niches that require 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:

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

	•		The Specialty Lines Underwriting Group, which has underwriting responsibility for the professional liability and management liability insurance products; and

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

The following table sets forth, for the years ended December 31, 2005, 2004 and 2003, 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,
	2005					2004					2003
	Dollars		Percentage			Dollars		Percentage			Dollars		Percentage
						(dollars in thousands)
Commercial Lines	$	960,344		75.9	%	$	874,018		74.6	%	$	662,339		73.1	%
Specialty Lines		205,306		16.2			184,419		15.7			154,105		17.0
Personal Lines		99,265		7.9			112,880		9.7			89,549		9.9

Total	$	1,264,915		100.0	%	$	1,171,317		100.0	%	$	905,993		100.0	%

Commercial Lines:

Commercial Package: The Company has provided commercial multi-peril package policies to targeted niche markets for over 17 years. The primary customers for these policies include:

	•		non-profit organizations;

	•		social service agencies;

	•		sports and recreation centers;

	•		homeowners’ and condominium associations;

	•		private, vocational and specialty schools;

	•		religious organizations;

	•		camp operators;

	•		day care facilities;

	•		mental health facilities;

	•		amateur sports associations;

	•		bowling centers;

	•		golf clubs; and

	•		public entity.

The package policies provide a combination of comprehensive liability, property and automobile coverage with limits of 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; and property to targeted markets for over 40 years. The primary customers for these policies include:

	•		rental car companies;

	•		leasing companies;

	•		banks; and

	•		credit unions.

Specialty Property & Inland Marine: The Company has provided property and inland marine coverage to targeted markets for the past 6 years. The primary customers for these policies include:

	•		shopping centers;

	•		business parks;

	•		medical facilities;

	•		hotels and motels; and

	•		new commercial construction (inland marine).

Specialty Lines:

The Company has provided management liability (directors and officers (D&O) liability, employment practices liability, fiduciary liability, kidnap and ransom, work place violence and internet liability) and errors and omissions (professional) to targeted classes of business for approximately 15 years. The professional and excess liability products provide errors and omissions coverage primarily for:

	•		lawyers;

	•		accountants;

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

Management and excess liability products are offered to:

	•		non-profit (501(c)(3) companies); and

	•		for-profit smaller 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 homeowners’ and manufactured

housing property and casualty business in Florida. Liberty also produces and services federal flood insurance under the National Flood Insurance Program for both personal and commercial policyholders. Liberty began producing and servicing a personal umbrella policy near the end of 2005.

Homeowners type products are offered to:

	•		single family homes, primarily built after 1995;

	•		mobile homes, primarily built after 1995;

	•		condominiums; and

	•		rental dwellings.

Geographic Distribution

The following table provides the geographic distribution of direct earned premiums for all reportable business segments of the Company for the year ended December 31, 2005. No other state accounted for more than 2% of total direct earned premiums for the year ended December 31, 2005.

(Dollars in thousands)


State	Direct Earned Premiums		Percent of Total
Florida	$	186,043		16.0	%
California		136,051		11.7
New York		119,049		10.3
Pennsylvania		60,993		5.3
Texas		59,786		5.1
New Jersey		51,408		4.4
Massachusetts		50,646		4.4
Illinois		41,830		3.6
Ohio		35,357		3.0
Minnesota		24,972		2.2
Michigan		24,805		2.1
Missouri		23,312		2.0
Other		347,032		29.9

Total Direct Earned Premiums	$	1,161,284		100.0	%

See Note 19 to the Company’s financial statements included with this Form 10-K 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.

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 in promptly recognizing and responding to price deterioration. When necessary, the Company re-underwrites, sharply curtails or discontinues 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 82 home office and 62 regional office underwriters who are supported by underwriting assistants, raters, and other policy administration personnel. The Commercial Lines home office underwriting unit is responsible for underwriting, auditing, servicing renewal business, and authorizing quotes for new business which are in excess of the regional office underwriters limits. 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 the Senior Vice President of Commercial Lines who reports directly to the Chief Underwriting Officer. Overall management responsibility for 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 organizational structure.

The Specialty Lines Underwriting Group has the underwriting responsibility for the errors and omissions and management liability products. The Group consists of 27 home office underwriters and underwriter trainees and 38 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 a Vice President who reports directly to the Chief Underwriting Officer.

The Personal Lines Underwriting Group is located in Pinellas Park, Florida. The underwriting staff consists of four professionals and several support positions 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 selectively inspects the properties for its preferred homeowners program and manufactured homes on private property product.

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 and managing capacity constraints as described below:

The Company’s casualty excess of loss reinsurance agreement (“Excess Treaty”) provides that the Company bears: the first $1.0 million primary layer of liability on each occurrence and 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. Casualty, fidelity, professional liability and fiduciary liability risks in excess of $1.0 million up to $11.0 million are reinsured under the Excess Treaty. As of January 2006, the reinsurers participating on the Excess Treaty are ACE Property and Casualty Insurance Co., Allied World Assurance Company Ltd., Everest Reinsurance Company, GE Reinsurance Corporation and Liberty Mutual Insurance Company, with a pro rata participation of 22%, 20%, 19%, 20% and 19%, respectively. Facultative reinsurance (reinsurance which is provided on an individual risk basis) is placed for each casualty risk in excess of $11.0 million.

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 losses up to $50.0 million on each risk. General Reinsurance Corporation provides limits of $8.0 million in excess of $2.0 million. Reinsurers that are rated at least “A” (Excellent) by A.M. Best Company provide limits of $40.0 million in excess of $10.0 million. In addition, the Company has automatic facultative excess of loss reinsurance with General Reinsurance Corporation for each property loss in excess of $50.0 million up to $100.0 million. To mitigate potential exposures to losses arising from terrorist acts, the Company has purchased per risk reinsurance coverage for terrorism with a $48.0 million aggregate policy limit for 2005. Under this reinsurance coverage, the Company bears the first $2.0 million layer of loss on each risk and coverage.

The Company purchases property catastrophe reinsurance covering both its commercial and personal lines catastrophe losses. The Company’s primary catastrophe reinsurance program provides coverage for a one year period with a June 1 renewal date. For its personal lines catastrophe losses, the Company’s reinsurance coverage is approximately $288.1 million in excess of the Company’s $3.5 million per occurrence retention. Of this total amount, the Florida Hurricane Catastrophe Fund (the “FHCF”) provides on an aggregate basis for Mobile USA Insurance Company and Liberty American Insurance Company 90% coverage for approximately $118.4 million in excess $31.6 million. The FHCF arrangement inures to the benefit of the Company’s open-market catastrophe program. The coverage provided by the open-market catastrophe program (large reinsurers that are rated at least “A-” (Excellent) by

A.M. Best Company) includes one mandatory reinstatement, but the FHCF coverage does not reinstate. Since the FHCF coverage cannot be reinstated, the Company’s open-market program is structured such that catastrophe reinsurance coverage excess of the FHCF coverage will “drop down” and fill in any portion of the FHCF coverage which has been utilized. Based upon the various modeling methods utilized by the Company to estimate its probable maximum loss for its personal lines business, the 100 year storm event is estimated at $235.3 million, and the 250 year storm event is estimated at $358.3 million. These loss estimates were calculated using the personal lines in-force exposures as of September 30, 2005.

For its commercial lines catastrophe losses, the Company’s catastrophe reinsurance coverage is $95.0 million in excess of the Company’s $5.0 million per occurrence retention. Based upon the various modeling methods utilized by the Company to estimate its probable maximum loss for its commercial lines business, the 100 year storm event is estimated at $79.9 million and the 250 year storm event is estimated at $119.1 million. These loss estimates were calculated using the commercial lines inforce exposures as of December 31, 2004.

The Company has purchased reinstatement premium protection reinsurance contracts, effective June 1, 2005, which pay 100% of the reinstatement premium for the one mandatory reinstatement which the Company becomes liable to pay as a result of loss occurrences exceeding $7.0 million and $5.0 million for its personal and commercial lines open-market catastrophe reinsurance programs, respectively.

The Company also has an excess casualty reinsurance agreement which provides an additional $18.0 million of coverage excess of a $2.0 million Company retention for protection from exposures such as extra-contractual obligations and judgments in excess of policy limits. 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 Company. Second, 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 $50.0 million. Although the Company purchases reinsurance to limit its loss exposure by transferring certain large risks to its reinsurers, reinsurance does not 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.

The following table sets forth the ten largest reinsurers in terms of reinsurance receivables, net of collateral the Company is holding from such reinsurers, as of December 31, 2005:

(In thousands)


	Unsecured
	Reinsurance
Reinsurer	Receivables			% of Total			AM Best Rating
National Flood Insurance Program	$	43,850			15.1	%	Not Rated-Voluntary Pool
Liberty Mutual Insurance Company		38,177			13.2	%	A
Florida Hurricane Catastrophe Fund		27,347			9.4	%	Not Rated-Mandatory Pool
American Re-Insurance Company		23,418			8.1	%	A
Swiss Reinsurance America Corporation		20,801			7.2	%	A+
ACE Property & Casualty Insurance Company		20,503			7.1	%	A+
Converium Reinsurance (NA) Inc.		18,765			6.5	%	B-
General Reinsurance Corporation		17,804			6.1	%	A++
Lloyds of London		12,946			4.5	%	A
CUMIS Insurance Society Inc.		8,834			3.0	%	A
All Other Reinsurers		57,275			19.8	%	—

Total Unsecured Reinsurance Receivables	$	289,720	(1)		100.0	%


(1)		This amount differs by $106.5 million from the reinsurance receivables of $396.2 million as reported in the consolidated financial statements as of December 31, 2005 due to collateral held by the Company from its reinsurers reflected in this table.

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 production underwriting organization, an extensive network of approximately 9,500 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 318 professionals located in 38 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 9,500 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, not only in stable market conditions.

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 146 preferred agents at year-end 2005. 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, eflyers 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 TouchSM” 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 agents 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 case reserves are being set at appropriate levels.

The Company’s experienced staff of claims management professionals is 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 changes 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. The Special Investigations Unit works closely with a variety of industry contacts, including attorneys and investigators 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’ internal actuary provides the Companies with an annual Statement of Actuarial Opinion for the statutory filings with regulators.

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


	As of and For the Years Ended December 31,
(In Thousands)	2005			2004		2003
Unpaid loss and loss adjustment expenses at beginning of year	$	996,667		$	627,086	$	445,548
Less: reinsurance receivables		324,948			145,591		85,837

Net unpaid loss and loss adjustment expenses at beginning of year		671,719			481,495		359,711

Provision for losses and loss adjustment expenses for current year claims		533,906			440,989		314,609
Increase (Decrease) in estimated ultimate losses and loss adjustment expenses for prior year claims		(29,900	)		35,126		44,568

Total incurred losses and loss adjustment expenses		504,006			476,115		359,177

Loss and loss adjustment expense payments for claims attributable to:
Current year		110,496			107,129		69,905
Prior years (1)		124,234			178,762		167,488

Total payments		234,730			285,891		237,393

Net unpaid loss and loss adjustment expenses at end of year		940,995			671,719		481,495
Plus: reinsurance receivables		304,768			324,948		145,591

Unpaid loss and loss adjustment expenses at end of year	$	1,245,763		$	996,667	$	627,086


(1)		During the year ended December 31, 2005, net loss and loss adjustment expense payments for claims attributable to prior years are lower by $64.3 million than they otherwise would have been due to the Company’s commutation of its 2003 Whole Account Net Quota Share Reinsurance Agreement (See Note 10 to the Company’s Consolidated Financial Statements included with this Form 10-K).

During 2005 the Company increased/(decreased) its estimated total net ultimate losses and loss adjustment expenses for prior accident years by the following amounts:

(In millions)


	Net Basis
	increase (decrease)
	Professional			Commercial			Commercial
	Liability			Package			Auto
Accident Year	Coverages			Coverages			Coverages			Other			Total
2004	$	(7.6	)	$	(12.7	)	$	(4.3	)	$	0.4		$	(24.2	)
2003	$	(2.4	)	$	3.5		$	(0.5	)	$	1.0		$	1.6
2002	$	(2.0	)	$	(0.6	)	$	(3.4	)	$	(1.0	)	$	(7.0	)
2001 & Prior	$	(0.7	)	$	1.9		$	(0.9	)	$	(0.6	)	$	(0.3	)

Calendar Year	$	(12.7	)	$	(7.9	)	$	(9.1	)	$	(0.2	)	$	(29.9	)

The changes in the net estimated total ultimate losses and loss adjustment expenses for prior accident years during 2005 were primarily attributable to the following:

	- -		For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower net loss estimates for: commercial package policies as a result of better than expected claim frequency and professional liability coverages due to better than expected case incurred development.

	- -		For accident year 2002, the decrease in estimated net unpaid loss and loss adjustment expenses and prior was principally due to decreased loss estimates across most commercial and specialty lines of business due to better than expected case incurred loss development.

During 2004, the Company increased its estimated total gross and net ultimate losses and loss adjustment expenses, primarily for accident years 1997 through 2002, and decreased its estimated total gross and net ultimate losses and loss adjustment expenses for accident year 2003. This increase in the liability for unpaid loss and loss adjustment expense, net of reinsurance recoverables, was primarily due to the following:

- -

The increase for accident years 1997 through 2002 is principally attributable to case reserve development above expectations primarily across various professional liability products in the specialty lines segment and general liability and commercial automobile coverages in the commercial lines segment. The decrease for accident year 2003 is principally attributable to better than expected claim frequency, primarily for general liability and commercial automobile coverages in the commercial lines segment.

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. 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 and 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 uncertain economic conditions.

•

The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank (“Firstar”) relating to residual value insurance policies purchased by Firstar from the Company. 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 for such policies 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 was 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 1995 through 2005. 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 may change 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)
	1995			1996			1997			1998			1999			2000			2001			2002			2003			2004			2005
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, AS STATED	$	68,246		$	85,723		$	108,928		$	136,237		$	161,353		$	195,464		$	250,134		$	359,711		$	481,496		$	671,719		$	940,995

Cumulative Paid as of:
1 year later		15,214			22,292			26,870			43,769			60,922			70,757			99,325			167,489			178,762			124,234
2 years later		31,410			38,848			56,488			84,048			109,092			131,649			211,851			291,325			258,186
3 years later		40,637			52,108			80,206			115,900			144,435			213,286			277,783			356,743
4 years later		47,994			63,738			95,047			131,062			201,779			247,298			314,042
5 years later		51,806			69,116			99,755			151,753			217,677			267,966
6 years later		53,198			70,779			106,915			158,158			225,737
7 years later		53,701			73,939			110,194			160,499
8 years later		55,541			74,496			111,102
9 years later		55,517			75,156
10 years later		55,638

Unpaid Loss and Loss Adjustment Expenses re-estimated as of End of Year:
1 year later		67,281			84,007			105,758			135,983			163,896			208,899			277,733			404,279			516,622			641,819
2 years later		66,061			81,503			103,513			138,245			177,782			232,582			334,802			473,680			510,916
3 years later		63,872			76,348			104,712			146,679			196,735			274,166			361,052			466,413
4 years later		59,085			73,992			109,061			151,077			228,082			283,619			360,791
5 years later		56,673			75,672			107,796			163,657			230,391			285,563
6 years later		55,861			74,645			110,845			164,272			233,206
7 years later		55,439			75,272			111,582			163,416
8 years later		55,606			74,982			111,827
9 years later		55,552			75,221
10 years later		55,718

Cumulative Redundancy (Deficiency):
Dollars	$	12,528		$	10,502		$	(2,899	)	$	(27,179	)	$	(71,853	)	$	(90,099	)	$	(110,657	)	$	(106,702	)	$	(29,420	)	$	29,900
Percentage		18.4	%		12.3	%		(2.7	)%		(20.0	)%		(44.5	)%		(46.1	)%		(44.2	)%		(29.7	%)		(6.1	%)		4.5	%


(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 $304,768, $324,948, $145,591, $85,837, $52,599, $42,030, $26,710, $16,120, $13,502, $10,919 and $9,440, at December 31, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996, and 1995, 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) above 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 profit and loss 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,
	2005			2004			2003			2002			2001
Loss Ratio		51.8	%		61.5	%		63.1	%		63.5	%		60.7	%
Expense Ratio		26.3	%		27.2	%		27.2	%		28.0	%		31.2	%

Combined Ratio		78.1	%		88.7	%		90.3	%		91.5	%		91.9	%

Industry Statutory Combined Ratio, after Policyholders’ Dividends		102.0	%		98.1	%		100.2	%		107.3	%		115.7	%

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


(1)		Source: A.M. Best Company “Review/Preview” January 2006 (Estimated 2005).

(2)		Source: A.M. Best Company “Review/Preview” January 2006

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 written 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,
	2005		2004		2003		2002		2001
	(Dollars in Thousands)
Net Written Premiums	$	1,107,460	$	919,152	$	601,253	$	523,962	$	333,817
Surplus as Regards Policyholders	$	691,038	$	503,657	$	415,900	$	312,626	$	280,960
Premium to Surplus Ratio		1.6 to 1.0		1.8 to 1.0		1.5 to 1.0		1.7 to 1.0		1.2 to 1.0

Investments

At December 31, 2005, the Company had total investments with a carrying value of $1,935.0 million. As of this date, 91.0% 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 credit quality of “AAA”. The remaining 9.0% 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, 2005:


			Estimated				Percent of
			Market		Carrying		Carrying
	Amortized Cost		Value		Value		Value
			(Dollars in Thousands)
Fixed Maturities:
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies	$	62,311	$	61,713	$	61,713		3.2
Obligations of States and Political Subdivisions		821,456		819,635		819,635		42.3
Corporate and Bank Debt Securities		246,918		241,210		241,210		12.5
Asset Backed Securities		138,292		137,827		137,827		7.1
Mortgage Pass-Through Securities		282,256		276,936		276,936		14.3
Collateralized Mortgage Obligations		226,982		224,209		224,209		11.6

Total Fixed Maturities		1,778,215		1,761,530		1,761,530		91.0	%
Equity Securities		160,926		173,455		173,455		9.0

Total Investments	$	1,939,141	$	1,934,985	$	1,934,985		100.0	%

At December 31, 2005, 99.97% 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, 2005, 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		Estimated
	Cost		Market Value
	(Dollars in Thousands)
Due in one year or less	$	109,860	$	109,002
Due after one year through five years		272,048		267,600
Due after five years through ten years		345,173		341,737
Due after ten years		403,604		404,219
Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities		647,530		638,972

Total	$	1,778,215	$	1,761,530

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, secured obligations, 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 and any actions taken by 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 of a Florida insurer 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. A Florida 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 $442.8 million at December 31, 2005. Of this amount, the Insurance Subsidiaries are entitled to pay a total of approximately $162.0 million of dividends in 2006 without obtaining prior approval from the Pennsylvania Insurance Department or the Florida Office of Insurance Regulation. During 2005, the insurance subsidiaries did not pay any dividends.

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 has 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, 2005 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 Company will closely monitor litigation trends in 2005, and continue to review relevant insurance policy exclusion language. 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; and

	•		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, as amended by the Terrorism Insurance Extension Act of 2005 (collectively 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 through December 31, 2006, and 85% of covered losses between January 1, 2007 and December 31, 2007, up to $100 billion. However, if a terrorist attack occurs after March 31, 2006, the government will provide funding only if aggregate industry losses between January 1, 2006 and December 31, 2006 exceed $50 million, or if such losses between January 1, 2007 and December 31, 2007 exceed $100 million. 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, 2007. 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 and other committees of the board of directors.

Competition

The Company competes with a large number of other companies in its selected lines 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, however, 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 9,500 brokers, thus facilitating a regular flow of submissions.

Employees

As of February 20, 2006, the Company had 1,072 full-time employees and 35 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 1A. RISK FACTORS

If our insurance company subsidiaries are unable to pay dividends or make loans to us due to government regulations that apply to insurance companies or for any reason, we may not be able to continue our normal business operations.

We are a holding company. Our principal assets currently consist of all or substantially all of the equity interests of our subsidiaries listed below:

	•		Philadelphia Indemnity Insurance Company;

	•		Philadelphia Insurance Company;

	•		Maguire Insurance Agency, Inc.;

	•		PCHC Investment Corp., a Delaware investment corporation;

	•		Liberty American Insurance Group, Inc., an insurance holding company;

	•		Mobile USA Insurance Company;

	•		Liberty American Insurance Company;

	•		Liberty American Insurance Services, Inc.; and

	•		Liberty American Premium Finance Company.

Philadelphia Indemnity Insurance Company, Philadelphia Insurance Company, Mobile USA Insurance Company, Inc. and Liberty American Insurance Company are our insurance company subsidiaries and are licensed to issue insurance policies. Maguire Insurance Agency, Inc. is an underwriting manager and Liberty American Insurance Services, Inc. is an insurance agency that markets, underwrites and services homeowners insurance and mobile homeowners policies.

Our primary sources of funds are dividends and payments from our subsidiaries that we receive under tax allocation agreements. Government regulations that apply to insurance companies restrict the ability of our insurance company subsidiaries to pay dividends and make loans to us. The accumulated profits of these subsidiaries from which dividends may be paid totaled $442.8 million at December 31, 2005. Of this amount, these insurance company subsidiaries may pay a total of approximately $162.0 million of dividends in 2006 without obtaining prior approval from the department of insurance for the states in which they are domiciled. Further, creditors of any of our subsidiaries will have the right to be paid in full the amounts they are owed if a subsidiary liquidates its

assets or undergoes a reorganization or other similar transaction before we will have the right to receive any distribution of assets from the subsidiary, unless we also are recognized as a creditor of the subsidiary. If we are unable to receive distributions from our subsidiaries, we may not be able to continue our normal business operations.

If A.M. Best downgrades the ratings of our insurance company subsidiaries, we will not be able to compete as effectively with our competitors and our ability to sell insurance policies could decline, reducing our sales and earnings.

A.M. Best Company rates Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company “A+” (Superior). According to A.M. Best Company, companies rated “A+” (Superior) have, on balance, superior financial strength, operating performance and market profile, when compared to the standards established by the A.M. Best Company, and have a very strong ability to meet their ongoing obligations to policyholders. We believe that the rating assigned by A.M. Best Company is an important factor in marketing our products. If the agency downgrades our ratings in the future, it is likely that:

	•		we would not be able to compete as effectively with our competitors; and

	•		our ability to sell insurance policies could decline.

If that happens, our sales and earnings would decrease. Rating agencies evaluate insurance companies based on financial strength and the ability to pay claims, factors more relevant to policyholders than investors.

If our reserves for losses and costs related to adjustment of losses are not adequate, we would have to increase our reserves, which would result in reductions in net income and policyholders’ surplus and could result in a downgrading of the rating of our insurance company subsidiaries.

We establish reserves for losses and costs related to the adjustment of losses under the insurance policies we write. We determine the amount of these reserves based on our best estimate and judgment of the losses and costs we will incur on existing insurance policies. While we believe that our reserves are adequate, we base these reserves on assumptions about future events. The following factors may have a substantial impact on our future loss experience:

	•		the amounts of claims settlements;

	•		legislative activity; and

	•		changes in inflation and economic conditions.

Actual losses and the costs we incur related to the adjustment of losses under insurance policies may be different from the amount of reserves we establish. If the actual amount of losses and costs related to the adjustment of losses under insurance policies exceed the amount we have reserved for these losses and costs related to the adjustment of losses, we would be required to increase our reserves. When we increase reserves, our income before income taxes for the period will decrease by a corresponding amount. In addition, increasing reserves causes a reduction in policyholders’ surplus and could cause a downgrading of the rating of our insurance company subsidiaries. This in turn could hurt our ability to sell insurance policies.

If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear increased risks or reduce the level of our underwriting commitments.

As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk underwritten by our insurance company subsidiaries, especially catastrophe risks. Market conditions beyond our control determine the availability and cost of the reinsurance we purchase, which may affect the level of our business and profitability. Our reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our current reinsurance facilities or to obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we would have to reduce the amount of risk we underwrite, especially risks related to catastrophes.

We cannot guarantee that our reinsurers will pay in a timely fashion, if at all, and, as a result, we could experience losses.

We transfer some of the risk we have assumed to reinsurance companies in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us, it does not relieve us of our liability to our policyholders. Our reinsurers may not pay the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely basis. If our reinsurers fail to pay us or fail to pay us on a timely basis, our financial results would be adversely affected.

Claims related to catastrophic events could result in catastrophe losses.

It is possible that a catastrophic event could greatly increase claims under the insurance policies we write. This, in turn, could result in losses for one or more of our insurance company subsidiaries. Catastrophes may result from a variety of events or conditions, including hurricanes, windstorms, earthquakes, hail and other severe weather conditions and may include terrorist events.

We generally try to reduce our exposure to catastrophe losses through underwriting and the purchase of catastrophe reinsurance. But, reinsurance may not be sufficient to cover our actual losses. In addition, a number of states from time to time have passed legislation that has had the effect of limiting the ability of insurers to manage risk, such as legislation prohibiting an insurer from withdrawing from catastrophe-prone areas. If we are unable to maintain adequate reinsurance or to withdraw from areas where we experience or expect significant catastrophe-related claims, we could experience significant losses.

We are subject to possible assessments from state insurance facilities and state guaranty funds.

We are subject to assessments from various state guaranty funds and state insurance facilities, including Florida Citizens Property Insurance Corporation, the Mississippi Windstorm Underwriting Association, the Alabama Insurance Underwriting Association, and the Texas Windstorm Insurance Association. The ultimate impact of Hurricanes Katrina, Rita and Wilma on these facilities is currently uncertain, but could result in the facilities recognizing a financial deficit or a financial deficit greater than the level currently estimated by these facilities. They may, in turn, have the ability to assess participating insurers when financial deficits occur, adversely affecting our results of operations. These facilities are generally designed so that the ultimate cost is borne by policyholders.

We and other insurance companies writing residential property policies in Florida must participate in the Florida Hurricane Catastrophe Fund, which potentially reimburses companies for their qualifying losses at various participating percentages above required retention levels subject to maximum reimbursement amounts. We currently have reimbursement recoverable balances from the Florida Hurricane Catastrophe Fund for the 2004 and 2005 hurricane losses in Florida. If the Florida Hurricane Catastrophe Fund does not have sufficient funds to pay its ultimate reimbursement obligations to us and other participating insurance companies, it has the authority to issue bonds. Such bonds are funded by assessments on generally all property and casualty premiums in Florida. By law, these assessments are the obligation of insurance policyholders which insurance companies must collect. Companies are required to collect the Florida Hurricane Catastrophe Fund assessments directly from residential property policyholders and remit them to the Florida Hurricane Catastrophe Fund as they are collected.

Our exposure to assessments and the availability of policyholder recoupments or premium rate increases related to these assessments may not offset each other in our financial statements. Moreover, even if they do offset each other, they may not offset each other in our financial statements for the same fiscal period due to the ultimate timing of when the assessments are accrued and when the related recoupments are accrued or when related premium rate increases are earned, as well as the possibility of policies not being renewed in subsequent years.

Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry.

The results of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. The industry’s profitability can be affected significantly by:

	•		rising levels of actual costs that are not known by companies at the time they price their products;

	•		volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks;

	•		changes in loss reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurer’s liability develop; and

•

fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested assets and may impact the ultimate payout of losses.

The demand for property and casualty insurance can also vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases. The property casualty insurance industry historically is cyclical in nature. These fluctuations in demand and competition could produce underwriting results that would have a negative impact on our results of operations and financial condition.

We face significant competitive pressures in our business that could cause demand for our products to fall and adversely affect our profitability.

We compete with a large number of other companies in our selected lines of business. We compete, and will continue to compete, with 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 our competitors have greater financial and marketing resources than we do. Our profitability could be adversely affected if we lose business to competitors offering similar or better products at or below our prices. In addition, a number of new, proposed or potential legislative or industry developments could further increase competition in our industry. New competition from these developments could cause the demand for our products to fall, which could adversely affect our profitability.

Because we are heavily regulated by the states in which we operate, we may be limited in the way we operate.

We are subject to extensive supervision and regulation in the states in which we operate. The supervision and regulation relate to numerous aspects of our business and financial condition. The primary purpose of the supervision and regulation is the protection of our insurance policyholders and not our 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:

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

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

	•		restrictions on the types of terms that we can include in the insurance policies we offer;

	•		certain required methods of accounting;

	•		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 our products and may impede us from obtaining rate increases or taking other actions we might wish to take to increase our profitability. Further, we may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could stop or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us.

The outcome of industry-wide investigations into finite risk reinsurance products and contingent commission arrangements could adversely affect our business and results of operations

Various regulatory authorities, including the SEC and a number of state attorneys-general, have initiated investigations and lawsuits relating to finite risk reinsurance arrangements entered into by insurance companies with reinsurers and the payment of so-called “contingent commissions” by insurance companies. Finite-risk reinsurance is a form of reinsurance in which, among other things, there is limited risk transferred to the reinsurer. See below for a description of contingent commission arrangements.

As previously reported in the Form 8-K we filed with the SEC on June 17, 2005, we received a subpoena on June 15, 2005 from the SEC requesting documents and other information regarding any non-traditional insurance arrangements, including finite risk reinsurance, we entered into with General Re Corporation and its affiliates. We supplied the requested documents to the SEC in response to the subpoena in August 2005.

Various regulatory agencies, including the office of the New York Attorney General, have conducted investigations and initiated lawsuits concerning contingent commission arrangements and the extent to which these arrangements have been disclosed to purchasers of insurance. These arrangements involve payments by insurance companies to brokers and agents of additional incentive commissions if they place business with the insurance company exceeding certain levels of profitability and/or volume. Some of these regulators have indicated that the brokers and agents should have disclosed these arrangements to their customers. We have approximately 150 preferred agents to which we pay additional commissions based on the profitability and volume of business they place with us. Our preferred agent arrangements, and similar arrangements which have been entered into by many other insurance companies, have been in place for many years. We and many other property and casualty insurance companies domiciled in Pennsylvania received a request in November 2004 from the Pennsylvania Insurance Department to supply the Department with information concerning contingent commission arrangements. We supplied the requested information to the Department in December 2004.

We cannot predict the effect, if any, of these investigations, or any proceedings which may result from these investigations, on our future operations, the insurance industry in general, or changes, if any, which may be made to any laws or regulations. The outcome of these matters could adversely affect our business and results of operations.

Because our investment portfolio is made up of primarily fixed income securities, our investment income could suffer as a result of fluctuations in interest rates.

We currently maintain and intend to continue to maintain an investment portfolio made up of primarily fixed income securities. The fair value of these securities can fluctuate depending on changes in interest rates. Generally, the fair market value of these investments increases or decreases in an inverse relationship with changes in interest rates, while net investment income earned by us from future investments in fixed income securities will generally increase or decrease with interest rates. Changes in interest rates may result in fluctuations in the income derived from, and the valuation of, our fixed income investments, which could have an adverse effect on our results of operations and financial condition.

Provisions of the Pennsylvania business corporation law, our articles of incorporation and the insurance laws of Pennsylvania, Florida and other states may discourage takeover attempts.

The Pennsylvania Business Corporation Law contains “anti-takeover” provisions. We have opted out of most of these provisions. However, Subchapter F of Chapter 25 of the Business Corporation Law applies to us and may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in shareholders receiving a premium over market price for their shares. Subchapter F of the Business Corporation Law prohibits certain “business combinations” between an “interested shareholder” and a corporation, unless the corporation’s board of directors gives prior approval and certain other conditions are satisfied, or there is an available exemption. The term “business combination” is defined broadly to include various merger, consolidation, division, exchange or sale transactions, including transactions using our assets for purchase price amortization or refinancing purposes. An “interested shareholder,” in general, is a beneficial owner of shares entitling that person to cast at least 20% of the votes that all shareholders would be entitled to cast in an election of directors.

In addition, our Articles of Incorporation allow the Board of Directors to issue one or more classes or series of preferred stock with voting rights, preferences and other privileges as the Board may determine. The issuance of preferred shares could adversely affect the holders of our common stock and could prevent, delay or defer a change of control.

We are also subject to the laws of various states, like Pennsylvania and Florida, governing insurance holding companies. 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 Consolidated or our insurance subsidiaries. An Insurance Department’s determination of whether to approve an acquisition would be based on a variety of factors, including an evaluation of the acquirer’s financial stability, the competence of its management and whether competition in that state would be reduced. These laws may delay or prevent a takeover of Philadelphia Consolidated or our insurance company subsidiaries.

We have a large shareholder whose interests may diverge from those of our other shareholders.

Mr. James J. Maguire, the Chairman of our Board of Directors, and his wife beneficially own approximately 21% of our issued and outstanding common stock. Other members of Mr. Maguire’s immediate family beneficially own approximately an additional 2% of our issued and outstanding common stock (the immediate family beneficial ownership for this purpose excludes beneficial ownership which is attributable to both Mr. James J. Maguire and his wife and immediate family members). Such beneficial ownership is calculated pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Consequently, Mr. Maguire will be in a position to strongly influence the outcome of substantially all corporate actions requiring shareholder approval, including mergers involving us, sales of all or substantially all of our assets, and the adoption of certain amendments to our Articles of Incorporation. In so acting, Mr. Maguire may have interests different than, or adverse to, those of the rest of our shareholders.

Item 1B. UNRESOLVED STAFF COMMENTS

None

Item 2. PROPERTIES

The Company leases certain office space at One Bala Plaza, Bala Cynwyd, PA which serves as its headquarters location, and also leases 38 offices for its field marketing organization.

Item 3. LEGAL PROCEEDINGS

Philadelphia Insurance received a subpoena on June 15, 2005 from the SEC requesting documents and other information regarding any non-traditional insurance arrangements, including finite risk reinsurance, we entered into with General Re Corporation and its affiliates.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2005.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES

OF EQUITY SECURITIES

(a) The Company’s common stock, no par value, trades on The Nasdaq Stock Market under the symbol “PHLY”. As of February 22, 2006, there were 671 holders of record and 12,741 beneficial shareholders of the Company’s common stock. The high and low sales prices of the common stock, as reported by the National Association of Securities Dealers, were as follows:


	2005 (1)				2004 (1)
Quarter	High		Low		High		Low
First		26.700		21.767		20.453		15.233
Second		29.277		24.453		20.250		17.537
Third		28.967		25.307		20.097		17.467
Fourth		34.133		27.250		22.953		16.323


(1)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

		The Company did not declare cash dividends on its common stock in 2005 or 2004, and currently intends to retain its earnings to enhance future growth. Any future payment of dividends by the Company will be determined by the Board of Directors and will be based on general business conditions and legal and regulatory restrictions.

		As a holding company, the Company is dependent upon dividends and other permitted payments from its subsidiaries to pay any cash dividends to its shareholders. The ability of the Company’s insurance subsidiaries to pay dividends to the Company is subject to regulatory limitations (see Item 7.-Liquidity and Capital Resources and Note 2 to the Consolidated Financial Statements).

(b)		During the three years ended December 31, 2005, the Company did not sell any of its securities which were not registered under the Securities Act of 1933.

(c)		The Company’s purchases of its common stock during the fourth quarter of 2005 are shown in the following table:


						(c) Total Number of
						Shares Purchased as	(d) Approximate Dollar
	(a) Total Number					Part of Publicly	Value of Shares That May
	of Shares			(b) Average Price		Announced Plans or	Yet Be Purchased Under
Period	Purchased (1)			Paid per Share (1)		Programs	the Plans or Programs
October 1 — October 31		20,175	(2)	$	19.243	—	$	45,000,000	(3)
November 1 — November 30		351	(2)	$	19.223	—	$	45,000,000	(3)
December 1 — December 31		7,293	(2)	$	21.120	—	$	45,000,000	(3)


(1)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

(2)		Such shares were issued under the Company’s Employee Stock Purchase Plan and Employees’ Stock Incentive and Performance Based Compensation Plan and were repurchased by the Company upon an employee’s termination.

(3)		The Company’s total stock purchase authorization which was publicly announced in August 1998, amounts to $75.3 million, of which $30.3 million has been utilized.

Item 6. SELECTED FINANCIAL DATA


	As of and For the Years Ended December 31,
	(In Thousands, Except Share and Per Share Data)
	2005			2004			2003			2002			2001
Operations and Comprehensive Income Statement Data:
Gross Written Premiums	$	1,264,915		$	1,171,317		$	905,993		$	663,739		$	473,565
Gross Earned Premiums		1,165,296			1,062,057			789,498			555,485			421,063
Net Written Premiums		1,110,771			914,532			602,300			519,707			337,281
Net Earned Premiums		976,647			770,248			574,518			417,722			299,557
Net Investment Income		63,709			43,490			38,806			37,516			32,426
Net Realized Investment Gain (Loss)		9,609			761			794			(3,371	)		3,357
Other Income		1,464			4,357			5,519			911			587

Total Revenue		1,051,429			818,856			619,637			452,778			335,927

Net Loss and Loss Adjustment Expenses		504,006			476,115			359,177			267,433			179,655
Acquisition Costs and Other Underwriting Expenses		263,759			214,369			162,912			129,918			97,020
Other Operating Expenses		17,124			9,439			7,822			6,372			6,841
Goodwill Impairment Loss (1)		25,724			—			—			—			—

Total Losses and Expenses		810,613			699,923			529,911			403,723			283,516

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

Income Before Income Taxes		240,816			118,933			89,726			49,055			49,662
Total Income Tax Expense		84,128			35,250			27,539			15,302			16,851

Net Income	$	156,688		$	83,683		$	62,187		$	33,753		$	32,811

Weighted-Average Common Shares Outstanding (3)		68,551,572			66,464,460			65,726,364			64,833,159			49,585,803
Weighted-Average Share Equivalents Outstanding (3)		4,533,807			3,456,099			2,254,800			2,047,146			1,968,225

Weighted-Average Shares and Share Equivalents Outstanding (3)		73,085,379			69,920,559			67,981,164			66,880,305			51,554,028

Basic Earnings Per Share (3)	$	2.29		$	1.26		$	0.95		$	0.52		$	0.66

Diluted Earnings Per Share (3)	$	2.14		$	1.20		$	0.91		$	0.50		$	0.64

Cash Dividends Per Share	$	—		$	—		$	—		$	—		$	—

Year End Financial Position:
Total Investments and Cash and Cash Equivalents	$	2,009,370		$	1,623,647		$	1,245,994		$	950,861		$	723,318
Total Assets		2,927,826			2,485,656			1,870,941			1,358,334			1,019,974
Unpaid Loss and Loss Adjustment Expenses		1,245,763			996,667			627,086			445,548			302,733
Total Shareholders’ Equity		816,496			644,157			545,646			477,823			430,944
Common Shares Outstanding (3)		69,266,016			66,821,751			66,022,656			65,606,631			64,529,169

Insurance Operating Ratios (Statutory Basis):
Net Loss and Loss Adjustment Expenses to Net Earned Premiums		51.8	%		61.5	%		63.1	%		63.5	%		60.7	%
Underwriting Expenses to Net Written Premiums		26.3	%		27.2	%		27.2	%		28.0	%		31.2	%

Combined Ratio		78.1	%		88.7	%		90.3	%		91.5	%		91.9	%

		A+			A+			A+			A+			A+
A.M. Best Rating (4)	(Superior)			(Superior)			(Superior)			(Superior)			(Superior)


(1)		During the fourth quarter of 2005, the Company recorded a $25.7 million impairment charge related to the write-down of goodwill arising from the acquisition of the Company’s personal lines segment. This loss, which was the same on a pre-tax and after-tax basis, was a result of the Company’s annual evaluation of the carrying value of goodwill. The write-down was determined by comparing the fair value of the Company’s personal lines segment and the implied value of the goodwill with the carrying amounts on the balance sheet. The write-down resulted from changes in business assumptions primarily due to the following: the unprecedented hurricane activity and associated catastrophe losses experienced in 2004 and 2005; the uncertainty of 2006 catastrophe reinsurance renewal rates; the decision to change the personal lines segment business model to discontinue writing the mobile homeowners business and target new construction homeowners business; and the disruption in the Florida marketplace.

(2)		Amount represents cash distributions related to Trust Originated Preferred Securities that were issued on May 5, 1998.

(3)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

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

GENERAL

Overview

The Company designs, markets, and underwrites specialty commercial and personal property and casualty insurance products for select markets or niches by offering differentiated products through multiple distribution channels. 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 multi-peril package, commercial automobile and specialty property and inland marine insurance products; The Specialty Lines Underwriting Group, which has underwriting responsibility for the professional and management liability insurance products; and The Personal Lines Group, which has responsibility for personal property and casualty insurance products for the homeowners and manufactured housing markets. The Company operates solely within the United States through its 13 regional and 25 field offices.

The Company generates most of its revenues through the sale of commercial and personal property and casualty insurance policies. The commercial 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 personal insurance policies are almost exclusively sold over the Internet via the Company’s proprietary In-Touch system.

During 2005, revenue growth from the sale of commercial and personal property and casualty policies was impacted by the following items:

	•		Increased premium rate competition for specialty lines segment products and for the specialty property product;

	•		Several products within the commercial and specialty lines segments were identified that did not meet predetermined standards for profitability and were culled resulting in approximately a $20.8 million reduction in gross written premiums;

	•		The product mix shift in personal lines was substantially completed resulting in a $44.9 million reduction in mobile homeowners gross written premium and a $25.7 million increase in the newer construction homeowners gross written premiums;

	•		The decisions by an automobile leasing customer and an automobile excess liability customer to self-insure business previously written by the Company. As a result, gross written premiums for the commercial lines segment were reduced by approximately $78.0 million.

	•		Introduction of a number of new products, many of which were within the existing sports and fitness market niche in the commercial lines segment.

Notwithstanding the adverse impact of certain of the above items, gross written premium growth remained strong across the Company’s commercial and specialty lines business segment. The Company believes its mixed marketing platform for its product distribution and the creation of value added features not typically found in property and casualty products contribute to generating premium growth above industry averages. Written premium information for the Company’s business segments for the years ended December 31, 2005 and 2004 is as follows:


	Commercial			Specialty			Personal
($’s in millions)	Lines			Lines			Lines			Total
2005 Gross Written Premium	$	960.3		$	205.3		$	99.3		$	1,264.9
2004 Gross Written Premium	$	874.0		$	184.4		$	112.9		$	1,171.3
Percentage Increase (Decrease)		9.9	%		11.3	%		(12.0	)%		8.0	%

The Company also generates revenue from its investment portfolio, which approximated $1.9 billion at December 31, 2005, and generated $68.1 million in gross pre-tax investment income during 2005. 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.

Hurricanes Dennis, Katrina, Rita and Wilma caused catastrophic losses during 2005, and the Company also suffered catastrophe losses from a number of hurricanes during 2004. These catastrophe losses, as noted in the table below, impacted both the Company’s

personal and commercial lines segments. Loss estimates may still change in the future due in part to the number of claims which have not yet been completely remediated or for which the property covered by the claim has not been repaired.

Under the Company’s catastrophe reinsurance programs in place for these hurricanes, the Company had a $3.5 million pre-tax per occurrence loss retention for its personal lines catastrophe losses and a $5.0 million pre-tax per occurrence loss retention for its commercial lines catastrophe losses. Under the loss occurrence provisions of the Company’s commercial lines catastrophe reinsurance program, Hurricane Katrina was treated as two separate loss occurrences. As a result, the Company estimates it has retained a $5.7 million loss. The Company’s net loss retention by hurricane is summarized in the table below:


Date of Event:	7/10/05		8/25/05 &		9/24/05		10/24/05
			8/29/05
Hurricane:	Dennis		Katrina		Rita		Wilma		Total
					(In millions)
Net Loss and Loss Adjustment Expense Estimates:
Personal Lines Segment	$	3.5	$	2.0	$	—	$	3.5	$	9.0
Commercial Lines Segment		—		5.7		5.0		5.0		15.7

Total	$	3.5	$	7.7	$	5.0	$	8.5	$	24.7

The 2005 calendar year also included $29.9 million of favorable development on prior accident years net loss and loss adjustment expense. The favorable net loss and loss adjustment expense development occurred primarily in the commercial and specialty lines segment in accident years 2004 and 2002. This favorable development is primarily attributed to better than expected claim frequency for commercial package business and better than expected case incurred development for professional liability business for accident year 2004. For accident year 2002, the favorable development resulted from decreased loss estimates across most commercial and specialty lines of business due to better than expected case incurred loss development. The following table illustrates the 2005 calendar year and accident year loss ratios by segment.


	Commercial			Specialty			Personal			Weighted
	Lines			Lines			Lines			Average
2005 calendar year net loss and loss adjustment expense ratio		48.3	%		61.9	%		74.3	%		51.6	%
2005 accident year net loss and loss adjustment expense ratio		50.4	%		70.2	%		75.2	%		54.7	%

The Company recorded a $25.7 million impairment charge related to the write down of the entire amount of goodwill arising from the acquisition of its personal lines segment based upon its annual impairment test. The write down was a result of changes to the personal lines segment business plan due to various factors, including, among others: the forecasted weather pattern of increased hurricane activity and the disruption in the Florida marketplace due to the 2004 and 2005 hurricane activity.

The Company believes its core strategy of adhering to an underwriting philosophy of sound risk selection and pricing discipline enables the Company to produce loss ratios well below industry averages. The Company monitors certain measures of growth and profitability of each business unit including but not limited to: number of policies written, renewal retention ratios, new business production, pricing, risk selection and loss ratios. Other key financial metrics that are regularly monitored in evaluating financial condition and operating performance include, but are not limited to: level of expenses, investment performance, return on equity, cash flow and capital leverage.

The following is a comparison of selected Statement of Operations and Comprehensive Income data:

(In millions)


	For the years ended December 31,
	2005		2004		2003
Total Revenue	$	1,051.4	$	818.9	$	619.6
Total Losses and Expenses	$	810.6	$	699.9	$	529.9
Net Income	$	156.7	$	83.7	$	62.2

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 $3.4 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 performance of the collateral underlying a secured investment; whether a significant credit rating action has occurred; whether scheduled interest payments have been delayed or missed; whether changes in laws and/or regulations have impacted an issuer or industry; an assessment of the timing of a security’s recovery to fair value; and an ability and intent to hold the security to recovery. The amount of any write down is included in earnings as a realized loss in the period the impairment arose (see Investments). Gross unrealized losses for investments excluding interests in securitized assets at December 31, 2005 were $16.8 million.

	- -		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. Pursuant to this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose (see Investments). Gross unrealized losses for investments in securitized assets at December 31, 2005 were $9.7 million.

			There are certain risks and uncertainties inherent in the Company’s impairment methodology including, but not limited to, the financial condition of specific industry sectors and the resultant effect on any underlying collateral values and changes in accounting, tax and/or regulatory requirements which may have an effect on either, or both, the investor and/or the issuer.

•

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 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 been reported to the Company and an amount for losses incurred that have not been reported to the Company. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. Estimates for unpaid loss and loss adjustment expenses are based on management’s assessment of known facts and circumstances, review of past loss experience and settlement patterns, and consideration of other factors such as legal, social, and economic developments. These estimates are reviewed regularly and any adjustments resulting therefrom are made in the accounting period in which the adjustment arose.

The table below classifies as of December 31, 2005 the components of the reserve for gross losses and loss expenses (“loss” or “losses”) with respect to major lines of business:

(In Thousands)


	As of December 31, 2005
	Case		IBNR		Total
Gross loss reserves by line of business:

Commercial Lines Segment:
Commercial Package — General Liability	$	138,660	$	266,023	$	404,683
Commercial Package — Auto		59,020		98,533		157,553
Commercial Package — Property		92,026		47,235		139,261
Automobile Rental — Supplemental Liability		18,391		19,161		37,552
Automobile Rental — Other		11,650		39,876		51,526
Program Umbrella		41,275		15,337		56,612
Other		4,442		7,580		12,022

		365,464		493,745		859,209

Specialty Lines Segment:
Professional Liability Errors & Omissions		51,222		106,411		157,633
Professional Liability Directors & Officers		38,625		68,855		107,480
Professional Liability Excess		20,792		20,860		41,652

		110,639		196,126		306,765


Personal Lines Segment:
Personal Lines		51,936		27,853		79,789

		51,936		27,853		79,789

TOTAL	$	528,039	$	717,724	$	1,245,763

The most significant actuarial assumptions used in determining the Company’s loss reserves are:

	•		Ultimate losses are determinable by extrapolation of claim emergence and settlement patterns observed in the past (via loss development factor selection) that can reasonably be expected to persist into the future.

			This assumption implies that historical claim reporting, handling, and settlement patterns are predictive of future activity and can thus be utilized to forecast ultimate liabilities on unpaid claims. Since the many factors that influence claim activity can change over time and are often difficult to isolate or quantify, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. Key objectives in developing estimates of ultimate losses are to identify aberrations and systemic changes occurring within historical experience and to adjust for them so that the future can be projected on a more reliable basis. Various diagnostic tools are employed, (e.g., ratios of claims paid-to-claims reported and analyses of average claim costs by age of development), and close communication is maintained among the Company’s actuarial, claims and underwriting departments to continually monitor and assess the validity of this assumption.

			In general, this assumption is considered fully valid across the Company’s lines of business for older, more mature accident years. Most claims in these years have been reported, fully adjusted and settled, and any remaining unpaid claims are not anticipated to result in incurred loss activity at levels significant enough to cause material deviation in ultimate losses as projected by generally accepted actuarial methods that rely upon this assumption.

			Loss reserve indications from generally accepted actuarial methods that rely upon this assumption are utilized where this assumption is considered fully valid. Where this assumption is considered to have less than full validity, those indications receive partial or no weight.

	•		Ultimate loss ratios (ultimate losses divided by earned premiums) in the current and most recent accident years can be projected from ultimate loss ratios of prior years after adjusting for factors such as trends and pricing changes, to the extent that those factors can be quantified.

This assumption implies consistency in the loss ratio, after adjusting for inflationary factors and other trends that may be affecting losses and/or premiums. Generally accepted actuarial methods employing this expected loss ratio assumption are used to supplement loss reserve indications from standard loss development methods where the validity of the first assumption discussed is incomplete. While this assumption is also subject to validity constraints, it is generally considered to have higher reliability than the first assumption discussed for the current and more recently completed accident years, as changes in rates and pricing can be monitored and loss trends can be derived or inferred from both internal and external sources.

The Company’s methodology is to employ several generally accepted actuarial methods to determine loss reserves, each of which has its own strengths and weaknesses. These methods generally fall into one of the categories described below, or they are hybrids of one or more of them (e.g., Bornhuetter-Ferguson method which blends development and expected methods). The predictive accuracy of any of these methods may vary by line of business, age of development, and credibility of underlying historical experience data. Loss development methods tend to be more accurate where claims data are relatively stable and for older accident years within most lines of business. Expected loss methods and hybrid methods can be more appropriate for more recent accident years. Adjusted historical loss development methods are employed where volatile claims data can be largely attributed to discernable events, such as changes in claim handling procedures. Accordingly, more or less weight is placed on a particular method based on the facts and circumstances at the time the actuarially determined loss reserve estimates are made.

	•		Historical paid loss development methods:

			These methods use historical loss payments over discrete periods of time to estimate future losses. Historical paid loss development methods assume that the ratio of losses paid in one period to losses paid in an earlier period will remain constant. These methods necessarily assume that factors that have affected paid losses in the past, such as claim settlement patterns, inflation, or the effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use case reserves to estimate ultimate losses, they can be more reliable than the other methods that use incurred losses in situations where there are significant changes in how case reserves are established by claims adjusters. However, historical paid loss development methods are more leveraged (meaning that small changes in payments have a larger impact on estimates of ultimate losses) than actuarial methods that use incurred losses, because cumulative loss payments can take much longer to converge on the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past.

	•		Historical incurred loss development methods:

			These methods, like historical paid loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. However, these methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods can be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims adjusters’ evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently applied over time. Therefore, when there have been significant changes in how case reserves are established or material changes in the underlying loss exposures and/or circumstances which may lead to a claim being reported, using incurred loss data to project ultimate losses can be less reliable than other methods.

	•		Expected loss ratio methods:

			These methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss ratios are typically developed based upon the information used in pricing, such as rate changes and trends affecting the frequency and/or severity of claims, and are multiplied by the total amount of premiums earned during a given accident period to calculate ultimate losses incurred during that same period. Expected loss ratio methods are useful for estimating ultimate losses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available, and in new or growing lines of business where historical information may lack predictive accuracy or otherwise not be representative of current loss exposures. Where expected loss ratio methods are employed, one or more of several traditional and accepted actuarial estimation methods are used to select expected loss ratios, including: loss ratios from mature years adjusted for trends in pricing and claim costs; permissible loss ratios underlying current rate levels; and projections of industry loss ratios in similar lines.

	•		Adjusted historical paid and incurred loss development methods:

			These methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of recent changes, such as inflation, changes in coverage and/or demographics of the line of business, the speed of claim payments, or the adequacy of case reserves. During periods of significant change, adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses provided the actuaries can reasonably quantify the impact of each change.

	•		Frequency/Severity Methods:

			These methods combine estimates of ultimate claim counts and estimates of per claim ultimate loss severities to yield estimates of ultimate losses. Ultimate claim counts (frequency) are typically estimated using expected ratios of claims to a selected base (e.g., exposures or policy counts), with the expected ratios being based on historically observed experience. Adjustments for trends affecting claim occurrence or affecting the value of the base are also typically made. Ultimate loss severity estimates are typically based on historically observed per claim average losses and are adjusted for trends affecting the size of claims, most notably inflation. The Company uses this method only in the case of its residual value product.

Each of the generally accepted actuarial methods employed generates discrete point estimates of ultimate loss by line of business, by accident year. While the estimates are often similar across methods, a diverse array of estimates may be generated, particularly for current and recently completed accident years of longer-tailed lines and lines of business experiencing growth. Often the outlying point estimates among these diverse results can be dismissed as unreasonable because either the key assumptions of the method generating those outliers are violated or the underlying data feeding that method are too “thin” for meaningful results. The remaining indications generally form a reasonable range of point estimates from which informed judgment is utilized to select the actuarially determined estimate.

For most lines of business, given the high level of case reserve adequacy observed in recent calendar periods and the consistent claim reserving practices employed by the Company’s claim staff, loss reserves for older accident years are generally set in accordance with ultimate projections from incurred loss development methods. Projections from paid loss development methods may be selected for these older accident years where very few claims remain open and case reserves held for those claims are low relative to observed historical average severities of similar claims. For two Specialty Lines professional liability products (Corporate Directors and Officers and Lawyers Errors and Omissions), changes in claims handling occurred within the past several years that may invalidate the assumptions underlying the standard incurred loss development method. For these products, indications from adjusted historical incurred loss development methods were utilized in place of the standard method in forming the actuarially determined estimate, as the adjustments made attempt to re-state historical experience as it might have appeared had current claim handling practices been in place throughout.

Data for the current accident year are often too limited to provide fully reliable indications using standard loss development methods due to the delays in reporting claims and the limited time that has elapsed for adjusting the known claims. For longer-tail coverages and lines experiencing exposure growth, data may be somewhat limited in the more recently completed accident years, as well, for similar reasons. In such situations, ultimate loss is assessed by weighting results from standard paid and incurred loss development methods, with results from expected loss ratio and hybrid methods. The judgmental weights assigned are based upon the partial validity that can be attributed to the traditional methods, given the stability of underlying claim activity and exposures, with the complement of that partial validity given to the indications from expected loss ratio methods. The actuarially determined estimates by line of business are often based upon a weighted average of these results.

The Company has a loss reserve review committee consisting of the most senior members of actuarial, corporate, claims, underwriting and financial management. This committee meets monthly to review and discuss the various monthly and quarterly actuarial analyses which are performed, as well as to discuss any other factors or trends that may influence the Company’s claims activity. Generally, loss reserves are recorded in accordance with the actuarially determined estimates by line. However, based upon review performed by the loss reserve committee, the committee may make a “management adjustment” to an actuarially determined estimate for a line of business if, in the committee’s collective judgment, factors affecting ultimate losses in a line have not been fully captured or considered by actuarial methods. This may be the case with newer product lines, lines that are growing, and/or lines which may be exposed to claims with latent emergence patterns that extend beyond the credible historical period that the Company has experienced to date. Any such “management adjustment” is documented and reported to the Company’s audit committee. The Company’s loss reserve committee did not establish a

management adjustment as of December 31, 2005. Accordingly, the loss reserves recorded in the financial statements as of December 31, 2005 are equal to the actuarially determined estimate for each line of business.

Due to numerous factors including, but not limited to, trends affecting loss development factors and pricing adequacy, the Company’s key actuarial assumptions may change. Approximately 87% of the Company’s loss reserves are for accident years 2003 through 2005. These accident years are also the period where changes, if any, to the factors underlying the actuarial assumptions would be most likely to occur. The quantification referred to in the next paragraph of the impact that changes to the actuarial assumptions could have are stated without any adjustment for reinsurance and before the effects of taxes.

•

Changes may occur in the actuarial assumption that ultimate losses are determinable by extrapolation of claim emergence and settlement patterns observed in the past (via loss development factor selection) that can reasonably be expected to persist into the future. Changes may also occur in the actuarial assumption that ultimate loss ratios in the current and most recent accident years can be projected from ultimate loss ratios of prior years. A 5% increase or decrease to the actuarially selected loss development factors and expected loss ratios, in the aggregate, as applicable to all lines of business in accident years 2003 to 2005, would increase or decrease the actuarially determined loss reserve estimate by approximately $69.0 million. The results of aggregate changes in the loss development factors and expected loss ratios are approximately linear over reasonable ranges. A 1% increase or decrease in the loss development factors and expected loss ratios, in the aggregate, would have impacts equal to approximately 20% of the impacts stated above.

•

Reinsurance Receivables:

Reinsurance receivables from reinsurers under reinsurance contracts are subject to estimation. Reinsurance receivables may prove uncollectible if reinsurers are unable or unwilling to perform under the Company’s reinsurance contracts due to, but not limited to, such factors as the reinsurers’ financial condition or coverage disputes. Reinsurance receivables are reported net of an allowance for estimated uncollectible reinsurance receivables. The allowance is based upon the Company’s regular review of amounts outstanding, length of collection period, changes in reinsurer credit standing and other relevant factors. Reinsurance receivables at December 31, 2005 amounted to $336.7 million, and the allowance for estimated uncollectible reinsurance receivables amounted to $1.0 million.

•

Goodwill

The carrying amount of goodwill is subject, at a minimum, to an annual impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). This annual test is performed at December 31 of each year or more frequently if events or circumstance change that require the Company to perform the impairment analysis on an interim basis. Goodwill impairment testing requires the evaluation of the fair value of each reporting unit to its carrying value, including the goodwill, and recording of an impairment charge if the carrying amount of the reporting unit exceeds its estimated fair value. The determination of a reporting unit’s fair value is based on management’s best estimate, which includes valuation techniques such as discounted cash flows, market multiples and comparable transactions. Based upon the Company’s annual impairment test as of December 31, 2005, the Company recorded a $25.7 million impairment charge related to the write-down of the entire amount of goodwill arising from the acquisition of the Company’s personal lines segment.

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, 2005, future effect on its 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, 2005.

RESULTS OF OPERATIONS
(2005 versus 2004)

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


	Commercial Lines			Specialty Lines			Personal Lines			Total
2005 Gross Written Premiums	$	960.3		$	205.3		$	99.3		$	1,264.9
2004 Gross Written Premiums	$	874.0		$	184.4		$	112.9		$	1,171.3
Percentage Increase (Decrease)		9.9	%		11.3	%		(12.0	)%		8.0	%
2005 Gross Earned Premiums	$	873.8		$	194.3		$	97.2		$	1,165.3
2004 Gross Earned Premiums	$	788.6		$	170.2		$	103.3		$	1,062.1
Percentage Increase (Decrease)		10.8	%		14.2	%		(5.9	)%		9.7	%

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

•		Prospecting efforts by marketing personnel in conjunction with long term relationships formed by the Company’s marketing Regional Vice Presidents continue to result in additional prospects and increased premium writings, most notably for the Company’s various commercial package and non profit management liability product lines.

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

•		The introduction of a number of new Sports and Fitness niche products.

•		In-force policy counts as of December 31, 2005 versus December 31, 2004 have increased 10.0% and 18.8% for the commercial lines and specialty lines segments, respectively, primarily as a result of the factors discussed above.

•		Realized average rate increases on renewal business approximating 1.3%, and 17.9% for the specialty and personal lines segments, respectively. Realized rates on renewal business decreased 0.2% for the commercial lines segment.

This growth was offset in part by:

•

Liberty American Insurance Group, Inc.’s planned shift in product mix of reducing mobile homeowners product policies and increasing homeowners product policies. As a result, mobile homeowners gross written premium decreased $44.9 million and homeowners gross written premium increased $25.7 million.

•

In-force policy counts for the personal lines segment decreased 3.8%, resulting from a decrease in the in-force counts for the mobile homeowners product of 70.9% and an increase in in-force policy counts for the homeowners product of 54.7%, as a result of the planned shift in product mix noted above.

•

The decisions by an automobile leasing customer and an automobile excess liability customer to self-insure business previously written by the Company. As a result, gross written premiums for the commercial lines segment were reduced by approximately $78.0 million.

•

Re-underwriting the lawyers’ errors and omissions, professional liability excess and program umbrella books of business, resulting in gross written premiums for the specialty lines segment being reduced by $10.9 million, $4.3 million and $5.6 million, respectively.

•

Increased pricing competition for specialty lines segment products and for the specialty property product (commercial lines segment).

The respective net written premiums, and net earned premiums for commercial lines, specialty lines and personal lines segments for the year ended December 31, 2005 vs. December 31, 2004 were as follows (in millions):


	Commercial Lines			Specialty Lines			Personal Lines			Total
2005 Net Written Premiums	$	904.7		$	159.1		$	47.0		$	1,110.8
2004 Net Written Premiums	$	720.6		$	154.1		$	39.8		$	914.5
Percentage Increase		25.5	%		3.2	%		18.1	%		21.5	%
2005 Net Earned Premiums	$	778.4		$	151.7		$	46.5		$	976.6
2004 Net Earned Premiums	$	614.1		$	134.1		$	22.0		$	770.2
Percentage Increase		26.8	%		13.1	%		111.4	%		26.8	%

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

•

A reduction in the Company’s net liability cession percentage under its quota share reinsurance agreements, as follows:

	•		The Company ceded 22% of its net written and earned premiums and loss and loss adjustment expenses for policies effective April 1, 2003 through December 31, 2003 and 10% of its commercial and specialty lines net written and earned premiums and loss and loss adjustment expenses for policies becoming effective during 2004. During the years ended December 31, 2005 and 2004, the Company ceded $(0.5) million ($0.2 million for the commercial lines segment and $(0.7) million for the specialty lines segment) and $94.5 million ($77.8 million for the commercial lines segment, $16.9 million for the specialty lines segment, and $(0.2) million for the personal lines segment) of net written premiums, respectively, and $43.7 million ($36.5 million for the commercial lines segment, $7.1 million for the specialty lines segment and $0.1 million for the personal lines segment) and $132.5 million ($103.6 million for the commercial lines segment, $23.4 million for the specialty lines segment, and $5.5 million for the personal lines segment) of net earned premiums, respectively.

	•		On December 31, 2004, the Company terminated a quota share reinsurance agreement under which it ceded 15% of its mobile homeowners and homeowners business (personal lines segment). Upon termination, the Company increased its unearned premium reserve and net written premium by $5.7 million.

•

As a result of the January 1, 2005 casualty excess of loss treaty renewal, the reinsurance costs by product charged by the reinsurers are at a different level than that charged under the prior treaty to reflect their view of expected treaty experience. Accordingly, the specialty lines segment product reinsurance costs were increased, and the commercial lines segment product reinsurance costs were decreased.

•

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 $4.0 million ($3.4 million for the commercial lines segment and $0.6 million for the specialty lines segment) and $15.6 million ($13.0 million for the commercial lines segment, $2.0 million for the specialty lines segment, and $0.5 million for the personal lines segment) for the years ended December 31, 2005 and 2004, respectively. The profit commissions reduced ceded written and earned premiums and increased net written and earned premiums.

•

Certain of the Company’s reinsurance contracts have reinstatement provisions under which the Company must pay additional reinsurance premiums to reinstate coverage provisions upon utilization of initial reinsurance coverage. During the years ended December 31, 2005 and 2004, the Company accrued $3.7 million ($1.6 million for the commercial lines segment and $2.1 million for the specialty lines segment) and $1.1 million ($0.8 million for the commercial lines segment and $0.3 million for the specialty lines segment), respectively, of reinstatement reinsurance premium under its casualty excess of loss reinsurance treaty, as a result of changes in ultimate loss estimates. The reinstatement premium increased ceded written and earned premiums and reduced net written and earned premiums.

•

A reduction in accelerated, reinstatement and additional reinsurance premium costs related to the Company’s catastrophe reinsurance coverages:

	•		During the year ended December 31, 2005, the Company experienced catastrophe losses attributable to Hurricanes Dennis, Katrina, Rita and Wilma. These multiple hurricane events resulted in the recognition of reinstatement and accelerated catastrophe reinsurance premium expense of $3.9 million ($0.6 million for the Commercial Lines Segment and $3.3 million for the Personal Lines Segment) during the year ended December 31, 2005 due to the utilization of certain of the catastrophe reinsurance coverages. This recognition of reinstatement and accelerated reinsurance premium expense increased ceded written and earned premiums and reduced net written and earned premiums.

	•		During the year ended December 31, 2004, the Company experienced catastrophe losses attributable to Hurricanes Charley, Frances, Ivan and Jeanne. Due to these multiple hurricane events, the Company purchased additional catastrophe reinsurance coverages (which provided coverage from the inception date of the coverage through May 31, 2005) to supplement its original reinsurance programs. The estimated aggregate pre-tax cost of these additional catastrophe reinsurance coverages is $22.9 million. Additionally, these multiple hurricane events resulted in accelerating the recognition of $26.0 million (Commercial Lines Segment ($2.2 million), and Personal Lines Segment ($23.8 million)) catastrophe reinsurance premium expense during 2004 due to the utilization of certain of the catastrophe reinsurance coverages. Of this $26.0 million, $10.3 million was attributable to the additional reinsurance coverages referred to above. This acceleration of reinsurance premium expense increased reinsurance ceded written and earned premiums and reduced net written and earned premiums.

Net Investment Income: Net investment income approximated $63.7 million in 2005 and $43.5 million in 2004. Total investments grew to $1,935.0 million at December 31, 2005 from $1,428.2 million at December 31, 2004. The growth in investment income is primarily due to increased investments which arose from investing net cash flows provided from operating activities. The Company’s average duration of its fixed income portfolio was 4.0 years and 4.1 years at December 31, 2005 and December 31, 2004, respectively. The Company’s taxable equivalent book yield on its fixed income holdings approximated 4.8% at December 31, 2005, compared to 4.7% at December 31, 2004. The Company’s expectation is that the fixed income security taxable equivalent book yield for funds invested during 2006 will approximate 5.25% to 5.75%. This range is based on current interest rates and a continuation of the Company’s asset allocation between taxable and tax-exempt fixed income securities. Net investment income was reduced by $1.5 million and $4.9 million for the years ended December 31, 2005 and 2004, respectively, due to the interest credit on the Funds Held Account balance pursuant to the Company’s quota share reinsurance agreement (see Note 10 to the Company’s consolidated financial statements included with this Form 10-K).

The total return, which includes the effects of both income and price returns on securities, of the Company’s fixed income portfolio was 2.34% and 4.05% for the years ended December 31, 2005 and 2004, respectively, compared to the Lehman Brothers Intermediate Aggregate Bond Index (“the Index”) total return of 2.01% and 3.76% 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 as compared to the Index.

Net Realized Investment Gain: Net realized investment gains were $9.6 million and $0.8 million for the years ended December 31, 2005 and 2004, respectively. The Company realized net investment gains of $3.5 million and $11.5 million from the sale of fixed maturity and equity securities, respectively, for the year ended December 31, 2005, and $0 million and $2.2 million in non-cash realized investment losses for fixed maturity and equity securities, respectively, as a result of the Company’s impairment evaluation. The $11.5 million net realized gains from the sale of equity securities included approximately $11.0 million of net realized gains as a result of the liquidation of certain of the Company’s equity portfolios following the Company’s decision to change four of its common stock investment managers. Net realized investment gains from the sale of fixed maturity and equity securities was also reduced by $3.2 million due to the recognized loss arising from the change in fair value of a cash flow hedge entered into by the Company for which the forecasted transaction did not occur (see Note 6 to the Company’s consolidated financial statements included with this Form 10-K).

The Company realized net investment gains of $4.2 million and $6.4 million from the sale of fixed maturity and equity securities, respectively, for the year ended December 31, 2004, and $6.1 million and $3.7 million in non-cash realized investment losses for fixed maturity and equity securities, respectively, as a result of the Company’s impairment evaluation. $1.4 million of the $3.7 million non-cash realized investment losses is due to a December 2004 decision to change certain of the Company’s common stock investment managers. As a result of this decision, the Company wrote down certain common stock securities since there was no longer an intent to hold the securities to recovery.

Other Income: Other income approximated $1.5 million and $4.4 million for the years ended December 31, 2005 and 2004, respectively. Other income consists primarily of commissions earned on brokered personal lines business, and to a lesser extent brokered commercial lines business. The decrease in other income is due primarily to reduced commissions earned on brokered personal lines business resulting from the termination of certain brokering agreements during 2004.

Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $27.9 million (5.9%) to $504.0 million for the year ended December 31, 2005 from $476.1 million for the same period of 2004, and the loss ratio decreased to 51.6% in 2005 from 61.8% in 2004.

The increase in net loss and loss adjustment expenses was primarily due to:

•

The growth in net earned premiums.

•

A $41.5 million reduction in ceded loss and loss adjustment expenses pursuant to quota share agreement (See Premiums). Ceded loss and loss adjustment expenses pursuant to this quota share agreement for the year ended December 31, 2005 were $18.3 million vs. $59.8 million for the same period during 2004.

This increase to the loss and loss adjustment expenses incurred was offset in part by:

•

A $22.0 million reduction in hurricane catastrophe losses incurred. During the year ended December 31, 2005, the Company incurred $24.7 million of net loss and loss adjustment expenses related to Hurricanes Dennis, Katrina, Rita and Wilma. During the year ended December 31, 2004, the Company incurred $46.7 million of net loss and loss adjustment expenses related to Hurricanes Charley, Frances, Ivan and Jeanne.

•

Reserve actions taken during the year ended December 31, 2005 whereby the estimated net unpaid loss and loss adjustment expenses for accident years 2004 and prior were decreased by $29.9 million vs. reserve actions taken during the year ended December 31, 2004 whereby the estimated net unpaid loss and loss adjustment expenses for accident years 2003 and prior were increased by $35.1 million. Changes in the estimated net unpaid loss and loss adjustment expenses during the year ended December 31, 2005 by accident year were as follows:


	Net Basis
	increase (decrease)
	(in millions)
Accident Year 2004	$	(24.2	)
Accident Year 2003		1.6
Accident Year 2002		(7.0	)
Accident Years 2001 and prior		(0.3	)

Total	$	(29.9	)

The decrease in estimated net loss and loss adjustment expenses was principally due to a lower loss estimate for commercial package policies for the 2004 accident year as a result of better than expected claim frequency, and a lower loss estimate for professional liability policies for the 2004 accident year due to better than expected case incurred development.

Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $49.4 million (23.0%) to $263.8 million for the year ended December 31, 2005 from $214.4 million for the same period of 2004, and the expense ratio decreased to 27.0% in 2005 from 27.8% in 2004. The increase in acquisition costs and other underwriting expenses was due primarily to:

•

The growth in net earned premiums

•		A $5.9 million net charge during 2005 for assessments from Citizens Property Insurance Corporation (“Citizens”). Citizens was established by the state of Florida to provide insurance to property owners unable to obtain coverage in the private insurance market.

		Citizens reported incurred losses from the hurricanes that struck Florida during 2004 and a deficit for the 2004 plan year. During 2005, the Board of Governors of Citizens authorized the levying of a regular assessment, and the Florida Office of Insurance Regulation also approved the assessment. Based on the Company’s market share, the Company was assessed and paid $11.9 million in Citizens assessments during 2005. This assessment may be recouped through future insurance policy surcharges to Florida insureds. These surcharges will be recorded in the consolidated financial statements as the related premiums are written.

		The Company also recognized and paid an additional $0.6 million related to this Citizens assessment pursuant to a quota share reinsurance agreement whereby the Company assumed a 50% participation from an unaffiliated Florida insurer.

		Of the $12.5 million in total payments related to the Citizens assessment during 2005, $8.6 million is recoverable from certain of the Company’s catastrophe reinsurers under its 2004 catastrophe reinsurance program and from one of the Company’s quota share reinsurers, resulting in a $3.9 million net assessment expense being recognized during 2005 for Citizens assessments paid during 2005. Any recoupment of the Citizens assessment through future policy surcharges will be allocated between the Company and its reinsurers.

		During the fourth quarter of 2005, Citizens announced that it was projecting the maximum ten percent regular assessment allowed under Florida law plus an additional emergency assessment of approximately one percent to be assessed during 2006 due to the hurricanes that struck Florida in 2005. As of December 31, 2005, the Company has accrued $12.4 million for the Company’s estimated share of the projected regular assessment. Of this amount, $10.4 million is recoverable from certain of the Company’s catastrophe reinsurers under its 2005 catastrophe reinsurance program and from one of the Company’s quota share reinsurers, resulting in a $2.0 million net assessment expense being recognized during 2005 for Citizens assessments accrued as of December 31, 2005. Companies are required to collect any emergency assessments from residential property policyholders and remit them to Citizens as they are collected, therefore, the Company has not recorded a liability related to the projected emergency assessment.

		The following table summarizes the impact to the Company of Citizens assessments recognized during 2005:

(In Millions)


	Gross of		Reinsurance			Net Expense
	Reinsurance		Receivables			Recognized
Assessments paid during 2005	$	12.5	$	(8.6	)	$	3.9
Assessments accrued as of December 31, 2005		12.4		(10.4	)		2.0

Total	$	24.9	$	(19.0	)	$	5.9

These increases in acquisition costs and other underwriting expenses were partially offset by:

•

A $42.5 million decrease in acquisition costs and other underwriting expenses due to an automobile excess liability customer’s decision to self insure business previously written by the Company (see Premiums). During the year ended December 31, 2005, the Company incurred $9.0 million in acquisition and underwriting expenses vs. $51.5 million during the same period in 2004 for the automobile excess liability product. Net earned premiums for this product were $13.8 million for the year ended December 31, 2005 vs. $71.3 million for the same period of 2004.

•

A $40.2 million decrease in ceding commission earned pursuant to quota share agreements (see Premiums). During the year ended December 31, 2005, the Company earned $21.3 million in ceding commissions vs. $61.5 million during the same period of 2004. Ceded earned premiums pursuant to these quota share agreements were $43.7 million for the year ended December 31, 2005 vs. $132.5 million for the same period of 2004.

Other Operating Expenses: Other operating expenses increased $7.7 million to $17.1 million for the year ended December 31, 2005 from $9.4 million for the same period of 2004. $2.0 million of the increase results from a bonus accrual under the terms of an employment agreement with the Company’s founder and Chairman. The remaining increase in the level of expenses is primarily due to the overall growth of the business, offset in part by reduced commissions paid on brokered personal lines business (see Other Income).

Goodwill Impairment Loss: During the fourth quarter of 2005, the Company recorded a $25.7 million impairment charge related to the write-down of goodwill arising from the acquisition of the Company’s personal lines segment. This loss, which was the same on a pre-tax and after-tax basis, was a result of the Company’s annual evaluation of the carrying value of goodwill. The write-down was determined by comparing the fair value of the Company’s personal lines segment and the implied value of the goodwill with the carrying amounts on the balance sheet. The write-down resulted from changes in business assumptions primarily due to the following: the unprecedented hurricane activity and associated catastrophe losses experienced in 2004 and 2005; the uncertainty of 2006 catastrophe reinsurance renewal rates; the forecasted weather pattern of increased hurricane activity; the decision to change the personal lines segment business model to discontinue writing the mobile homeowners business and target new construction homeowners business; and the disruption in the Florida marketplace.

Income Tax Expense: The Company’s effective tax rate for the years ended December 31, 2005 and 2004 was 34.9% and 29.6%, respectively. The effective rate for 2005 differed from the 35% statutory rate principally due to investments in tax-exempt securities, offset by the non-deductible goodwill impairment loss. The effective tax rate for 2004 differed from the 35% statutory rate principally due to investments in tax-exempt securities.

RESULTS OF OPERATIONS
(2004 versus 2003)

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


	Commercial Lines			Specialty Lines			Personal Lines			Total
2004 Gross Written Premiums	$	874.0		$	184.4		$	112.9		$	1,171.3
2003 Gross Written Premiums	$	662.4		$	154.1		$	89.5		$	906.0
Percentage Increase		32.0	%		19.7	%		26.1	%		29.3	%
2004 Gross Earned Premiums	$	788.6		$	170.2		$	103.3		$	1,062.1
2003 Gross Earned Premiums	$	566.1		$	138.3		$	85.1		$	789.5
Percentage Increase		39.3	%		23.1	%		21.4	%		34.5	%

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

•

Consistent prospecting efforts by marketing personnel in conjunction with long term relationships formed by the Company’s marketing Regional Vice Presidents continue to result in additional prospects and increased premium writings, most notably for the Company’s various commercial package and non-profit management liability product lines.

•

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.

•

The insurance subsidiaries of Liberty American Insurance Group, Inc. (a subsidiary of the Company) have recently commenced writing a previously brokered homeowners product on a direct basis due to a recent termination of a brokerage agreement. Gross written premiums from this homeowners product approximated $17.1 million for the year ended December 31, 2004.

•

In-force policy counts have increased 14.7%, 30.0%, and 16.0% for the commercial lines, specialty lines and personal lines segments, respectively, primarily as a result of the factors discussed above.

•

Realized average rate increases on renewal business approximating 2.2%, 2.7%, and 7.1% for the commercial, specialty and personal lines segments, respectively.

•

This growth was offset in part as a result of Liberty American Insurance Group, Inc. suspending the acceptance of applications for new personal lines insurance policies the day prior to Hurricane Charley making landfall in Florida to restrict an increase in exposure during hurricane season. It is estimated that gross written premiums were reduced by approximately $9.5 million due to this restriction. The Company resumed underwriting new preferred homeowners business effective January 1, 2005.

The respective net written premium changes for commercial lines, specialty lines and personal lines segments for the year ended December 31, 2004 vs. December 31, 2003 were (in millions):


	Commercial Lines			Specialty Lines			Personal Lines			Total
2004 Net Written Premiums	$	720.6		$	154.1		$	39.8		$	914.5
2003 Net Written Premiums	$	463.9		$	107.9		$	30.5		$	602.3
Percentage Increase		55.3	%		42.8	%		30.5	%		51.8	%
2004 Net Earned Premiums	$	614.1		$	134.1		$	22.0		$	770.2
2003 Net Earned Premiums	$	431.5		$	108.8		$	34.2		$	574.5
Percentage Increase (Decrease)		42.3	%		23.3	%		(35.7	)%		34.1	%

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

•

A change in the Company’s reinsurance program whereby, effective April 1, 2003, the Company entered into a Quota Share reinsurance agreement covering substantially all of the Company’s lines of business. Under this agreement:

	•		The Company ceded 22% of its net written premiums and loss and loss adjustment expenses for policies effective April 1, 2003 through December 31, 2003 and 10% of its commercial and specialty lines net written premiums and loss and loss adjustment expenses for policies effective January 1, 2004 through December 31, 2004. During the years ended December 31, 2004 and 2003, the Company ceded $94.5 million and $199.4 million of net written premiums, respectively, and $132.5 million and $116.8 million of net earned premiums, respectively.

	•		Of the $199.4 million of net written premiums ceded during the year ended December 31, 2003, $63.5 million represents 22% of the Company’s April 1, 2003 unearned premium reserve which was ceded upon entering into the quota share agreement. This cession of the unearned premium reserve reduced net written premiums which approximated the following by segment: commercial lines ($44.0 million), specialty lines ($13.3 million), and personal lines ($6.2 million).

•	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 $15.6 million and $10.5 million for the years ended December 31, 2004 and 2003, respectively. The profit commissions reduce ceded written and earned premiums and increase net written and earned premiums.

•	The Company experienced catastrophe losses attributable to Hurricanes Charley, Frances, Ivan and Jeanne. Due to these multiple hurricane events, the Company purchased additional catastrophe reinsurance coverages (which provide coverage from the inception date of the coverage through May 31, 2005) to supplement its original catastrophe reinsurance program. The estimated aggregate pre-tax cost of these additional catastrophe reinsurance coverages is $22.9 million. Additionally, these multiple hurricane events resulted in accelerating the recognition of $26.0 million (Commercial Lines Segment ($2.2 million), and Personal Lines Segment ($23.8 million)) catastrophe reinsurance premium expense during 2004 due to the utilization of certain of the catastrophe reinsurance coverages. Of this $26.0 million, $10.3 million was attributable to the additional reinsurance coverages referred to above. This acceleration of reinsurance premium expense increased reinsurance ceded written and earned premiums and reduced net written and earned premiums.

•	On December 31, 2004 the Company terminated a quota share reinsurance agreement where under it ceded 15% of its mobile homeowners and homeowners business (personal lines segment). Upon termination the Company increased its unearned premium reserve and net written premium by $5.7 million.

Net Investment Income: Net investment income approximated $43.5 in 2004 and $38.8 in 2003. Total investments grew to $1,428.2 million at December 31, 2004 from $1,172.1 million at December 31, 2003. The growth in investment income is due to investing net cash flows provided from operating activities. The Company’s average duration of its fixed income portfolio was 4.1 years at December 31, 2004, compared to 4.0 years at December 31, 2003. The Company’s taxable equivalent book yield on its fixed income holdings approximated 4.7% at December 31, 2004, compared to 4.9% at December 31, 2003. Net investment income was reduced by $4.9 million and $2.3 million for the years ended December 31, 2004 and 2003, respectively, 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 4.05% and 4.36% for the years ended December 31, 2004 and 2003, respectively, as compared to the Lehman Brothers Intermediate Aggregate Bond Index (“the Index”) total return of 3.76% and 3.81% 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 were $0.8 million for the years ended December 31, 2004 and 2003. The Company realized net investment gains of $4.2 million and $6.4 million from the sale of fixed maturity and equity securities, respectively, for the year ended December 31, 2004, and $6.1 million and $3.7 million in non-cash realized investment losses for fixed maturity and common stock investments, respectively, as a result of the Company’s impairment evaluation. $1.4 million of the $3.7 million non-cash realized investment losses is due to a December 2004 decision to change certain of the

Company’s common stock investment managers. As a result of this decision the Company wrote down certain common stock securities since there was no longer an intent to hold the securities to recovery.

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 evaluation.

Other Income: Other income approximated $4.4 million for the year ended December 31, 2004 and $5.5 million for the same period of 2003. Other income primarily consists of commissions earned on brokered personal lines business, and to a lesser extent brokered commercial lines business. The decrease in other income is due primarily to reduced commissions earned on brokered personal lines business due to terminations of certain brokering agreements.

Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $116.9 million (32.5%) to $476.1 million for the year ended December 31, 2004 from $359.2 million for the same period of 2003 and the loss ratio decreased to 61.8% in 2004 from 62.5% in 2003. This increase in net loss and loss adjustment expenses and/or loss ratio was primarily due to:

•		A 34.1% growth in net earned premiums

•		Multiple hurricane events which resulted in:

	•		$46.7 million of hurricane catastrophe losses incurred; and

	•		Acceleration of the recognition of $26.0 million of catastrophe reinsurance premium expense, which reduced net earned premiums, due to the utilization of certain of the catastrophe reinsurance coverages. The hurricane losses and associated accelerated catastrophe reinsurance premium expense contributed 8.8 percentage points to the combined ratio.

•

Reserve actions taken during the year ended December 31, 2004 wherein the estimated gross and net unpaid loss and loss adjustment expenses for accident years 1996 through 2002 were increased by $84.8 million and $69.4 million, respectively, due principally to continued case reserve development above expectations primarily across various professional liability products in the specialty lines segment and general liability and commercial automobile liability coverages in the commercial lines segment.

These increases to the loss and loss adjustment expenses and/or loss ratio were offset in part by:

•

Reserve actions taken during the year ended December 31, 2004 wherein:

•

The estimated gross and net unpaid loss and loss adjustment expenses for accident year 2003 were decreased by $37.5 million and $34.3 million, respectively, due principally to continued better than expected claim frequency primarily for general liability and commercial automobile coverages in the commercial lines segment.

Reserve actions taken during the year ended December 31, 2003 wherein the estimated gross and net liability for residual value policies were increased by $38.8 million 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 years ended December 31, 2004 and 2003, the Company ceded $132.5 million and $116.8 million of net earned premium, respectively, and $59.7 million and $62.7 million in net loss and loss adjustment expenses, respectively, pursuant to a quota share reinsurance agreement (see Premiums).

Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $51.5 million (31.6%) to $214.4 million for the year ended December 31, 2004 from $162.9 million for the same period of 2003, and the expense ratio decreased to 27.8% in 2004 from 28.4% in 2003. This increase in acquisition costs and other underwriting expenses was due primarily to the 34.1% growth in net earned premiums. The decrease in the expense ratio is due primarily to an increase in ceding commissions earned and an increase in the ceding commission percentage earned under a quota share reinsurance agreement (see Premiums). This decrease was offset in part by the accelerated recognition of $26.0 million in catastrophe reinsurance expense which reduced net earned premiums. For the years ended December 31, 2004 and 2003, the Company ceded $132.5 million and $116.8 million, respectively, of net earned premiums and earned $61.5 million and $46.7 million, respectively, in ceding commission under a

quota share reinsurance agreement. The quota share reinsurance agreement lowered the reported expense ratio by 3.1 and 2.0 percentage points during 2004 and 2003, respectively.

Other Operating Expenses: Other operating expenses increased $1.6 million to $9.4 million for the year ended December 31, 2004 from $7.8 million for the same period of 2003. The increase in the level of expenses is primarily due to the growth of the business, offset in part by reduced commission paid on brokered personal lines business (see Other Income).

Income Tax Expense: The Company’s effective tax rate for the years ended December 31, 2004 and 2003 was 29.6% and 30.7%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities and the relative proportion of tax-exempt income to total income before tax.

Investments

The Company’s investment objectives are the realization of relatively high levels of after-tax net investment income while generating competitive after-tax total rates of return within a prudent level of risk and within the constraints of maintaining adequate securities in amount and duration to meet the Company’s cash requirements, 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, 2005 approximately 90.1% and 8.1% of the total invested assets (total investments plus cash equivalents) on a cost basis consisted of investments in fixed maturity and equity securities, respectively, versus 84.9% and 7.3%, respectively, at December 31, 2004.

Of the total investments in fixed maturity securities, asset backed, mortgage pass-through, and collateralized mortgage obligation securities, on a cost basis, amounted to $138.3 million, $282.3 million and $227.0 million, respectively, as of December 31, 2005 and $96.0 million, $229.6 million and $62.6 million, respectively, as of December 31, 2004.

The Company regularly performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed for all securities, except interests in securitized assets, meeting predetermined thresholds to determine whether such decline is other than temporary. If the Company determines a decline in value to be other than temporary, based upon its detailed review, or if a decline in value for an equity investment has persisted continuously for nine months, the cost basis of the security is written down to its fair value. The factors considered in reaching the conclusion that a decline below cost is other than temporary include, but are not limited to: whether the issuer is in financial distress; the performance of the collateral underlying a secured investment; whether a significant credit rating action has occurred; whether scheduled interest payments have been delayed or missed; whether changes in laws and/or regulations have impacted an issuer or industry; an assessment of the timing of a security’s recovery to fair value; and an ability and intent to hold the security to recovery. The amount of any writedown is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $2.2 million and $2.5 million for the years ended December 31, 2005 and 2004, respectively. The Company attributes these other than temporary declines in fair value primarily to issuer specific conditions, except as noted in the following paragraph.

During 2004 the Company’s Investment Committee (The “Committee”) engaged an investment consulting firm under a full service retainer relationship. The Committee initially directed the investment firm to review the Company’s common stock portfolio and managers with respect to style, diversification and performance. Based upon the results of this review and recommendations of the investment firm, the Committee conducted an investment manager search for a large cap growth and large cap value manager. Upon conclusion of the interview process the Committee decided, in December 2004, to change three of its current common stock managers and engaged a new large cap growth and large cap value manager. As a result of this decision, $1.4 million in non-cash investment losses was realized in the fourth quarter of 2004 due to writing down certain common stock securities, for which there was no longer an intent to hold such securities to recovery of cost.

The Company conducts its impairment evaluation and recognition for interests in securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board (the “EITF”). Pursuant to this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $0 million and $7.3 million for the years ended December 31, 2005 and 2004, respectively. These non-cash realized investment losses recognized in 2004 were from investments primarily in collateralized bond obligations which were

impacted by recent years’ non investment grade default rates that were higher than historic averages and from investments in other asset backed securities which experienced extension of cash flows on the underlying collateral.

The Company’s fixed maturity portfolio amounted to $1,761.5 million and $1,299.7 million, as of December 31, 2005 and December 31, 2004, respectively, of which 99.9% and 99.3% of the portfolio as of December 31, 2005 and December 31, 2004, respectively, was comprised of investment grade securities. The Company had fixed maturity investments with gross unrealized losses amounting to $23.5 million and $4.9 million as of December 31, 2005 and December 31, 2004, respectively. Of these amounts, interests in securitized assets had gross unrealized losses amounting to $9.7 million and $1.3 million as of December 31, 2005 and December 31, 2004, respectively. The remaining unrealized losses are attributable largely to market price changes due to interest rate increases, since the investments were purchased, and are not considered to be other than temporary impairments, given the ability and intent to hold the securities to recovery. As discussed above, the Company’s impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the EITF.

The following table identifies the period of time securities with an unrealized loss at December 31, 2005 have continuously been in an unrealized loss position. None of the amounts displayed in the table are due to non-investment grade fixed maturity securities. No issuer of securities or industry represents more than 1.5% and 19.4%, respectively, of the total estimated fair value, or 2.2% and 20.9%, respectively, of the total gross unrealized loss included in the table below. As mentioned above, there are certain risks and uncertainties inherent in the Company’s impairment methodology, including, but not limited to, the financial condition of specific industry sectors and the resultant effect on any such underlying security collateral values and changes in accounting, tax, and/or regulatory requirements which may have an effect on either, or both, the investor and/or the issuer. Should the Company subsequently determine a decline in the fair value below the cost basis to be other than temporary, the security would be written down to its fair value and the difference would be included in earnings as a realized loss for the period such determination was made.


	Gross Unrealized Losses as of December 31, 2005
	(in millions)
	Fixed Maturities
	Available for Sale
	Excluding Interests
Continuous time in	in Securitized		Interests in		Fixed Maturities
Unrealized loss position	Assets		Securitized Assets		Available for Sale		Equity Securities		Total Investments
0 – 3 months	$	0.1	$	0.3	$	0.4	$	1.6	$	2.0
>3 – 6 months		3.2		4.4		7.6		0.7		8.3
>6 – 9 months		0.6		0.4		1.0		0.7		1.7
>9 – 12 months		3.4		1.6		5.0		—		5.0
>12 – 18 months		3.2		1.7		4.9		—		4.9
>18 – 24 months		3.2		0.6		3.8		—		3.8
> 24 months		0.1		0.7		0.8		—		0.8

Total Gross Unrealized Losses	$	13.8	$	9.7	$	23.5	$	3.0	$	26.5

Estimated fair value of securities with a gross unrealized loss	$	766.9	$	555.7	$	1,322.6	$	38.7	$	1,361.3

Based upon the Company’s impairment evaluation as of December 31, 2005, it was concluded that the remaining unrealized losses in the table above are not other than temporary.

During 2005 the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.9 million and $5.5 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $63.6 million and $56.5 million, respectively. During 2004 the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $1.3 million and $1.9 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $30.7 million and $7.5 million, respectively.

$1.2 million of the $5.5 million gross loss on the sale of equity securities for the year ended December 31, 2005 was the result of the liquidation of certain of the Company’s equity portfolios following the Company’s decision to change four of its common stock investment managers. This $1.2 million realized gross loss was in addition to the previously reported $1.4 million impairment loss recognized during the three months ended December 31, 2004 upon the Company’s initial decision to change three of its common stock investment managers and no longer hold the securities to recovery. The remaining gross loss on the sale of fixed maturity and equity securities resulted from the decision to sell securities based upon an assessment of economic

conditions and ongoing portfolio management objectives of attempting to maximize the Company’s after-tax net investment income.

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 and shows the effect of hypothetical changes in interest rates as of December 31, 2005 and 2004. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency.

(Dollars in Thousands)


				Estimated
			Hypothetical	Fair Value after
			Change in	Hypothetical		Hypothetical Percentage
			Interest	Changes in		Increase (Decrease) in
	Estimated		Rates (bp=basis	Interest					Shareholders’
	Fair Value		points)	Rates		Fair Value			Equity
December 31, 2005
Investments
Total Fixed Maturities Available For Sale	$	1,761,530	200 bp decrease	$	1,894,692		7.6	%		10.6	%
			100 bp decrease	$	1,831,630		4.0	%		5.6	%
			50 bp decrease	$	1,797,245		2.0	%		2.8	%
			50 bp increase	$	1,725,460		(2.1	)%		(2.9	)%
			100 bp increase	$	1,689,499		(4.1	)%		(5.7	)%
			200 bp increase	$	1,620,123		(8.0	)%		(11.3	)%

December 31, 2004
Investments
Total Fixed Maturities Available For Sale	$	1,299,704	200 bp decrease	$	1,397,335		7.5	%		9.9	%
			100 bp decrease	$	1,350,997		4.0	%		5.2	%
			50 bp decrease	$	1,326,263		2.0	%		2.7	%
			50 bp increase	$	1,272,549		(2.1	)%		(2.7	)%
			100 bp increase	$	1,245,506		(4.2	)%		(5.5	)%
			200 bp increase	$	1,192,788		(8.2	)%		(10.8	)%

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 and proceeds from the issuance of shares pursuant to the Company’s Stock Purchase and Performance Based Compensation Plans. For the year ended December 31, 2005, payments to PCHC pursuant to such tax allocation agreements totaled $77.0 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 $442.7 million at December 31, 2005. Of this amount, the insurance subsidiaries are entitled to pay a total of approximately $162.0 million of dividends in 2006 without obtaining prior approval from the Insurance Commissioner of the Commonwealth of Pennsylvania or State of Florida (see Business Regulation). No dividends were paid during 2005. During 2005, PCHC contributed $27.0 million to the surplus of PIIC. During 2005, there were no stock repurchases under the stock repurchase authorization. At December 31, 2005, the remaining stock repurchase authorization is $45.0 million.

The Company produced net cash from operations of $430.7 million in 2005, $390.5 million in 2004 and $298.5 million in 2003. 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 2005 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 $234.7 million in 2005, $285.9 million in 2004, and $237.4 million in 2003. Net cash from operations also included cash provided from tax savings from the issuance of shares pursuant to stock based compensation plans amounting to $7.0 million, $1.0 million and $0.9 million for 2005, 2004 and 2003, respectively. Management believes that the Company has adequate liquidity to pay all claims and meet all other cash needs.

During 2005, the Company experienced catastrophe losses attributable to Hurricanes Dennis, Katrina, Rita and Wilma. The catastrophe losses primarily impacted the Company’s personal lines segment and, to a lesser extent, its commercial lines segment. The gross catastrophe loss and loss adjustment expense estimates as a result of these hurricanes was $72.6 million for the personal lines segment and $54.2 million for the commercial lines segment. Loss estimates may still change in the future due in part to the number of claims which have not yet been completely remediated or for which the property covered by the claim has not been repaired. Under the Company’s catastrophe reinsurance programs in place at the time of these hurricane events, the Company had a $3.5 million pre-tax per occurrence loss retention for its personal lines catastrophe losses and a $5.0 million pre-tax per occurrence loss retention for its commercial lines catastrophe losses. The Company estimates its net aggregate retention losses for the four hurricane events is $24.7 million.

The Company used $2.8 million of net cash from financing activities during 2005. Cash provided from financing activities consisted of $23.7 million from the Company’s stock purchase plans; $11.4 million in proceeds from Federal Home Loan Bank of Pittsburgh (“FHLB”) borrowings; $4.6 million from the exercise of stock options issued under the Company’s performance based compensation plan and $2.3 million from the collection of notes receivable associated with the Company’s employee stock purchase plans. Cash used by financing activities consisted of $44.8 million of repayments of FHLB loans.

Two of the Company’s insurance subsidiaries are members of the FHLB. A primary advantage of FHLB membership is the ability of members to access credit products from a reliable capital markets provider. The availability of any one member’s access to credit is based upon its FHLB eligible collateral. The insurance subsidiaries in the past have utilized a portion of their borrowing capacity to purchase a diversified portfolio in investment grade floating rate securities. These purchases were funded by floating rate FHLB borrowings to achieve a positive spread between the rate of interest on these securities and borrowing rates. The Company prepaid outstanding FHLB loans during the first quarter of 2005. At December 31, 2005 the insurance subsidiaries’ unused borrowing capacity was $391.2 million. The borrowing capacity will provide an immediately available line of credit.

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 managing capacity constraints. 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. At December 31, 2005, approximately 89.7% of the Company’s reinsurance receivables are either with reinsurers rated “A” (Excellent) or better by A.M. Best Company or are fully collateralized. Approximately $18.8 million of the Company’s reinsurance receivable balances at December 31, 2005 are with Converium Reinsurance North American Inc. (“CRNA”). During the third quarter of 2004, Converium AG (Switzerland), CRNA’s parent company, placed CRNA into an orderly runoff. Of the $18.8 million of reinsurance receivable balances with CRNA, $1.8 million are for receivables on paid losses and $17.0 million are for receivables on case reserves and IBNR. The Company is monitoring CRNA’s ability to pay claims, and at this time, believes that the amounts with CRNA will be collectible.

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, 2005, 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, 2005, the balance on deposit for the benefit of such policyholders totaled approximately $15.1 million.

The Insurance Subsidiaries, which operate under intercompany reinsurance pooling agreements, 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 1.6-to-1.0 and 1.8-to-1.0 for 2005 and 2004, 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, 2005, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based capital requirements of $239.0 million, $12.4 million, $7.2 million and $6.1 million, respectively, by 149%, 268%, 237% and 318%, respectively.

CONTRACTUAL OBLIGATIONS

The Company has certain contractual obligations and commitments as of December 31, 2005 which are summarized below:


	Payments Due by Period
	(in thousands)
			Less than						More Than
Contractual Obligations	Total		1 year		1-3 years		4-5 years		5 years
Gross Loss and Loss Adjustment Expense Reserves (1)	$	1,245,763	$	501,253	$	473,273	$	197,926	$	73,311
Reinsurance Premiums Payable Under Terms of Reinsurance Contracts (2)		67,608		67,608		—		—		—
Operating Leases		13,014		4,330		7,325		892		467
Other Long-Term Contractual Commitments (3,5)		3,688		2,744		444		200		300

Total (4)	$	1,330,073	$	575,935	$	481,042	$	199,018	$	74,078


(1)		Although there is typically no minimum contractual commitment with insurance contracts, the cash flows displayed in the table above represent the Company’s best estimate as to amount and timing of such.

(2)		Represents payments based on estimated subject earned premiums under certain reinsurance contracts.

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

(4)		As of December 31, 2005, the Company has recorded a $2.0 million liability for a bonus amount due to the Company’s founder and Chairman under the terms of his employment agreement with the Company. This payment is due to be paid six months after the date of the termination of his employment with the Company. Since his date of termination is uncertain, this payment has been excluded from the above table.

(5)		The Company anticipates that it will acquire in 2006, pursuant to the terms of a Purchase Agreement entered into in 2005, policy renewals, customer lists and other assets relating to an insurance program developed by an insurance brokerage company. The purchase price is (a) $1,500,000, of which $1,000,000 has already been paid to the seller as a deposit, and the $500,000 balance will be paid at closing under the Purchase Agreement, plus (b) an additional amount payable in four installments. The first installment will be equal to the excess of (a) 25% of the Specified Amount (as that term is hereinafter defined) over (b) $500,000, and is payable within a specified period of time after closing. The next three installments are each in the amount of 25% of the Specified Amount, and are payable on the first through third anniversaries, respectively, of the Date on which the first installment is payable. The Specified Amount is the amount of the gross written annual premiums of the policies in force (with certain exceptions) relating to the insurance program referred to above. Each of the installment payments is subject to increase or decrease, based on a formula contained in the Purchase Agreement.

INFLATION

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

On March 29, 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides guidance on accounting for share-based payments. SAB 107 summarizes the views of the SEC regarding the interaction between Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R), “Share-Based Payment” and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. The Company will utilize the guidance provided by SAB 107 when implementing SFAS 123R.

On April 14, 2005 the SEC announced the adoption of a new rule that amends the compliance dates for the adoption of SFAS 123R. Under SFAS 123R, public companies would have been required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005. The SEC’s new rule allows public companies to implement SFAS 123R at the beginning of the next fiscal year after June 15, 2005. The Company intends to adopt the provisions of SFAS 123R effective January 1, 2006.

FORWARD-LOOKING INFORMATION

Certain information included in this report and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company’s business, and the other matters referred to above include, but are not limited to: (i) changes in the business environment in which the Company operates, including inflation and interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii) competitive product and pricing activity; (iv) difficulties of managing growth profitably; (v) claims development and the adequacy of the Company’s 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 the Company’s reinsurers to pay; (ix) future terrorist attacks; (x) the outcome of the Securities and Exchange Commission’s industry-wide investigation relating to the use of non-traditional insurance products, including finite risk reinsurance arrangements; and (xi) the outcome of industry-wide investigations being conducted by various insurance departments, attorneys-general and other authorities relating to the use of contingent commission arrangements. The Company does not intend to publicly update any forward looking statement, except as may be required by law.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(Dollars in Thousands)


				Estimated
			Hypothetical	Fair Value after
			Change in	Hypothetical		Hypothetical Percentage
			Interest	Changes in		Increase (Decrease) in
	Estimated		Rates (bp=basis	Interest					Shareholders’
	Fair Value		points)	Rates		Fair Value			Equity
December 31, 2005
Investments
Total Fixed Maturities Available For Sale	$	1,761,530	200 bp decrease	$	1,894,692		7.6	%		10.6	%
			100 bp decrease	$	1,831,630		4.0	%		5.6	%
			50 bp decrease	$	1,797,245		2.0	%		2.8	%
			50 bp increase	$	1,725,460		(2.1	)%		(2.9	)%
			100 bp increase	$	1,689,499		(4.1	)%		(5.7	)%
			200 bp increase	$	1,620,123		(8.0	)%		(11.3	)%

December 31, 2004
Investments
Total Fixed Maturities Available For Sale	$	1,299,704	200 bp decrease	$	1,397,335		7.5	%		9.9	%
			100 bp decrease	$	1,350,997		4.0	%		5.2	%
			50 bp decrease	$	1,326,263		2.0	%		2.7	%
			50 bp increase	$	1,272,549		(2.1	)%		(2.7	)%
			100 bp increase	$	1,245,506		(4.2	)%		(5.5	)%
			200 bp increase	$	1,192,788		(8.2	)%		(10.8	)%

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


Financial Statements		Page
Report of Independent Registered Public Accounting Firm			50
Consolidated Balance Sheets — As of December 31, 2005 and 2004			52
Consolidated Statements of Operations and Comprehensive Income — For the Years Ended December 31, 2005, 2004 and 2003			53
Consolidated Statements of Changes in Shareholders’ Equity — For the Years Ended December 31, 2005, 2004 and 2003			54
Consolidated Statements of Cash Flows — For the Years Ended December 31, 2005, 2004, and 2003			55

Notes to Consolidated Financial Statements			56-77

Financial Statement Schedules:

Schedule
I	Summary of Investments -		S-1

	Other Than Investments in Related Parties As of December 31, 2005

II	Condensed Financial Information of Registrant As of December 31, 2005 and 2004 and For Each of the Three Years in the Period Ended December 31, 2005		S-2—S-4

III	Supplementary Insurance Information As of and For the Years Ended December 31, 2005, 2004 and 2003		S-5

IV	Reinsurance For the Years ended December 31, 2005, 2004 and 2003		S-6

VI	Supplementary Information Concerning Property-Casualty Insurance Operations As of and For the Years Ended December 31, 2005, 2004 and 2003		S-7

Report of Independent Registered Public Accounting Firm

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

We have completed integrated audits of Philadelphia Consolidated Holding Corp. and Subsidiaries’ 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedules

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Philadelphia Consolidated Holding Corp. and Subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying indexpresent fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 of financial statements 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.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)


	As of December 31,
	2005			2004
ASSETS
Investments:
Fixed Maturities Available for Sale at Market (Amortized Cost $1,778,215 and $1,287,094)	$	1,761,530		$	1,299,704
Equity Securities at Market (Cost $160,926 and $110,601)		173,455			128,447

Total Investments		1,934,985			1,428,151
Cash and Cash Equivalents		74,385			195,496
Accrued Investment Income		18,095			13,475
Premiums Receivable		286,778			229,502
Prepaid Reinsurance Premiums and Reinsurance Receivables		396,248			429,850
Deferred Income Taxes		31,893			14,396
Deferred Acquisition Costs		129,486			91,647
Property and Equipment, Net		23,886			21,281
Goodwill		—			25,724
Other Assets		32,070			36,134

Total Assets	$	2,927,826		$	2,485,656

LIABILITIES and SHAREHOLDERS’ EQUITY
Policy Liabilities and Accruals:
Unpaid Loss and Loss Adjustment Expenses	$	1,245,763		$	996,667
Unearned Premiums		631,468			531,849

Total Policy Liabilities and Accruals		1,877,231			1,528,516
Funds Held Payable to Reinsurer		39,221			131,119
Loans Payable		—			33,406
Premiums Payable		58,839			48,111
Other Liabilities		136,039			100,347

Total Liabilities		2,111,330			1,841,499

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, 69,266,016 and 66,821,751
Shares Issued and Outstanding		336,277			292,856
Notes Receivable from Shareholders		(7,217	)		(5,465	)
Restricted Stock Deferred Compensation Cost		(3,520	)		—
Accumulated Other Comprehensive Income (Loss)		(2,702	)		19,796
Retained Earnings		493,658			336,970

Total Shareholders’ Equity		816,496			644,157

Total Liabilities and Shareholders’ Equity	$	2,927,826		$	2,485,656

Share information restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006, see Note 20.

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,
	2005			2004			2003
Revenue:
Net Earned Premiums	$	976,647		$	770,248		$	574,518
Net Investment Income		63,709			43,490			38,806
Net Realized Investment Gain		9,609			761			794
Other Income		1,464			4,357			5,519

Total Revenue		1,051,429			818,856			619,637

Losses and Expenses:
Loss and Loss Adjustment Expenses		711,706			1,232,645			469,547
Net Reinsurance Recoveries		(207,700	)		(756,530	)		(110,370	)

Net Loss and Loss Adjustment Expenses		504,006			476,115			359,177
Acquisition Costs and Other Underwriting Expenses		263,759			214,369			162,912
Other Operating Expenses		17,124			9,439			7,822
Goodwill Impairment Loss		25,724			—			—

Total Losses and Expenses		810,613			699,923			529,911

Income Before Income Taxes		240,816			118,933			89,726

Income Tax Expense (Benefit):
Current		89,510			33,158			38,430
Deferred		(5,382	)		2,092			(10,891	)

Total Income Tax Expense		84,128			35,250			27,539

Net Income	$	156,688		$	83,683		$	62,187

Other Comprehensive Income (Loss), Net of Tax:
Holding Gain (Loss) Arising during Year	$	(16,252	)	$	3,576		$	1,046
Reclassification Adjustment		(6,246	)		(495	)		(516	)

Other Comprehensive Income (Loss)		(22,498	)		3,081			530

Comprehensive Income	$	134,190		$	86,764		$	62,717

Per Average Share Data:
Basic Earnings Per Share	$	2.29		$	1.26		$	0.95

Diluted Earnings Per Share	$	2.14		$	1.20		$	0.91

Weighted-Average Common Shares Outstanding		68,551,572			66,464,460			65,726,364
Weighted-Average Share Equivalents Outstanding		4,533,807			3,456,099			2,254,800

Weighted-Average Shares and Share Equivalents Outstanding		73,085,379			69,920,559			67,981,164

Share information restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006, see Note 20.

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,
	2005			2004			2003
Common Shares:
Balance at Beginning of Year		66,821,751			66,022,656			65,606,631
Issuance of Shares Pursuant to Stock Purchase Plans, net		1,589,406			597,345			116,400
Issuance of Shares Pursuant to Stock based Compensation Plans		854,859			201,750			299,625

Balance at End of Year		69,266,016			66,821,751			66,022,656

Treasury Shares:
Balance at Beginning of Year		—			—			—
Issuance of Shares Pursuant to Stock based Compensation Plans		—			—			(19,500	)
Issuance of Shares Pursuant to Stock Purchase Plans, net		—			—			(10,500	)
Shares Repurchased Pursuant to Authorization		—			—			30,000

Balance at End of Year		—			—			—

Common Stock:
Balance at Beginning of Year	$	292,856		$	281,088		$	276,945
Issuance of Shares Pursuant to Stock Purchase Plans		27,817			9,585			1,291
Issuance of Shares Pursuant to Stock based Compensation Plans		15,459			2,183			2,852
Other		145			—			—

Balance at End of Year		336,277			292,856			281,088

Notes Receivable from Shareholders:
Balance at Beginning of Year		(5,465	)		(5,444	)		(6,407	)
Notes Receivable Issued Pursuant to Employee Stock Purchase Plans		(4,095	)		(2,326	)		(1,065	)
Collection of Notes Receivable		2,343			2,305			2,028

Balance at End of Year		(7,217	)		(5,465	)		(5,444	)

Restricted Stock Deferred Compensation Cost:
Balance at Beginning of Year		—			—			—
Deferred Compensation Cost Pursuant to Issuance of Restricted Stock		(3,926	)		—			—
Amortization of Deferred Compensation Cost		406			—			—

Balance at End of Year		(3,520	)		—			—

Accumulated Other Comprehensive Income (Loss), Net of Deferred Income Taxes:
Balance at Beginning of Year		19,796			16,715			16,185
Other Comprehensive Income (Loss), Net of Taxes		(22,498	)		3,081			530

Balance at End of Year		(2,702	)		19,796			16,715

Retained Earnings:
Balance at Beginning of Year		336,970			253,287			191,100
Net Income		156,688			83,683			62,187

Balance at End of Year		493,658			336,970			253,287

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

Balance at End of Year		—			—			—

Total Shareholders’ Equity	$	816,496		$	644,157		$	545,646

Share information restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006, see Note 20.

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,
	2005			2004			2003
Cash Flows from Operating Activities:
Net Income	$	156,688		$	83,683		$	62,187
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Net Realized Investment Gain		(9,609	)		(761	)		(794	)
Amortization of Investment Premiums, Net of Discount		11,707			9,175			5,432
Depreciation		4,798			3,494			2,665
Amortization of Stock Based Compensation Costs		551			—			—
Deferred Income Tax Expense (Benefit)		(5,382	)		2,092			(10,891	)
Change in Premiums Receivable		(57,276	)		(49,993	)		(49,502	)
Change in Prepaid Reinsurance Premiums and Reinsurance Receivables, Net of Funds Held Payable to Reinsurer		(58,296	)		(116,585	)		(30,794	)
Change in Other Receivables		(4,620	)		(2,467	)		(2,437	)
Change in Deferred Acquisition Costs		(37,839	)		(35,359	)		4,984
Goodwill Impairment Loss		25,724			—			—
Change in Income Taxes Payable		13,202			(8,563	)		513
Change in Other Assets		(909	)		(6,392	)		(14,721	)
Change in Unpaid Loss and Loss Adjustment Expenses		249,096			369,581			181,538
Change in Unearned Premiums		99,619			109,260			116,496
Change in Other Liabilities		36,338			32,341			32,958
Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans		6,952			1,031			889

Net Cash Provided by Operating Activities		430,744			390,537			298,523

Cash Flows from Investing Activities:
Proceeds from Sales of Investments in Fixed Maturities		185,576			198,442			184,082
Proceeds from Maturity of Investments in Fixed Maturities		200,615			195,317			202,284
Proceeds from Sales of Investments in Equity Securities		160,158			43,734			23,992
Cost of Fixed Maturities Acquired		(883,560	)		(622,238	)		(628,879	)
Cost of Equity Securities Acquired		(201,333	)		(71,924	)		(54,956	)
Settlement of Cash Flow Hedge		(3,148	)		—			—
Purchase of Property and Equipment, Net		(7,403	)		(7,954	)		(6,692	)

Net Cash Used for Investing Activities		(549,095	)		(264,623	)		(280,169	)

Cash Flows from Financing Activities:
Proceeds from Loans Payable		11,381			76,104			62,340
Repayments on Loans Payable		(44,787	)		(91,180	)		(52,971	)
Proceeds from Exercise of Employee Stock Options		4,582			1,151			2,057
Proceeds from Collection of Notes Receivable		2,343			2,305			2,028
Proceeds from Shares Issued Pursuant to Stock Purchase Plans		23,721			7,260			432
Cost of Common Stock Repurchased		—			—			(300	)

Net Cash Provided (Used) by Financing Activities		(2,760	)		(4,360	)		13,586

Net Increase (Decrease) in Cash and Cash Equivalents		(121,111	)		121,554			31,940
Cash and Cash Equivalents at Beginning of Year		195,496			73,942			42,002

Cash and Cash Equivalents at End of Year	$	74,385		$	195,496		$	73,942

Cash Paid During the Year for:
Income Taxes	$	73,903		$	41,442		$	36,319
Interest		165			639			638
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase Plans in Exchange for Notes Receivable	$	4,095		$	2,326		$	1,065

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, Liberty American Insurance Services, 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 homeowners and manufactured housing 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.

(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. For mortgage and asset-backed securities (“structured securities”) of high credit quality, changes in expected cash flows are recognized using the retrospective method. For structured securities where the possibility of credit loss is other than remote, changes in expected cash flows are recognized on the prospective method over the remaining life of the securities. Cash flow assumptions for structured securities are obtained from broker dealer survey values or internal estimates consistent with the current interest rate and economic environments. These assumptions represent the Company’s best estimate of the amount and timing of estimated principal and interest cash flows based on current information and events that a market participant would use in determining the current fair value of the security. The Company’s total investments include $3.4 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, on a cost basis, amounted to $138.3 million, $282.3 million and $227.0 million, respectively, at December 31, 2005 and $96.0 million, $229.6 million and $62.6 million, respectively, at December 31, 2004.

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’s impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. Pursuant to this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. Non-cash realized investment losses recorded for the years ended December 31, 2005, 2004 and 2003 were $0 million, $7.3 million, and $9.3 million, respectively, as a result of the Company’s impairment evaluation for investments in securitized assets.

The Company held no derivative financial instruments, nor embedded financial derivatives, as of December 31, 2005 and 2004.

(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 performs an annual impairment analysis to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). This annual test is performed at December 31 of each year or more frequently if events or circumstance change that require the Company to perform the impairment analysis on an interim basis.

Goodwill impairment testing requires the evaluation of the fair value of each reporting unit to its carrying value, including the goodwill, and an impairment charge is recorded if the carrying amount of the reporting unit exceeds its estimated fair value. As a

result of the impairment analysis, the Company recorded a $25.7 million impairment charge during the fourth quarter of 2005 related to the write-down of goodwill arising from the acquisition of the Company’s personal lines segment. (See Note 8)

(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. Estimates for unpaid loss and loss adjustment expenses are based upon management’s assessment of known facts and circumstances, review of past loss experience and settlement patterns and consideration of other factors such as legal, social, and economic developments. These adjustments are reviewed regularly and any adjustments therefrom are made in the accounting period in which the adjustment arose. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at December 31, 2005, 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, 2005 and 2004, the allowance for doubtful accounts amounted to $0.8 million and $0.6 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, 2005 and 2004, the allowance for uncollectible reinsurance amounted to $1.0 million. 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 from state insurance facilities. 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 other state insurance facility 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.

(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. Basic and diluted earnings per share and share equivalents outstanding have been retroactively restated to reflect the increased number of common shares resulting from a three-for-one stock split that was announced in February 2006 and distributed to shareholders on March 1, 2006. A total of 46,504,434 additional shares were issued as a result of the stock split. The par value of the Company’s stock remained unchanged.

(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 $(8.8) million, $1.9 million and $0.6 million in 2005, 2004 and 2003, respectively. The related tax effect of Reclassification Adjustments was $(3.4) million, $(0.3) million, and $(0.3) million in 2005, 2004 and 2003, respectively.

(m) Stock Based Compensation Plans

In December 2004, the FASB revised Statement No. 123 (SFAS 123R), “Share-Based Payment,” which requires companies to expense the estimated fair value of employee stock options and similar awards, for all options vesting, granted, or modified after the effective date of this revised statement. The accounting provisions of SFAS 123R were to become effective for interim periods beginning after June 15, 2005. However, in April 2005, the Securities and Exchange Commission (SEC) adopted a final rule amending Rule 4-01(a) of Regulation S-X regarding the compliance date for SFAS 123R. The effect of this ruling is to delay the effective date of SFAS 123R to the first interim or annual reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. As a result, the accounting provisions of SFAS 123R will become effective for the Company’s financial statements beginning in 2006.

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):


	2005		2004		2003
Net Income As Reported	$	156,688	$	83,683	$	62,187
Assumed Stock Compensation Cost		6,354		4,107		3,029

Pro Forma Net Income	$	150,334	$	79,576	$	59,158

Diluted Earnings Per Average Common Share as Reported (1)	$	2.14	$	1.20	$	0.91

Pro Forma Diluted Earnings Per Average Common Share (1)	$	2.06	$	1.14	$	0.87


(1)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

(n) New Accounting Pronouncements

On April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance dates for the adoption of SFAS 123R. Under SFAS 123R, public companies would have been required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005. The SEC’s new rule allows public companies to implement SFAS 123R at the beginning of the next fiscal year after June 15, 2005. The Company intends to adopt the provisions of SFAS 123R effective January 1, 2006.

2. 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, 2005 and 2004 was $691.0 million and $503.7 million, respectively. Combined statutory net income for the years ended December 31, 2005, 2004 and 2003 was $155.5 million, $48.2 million, and $49.9 million, respectively. The Company made capital contributions of $27.0 million and $9.5 million to the Insurance Subsidiaries for the years ended December 31, 2005 and 2004, 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 2006 without prior approval is $162.0 million. There were no dividends paid for the years ended December 31, 2005 or 2004.

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, 2005, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based capital requirement of $239.0 million, $12.4 million, $7.2 million and $6.1 million, respectively, by 149%, 268%, 237% and 318%, respectively.

3. Investments

The Company invests primarily in investment grade fixed maturities which possessed a weighted average quality of AAA at December 31, 2005. In addition, 99.97% 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 at December 31, 2005. The cost, gross unrealized gains and losses and estimated market value of investments as of December 31, 2005 and 2004 are as follows (in thousands):


			Gross		Gross		Estimated
			Unrealized		Unrealized		Market
	Cost (1)		Gains		Losses		Value (2)
December 31, 2005
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies	$	62,311	$	48	$	646	$	61,713
Obligations of States and Political Subdivisions		821,456		5,046		6,867		819,635
Corporate and Bank Debt Securities		246,918		555		6,263		241,210
Asset Backed Securities		138,292		728		1,193		137,827
Mortgage Pass-Through Securities		282,256		201		5,521		276,936
Collateralized Mortgage Obligations		226,982		189		2,962		224,209

Total Fixed Maturities Available for Sale		1,778,215		6,767		23,452		1,761,530

Equity Securities		160,926		15,541		3,012		173,455

Total Investments	$	1,939,141	$	22,308	$	26,464	$	1,934,985

December 31, 2004
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies	$	62,929	$	172	$	432	$	62,669
Obligations of States and Political Subdivisions		617,464		10,575		1,447		626,592
Corporate and Bank Debt Securities		218,434		2,580		1,745		219,269
Asset Backed Securities		96,029		1,460		433		97,056
Mortgage Pass-Through Securities		229,623		2,470		483		231,610
Collateralized Mortgage Obligations		62,615		310		417		62,508

Total Fixed Maturities Available for Sale		1,287,094		17,567		4,957		1,299,704

Equity Securities		110,601		18,216		370		128,447

Total Investments	$	1,397,695	$	35,783	$	5,327	$	1,428,151


(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 Company regularly performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed for all securities, except interests in securitized assets, meeting predetermined thresholds to determine whether such decline is other than temporary. If the Company determines a decline in value to be other than temporary, based upon its detailed review, or if a decline in value for an equity investment has persisted continuously for nine months, the cost basis of the security is written down to its fair value. The factors considered in reaching the conclusion that a decline below cost is other than temporary include, but are not limited to: whether the issuer is in financial distress; the performance of the collateral underlying a secured investment; whether a significant credit rating action has occurred; whether scheduled interest payments have been delayed or missed; whether changes in laws and/or regulations have impacted an issuer or industry; an assessment of the timing of a security’s recovery to cost; and an ability and intent to hold the security to recovery. 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 $2.2 million, $2.5 million and $1.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. The Company attributes these other than temporary declines in fair value primarily to issuer specific conditions, except for as noted in the following paragraph.

Additionally, the Company conducts its impairment evaluation and recognition for interests in securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board (the “EITF”). Pursuant to this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $0 million, $7.3 million and $9.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. These non-cash realized investment losses were from investments primarily in collateralized bond obligations which were impacted by recent years’ non investment grade default rates that were higher than historic averages and from investments in other asset backed securities which experienced extension of cash flows on the underlying collateral.

The following table identifies the period of time securities with an unrealized loss at December 31, 2005 have continuously been in an unrealized loss position. None of the amounts displayed in the table are due to non-investment grade fixed maturity securities. No issuer of securities or industry represents more than 1.5% and 19.4%, respectively, of the total estimated fair value, or 2.2% and 20.9%, 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, including, but not limited to, the financial condition of specific industry sectors and the resultant effect on any such underlying security collateral values and changes in accounting, tax, and/or regulatory requirements which may have an effect on either, or both, the investor and/or the issuer. Should the Company subsequently determine a decline in the fair value below the cost basis to be other than temporary, the security would be written down to its fair value and the difference would be included in earnings as a realized loss for the period such determination was made.


	As of December 31, 2005
(In Thousands)	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	$	10,968	$	141	$	47,030	$	505	$	57,998	$	646
Obligations of States and Political Subdivisions		391,586		4,732		107,099		2,135		498,685		6,867
Corporate and Bank Debt Securities		84,848		2,367		125,359		3,896		210,207		6,263
Asset Backed Securities		75,151		648		20,029		545		95,180		1,193
Mortgage Pass-Through Securities		202,901		3,661		61,399		1,860		264,300		5,521
Collateralized Mortgage Obligations		175,397		2,387		20,865		575		196,262		2,962

Total Fixed Maturities Available for Sale		940,851		13,936		381,781		9,516		1,322,632		23,452
Equity Securities		38,709		3,012		—		—		38,709		3,012

Total Investments	$	979,560	$	16,948	$	381,781	$	9,516	$	1,361,341	$	26,464

Based upon the Company’s impairment evaluation as of December 31, 2005, it was concluded that the remaining unrealized losses in the table above are not other than temporary.

During 2005, the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.9 million and $5.5 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $63.6 million and $56.5 million, respectively. During 2004, the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $1.3 million and $1.9 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $30.7 million and $7.5 million, respectively. 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. The decision to sell these securities was based upon management’s assessment of economic conditions.

The Company had no debt or equity investments in a single issuer totaling in excess of 10% of shareholders’ equity at December 31, 2005.

The cost and estimated market value of fixed maturity securities at December 31, 2005, by remaining contractual maturity, are shown 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.

(In Thousands)


			Estimated
	Amortized		Market
	Cost (1)		Value (2)
Due in One Year or Less	$	109,860	$	109,002
Due After One Year Through Five Years		272,048		267,600
Due After Five Years through Ten Years		345,173		341,737
Due After Ten Years		403,604		404,219
Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities		647,530		638,972

	$	1,778,215	$	1,761,530


(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, 2005, 2004, and 2003 are as follows (in thousands):


	2005			2004			2003
Fixed Maturities	$	61,550		$	47,739		$	41,393
Equity Securities		2,585			2,046			1,373
Cash and Cash Equivalents		3,943			1,443			656

Total Investment Income		68,078			51,228			43,422
Funds Held Interest Credit		(1,486	)		(4,853	)		(2,318	)
Investment Expense		(2,883	)		(2,885	)		(2,298	)

Net Investment Income	$	63,709		$	43,490		$	38,806

There was one remaining non-income producing fixed maturity security in the investment portfolio as of December 31, 2005.

Realized pre-tax investment gains (losses) for the years ended December 31, 2005, 2004, and 2003 are as follows (in thousands):


	2005			2004			2003
Fixed Maturities
Gross Realized Gains	$	4,454		$	5,472		$	7,832
Gross Realized Losses		(931	)		(7,437	)		(4,718	)

Net Fixed Maturities Gain (Loss)		3,523			(1,965	)		3,114

Equity Securities
Gross Realized Gains		17,040			8,340			4,903
Gross Realized Losses		(7,806	)		(5,614	)		(7,223	)

Net Equity Securities Gain (Loss)		9,234			2,726			(2,320	)

Cash Flow Hedge Realized Loss		(3,148	)		—			—

Total Net Realized Investment Gain	$	9,609		$	761		$	794

4. Restricted Assets

The Insurance Subsidiaries have investments, principally U.S. Treasury securities and Obligations of States and Political Subdivisions, on deposit with the various states in which they are licensed insurers. The carrying value of the securities on deposit was $15.1 million and $15.3 million as of December 31, 2005 and 2004, respectively.

Additionally, the Insurance Subsidiaries had investments, principally Mortgage Pass-Through securities, which collateralized the borrowings from the Federal Home Loan Bank of Pittsburgh, see Note 11. The carrying value of these investments was $0 million and $46.8 million as of December 31, 2005 and 2004, respectively.

PIIC and PIC are required to hold a certain minimum amount of Federal Home Loan Bank of Pittsburgh common stock as a requirement of membership in the Federal Home Loan Bank of Pittsburgh. The required minimum amount of common stock is based on the amount of PIIC’s and PIC’s outstanding borrowings plus the unused maximum borrowing capacity, as defined by the Federal

Home Loan Bank of Pittsburgh. At December 31, 2005 and 2004, the carrying value of Federal Home Loan Bank of Pittsburgh common stock was $0.3 million and $1.8 million, respectively.

5. Trust Accounts

The Company maintains investments in trust accounts under certain 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, 2005 and 2004, the carrying values 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.

6. Derivatives

Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, requires that derivatives be recorded on the balance sheet as either assets or liabilities measured at fair value. Changes in the fair value of derivatives are recorded either through current earnings or as other comprehensive income, depending on the type of hedge transaction. Gains and losses on the derivative instrument reported in other comprehensive income are reclassified into earnings in the periods in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of all hedge transactions is recognized in current period earnings.

During the first quarter of 2005, the Company was considering the issuance of a debt offering. To manage potential interest rate risk and mitigate the impact of fluctuations in interest rates prior to any issuance, a cash flow hedge derivative instrument was purchased. Cash flow hedges are hedges that use simple derivatives to offset the variability of expected future cash flows. The cash flow hedge purchased was for a notional amount of $125 million, had an interest rate of 4.557% based on the Then-Current 10-Year Treasury interest rate, and a final settlement date of May 6, 2005. At the time of purchase, the cash flow hedge was anticipated to be highly effective in offsetting the changes in the expected future interest rate payments on the proposed debt offering attributable to fluctuations in the Treasury benchmark interest rate.

Subsequent to the purchase of the cash flow hedge, the Company decided against the issuance of a debt offering. As a result, the cash flow hedge became an ineffective hedge and the change in fair value of the hedge was reported as a component of earnings immediately. The cash flow hedge settled on May 9, 2005. For the year ended December 31, 2005, the Company has recorded the change in fair value of $3.2 million as a reduction to net realized investment gain. The Company does not hold any other derivative instruments.

7. Property and Equipment

The following table summarizes property and equipment at December 31, 2005 and 2004 (dollars in thousands):


	December 31,						Estimated Useful
	2005			2004			Lives (Years)
Furniture, Fixtures and Automobiles	$	7,072		$	6,027		5
Computer Software		22,446			19,625		5
Computer Hardware and Telephone Equipment		14,603			11,475		5
Land and Building		3,635			3,602		40
Leasehold Improvements		2,686			2,344		3 -12

		50,442			43,073
Accumulated Depreciation and Amortization		(26,556	)		(21,792	)

Property and Equipment	$	23,886		$	21,281

At December 31, 2005, costs incurred for Property and Equipment not yet placed in service was $1.3 million. Amortization of computer software was $2.6 million, $2.1 million and $1.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. Depreciation expense, excluding amortization of computer software, was $2.1 million, $1.3 million and $1.4 million, for the years ended December 31, 2005, 2004 and 2003, respectively.

8. Goodwill

During the fourth quarter of 2005, the Company recorded a $25.7 million impairment charge related to the write-down of goodwill arising from the acquisition of the Company’s personal lines segment. This loss, which was the same on a pre-tax and after-tax basis, was a result of the Company’s annual evaluation of the carrying value of goodwill. The write-down was determined by comparing the fair value of the Company’s personal lines segment and the implied value of the goodwill with the carrying amounts on the balance sheet. The write-down resulted from changes in business assumptions primarily due to the following: the unprecedented hurricane activity and associated catastrophe losses experienced in 2004 and 2005; the uncertainty of 2006 catastrophe reinsurance renewal rates; the forecasted weather pattern of increased hurricane activity; the decision to change the personal lines segment business model to discontinue writing the mobile homeowners business and target new construction homeowners business; and the disruption in the Florida marketplace.

9. Liability for Unpaid Loss and Loss Adjustment Expenses

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.

Net loss and loss adjustment expenses:

(In Thousands)


	As of and For the Years Ended December 31,
	2005			2004		2003
Unpaid loss and loss adjustment expenses at beginning of year	$	996,667		$	627,086	$	445,548
Less: reinsurance receivables		324,948			145,591		85,837

Net unpaid loss and loss adjustment expenses at beginning of year		671,719			481,495		359,711

Provision for losses and loss adjustment expenses for current year claims		533,906			440,989		314,609
Increase (Decrease) in estimated ultimate losses and loss adjustment expenses for prior year claims		(29,900	)		35,126		44,568

Total incurred losses and loss adjustment expenses		504,006			476,115		359,177

Loss and loss adjustment expense payments for claims attributable to:
Current year		110,496			107,129		69,905
Prior years (1)		124,234			178,762		167,488

Total payments		234,730			285,891		237,393

Net unpaid loss and loss adjustment expenses at end of year		940,995			671,719		481,495
Plus: reinsurance receivables		304,768			324,948		145,591

Unpaid loss and loss adjustment expenses at end of year	$	1,245,763		$	996,667	$	627,086


(1)		During the year ended December 31, 2005, net loss and loss adjustment expense payments for claims attributable to prior years are lower by $64.3 million than they otherwise would have been due to the Company’s commutation of its 2003 Whole Account Net Quota Share Reinsurance Agreement (See Note 10).

During 2005, the Company decreased its estimated total net ultimate losses and loss adjustment expenses for prior accident years by the following amounts:

(In millions)


	Net Basis
	increase (decrease)
	Professional			Commercial
	Liability			Package			Commercial
Accident Year	Coverages			Coverages			Auto Coverages			Other			Total
2004	$	(7.6	)	$	(12.7	)	$	(4.3	)	$	0.4		$	(24.2	)
2003	$	(2.4	)	$	3.5		$	(0.5	)	$	1.0		$	1.6
2002	$	(2.0	)	$	(0.6	)	$	(3.4	)	$	(1.0	)	$	(7.0	)
2001 & Prior	$	(0.7	)	$	1.9		$	(0.9	)	$	(0.6	)	$	(0.3	)

Calendar Year	$	(12.7	)	$	(7.9	)	$	(9.1	)	$	(0.2	)	$	(29.9	)

The changes in the net ultimate losses and loss adjustment expenses for prior accident years during 2005 was primarily attributable to the following:

	- -		For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower net loss estimates for: commercial package policies as a result of better than expected claim frequency and professional liability coverages due to better than expected case incurred development.

	- -		For accident years 2002, the decrease in estimated net unpaid loss and loss adjustment expenses and prior was principally due to decreased loss estimates across most commercial and specialty lines of business due to better than expected case incurred loss development.

- -

	•		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 and 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 uncertain economic conditions.

	•		The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank (“Firstar”) relating to residual value insurance policies purchased by Firstar from the Company. 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.

- -

•

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:

•

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 allows for a profit commission to be paid to the Company upon commutation. Effective January 1, 2005, the Company entered into a Reinsurance Commutation and Release Agreement with respect to the 2003 Whole Account Net Quota Share Reinsurance contract. As a result of this commutation, the Funds Held Payable to Reinsurer liability was reduced by approximately $77.9 million, offset by an increase to net Unpaid Loss and Loss Adjustment Expenses of $64.3 million, an increase to net Unearned Premiums of $0.2 million and a reduction to the profit commission receivable by approximately $13.4 million. No gain or loss was realized as a result of this commutation.

Activity for the Funds Held Payable to Reinsurer is summarized as follows (in thousands):


	As of and For the			As of and For the
	Year Ended			Year Ended
	December 31, 2005			December 31, 2004
Funds Held Payable to Reinsurer Balance at Beginning of Period	$	131,119		$	110,011

Net Written Premiums Ceded		(316	)		94,474
Reinsurer Expense Allowance		11			(3,318	)
Provisional Commission		(6,722	)		(48,971	)
Paid Loss and Loss Adjustment Expenses		(8,451	)		(25,585	)
Interest Credit		1,486			4,853
Commutation		(77,906	)		—
Other		—			(345	)

Subtotal Activity		(91,898	)		21,108

Funds Held Payable to Reinsurer Balance at End of Period	$	39,221		$	131,119

The Company has also accrued a profit commission receivable, which is recorded in Other Assets, based upon the experience of the underlying business ceded to this reinsurance agreement, in the amounts of $7.0 million and $16.7 million as of December 31, 2005 and 2004, respectively. The profit commission reduces ceded written and earned premiums and increases net written and earned premiums.

11. Loans Payable

The Company had aggregate borrowings of $0 million and $33.4 million as of December 31, 2005 and 2004, respectively, from the Federal Home Loan Bank of Pittsburgh (“FHLB”). Any outstanding borrowings bear interest at adjusted LIBOR and mature twelve months or less from inception. The proceeds from any outstanding borrowings are invested in asset backed and collateralized mortgage obligation securities to achieve a positive spread between the rate of interest on these securities and the borrowing rates. Due to declining spreads, the Company prepaid all outstanding FHLB loans during the first quarter of 2005.

12. Income Taxes

The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2005 and 2004 are as follows (in thousands):


	December 31,
	2005		2004
Deferred Income Tax Assets:
Unearned Premium	$	40,161	$	30,862
Loss Reserve Discounting		32,587		27,376
State Insurance Related Assessments		4,233		1,382
Net Realized Investment Losses		1,603		1,855
Deferred Compensation		1,577		616
Unrealized Depreciation of Securities		1,455		—
Other Assets		185		85

Total Deferred Income Tax Assets		81,801		62,176

Deferred Income Tax Liabilities:
Deferred Acquisition Costs		45,320		32,077
Unrealized Appreciation of Securities		—		10,660
Property and Equipment Basis		2,492		1,919
Net Investment Income		1,035		1,074
Other Liabilities		1,061		2,050

Total Deferred Income Tax Liabilities		49,908		47,780

Net Deferred Income Tax Asset	$	31,893	$	14,396

Based on the Company’s federal tax loss and capital loss carryback availability, expected levels of future pre-tax financial statement income and federal taxable income, the Company believes that it is more likely than not that the existing deductible temporary differences will reverse during periods in which net federal taxable income is generated or have adequate federal carryback availability. As a result, no valuation allowance is recognized for deferred income tax assets as of December 31, 2005 or 2004.

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, 2005:
Federal Tax at Statutory Rate	$	84,286			35	%
Non-deductible Goodwill Impairment Loss		9,003			4
Nontaxable Municipal Bond Interest and Dividends Received Exclusion		(8,616	)		(4	)
Other, Net		(545	)		—

Income Tax Expense	$	84,128			35	%

For the year ended December 31, 2004:
Federal Tax at Statutory Rate	$	41,627			35	%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion		(6,439	)		(5	)
Other, Net		62			—

Income Tax Expense	$	35,250			30	%

For the year ended December 31, 2003:
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	%

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. As of December 31, 2005, included in Other Liabilities in the Consolidated Balance Sheets were income taxes payable amounting to $7.8 million. As of December 31, 2004, included in Other Assets in the Consolidated Balance Sheets were income taxes recoverable amounting to $5.4 million.

13. 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,
	2005		2004		2003
Weighted-Average Common Shares Outstanding (1)		68,551		66,465		65,726
Weighted-Average Share Equivalents Outstanding (1)		4,534		3,456		2,255

Weighted-Average Shares and Share Equivalents Outstanding (1)		73,085		69,921		67,981

Net Income	$	156,688	$	83,683	$	62,187

Basic Earnings Per Share (1)	$	2.29	$	1.26	$	0.95

Diluted Earnings Per Share (1)	$	2.14	$	1.20	$	0.91


(1)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

The number of weighted share equivalents which are anti-dilutive, and therefore, not included in the weighted-average share equivalents outstanding calculation amounted to 372, 72 and 8,190 for the years ended December 31, 2005, 2004 and 2003, respectively.

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 Company’s shareholders, at the 2005 Annual Meeting of Shareholders, approved the adoption of the Philadelphia Consolidated Holding Corp Amended and Restated Employees’ Stock Incentive and Performance Based Compensation Plan (the “Plan”) as an amendment and restatement of the stock option plan (formerly known as Philadelphia Consolidated Holding Corp. Stock Option Plan) as means for the provision of incentives and awards to those employees and members of the Board (“participants”) largely responsible for the long term success to the Company.

The adoption of the amendment and restatement of the plan, among other things, allows for the provision of the incentive awards and increased the maximum number of shares of the Company’s common stock which may be subject to stock options, Stock Appreciation Rights (“SARS”), and awards granted under the Plan to 18,750,000 (restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006), and permits (but does not require) the grant of restricted stock awards under conditions meeting the “performance based” compensation requirements of Section 162(m) of the Internal Revenue Code. The maximum number of shares includes all shares previously available for grants under the stock option plan prior to the adoption of this Amended and Restated Plan. As of December 31, 2005, 5,631,210 shares of common stock remain reserved for future issuance pursuant to stock options, SARS and awards granted under the Plan. As of December 31, 2005, stock options and restricted stock awards have been granted to employees pursuant to the Plan.

Under the Plan, the Company may grant stock options and other equity based awards to employees and members of the Board. During 2005 the Company granted stock options and restricted stock awards to certain employees. Stock options are granted for the purchase of common stock at a price not less than the fair market value on the grant date. Stock options are primarily exercisable after the expiration of five years following the grant date and expire ten years following the grant date. Stock options are generally forfeited by participants who terminate employment prior to vesting.

Compensation expense for restricted stock awards is recognized ratably over the vesting period (“Restriction Period”). Stock subject to restricted stock awards granted during 2005 generally become free of the risk of forfeiture (i.e., become vested) after the expiration of five years following the grant date (the applicable Restriction Period). Generally, if a participant terminates employment prior to

the expiration of the Restriction Period, the award will lapse and all shares of common stock still subject to the restriction shall be forfeited.

The following table presents certain information regarding stock option plan transactions.


	As of and For the Years Ended December 31,
	2005 (1)					2004 (1)					2003 (1)
				Exercise Price					Exercise Price					Exercise Price
	Options			Per Option(2)		Options			Per Option(2)		Options			Per Option(2)
Outstanding at beginning of year		7,931,100		$	10.86		6,704,100		$	9.18		5,670,225		$	8.27
Granted		1,485,000		$	23.34		1,440,750		$	17.70		1,452,000		$	12.20
Exercised		(854,859	)	$	5.36		(201,750	)	$	5.71		(319,125	)	$	6.45
Canceled		(77,250	)	$	17.58		(12,000	)	$	14.97		(99,000	)	$	10.23

Outstanding at end of year		8,483,991		$	13.54		7,931,100		$	10.86		6,704,100		$	9.18

Exercisable at end of year		1,474,491					1,363,350					969,600
Weighted-average fair value of options granted during the year (2)				$	9.40				$	6.21				$	3.76

The following table presents certain information regarding stock options outstanding at December 31, 2005.


	Outstanding		Exercise Price		Remaining				Exercise Price
	At December		Per		Contractual Life		Exercisable at		Per
Range of Exercise Prices	31, 2005		Option(2)		(Years)(2)		December 31, 2005		Option(2)
$2.83 to $5.00		856,398	$	3.92		2.2		856,398	$	3.92
$5.60 to $7.67		291,693	$	7.37		3.8		291,693	$	7.37
$7.83 to $11.17		2,271,900	$	9.38		5.8		200,400	$	9.89
$11.42 to $14.16		1,981,500	$	12.97		6.9		126,000		12.83
$15.33 to $19.14		1,615,500	$	17.40		8.2		—	$	—
$22.62 to $28.30		1,467,000	$	23.35		9.2		—		—

		8,483,991	$	13.54				1,474,491	$	6.18


(1)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

(2)		Weighted Average.

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

The following table presents information regarding restricted stock award transactions:


				Weighted Average
	Restricted Stock			Grant Date Fair
	Shares (1)			Value (1)
Unvested at beginning of year		—			—
Granted (2)		145,140		$	27.74
Vested		—			—
Forfeited		(3,675	)	$	27.52

Unvested at end of year		141,465		$	27.75


(1)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

(2)		Initial grant of restricted stock awards pursuant to the Plan occurred during 2005

The Company has established the following stock purchase plans (all share and purchase rights granted amounts have been restated to reflect a three-for-one split of the Company’s common stock which was distributed on March 1, 2006):

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 3,000,000. 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 217,806 and 139,998 shares in 2005 and 2004, respectively. The weighted-average fair value of those purchase rights granted in 2005 and 2004 was $4.13 and $2.79, 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 3,000,000. 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 1,263,600 and 390,822 shares in 2005 and 2004, respectively. The weighted-average fair value of those purchase rights granted in 2005 and 2004 was $4.03 and $2.79, 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 150,000. Non-employee Directors, during monthly offering 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 8,883 and 15,627 shares in 2005 and 2004, respectively. The weighted-average fair value of those purchase rights granted in 2005 and 2004 was $3.90 and $2.81, 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 600,000. 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 62,997 shares in 2004. The weighted-average fair value of those purchase rights granted in 2004 was $2.79. There were no shares issued under the Preferred Agent Plan during 2005.

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


	2005			2004			2003
Expected Stock Volatility		33.9	%		28.3	%		23.2	%
Risk-Free Interest Rate		3.8	%		3.8	%		3.1	%
Expected Option Life (Years)		6.0			6.0			6.0
Expected Dividends		0.0	%		0.0	%		0.0	%

14. Stock Repurchase Authorization

During the three years ended December 31, 2005, the Company repurchased 30,000 shares for approximately $0.3 million under its stock repurchase authorization. At December 31, 2005, $45.0 million remains under a $75.3 million stock purchase authorization.

15. Reinsurance

The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The percentage of ceded reinsurance receivables (excluding amounts ceded to voluntary and mandatory pool mechanisms) that are with companies rated “A” (Excellent) or better by A.M. Best Company or are fully collateralized was 89.7% and 95.8% as of December 31, 2005 and 2004, respectively.

As of December 31, 2005, the Company had aggregate unsecured reinsurance receivables that exceeded 3% of shareholders’ equity from the reinsurers listed in the table below. Unsecured reinsurance receivables include amounts receivable for paid and unpaid losses and loss adjustment expenses and unearned premium less reinsurance receivables secured by collateral.


	As of December 31, 2005
	Unsecured Reinsurance
(In millions)	Receivables		A.M. Best Ratings
National Flood Insurance Program	$	43.9	Not Rated - Voluntary Pool
Liberty Mutual Insurance Company		38.2		A
Florida Hurricane Catastrophe Fund		27.3	Not Rated - Mandatory Pool

	$	109.4

Approximately $18.8 million of the Company’s reinsurance receivable balances at December 31, 2005 are with Converium Reinsurance North American Inc. (“CRNA”). During 2004, Converium AG (Switzerland), CRNA’s parent company, placed CRNA into an orderly runoff. Of the $18.8 million of reinsurance receivable balances with CRNA, $1.8 million are receivables on paid losses, and $17.0 million are for receivables on unpaid loss and loss adjustment expenses. The Company is monitoring CRNA’s ability to pay claims, and at this time, believes that the amounts receivable from CRNA will be collectible.

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


	Written			Earned
For the Year Ended December 31, 2005
Direct Business	$	1,260,693		$	1,161,284
Reinsurance Assumed		4,222			4,012
Reinsurance Ceded		154,144			188,649

Net Premiums	$	1,110,771		$	976,647

Percentage Assumed of Net		0.4	%		0.4	%

For the Year Ended December 31, 2004:
Direct Business	$	1,166,966		$	1,055,152
Reinsurance Assumed		4,351			6,905
Reinsurance Ceded		256,785			291,809

Net Premiums	$	914,532		$	770,248

Percentage Assumed of Net		0.5	%		0.9	%

For the Year Ended December 31, 2003:
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	%

16. 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 $1.3 million, $1.2 million and $0.9 million for the years ended December 31, 2005, 2004, and 2003, 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 $4.7 million and $3.2 million as of December 31, 2005 and 2004, 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 $3.6 million and $1.1 million as of December 31, 2005 and 2004, respectively.

17. 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.

Operating Leases:

The Company currently leases office space to serve as its headquarters location and 38 field offices for its production underwriters. In addition, the Company leases certain computer equipment and licenses certain computer software. Rental expense for operating leases was $5.1 million, $4.0 million and $3.5 million for the years ended December 31, 2005, 2004, and 2003, 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, 2005 were as follows (in thousands):

Year Ending December 31:


2006	$	4,330
2007		4,020
2008		2,056
2009		1,249
2010 and Thereafter		1,359

Total Minimum Payments Required	$	13,014

Open Commitments:

At December 31, 2005 the Company has open commitments of $3.7 million under certain limited partnership, information technology and corporate sponsorship agreements.

State Insurance Guaranty Funds:

As of December 31, 2005 and 2004, included in Other Liabilities in the Consolidated Balance Sheets were $12.8 million and $12.4 million, respectively, of liabilities for state guaranty funds. As of December 31, 2005 and 2004, included in Other Assets in the Consolidated Balance Sheets were $0.1 million and $0.4 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.

State insurance facility assessments:

The Company continually monitors developments with respect to state insurance facilities. The Company is required to participate in various state insurance facilities that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Because of the Company’s participation, it may be exposed to losses that surpass the capitalization of these facilities and/or to assessments from these facilities.

Among other state insurance facilities, the Company is subject to assessments from Florida Citizens Property Insurance Corporation (“Florida Citizens”), which was created by the state of Florida to provide insurance to property owners unable to obtain coverage in the private insurance market. Citizens, at the discretion and direction of its Board of Governors (“Citizens Board”), can levy a regular assessment on participating companies for a deficit in any calendar year up to a maximum of the greater of 10% of the deficit or 10% of Florida property premiums industry-wide for the prior year. An insurer may recoup a regular assessment through a surcharge to policyholders. If a deficit remains after the regular assessment, Florida Citizens can also fund any remaining deficit through emergency assessments in the current and subsequent years. Companies are required to collect the emergency assessments directly from residential property policyholders and remit to Florida Citizens as collected. In addition, Florida Citizens may issue bonds to further fund a deficit. Participating companies are obligated to purchase any unsold bonds issued by Florida Citizens.

Florida Citizens reported a deficit for the 2004 plan year. During 2005, the Company paid its portion of the assessment totaling $12.5 million, of which $8.6 million is recoverable from certain of the Company’s reinsurers, resulting in a $3.9 million net assessment expense being recognized during 2005 for Citizen’s amounts assessed and paid during 2005. Any recoupments of the Citizens assessment through future policy surcharges will be allocated between the Company and its reinsurers. Recoupments are recorded as the related premiums are written.

Florida Citizens also reported losses from Hurricane Wilma in 2005, which followed the deficit for the 2004 plan year. Florida Citizens announced that a future assessment as a result of Citizens’ current financial deficit is both probable and can be reasonably estimated. As of December 31, 2005, the Company has accrued its estimated assessment of $12.4 million, which represents its portion of the maximum regular assessment available to Citizens. Of this amount, $10.4 million is recoverable from certain of the Company’s reinsurers, resulting in a $2.0 million net assessment expense being recognized during 2005 for Citizens assessments accrued as of December 31, 2005.

The Company continues to monitor developments with respect to various other state facilities such as the Mississippi Windstorm Underwriting Association, the Alabama Insurance Underwriting Association, and the Texas Windstorm Insurance Association. The ultimate impact of the 2005 hurricane season on these facilities is currently uncertain, but could result in the facilities recognizing a financial deficit or a financial deficit greater than the level currently estimated by the facility. They may, in turn, have the ability to assess participating insurers when financial deficits occur, adversely affecting the Company’s results of operations.

Florida Hurricane Catastrophe Fund

The Company and other insurance companies writing residential property policies in Florida must participate in the Florida Hurricane Catastrophe Fund (“FHCF”). If the FHCF does not have sufficient funds to pay its ultimate reimbursement obligations to participating insurance companies, it has the authority to issue bonds, which are funded by assessments on generally all property and casualty premiums in Florida. By law, these assessments are the obligation of insurance policyholders, which insurance companies must collect. The FHCF assessments are limited to 6% of premiums per year beginning the first year in which reimbursements require bonding, and up to a total of 10% of premiums per year for assessments in the second and subsequent years, if required to fund additional bonding. Upon the order of the Florida Office of Insurance Regulation, companies are required to collect the FHCF assessments directly from residential property policyholders and remit them to the FHCF as they are collected.

18. 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, 2005 and 2004 is unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) 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
	March 31,		June 30,		September 30,		December 31,
	2005 (1)(2)		2005 (1)(2)		2005 (1)(2)		2005 (1)(2)
Net Earned Premiums	$	236,755	$	233,136	$	244,770	$	261,986
Net Investment Income	$	13,491		15,373	$	16,979	$	17,866
Net Realized Investment Gain (Loss)	$	10,798	$	296	$	1,097	$	(2,582	)
Net Loss and Loss Adjustment Expenses	$	126,471	$	115,802	$	141,859	$	119,874
Acquisition Costs and Other Underwriting Expenses	$	63,948	$	57,826	$	67,542	$	74,443
Goodwill Impairment Loss	$	—	$	—	$	—	$	25,724
Net Income	$	45,571	$	47,140	$	35,090	$	28,887
Basic Earnings Per Share (5)	$	0.68	$	0.68	$	0.51	$	0.42
Diluted Earnings Per Share (5)	$	0.64	$	0.64	$	0.48	$	0.39
Weighted-Average Common Shares Outstanding (5)		67,273,227		68,858,718		69,008,412		69,041,580
Weighted-Average Share Equivalents Outstanding (5)		4,310,019		4,461,048		4,368,114		4,925,142

Weighted-Average Shares and Share Equivalents Outstanding (5)		71,583,246		73,319,766		73,376,526		73,966,722


	Three Months Ended
	March 31,		June 30,			September 30,			December 31,
	2004 (3)(4)		2004 (3)(4)			2004 (3)(4)			2004 (3)(4)
Net Earned Premiums	$	171,422	$	189,563		$	187,845		$	221,418
Net Investment Income	$	9,973		10,800		$	10,896		$	11,821
Net Realized Investment Gain (Loss)	$	1,778	$	(1,061	)	$	268		$	(224	)
Net Loss and Loss Adjustment Expenses	$	96,243	$	107,317		$	147,769		$	124,786
Acquisition Costs and Other Underwriting Expenses	$	47,354	$	51,272		$	56,863		$	58,880
Net Income (Loss)	$	26,761	$	26,667		$	(2,095	)	$	32,351
Basic Earnings (Loss) Per Share (5)	$	0.41	$	0.40		$	(0.03	)	$	0.48
Diluted Earnings (Loss) Per Share (5)	$	0.39	$	0.38		$	(0.03	)	$	0.46
Weighted-Average Common Shares Outstanding (5)		66,054,810		66,333,696			66,692,187			66,771,270
Weighted-Average Share Equivalents Outstanding (5)		3,247,833		3,245,862			3,397,353			3,776,313

Weighted-Average Shares and Share Equivalents Outstanding (5)		69,302,643		69,579,558			70,089,540			70,547,583


(1)		Net Earned Premiums for the three months ended March 31, 2005, June 30, 2005, September 30, 2005 and December 31, 2005 includes accrued profit commissions on certain reinsurance contracts of $1.3 million, $1.2 million, $0.8 million and $0.7 million, respectively.

(2)		Net Realized Investment Gain (Loss) for the three months ended March 31, 2005, June 30, 2005, September 30, 2005 and December 31, 2005 includes non-cash realized losses of $0.1 million, $0.1 million, $0.1 million, and $1.9 million, respectively, as a result of impairment evaluations.

(3)		Net Earned Premiums for the three months ended March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004 includes accrued profit commissions on certain reinsurance contracts of $4.2 million, $4.5 million, $4.6 million and $2.3 million, respectively.

(4)		Net Realized Investment Gain (Loss) for the three months ended March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004 includes non-cash realized losses of $1.0 million, $1.7 million, $5.7 million, and $1.5 million, respectively, as a result of impairment evaluations.

(5)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

19. 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 multi-peril package, commercial automobile and commercial property insurance products; The Specialty Lines Underwriting Group which has underwriting responsibility for the errors and omissions and management liability products and The Personal Lines Group which designs, markets and underwrites personal property and casualty insurance products for the homeowners and manufactured housing 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; 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
2005:
Gross Written Premiums	$	960,344	$	205,306	$	99,265		$	—		$	1,264,915

Net Written Premiums	$	904,707	$	159,112	$	46,952		$	—		$	1,110,771

Revenue:
Net Earned Premiums	$	778,407	$	151,678	$	46,562		$	—		$	976,647
Net Investment Income		—		—		—			63,709			63,709
Net Realized Investment Gain		—		—		—			9,609			9,609
Other Income		—		—		943			521			1,464

Total Revenue		778,407		151,678		47,505			73,839			1,051,429

Losses and Expenses:
Net Loss and Loss Adjustment Expenses		375,590		93,824		34,592			—			504,006
Acquisition Costs and Other Underwriting Expenses		—		—		—			263,759			263,759
Other Operating Expenses		—		—		370			16,754			17,124
Goodwill Impairment Loss		—		—		25,724			—			25,724

Total Losses and Expenses		375,590		93,824		60,686			280,513			810,613

Income Before Income Taxes		402,817		57,854		(13,181	)		(206,674	)		240,816
Total Income Tax Expense		—		—		—			84,128			84,128

Net Income	$	402,817	$	57,854	$	(13,181	)	$	(290,802	)	$	156,688

Total Assets	$	—	$	—	$	227,122		$	2,700,704		$	2,927,826

2004:
Gross Written Premiums	$	874,018	$	184,419	$	112,880		$	—		$	1,171,317

Net Written Premiums	$	720,639	$	154,130	$	39,763		$	—		$	914,532

Revenue:
Net Earned Premiums	$	614,151	$	134,050	$	22,047		$	—		$	770,248
Net Investment Income		—		—		—			43,490			43,490
Net Realized Investment Gain		—		—		—			761			761
Other Income		—		—		3,426			931			4,357

Total Revenue		614,151		134,050		25,473			45,182			818,856

Losses and Expenses:
Net Loss and Loss Adjustment Expenses		303,847		123,597		48,671			—			476,115
Acquisition Costs and Other Underwriting Expenses		—		—		—			214,369			214,369
Other Operating Expenses		—		—		1,969			7,470			9,439

Total Losses and Expenses		303,847		123,597		50,640			221,839			699,923

Income Before Income Taxes		310,304		10,453		(25,167	)		(176,657	)		118,933
Total Income Tax Expense		—		—		—			35,250			35,250

Net Income	$	310,304	$	10,453	$	(25,167	)	$	(211,907	)	$	83,683

Total Assets	$	—	$	—	$	248,031		$	2,237,625		$	2,485,656

2003:
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

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 by management, with the participation of the Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

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

(c)		Management’s Report on Internal Control Over Financial Reporting

		The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, the Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control-Integrated Framework, management concluded that the internal control over financial reporting was effective as of December 31, 2005. Our management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

		Because of its inherent limitations, internal control over the financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(d)		The Report of Independent Registered Public Accounting Firm on internal control over financial reporting is included in this Annual Report on Form 10-K immediately before the consolidated financial statements.

Item 9B. OTHER INFORMATION

Not applicable.

PART III

Certain information required by Part III is omitted from this Report in that the Company will file a definitive proxy statement pursuant to Regulation 14A (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Company’s director and executive officers required by this Item is incorporated by reference to the Proxy Statement under the caption “Management-Directors and Executive Officers”.

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the Proxy Statement under the captions “Executive Compensation”, “Stock Option Grants”, “Stock Option Exercises and Holdings” and “Directors Compensation”.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

(a)		The information required by this Item is incorporated by reference to the Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management”.

(b)		Equity Compensation Plan Information

The following table sets forth certain information relating to the Company’s equity compensation plans as of December 31, 2005:

Number of

securities to be

issued upon

Weighted-average

Number of securities remaining

exercise of

exercise price of

available for future issuance

outstanding

under equity compensation

options, warrants

plans (1) (excluding securities

and rights (1)

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

8,483,991

13.54

7,109,319

(2)

Equity compensation plans not approved by security holders

—

442,353

(3)

Total

8,483,991

13.54

7,551,672


(1)		Restated to reflect a three-for-one split of the Company’s common stock distributed on March 1, 2006.

(2)		Includes 618,915, 837,138, 5,631,210 and 22,056 shares of the Company’s common stock available for future issuance under the Company’s Non-Qualified Employee Stock Purchase Plan, Employee Stock Purchase Plan, Amended and Restated Employees’ Stock Incentive and Performance Based Compensation Plan and Directors Stock Purchase Plan, respectively.

(3)		These shares of the Company’s common stock are available for future issuance under a stock purchase plan for the Company’s eligible Preferred Agents approved by the Company’s Board of Directors. Under this Plan the Company’s eligible Preferred Agents may purchase shares of the Company’s common stock during 30 day offering periods as designated by the Company’s Preferred Agent Committee at a per share price equal to 85% of the lesser of the fair market value of a share of the Company’s common stock on the first business day of the offering period or the last day of the offering period. Any shares purchased pursuant to the Plan are restricted for a period of two-years, measured from the first day of the relevant offering period, and no eligible Preferred Agent is permitted to purchase shares under the plan during any three consecutive calendar years having an aggregate value in excess of $100,000.

PART IV

Item 15. — EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a) Financial Statements and Exhibits

1. The Financial Statements and Financial Statement Schedules listed in the accompanying index on page 49 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	G	Amendment to Articles of Incorporation, Philadelphia Consolidated Holding Corp.

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

	3.21	P	By-Laws of Philadelphia Consolidated Holding Corp. (as Amended through April 29, 2005).

	3.22	Q	Amendment to the Company’s bylaws effective as of April 29, 2005.

	10.1	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.

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

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

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

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

	10.6	C (1)	Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996.

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

	10.8	B (1)	Employee Stock Purchase Plan.

	10.9	B (1)	Cash Bonus Plan.

	10.10	B (1)	Executive Deferred Compensation Plan.

	10.11	D (1)	Directors Stock Purchase Plan

	10.12	E	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.

	10.13	E	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.

	10.14	F	Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc.


Exhibit No.			Description

	10.15	G(1)	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.

	10.16	G (1)	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.

	10.17	G (1)	Employment Agreement with James J. Maguire, Jr. effective June 1, 2002.

	10.18	G (1)	Employment Agreement with Sean S. Sweeney effective June 1, 2002.

	10.19	G (1)	Employment Agreement with Craig P. Keller effective June 1, 2002.

	10.20	H (1)	Employment Agreement with James J. Maguire effective June 1, 2002.

	10.21	H (1)	Employment Agreement with Christopher J. Maguire effective June 1, 2002.

	10.22	I	AQS, Inc. Software License Agreement, dated October 1, 2002.

	10.23	I(1)	Employment Agreement with P. Daniel Eldridge effective October 1, 2002.

	10.24	J	Florida Hurricane Catastrophe Fund Reimbursement Contract Effective June 1, 2003.

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

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

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

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

	10.29	K	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.

	10.30	L	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.

	10.31	L	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.

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

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

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

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


Exhibit No.			Description

	10.36	M	Whole Account Net Quota Share Reinsurance Contract effective as of January 1, 2004 (Addendum No. 1)

	10.37	M	Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective as of June 1, 2004

	10.38	M	Casualty Excess of Loss Reinsurance Contract effective as of January 1, 2004

	10.39	M	Property Per Risk 1st and 2nd Excess Reinsurance Contract effective as of January 1, 2004 (Endorsement No. 1)

	10.40	M(1)	Amended and Restated Employment Agreement with James J. Maguire effective as of January 1, 2004

	10.41	N	Gap Quota Share Reinsurance Contract effective as of April 1, 2004

	10.42	N	Casualty (Clash) Excess of Loss effective January 1, 2004

	10.43	N	Casualty Semi-Automatic Facultative Excess of Loss reinsurance binder with Berkley Insurance Company effective April 1, 2004

	10.44	N	Casualty Automatic Facultative certificate with B F Re Underwriters, LLC effective June 1, 2004. RE Philadelphia Insurance Companies certificate number 423004P1

	10.45	N	Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Liberty American Insurance Company)

	10.46	N	Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Mobile USA Insurance Company)

	10.47	O	Reinstatement Premium Protection Reinsurance Contract effective July 1, 2004.

	10.48	O	Underlying Excess Catastrophe and Reinstatement Premium Protection Reinsurance Contract effective July 1, 2004.

	10.49	O	35% Florida Only Third and Fourth Catastrophe Event Reinsurance Contract effective September 2, 2004.

	10.50	O	$50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective September 3, 2004.

	10.51	P	Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.

	10.52	P	$50 million excess of $90 million Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.

	10.53	P	$50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective September 1, 2004 with the Subscribing Reinsurers.

	10.54	P	$5 million excess of $190 million Florida Only Catastrophe Excess Reinsurance Contract effective September 10, 2004 with the Subscribing Reinsurers.

	10.55	P	Underlying Excess Catastrophe Reinsurance Contract effective July 1, 2004 with the Subscribing Reinsurers.

	10.56	P	Casualty Excess of Loss Contract effective January 1, 2005 with Swiss Reinsurance America Corporation.

	10.57	P	Addendum Number 2 to the Property Excess of Loss Contract effective January 1, 2005 with Swiss Reinsurance America Corporation.

	10.58	P	Preliminary Endorsement No. 2 to the Property Per Risk 1^st and 2^nd Excess Reinsurance Contract effective January 1, 2005 with General Reinsurance Corporation.

	10.59	P	2003 Whole Account Net Quota Share Reinsurance Commutation and Release agreement effective January 1, 2005 with Chubb Re, Inc.

	10.60	P	2003 Whole Account Net Quota Share Reinsurance Commutation and Release agreement effective January 1, 2005 with Swiss Reinsurance America Corporation.

	10.61	Q	Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.


Exhibit No.			Description

	10.62	Q	65% Florida Only Third and Fourth Event Excess Catastrophe Reinsurance Contract effective September 1, 2004 with the Subscribing Reinsurers.

	10.63	Q	$45 million excess of $195 million Florida Only Catastrophe Reinsurance Contract effective September 10, 2004 with the Subscribing Reinsurers.

	10.64	Q	$6.5 million excess of $3.5 million Florida Only Fifth Event Catastrophe Reinsurance Contract effective September 24, 2004 with the Subscribing Reinsurers.

	10.65	Q	$50 million excess of $240 million Florida Only Catastrophe Reinsurance Contract effective October 1, 2004 with the Subscribing Reinsurers.

	10.66	Q	$40 million excess of $50 million Florida Only Third Event Catastrophe Reinsurance Contract effective October 1, 2004 with the Subscribing Reinsurers.

	10.67	Q	$50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective October 1, 2004 with the Subscribing Reinsurers.

	10.68	Q	Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Liberty American Insurance Company)

	10.69	Q	Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Mobile USA Insurance Company)

	10.70	Q	Excess Catastrophe Reinsurance Contract effective June 1, 2005 (Preliminary Agreement).

			The participating reinsurers on the $5.0 million excess of $5.0 million in coverage are Aspen Insurance Limited, AXA Re, Everest Reinsurance Company, Munchener Ruckversicherungs — Gesellschaf, Quanta Reinsurance LTD, Renaissance Reinsurance Limited (Bermuda), Rosemont Reinsurance LTD and Transatlantic Reinsurance Company at varying levels of participation.

			The participating reinsurers on the $10.0 million excess of $10 million in coverage are AXA Re, AXIS Specialty Limited (Bermuda), Everest Reinsurance Company, Munchener Ruckversicherungs — Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Quanta Reinsurance LTD, Rosemont Reinsurance LTD, Sirius International Insurance Corporation , Swiss Reinsurance America, Swiss Re Underwriting Agency Inc. and Transatlantic Reinsurance Co. at varying levels of participation.

			The participating reinsurers on the $20.0 million excess of $20.0 million in coverage are American Re Broker Market, AXA Re, AXIS Specialty Limited (Bermuda), Everest Reinsurance Company, Hannover Re (Bermuda) Ltd., Munchener Ruckversicherungs — Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Quanta Reinsurance LTD, Rosemont Reinsurance LTD, Sirius International Insurance Corporation, Swiss Reinsurance America, Transatlantic Reinsurance Co.and XL Re Limited at varying levels of participation.

			The participating reinsurers on the $60.0 million excess of $40.0 million in coverage are American Re Broker Market, AXA Re, AXIS Specialty Limited (Bermuda), Everest Reinsurance Company, Hannover Re (Bermuda) Ltd., Munchener Ruckversicherungs — Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Quanta Reinsurance LTD, Rosemont Reinsurance LTD, Sirius International Insurance Corporation, Swiss Reinsurance America, Swiss Re Underwriting Agency Inc., Transatlantic Reinsurance Co., Syndicate #2020 and XL Re Limited at varying levels of participation.


Exhibit No.			Description

	10.71	Q	Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005 (Preliminary Agreement). The participating reinsurers are ACE Tempest Reinsurance LTD, AXIS Specialty Limited, Everest Reinsurance Company, Munchener Ruckversicherungs — Gesellschaft and Rosemont Reinsurance LTD at varying levels of participation.

	10.72	Q	Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2005 (Preliminary Agreement).

			The participating reinsurers on the $3.5 million excess of $3.5 million in coverage are Aspen Insurance UK LTD, Rosemont Reinsurance LTD, Ascot Insurance Services Limited, Syndicate #2623, Syndicate #0033, Syndicate #0623, Syndicate #0780, Syndicate #0958, Syndicate #2001 and Syndicate #2791 at varying levels of participation

			The participating reinsurers on the $13.0 million excess of $7.0 million in coverage are Ascot Insurance Services Limited, Aspen Insurance UK LTD, AXIS Specialty Limited (Bermuda ), AXA Re, Montpelier Reinsurance Ltd, Platinum Underwriters Re, Partner Re (Bermuda), PXRE Reinsurance, Rosemont Reinsurance LTD, Syndicate #2623, Syndicate #0033, Syndicate #0566, Syndicate #0623, Syndicate #0780, Syndicate #0958, Syndicate #2001, Syndicate #2003, Syndicate #2010 and Syndicate #2791 at varying levels of participation.

			The participating reinsurers on the $15.0 million excess of $20 million in coverage are Ascot Insurance Services Limited , Aspen Insurance UK LTD, AXIS Specialty Limited (Bermuda ), AXA Re, General Reinsurance Corporation, Montpelier Reinsurance Ltd , Partner Re (Bermuda), Platinum Underwriters Re, PXRE Reinsurance, Rosemont Reinsurance LTD, Syndicate #2623, Syndicate #0566, Syndicate #0623, Syndicate #0780, Syndicate #0958, Syndicate #2001, Syndicate #2003, Syndicate #2010 and Syndicate #2791 at varying levels of participation.

			The participating reinsurers on the $25.0 million excess of $35.0 million layer in coverage are Ascot Insurance Services Limited , Aspen Insurance UK LTD, AXIS Specialty Limited (Bermuda ), AXA Re, General Reinsurance Corporation, Hannover Re (Bermuda) Ltd, Montpelier Reinsurance Ltd, Partner Re (Bermuda), Platinum Underwriters Re, PXRE Reinsurance, Rosemont Reinsurance LTD, XL Re Limited , Syndicate #2623, Syndicate #0566, Syndicate #0623, Syndicate #0780 and Syndicate #2010 at varying levels of participation.

			The participating reinsurers on the $60.0 million excess of $60.0 million in coverage are American Re Broker Market, Ascot Insurance Services Limited, AXIS Specialty Limited (Bermuda ), AXA Re, General Reinsurance Corporation , Hannover Re (Bermuda) Ltd., Montpelier Reinsurance Ltd., Munchener Ruckversicherungs — Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Rosemont Reinsurance LTD, Swiss Re Underwriting Agency Inc., Transatlantic Reinsurance Co., XL Re Limited, Syndicate #0566, Syndicate #0626, Syndicate #2001, Syndicate #2003, Syndicate #2010, Syndicate #2020 and Syndicate #2791 at varying levels of participation.

			The participating reinsurers on the $65.0 million excess of $120.0 million in coverage are American Re Broker Market, Ascot Insurance Services Limited, AXIS Specialty Limited (Bermuda), AXA Re, Hannover Re (Bermuda) Ltd., Montpelier Reinsurance Ltd., Munchener Ruckversicherungs - Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Rosemont Reinsurance LTD, Swiss Re Underwriting Agency Inc., Transatlantic Reinsurance Co., XL Re Limited, Syndicate #2001, Syndicate #2020 and Syndicate #2791 at varying levels of participation.

	10.73	Q	Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing Reinsurers for 50% share.

	10.74	Q	Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing Reinsurers for 50% share.

	10.75	Q (1)	Amendment and Restatement of the Company’s Employees’ Stock Incentive and Performance Based Compensation Plan.

	10.76	Q (1)	Form of Stock Option Award Agreement.

	10.77	Q (1)	Form of Restricted Stock Award Agreement.


Exhibit No.			Description

	10.78	R	Casualty Excess of Loss Reinsurance Contract and Endorsement No. 1 effective January 1, 2005. The participating reinsurers are Ace Property & Casualty Insurance Company, Allied World Assurance Company, Ltd., Liberty Mutual Insurance Company, Max Re Ltd.

	10.79	R	Florida Only Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005. The participating reinsurers are ACE Tempest Reinsurance LTD, Aspen Insurance UK LTD, AXIS Specialty Limited, Hannover Re (Bermuda) Ltd., Rosemont Reinsurance LTD, Syndicate #0958 and Syndicate #2001 at varying levels of participation.

	10.80	R	Professional Liability Insurance Quota Share Contract effective July 1, 2005 with Cumis Insurance Society, Inc.

	21	R	List of Subsidiaries of the Registrant.

	23	R	Consent of Independent Registered Public Accounting Firm.

	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.

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

	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.

	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.


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 Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated by reference.

C		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.

D		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.

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

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

G		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.

H		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.

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

J		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.

K		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.

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

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: James J. Maguire, Jr.

		James J. Maguire, Jr.
		President and Chief Executive Officer
		March 10, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

James J. Maguire, Jr. James J. Maguire, Jr.	President & Chief Executive Officer, (Principal Executive Officer)	March 10, 2006

Craig P. Keller Craig P. Keller	Executive Vice President, Secretary, Treasurer, and Chief Financial Officer (Principal Financial and Accounting Officer)	March 10, 2006

James J. Maguire James J. Maguire	Chairman of the Board of Directors	March 10, 2006

Sean S. Sweeney Sean S. Sweeney	Executive Vice President, Director	March 10, 2006

Aminta Hawkins Breaux Aminta Hawkins Breaux	Director	March 10, 2006

Michael J. Cascio Michael J. Cascio	Director	March 10, 2006

Elizabeth H. Gemmill Elizabeth H. Gemmill	Director	March 10, 2006

Margaret M. Mattix Margaret M. Mattix	Director	March 10, 2006

Donald A. Pizer Donald A. Pizer	Director	March 10, 2006

Ronald R. Rock Ronald R. Rock	Director	March 10, 2006

Dirk A. Stuurop Dirk A. Stuurop	Director	March 10, 2006

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule I — Summary of Investments — Other than Investments in Related Parties
As of December 31, 2005
(Dollars in Thousands)


			COLUMN C		COLUMN D
			Estimated		Amount at which
COLUMN A	COLUMN B		Market		shown in the
Type of Investment	Cost *		Value		Balance Sheet
Fixed Maturities:
Bonds:
United States Government and Government Agencies and Authorities	$	339,849	$	333,984	$	333,984
States, Municipalities and Political Subdivisions		821,456		819,635		819,635
Foreign Governments		4,718		4,665		4,665
Public Utilities		35,787		34,940		34,940
All Other Corporate Bonds		573,237		565,267		565,267
Redeemable Preferred Stock		3,168		3,039		3,039

Total Fixed Maturities		1,778,215		1,761,530		1,761,530


Equity Securities:
Common Stocks:
Public Utilities		7,944		8,228		8,228
Banks, Trust and Insurance Companies		20,131		21,313		21,313
Industrial, Miscellaneous and all other		132,352		143,412		143,412
Non-redeemable Preferred Stocks		499		502		502

Total Equity Securities		160,926		173,455		173,455

Total Investments	$	1,939,141	$	1,934,985	$	1,934,985


*		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.

See Notes to Consolidated Financial Statements included in Item 8.

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,
	2005			2004
ASSETS
Cash and Cash Equivalents	$	196		$	117
Equity in and Advances to Unconsolidated Subsidiaries (a)		815,735			645,404
Income Taxes Recoverable		1,266			—

Total Assets	$	817,197		$	645,521


LIABILITIES AND SHAREHOLDERS’ EQUITY
Income Taxes Payable		—			881
Other Liabilities	$	701		$	483

Total Liabilities		701			1,364


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, 69,266,016 and 66,821,751 Shares Issued and Outstanding		336,277			292,856
Notes Receivable from Shareholders		(7,217	)		(5,465	)
Restricted Stock Deferred Compensation Cost		(3,520	)		—
Accumulated Other Comprehensive Income (Loss)		(2,702	)		19,796
Retained Earnings		493,658			336,970

		816,496			644,157

Total Liabilities and Shareholders’ Equity	$	817,197		$	645,521


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

Share information restated to reflect a three-for-one split of the Company’s Common Stock distributed on March 1, 2006.

See Notes to Consolidated Financial Statements included in Item 8.

S-2

See Notes to Consolidated Financial Statements included in Item 8.
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,
	2005			2004			2003
Cash Flows From Operating Activities:
Net Income	$	156,688		$	83,683		$	62,187
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Equity in Earnings of Unconsolidated Subsidiaries		(125,137	)		(73,517	)		(1,345	)
Net Realized Investment Loss		3,148			—			—
Change in Other Liabilities		218			56			(188	)
Change in Other Assets		—			1			—
Change in Income Taxes Recoverable		(2,147	)		(401	)		35
Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans		6,952			1,031			889

Net Cash Provided by Operating Activities		39,722			10,853			61,578


Cash Flows Used by Investing Activities:
Net Transfers to Subsidiaries (a)		(67,141	)		(21,577	)		(65,794	)
Settlement of Cash Flow Hedge		(3,148	)		—			—

Net Cash Used by Investing Activities		(70,289	)		(21,577	)		(65,794	)


Cash Flows From Financing Activities:
Proceeds from Exercise of Employee Stock Options		4,582			1,151			2,057
Proceeds from Collection of Notes Receivable		2,343			2,305			2,028
Proceeds from Shares Issued Pursuant to Stock Purchase Plans		23,721			7,260			432
Cost of Common Stock Repurchased		—			—			(300	)

Net Cash Provided by Financing Activities		30,646			10,716			4,217


Net Increase (Decrease) in Cash and Equivalents		79			(8	)		1
Cash and Cash Equivalents at Beginning of Year		117			125			124

Cash and Cash Equivalents at End of Year	$	196		$	117		$	125

Cash Dividends Received From Unconsolidated Subsidiaries	$	35,797		$	11,838		$	61,348

Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for Notes Receivable	$	4,095		$	2,326		$	1,065


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

See Notes to Consolidated Financial Statements included in Item 8.

S-4

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule III — Supplementary Insurance Information
As of and For the Years Ended December 31, 2005, 2004 and 2003
(In Thousands)


			COLUMN C
			Future Policy				COLUMN E					COLUMN H		COLUMN I
	COLUMN B		Benefits,				Other Policy					Benefits,		Amortization of
	Deferred Policy		Losses, Claims		COLUMN D		Claims and	COLUMN F		COLUMN G		Claims, Losses,		Deferred Policy		COLUMN J		COLUMN K
COLUMN A	Acquisition		and Loss		Unearned		Benefits	Premium		Net Investment		and Settlement		Acquisition		Other Operating		Premiums
Segment	Costs		Expenses		Premiums		Payable	Revenue		Income		Expenses		Costs		Expenses		Written
2005:
Commercial Lines	$	—	$	859,209	$	481,568		$	778,407	$	—	$	375,590	$	—	$	—	$	904,707
Specialty Lines		—		306,765		97,028			151,678		—		93,824		—		—		159,112
Personal Lines		—		79,789		52,872			46,562		—		34,592		—		—		46,952
Corporate		129,486		—		—			—		63,709		—		208,914		54,845		—

Total	$	129,486	$	1,245,763	$	631,468		$	976,647	$	63,709	$	504,006	$	208,914	$	54,845	$	1,110,771


2004:
Commercial Lines	$	—	$	633,859	$	395,035		$	614,151	$	—	$	303,847	$	—	$	—	$	720,639
Specialty Lines		—		228,269		85,981			134,050		—		123,597		—		—		154,130
Personal Lines		—		134,539		50,833			22,047		—		48,671		—		—		39,763
Corporate		91,647		—		—			—		43,490		—		131,557		82,812		—

Total	$	91,647	$	996,667	$	531,849		$	770,248	$	43,490	$	476,115	$	131,557	$	82,812	$	914,532


2003:
Commercial Lines	$	—	$	477,483	$	309,596		$	431,535	$	—	$	273,487	$	—	$	—	$	463,853
Specialty Lines		—		136,000		71,743			108,809		—		65,075		—		—		107,911
Personal Lines		—		13,603		41,250			34,174		—		20,615		—		—		30,536
Corporate		56,288		—		—			—		38,806		—		109,888		53,024		—

Total	$	56,288	$	627,086	$	422,589		$	574,518	$	38,806	$	359,177	$	109,888	$	53,024	$	602,300

S-5

Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule VI — Supplemental Information Concerning Property — Casualty Insurance Operations
As of and For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in Thousands)


													Claims and Claims
													Adjustment Expenses
													Incurred Related to
																				Paid Claims
			Reserve for Unpaid		Discount if				Net		Net		(1)		(2)			Amortization of		and Claim
Affiliation with	Deferred Policy		Claims and Claim		Any deducted		Unearned		Earned		Investment		Current		Prior			deferred policy		Adjustment		Net Written
Registrant	Acquisition Costs		Adjustment Expenses		in Column C		Premiums		Premiums		Income		Year		Year			acquisition costs		Expenses		Premiums
COLUMN A	COLUMN B		COLUMN C		COLUMN D		COLUMN E		COLUMN F		COLUMN G		COLUMN H					COLUMN I		COLUMN J		COLUMN K
Consolidated Property – Casualty Entities
December 31, 2005	$	129,486	$	1,245,763	$	0	$	631,468	$	976,647	$	63,709	$	533,906	$	(29,900	)	$	208,914	$	234,730	$	1,110,771

December 31, 2004	$	91,647	$	996,667	$	0	$	531,849	$	770,248	$	43,490	$	440,989	$	35,126		$	131,557	$	285,891	$	914,532

December 31, 2003	$	56,288	$	627,086	$	0	$	422,589	$	574,518	$	38,806	$	314,609	$	44,568		$	109,888	$	237,393	$	602,300

S-7


(4)		As of September 30, 2004, the Company’s four insurance subsidiaries were rated A+ (Superior) by A.M. Best Company. Effective October 1, 2004, the Company’s four insurance subsidiaries entered into a new intercompany reinsurance pooling arrangement. Two of the Company’s insurance subsidiaries, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company, entered into an intercompany reinsurance pooling arrangement which includes substantially all the Company’s commercial and specialty lines business. The Company’s two other insurance subsidiaries, Mobile USA Insurance Company and Liberty American Insurance Company, also entered into an intercompany reinsurance pooling arrangement which substantially includes all the Company’s personal lines segment business. As a result of this arrangement, A.M. Best Company assigned an A- (Excellent) rating to these two companies. The rating of Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company remained at A+.