10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2008

Commission File Number 0-22280

PHILADELPHIA CONSOLIDATED HOLDING CORP.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA	23-2202671
(State of Incorporation)	(IRS Employer Identification No.)

One Bala Plaza, Suite 100
Bala Cynwyd, Pennsylvania 19004
(610) 617-7900

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: þ NO: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check only):

Large accelerated filer: þ	Accelerated Filer: o		Non-accelerated Filer: o	Smaller reporting company: o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES: o NO: þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of October 31, 2008.

Common Stock, no par value, 71,788,892 shares outstanding

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

INDEX

For the Quarterly Period Ended September 30, 2008

Part I — Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets –September 30, 2008 and December 31, 2007	3
Consolidated Statements of Operations and Comprehensive Income — For the three and nine months ended September 30, 2008 and 2007	4
Consolidated Statements of Changes in Shareholders’ Equity — For the nine months ended September 30, 2008 and the year ended December 31, 2007	5
Consolidated Statements of Cash Flows — For the nine months ended September 30, 2008 and 2007	6
Notes to Consolidated Financial Statements	7 - 28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29 - 51
Item 3. Quantitative and Qualitative Disclosures About Market Risk	52
Item 4. Controls and Procedures	53
Part II — Other Information
Item 1. Legal Proceedings	54
Item 1A. Risk Factors	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3. Defaults Upon Senior Securities	55
Item 4. Submission of Matters to a Vote of Security Holders	55
Item 5. Other Information	55
Item 6. Exhibits	55
Signatures	56

2

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

	As of
	September 30,
	2008			December 31,
	(Unaudited)			2007
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET (AMORTIZED COST $2,863,583 AND $2,639,471)	$	2,778,992		$	2,659,197
EQUITY SECURITIES AT MARKET (COST $357,918 AND $322,877)		352,053			356,026
TOTAL INVESTMENTS		3,131,045			3,015,223
CASH AND CASH EQUIVALENTS		152,050			106,342
ACCRUED INVESTMENT INCOME		31,249			24,964
PREMIUMS RECEIVABLE		433,958			378,217
PREPAID REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES		376,263			280,110
DEFERRED INCOME TAXES		115,303			42,855
DEFERRED ACQUISITION COSTS		205,838			184,446
PROPERTY AND EQUIPMENT, NET		20,870			26,330
OTHER ASSETS		349,879			41,451
TOTAL ASSETS	$	4,816,455		$	4,099,938
LIABILITIES AND SHAREHOLDERS’ EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES	$	1,733,936		$	1,431,933
UNEARNED PREMIUMS		962,472			847,485
TOTAL POLICY LIABILITIES AND ACCRUALS		2,696,408			2,279,418
PREMIUMS PAYABLE		97,196			97,674
OTHER LIABILITIES		416,079			175,373
TOTAL LIABILITIES		3,209,683			2,552,465
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES AUTHORIZED, NONE ISSUED AND OUTSTANDING		—			—
COMMON STOCK, NO PAR VALUE 125,000,000 SHARES AUTHORIZED, 71,783,778 AND 72,087,287 SHARES ISSUED AND OUTSTANDING ,		412,184			423,379
NOTES RECEIVABLE FROM SHAREHOLDERS		(21,487	)		(19,595	)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)		(58,796	)		34,369
RETAINED EARNINGS		1,274,871			1,109,320
TOTAL SHAREHOLDERS’ EQUITY		1,606,772			1,547,473
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	4,816,455		$	4,099,938

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

3

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

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

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
REVENUE:
NET EARNED PREMIUMS	$	408,512		$	359,149		$	1,180,937		$	1,015,182
NET INVESTMENT INCOME		33,273			30,199			97,577			85,694
NET REALIZED INVESTMENT GAIN (LOSS)		(17,852	)		2,817			(40,759	)		32,638
OTHER INCOME		870			980			5,877			2,660
TOTAL REVENUE		424,803			393,145			1,243,632			1,136,174
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES		330,726			146,389			820,218			479,142
NET REINSURANCE RECOVERIES		(96,887	)		(1,584	)		(169,690	)		(35,243	)
NET LOSS AND LOSS ADJUSTMENT EXPENSES		233,839			144,805			650,528			443,899
ACQUISITION COSTS AND OTHER UNDERWRITING EXPENSES		117,640			101,252			347,275			299,902
OTHER OPERATING EXPENSES		4,314			2,992			12,279			9,128
TOTAL LOSSES AND EXPENSES		355,793			249,049			1,010,082			752,929
INCOME BEFORE INCOME TAXES		69,010			144,096			233,550			383,245
INCOME TAX EXPENSE (BENEFIT):
CURRENT		24,931			53,198			90,281			146,528
DEFERRED		(5,888	)		(5,346	)		(22,282	)		(19,908	)
TOTAL INCOME TAX EXPENSE		19,043			47,852			67,999			126,620
NET INCOME	$	49,967		$	96,244		$	165,551		$	256,625
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
HOLDING LOSS ARISING DURING PERIOD	$	(63,044	)	$	21,727		$	(119,658	)	$	18,688
RECLASSIFICATION ADJUSTMENT		11,604			(1,831	)		26,493			(21,215	)
OTHER COMPREHENSIVE INCOME (LOSS)		(51,440	)		19,896			(93,165	)		(2,527	)
COMPREHENSIVE INCOME (LOSS)	$	(1,473	)	$	116,140		$	72,386		$	254,098
PER AVERAGE SHARE DATA:
NET INCOME – BASIC	$	0.71		$	1.37		$	2.36		$	3.65
NET INCOME – DILUTED	$	0.68		$	1.30		$	2.27		$	3.46
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING		69,996,068			70,457,765			70,084,248			70,323,834
WEIGHTED-AVERAGE SHARE EQUIVALENTS OUTSTANDING		3,602,386			3,599,654			2,884,758			3,856,902
WEIGHTED-AVERAGE SHARES AND SHARE EQUIVALENTS OUTSTANDING		73,598,454			74,057,419			72,969,006			74,180,736

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

4

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

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

	For the Nine Months
	Ended
	September 30, 2008			For the Year Ended
	(Unaudited)			December 31, 2007
COMMON SHARES:
BALANCE AT BEGINNING OF YEAR		72,087,287			70,848,482
ISSUANCE OF SHARES PURSUANT TO STOCK PURCHASE PLANS, NET		853,897			491,416
ISSUANCE OF SHARES PURSUANT TO STOCK BASED COMPENSATION PLANS		195,794			747,389
LESS: TREASURY SHARES ACQUIRED		(1,353,200	)		—
BALANCE AT END OF PERIOD		71,783,778			72,087,287
COMMON STOCK:
BALANCE AT BEGINNING OF YEAR	$	423,379		$	376,986
ISSUANCE OF SHARES PURSUANT TO STOCK PURCHASE PLANS, NET		5,067			16,448
EFFECTS OF ISSUANCE OF SHARES PURSUANT TO STOCK BASED COMPENSATION PLANS		26,639			29,155
OTHER		—			790
LESS: COST OF TREASURY SHARES ACQUIRED		(42,901	)		—
BALANCE AT END OF PERIOD		412,184			423,379
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF YEAR		(19,595	)		(17,074	)
NOTES RECEIVABLE ISSUED PURSUANT TO EMPLOYEE STOCK PURCHASE PLANS		(4,883	)		(8,466	)
COLLECTION OF NOTES RECEIVABLE		2,968			5,945
OTHER		23			—
BALANCE AT END OF PERIOD		(21,487	)		(19,595	)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF DEFERRED INCOME TAXES:
BALANCE AT BEGINNING OF YEAR		34,369			24,848
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAXES		(93,165	)		9,521
BALANCE AT END OF PERIOD		(58,796	)		34,369
RETAINED EARNINGS:
BALANCE AT BEGINNING OF YEAR		1,109,320			782,507
NET INCOME		165,551			326,813
BALANCE AT END OF PERIOD		1,274,871			1,109,320
TOTAL SHAREHOLDERS’ EQUITY	$	1,606,772		$	1,547,473

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

5

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

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

	For the Nine Months Ended September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME	$	165,551		$	256,625
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT (GAIN) LOSS		40,759			(32,638	)
GAIN ON SALE OF PROPERTY AND EQUIPMENT		(1,174	)		—
AMORTIZATION OF INVESTMENT PREMIUMS, NET OF DISCOUNT		7,779			4,414
AMORTIZATION OF INTANGIBLE ASSETS		3,104			2,217
DEPRECIATION		6,517			5,755
DEFERRED INCOME TAX BENEFIT		(22,282	)		(19,908	)
CHANGE IN PREMIUMS RECEIVABLE		(55,741	)		(59,645	)
CHANGE IN PREPAID REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES, NET OF FUNDS HELD PAYABLE TO REINSURER		(96,153	)		(4,051	)
CHANGE IN ACCRUED INVESTMENT INCOME		(6,285	)		(4,220	)
CHANGE IN DEFERRED ACQUISITION COSTS		(21,392	)		(29,339	)
CHANGE IN INCOME TAXES PAYABLE		(6,646	)		8,085
CHANGE IN OTHER ASSETS		(27,684	)		8,459
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES		302,003			111,596
CHANGE IN UNEARNED PREMIUMS		114,987			112,484
CHANGE IN OTHER LIABILITIES		12,434			36,503
FAIR VALUE OF STOCK BASED COMPENSATION		12,664			11,341
EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO STOCK BASED COMPENSATION PLANS		(5,737	)		(4,368	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		422,704			403,310
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES		91,336			185,559
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES		206,772			183,600
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES		55,837			213,854
COST OF FIXED MATURITIES ACQUIRED		(678,871	)		(725,502	)
COST OF EQUITY SECURITIES ACQUIRED		(111,979	)		(241,526	)
PROCEEDS FROM SALE OF PROPERTY AND EQUIPMENT, NET		3,825			—
PURCHASE OF PROPERTY AND EQUIPMENT, NET		(3,708	)		(5,569	)
PAYMENT FOR ACQUISITION OF GILLINGHAM & ASSOCIATES INC.,
NET OF CASH ACQUIRED		(32,881	)		—
PURCHASE OF OTHER INTANGIBLES		(11,159	)		(12,726	)
NET CASH USED FOR INVESTING ACTIVITIES		(480,828	)		(402,310	)
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENTS ON LOANS		(45,000	)		—
PROCEEDS FROM LOANS		175,558			—
PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS		7,287			4,604
PROCEEDS FROM COLLECTION OF SHAREHOLDER NOTES RECEIVABLE		2,969			3,574
PROCEEDS FROM SHARES ISSUED PURSUANT TO STOCK PURCHASE PLANS		182			269
EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO STOCK BASED COMPENSATION PLANS		5,737			4,368
COST OF COMMON STOCK REPURCHASED		(42,901	)		—
NET CASH PROVIDED BY FINANCING ACTIVITIES		103,832			12,815
NET INCREASE IN CASH AND CASH EQUIVALENTS		45,708			13,815
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		106,342			108,671
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	152,050		$	122,486
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK PURCHASE PLANS IN EXCHANGE FOR NOTES RECEIVABLE	$	4,883		$	3,287

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

6

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The consolidated financial statements for the quarterly period ended September 30, 2008 are unaudited, but in the opinion of management have been prepared on the same basis as the annual audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair statement of the information set forth therein. The results of operations for the nine months ended September 30, 2008 are not necessarily indicative of the operating results to be expected for the full year or any other period.

These consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2007.

2. Fair Value Measurements

On January 1, 2008, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement No. 157 Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value and provides a consistent framework for measuring items at fair value as previously permitted by existing accounting pronouncements. SFAS 157 provides a “fair value hierarchy” which prioritizes the quality of inputs used when measuring items at fair value and requires expanded disclosures for fair value measurements.

On February 12, 2008, SFAS 157 was amended by FASB Staff Position No. FAS 157-2 Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of SFAS 157 for non-financial assets and non-financial liabilities which are measured at fair value on a nonrecurring basis. Non-financial assets and non-financial liabilities which are measured at fair value on a recurring basis (i.e. at least annually) are not subject to this deferral. This deferral is effective until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At that time, provisions of SFAS 157 will apply to non-financial assets and non-financial liabilities which are measured at fair value on a non-recurring basis.

As of September 30, 2008, the Company has no non-financial assets or non-financial liabilities that are measured at fair value on a recurring basis. The Company is currently evaluating the impact of measuring non-financial assets and non-financial liabilities on a non-recurring basis.

On October 10, 2008, SFAS 157 was amended by FASB Staff Position No. FAS 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP FAS 157-3”). FSP FAS 157-3, effective immediately, clarifies the application of SFAS 157 in inactive markets. It also clarifies that the use of internal management assumptions about future cash flows, which are discounted with appropriate risk adjusted discount rates, is an acceptable fair value measurement technique when relevant observable market information does not exist. However, FSP FAS 157-3 reiterates that the objective of fair value measurements under SFAS 157 is to determine the price that would be received by a holder of a financial asset in an orderly transaction between market participants, which is defined as the exit price, that is not a forced liquidation or distressed sale at the measurement date. As of September 30, 2008, the Company has fully adopted the provisions of FSP FAS 157-3, which did not have a significant impact on the Company’s financial statements or disclosures.

The Company’s financial assets consist of its investments in fixed maturity and equity securities, and cash equivalents. The Company accounts for its fixed maturity and equity securities assets at fair value under FASB Statement No. 115 Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). No cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2008 was required as the result of the adoption of SFAS 157. As of September 30, 2008, the Company has no liabilities required to be measured at fair value in accordance with the provisions of SFAS 157.

7

SFAS 157 Valuation Techniques:

SFAS 157 provides three acceptable valuation techniques that should be used to measure fair value. The following is a brief description of these valuation techniques:

Market Approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities to measure fair value.

Income Approach – Uses valuation techniques to convert future amounts (i.e. cash flows or earnings) to a single discounted present value amount to measure fair value.

Cost Approach – Uses the cost that would currently be required to replace the service capacity of an asset (“current replacement cost”) to measure fair value.

“Fair Value Hierarchy” to SFAS 157 Valuation Techniques:

The SFAS 157 “fair value hierarchy” provides three priority levels to the inputs used in the valuation techniques described above when determining a fair value measurement. The following represents a brief description of the three priority levels to the inputs in the “fair value hierarchy”:

Level 1 – Represents inputs that are observable unadjusted quoted market prices for identical financial assets in active markets.

Level 2 – Represents inputs that are observable unadjusted quoted market prices for similar assets or liabilities in active markets, quoted market prices for identical assets in inactive markets, inputs other than quoted market prices that are observable for the asset such as interest rates or yield curves, or other inputs derived principally from or corroborated from other observable market information.

Level 3 – Represents inputs that are unobservable, including the Company’s own determinations of the assumptions that a market participant would use in pricing the asset.

The “fair value hierarchy” gives the highest priority to observable inputs represented by quoted prices in active markets for identical assets or liabilities (Level 1 input) and the lowest priority to unobservable inputs primarily based upon a Company’s own internal determinations of the assumptions that a market participant would use in pricing the asset or liability (Level 3 input). The Company determines a market to be active if securities have traded on it within the last 7 business days.

SFAS 157 Recurring Fair Value Measurements:

The following is a description of the Company’s recurring fair value measurements and categorization of the inputs used in the recurring fair value measurements of its financial assets included in its Consolidated Balance Sheets as of September 30, 2008:

Fixed Maturity Securities – The Company’s fixed maturity securities consist of investments in US treasury securities and obligations of US government corporations and agencies, obligations of states and political subdivisions, corporate and bank debt securities, asset backed securities, mortgage pass-through securities, and collateralized mortgage obligations. The fair value of the Company’s fixed maturity securities is primarily determined using quoted market prices in active markets (US treasury securities) or “Matrix Pricing”. “Matrix pricing” relies on observable inputs from active markets other than quoted market prices including, but not limited to, benchmark securities and yields, latest reported trades, quotes from brokers or dealers, issuer spreads, bids, offers, and other relevant reference data to determine fair value. “Matrix pricing” is used to measure the fair value of fixed maturity securities where obtaining individual quoted market prices is impractical. The Company also holds one investment grade asset backed security which is measured using broker pricing obtained from the lead manager of the issue. The broker pricing used to measure this security relies on unobservable inputs and assumptions and may include the broker’s evaluation of, collateral performance including payment speeds, delinquencies, defaults and recoveries, and

8

any market clearing activity or liquidity circumstances in the security or benchmark securities that may have occurred since the prior pricing period. The Company classifies the fair value measurement of its investments in US treasury securities within Level 1 of the “fair value hierarchy.” The Company classifies the fair value measurement of all other fixed maturity securities within Level 2 of the “fair value hierarchy,” with the exception of the one asset backed security described above, which is classified within Level 3 of the “fair value hierarchy” due to the Company’s reliance on the broker’s unobservable inputs when determining its fair value. The Company’s external fixed maturity investment manager also assists the Company with the categorization of these inputs within the SFAS 157 “fair value hierarchy” based upon their internal SFAS 157 policies and procedures, approved by their internal pricing committee.

Equity Securities — The Company’s equity securities consist of investments in the common stock of companies traded on active or inactive stock exchange markets, an investment in an international equity fund owning international equity securities, and investments in limited partnerships. The fair value of the Company’s equity securities is determined as follows:

Investments in Common Stock – The closing price of one share of the common stock traded on active or inactive exchange markets at the measurement date. The Company classifies the fair value measurement of its investments in common stock within Level 1 or Level 2 of the “fair value hierarchy.”

Investment in an international equity fund – The net asset value of the fund at the measurement date obtained from the investment manager, calculated using the value of the assets owned and liabilities incurred at the measurement date multiplied by the Company’s percentage of ownership in the fund. The Company assumes a market participant would consider the calculation of the value of the Company’s percentage of ownership of the net asset value of the fund to be its fair value at the measurement date. The Company classifies the fair value measurement of its investment in an international equity fund within Level 3 of the “fair value hierarchy.”

Investments in limited partnerships – The net asset value of the limited partnership at the measurement date obtained from the investment manager, calculated using the value of the assets owned and liabilities incurred at the measurement date multiplied by the Company’s percentage of ownership in the limited partnership. The Company assumes a market participant would consider the value resulting from the calculation of the Company’s percentage of ownership of the net asset value of the limited partnerships to be its fair value at the measurement date. The Company classifies the fair value measurement of its investments in limited partnerships within Level 3 of the “fair value hierarchy.”

Cash Equivalents – The Company’s cash equivalents consist of investments in money market mutual funds traded on active exchange markets and short-term Federal Home Loan Bank (“FHLB”) discount notes offered through the FHLB discount window, regularly scheduled FHLB Office of Finance auctions or through financial institution secondary market trading desks. The fair value of the Company’s investments in money market mutual funds is determined using closing prices of the money market mutual funds traded on active exchange markets at the measurement date. The Company classifies the fair value measurement of its investments in money market mutual funds within Level 1 of the “fair value hierarchy.” The fair value of the Company’s investments in short-term FHLB discount notes is determined based on observable market inputs available from the FHLB Office of Finance. The Company classifies the fair value measurement of its short-term discount notes within Level 2 of the “fair value hierarchy.”

In the event that the inputs utilized to measure a financial asset at fair value fall within different levels of the “fair value hierarchy,” the Company uses the lowest level of the most significant input utilized to categorize the measurement within the “fair value hierarchy.” Consequently, a fair value measurement categorized as having Level 3 inputs may also contain Level 1 or Level 2 inputs. The Company has consistently applied these valuation techniques during the nine months ended September 30, 2008.

The following table represents the Company’s “fair value hierarchy” for all assets measured on a recurring basis as of September 30, 2008:

9

Fair Value Measurements as of September 30, 2008 Utilizing:
(In Thousands)
	Quoted Prices –
	Active Markets						Significant
	Identical Assets –			Significant Other			Unobservable
	Observable Inputs			Observable Inputs			Inputs
Description	(Level 1)			(Level 2)			(Level 3)			Total
US Treasury Securities and Obligations of US Government Corporations and Agencies	$	9,460		$	4,001		$	—		$	13,461
Obligations of States and Political Subdivisions		—			1,681,310			—			1,681,310
Corporate and Bank Debt Securities		—			144,807			—			144,807
Asset Backed Securities		—			250,376			8,978			259,354
Mortgage Pass-Through Securities		—			408,689			—			408,689
Collateralized Mortgage Obligations		—			271,371			—			271,371
Total Fixed Maturities Available For Sale at Market	$	9,460		$	2,760,554		$	8,978		$	2,778,992
Equity Securities at Market		313,085			11,705			27,263			352,053
Cash Equivalents		109,201			73,980			—			183,181
Total Fair Value Measurements	$	431,746		$	2,846,239		$	36,241		$	3,314,226
% of Total Fair Value Measurements		13.0	%		85.9	%		1.1	%		100.0	%

On at least a quarterly basis, the Company reviews the “fair value hierarchy” classifications for its financial assets measured at fair value on a recurring basis. Changes in the observability of the inputs used to calculate the fair value of these financial assets may result in a reclassification of these financial assets within the “fair value hierarchy.” Any significant reclassifications impacting Level 3 inputs of the “fair value hierarchy” will be reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassification occurred. Gains or losses for assets categorized with Level 3 inputs may include changes in fair value that are attributable to both observable Level 1 and Level 2 inputs and unobservable Level 3 inputs.

Fair Value Measurements Utilizing Level 3 Inputs:

The $9.0 million of asset backed securities measured utilizing Level 3 inputs included in the table above represents one security as described previously.

The $27.3 million of equity securities measured utilizing Level 3 inputs included in the table above primarily consists of a $23.3 million investment in an international equity fund owning international equity securities, and $3.8 million of investments in limited partnerships.

The following tables represent a summary of the changes in the fair value of the Company’s assets measured on a recurring basis using Level 3 inputs as of and for the three and nine months ended September 30, 2008:

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Fair Value Measurements Utilizing Significant Unobservable (Level 3) Inputs:
(In Thousands)
				Collateralized
	Asset Backed			Mortgage			Equity
	Securities			Obligations			Securities			Total
For The Three Months Ended September 30, 2008:
Beginning Balance as of July 1, 2008:	$	19,161		$	—		$	22,394		$	41,555
Total gains or loss (realized/unrealized)
Included in earnings		—			(4	)		—			(4	)
Included in Other Comprehensive Income		(208	)		—			(7,232	)		(7,440	)
Purchases, issuances, settlements		(26	)		(10	)		12,101			12,065
Transfers in and/or out of Level 3		(9,949	)		14			—			(9,935	)
Ending Balance as of September 30, 2008:	$	8,978		$	—		$	27,263		$	36,241
For The Nine Months Ended September 30, 2008:
Beginning Balance as of January 1, 2008:	$	10,511		$	121		$	11,505		$	22,137
Total gains or loss (realized/unrealized)
Included in earnings		1			(16	)		(795	)		(810	)
Included in Other Comprehensive Income		(1,043	)		47			(9,094	)		(10,090	)
Purchases, issuances, settlements		9,796			(26	)		25,647			35,417
Transfers in and/or out of Level 3		(10,287	)		(126	)		—			(10,413	)
Ending Balance as of September 30, 2008:	$	8,978		$	—		$	27,263		$	36,241

Realized gains and losses included in earnings for the three and nine months ended September 30, 2008 are reported as net realized investment gain (loss). During the three and nine months ended September 30, 2008, the Company recorded $4,000 and $810,000, respectively, of net realized investment losses on its assets measured at fair value on a recurring basis utilizing Level 3 inputs within the net realized investment gain (loss) line of revenues.

For the three and nine months ended September 30, 2008, the Company has not included any gains or losses in earnings that are attributable to the change in unrealized gains or losses relating to assets still held as of September 30, 2008. Due to the fact that the Company’s investment portfolio is classified as available for sale under SFAS 115, unrealized gains and losses are recorded as a component of other comprehensive income rather than earnings.

SFAS 159 Fair Value Option for Eligible Financial Assets and Liabilities:

On January 1, 2008, the provisions of Statement No. 159 “The Fair Value Options for Financial Assets and Financial Liabilities” (“SFAS 159”) also became effective. The purpose of SFAS 159 is to expand the use of fair value measurements by providing entities with the option of measuring certain financial assets and liabilities at fair value, which were previously measured on a basis other than fair value under existing accounting pronouncements. The Company did not elect the fair value option under SFAS 159 for any of its eligible financial instruments as of September 30, 2008.

3. Investments

As a result of the systemic financial, credit and liquidity crises impacting financial and capital markets across the world and virtually all asset classes, the Company expects fixed income and equity markets, in general, to continue to experience more volatility than during most prior historical reporting periods. As of September 30, 2008, the Company had $7.5 million in non-cash realized fixed maturity security investment losses and $34.7 million in non-cash realized equity security investment losses relating to these market conditions as a result of the Company’s impairment evaluations. The Company expects that ongoing volatility in these sectors, in particular, and in spread related sectors, in general, will continue to impact the prices of securities held in the

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Company’s average AA+ rated investment portfolio, including its average AAA rated structured securities portfolio.

Impairment Reviews as of September 30, 2008:

The Company regularly performs impairment reviews with respect to its investments. 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. For investments other than interests in securitized assets, these reviews include identifying any security whose fair value is below its cost and an analysis of securities meeting predetermined impairment thresholds to determine whether such decline is other than temporary. If the Company does not intend to hold a security to maturity or determines a decline in value to be other than temporary, the cost basis of the security is written down to its fair value with the amount of the write down included in earnings as a realized investment loss in the period the impairment arose. This evaluation, for investments other than interests in securitized assets, resulted in non-cash realized investment losses of $18.8 million and $1.1 million, respectively, for the three months ended September 30, 2008 and 2007, and $42.2 million and $3.7 million, respectively, for the nine months ended September 30, 2008 and 2007. The Company’s impairment review also includes an impairment evaluation for interests in securitized assets conducted in accordance with the guidance provided by the Emerging Issues Task Force of the FASB. As a result of the Company’s impairment evaluation for investments in securitized assets, there were no non-cash realized investment losses recorded for the three or nine months ended September 30, 2008 or 2007.

The following table identifies the period of time securities with an unrealized loss as of September 30, 2008 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 3.5% and 22.3%, respectively, of the total estimated fair value, or 6.3% and 18.9%, respectively, of the total gross unrealized loss included in the table below. The industry concentration as a percentage of total estimated fair value represents investments in a geographically diversified pool of investment grade Municipal securities issued by states, political subdivisions, and public authorities under general obligation and/or special district/purpose issuing authority.  The industry concentration as a percentage of the total gross unrealized loss primarily represents investments in equity securities issued by companies in the Diversified Financial Services industry.

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	Less Than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
					(In Thousands)
September 30, 2008
Fixed Maturities Available for Sale:
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies	$	727	$	8	$	—	$	—	$	727	$	8
Obligations of States and Political Subdivisions		1,059,676		50,305		157,596		16,478		1,217,272		66,783
Corporate and Bank Debt Securities		104,961		7,708		5,397		355		110,358		8,063
Asset Backed Securities		240,745		10,982		12,983		1,573		253,728		12,555
Mortgage Pass-Through Securities		212,878		2,577		24,312		671		237,190		3,248
Collateralized Mortgage Obligations		100,352		4,756		20,249		1,719		120,601		6,475
Total Fixed Maturities Available for Sale		1,719,339		76,336		220,537		20,796		1,939,876		97,132
Equity Securities		156,327		33,011		—		—		156,327		33,011
Total Investments	$	1,875,666	$	109,347	$	220,537	$	20,796	$	2,096,203	$	130,143

The Company’s impairment evaluation as of September 30, 2008 for fixed maturities available for sale excluding interests in securitized assets resulted in the following conclusions:

U.S. Treasury Securities and Obligations of U.S. Government Agencies:

The unrealized losses on the Company’s investments in U.S. Treasury Securities and Obligations of U.S. Government Agencies which have ratings of Aaa/AAA are attributable to the general level of interest rates. Of the 29 investment positions held, approximately 10.3% were in an unrealized loss position as of September 30, 2008.

Obligations of States and Political Subdivisions:

The unrealized losses on the Company’s investments in long term tax exempt securities which have ratings of A1/A to Aaa/AAA, except for one security which has a rating of Baa3/BBB-, are attributable to changes both in market spreads and in the level of Treasury yields. Of the 990 investment positions held, approximately 66.2% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

Corporate and Bank Debt Securities:

The unrealized losses on the Company’s long term investments in Corporate bonds which have ratings from Baa3/BBB to Aaa/AAA, except for one security which has a rating of Ca/CCC and matured on October 6, 2008, are attributable primarily to changes in market spreads. Of the 64 investment positions held, approximately 70.3% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

The Company’s impairment evaluation as of September 30, 2008 for interests in securitized assets resulted in the following conclusions:

Asset Backed Securities:

The unrealized losses on the Company’s investments in Asset Backed Securities which have ratings of Baa2/BBB to Aaa/AAA are attributable primarily to changes in market spreads. Of the 114 investment

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positions held, approximately 90.4% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

Mortgage Pass-Through Securities:

The unrealized losses on the Company’s investments in U.S. government agency issued Mortgage Pass-Through Securities which have ratings of Aaa/AAA are attributable primarily to changes in market spreads. Of the 128 investment positions held, approximately 44.5% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

Collateralized Mortgage Obligations:

The unrealized losses on the Company’s investments in Collateralized Mortgage Obligations which have ratings of Aa2/AA+ to Aaa/AAA are attributable primarily to changes in market spreads. Of the 165 investment positions held, approximately 41.8% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

The Company’s impairment evaluation as of September 30, 2008 for equity securities resulted in the conclusion that the Company does not consider the equity securities remaining in an unrealized loss position to be other than temporarily impaired. Of the 3,114 investment positions held, approximately 45.7% were in an unrealized loss position.

Structured Securities Investment Portfolio:

The fair value of the Company’s structured securities investment portfolio (Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation securities) amounted to $939.4 million as of September 30, 2008. AAA rated securities represented approximately 98.2% of the September 30, 2008 structured securities portfolio. Approximately $688.8 million of the structured securities investment portfolio is backed by residential collateral, consisting of:

• $407.8 million of U.S. government agency backed Mortgage Pass-Through Securities;

• $195.9 million of U.S. government agency backed Collateralized Mortgage Obligations;

• $67.9 million of non-U.S. government agency Collateralized Mortgage Obligations backed by pools of prime loans (generally consists of loans made to the highest credit quality borrowers with Fair Isaac Corporation (“FICO”) scores generally greater than 720);

• $14.4 million of structured securities backed by pools of ALT A loans (loans with less than normal documentation and borrowers with FICO scores in the approximate range of 650 to the low 700’s); and

• $2.8 million of structured securities backed by pools of subprime loans (loans with low documentation, higher combined loan-to-value ratios and borrowers with FICO scores capped at approximately 650).

The Company’s $17.2 million ALT-A and subprime loan portfolio includes 19 securities with net unrealized losses of $1.6 million as of September 30, 2008. These securities have the following characteristics:

• first to pay or among the first cash flow tranches of their respective transactions;

• weighted average life of 1.6 years;

• spread across multiple vintages (origination year of underlying collateral pool); and

• an average AAA rating, with one holding experiencing a rating downgrade by Moody’s during the current quarter to A2 from Aaa based on increased delinquencies and lower coverage levels. Based on the Company’s analysis of the collateral underlying the security, the Company expects to receive full return of its investment.

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The Company’s ALT-A and subprime loan portfolio has paid down to $17.2 million as of September 30, 2008 from $27.6 million as of December 31, 2007, and $35.7 million as of September 30, 2007.

As of September 30, 2008, the Company holds no investments in Collateralized Debt Obligations or Net Interest Margin securities.

Amortized Cost of Structured Securities:

For mortgage and asset-backed securities (“structured securities”) of high credit quality rated AA- and higher, changes in expected cash flows are recognized using the retrospective method. Under the retrospective method, the effective yield on a security is recalculated each period based upon future expected and past actual cash flows. The security’s book value is restated based upon the most recently calculated effective yield, assuming such yield had been in effect from the security’s purchase date. The retrospective method results in an increase or decrease to investment income (amortization of premium or discount) at the time of each recalculation. Future expected cash flows consider various prepayment assumptions, as well as current market conditions. These assumptions include, but are not limited to, prepayment rates, default rates, and loss severities.

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 security. Under the prospective method, revisions to cash flows are reflected in a higher or lower effective yield in future periods and there are no adjustments to the security’s book value. Various assumptions are used to estimate projected cash flows and projected book yields based upon the most recent month end market prices. These assumptions include, but are not limited to, prepayment rates, default rates and loss severities.

Cash flow assumptions for structured securities are obtained from a primary market provider of such information. These assumptions represent a market based best estimate of the amount and timing of estimated principal and interest cash flows based on current information and events. Prepayment assumptions for asset/mortgage backed securities consider a number of factors in estimating the prepayment activity, including, but not limited to, seasonality (the time of the year), refinancing incentive (current level of interest rates), economic activity (including housing turnover) and burnout/seasoning (term and age of the underlying collateral).

Municipal Bond Portfolio:

The Company’s average AA+ rated $1,681.3 million municipal bond portfolio includes $1,046.3 million of insured securities, or 62.2% of the Company’s total municipal bond portfolio. The average underlying rating of the insured portion of the Company’s municipal bond portfolio is AA and the average underlying rating of the uninsured portion of the Company’s municipal bond portfolio is AA+. The following table represents the Company’s insured bond portfolio by monoline insurer as of September 30, 2008:

	Market Value of					Weighted Average
	Insured Municipal		Percentage of			Underlying Rating of
	Bonds		Municipal Bond			Insured Municipal
Monoline Insurer	(In Thousands)		Portfolio			Bonds
Financial Security Assurance, Inc.	$	341,014		20.3	%	AA
MBIA, Inc.		308,069		18.3		AA
FGIC Corporation.		208,117		12.4		AA-
AMBAC Financial Group, Inc.		178,252		10.6		AA-
Berkshire Hathaway Assurance Company		4,696		0.3			A+
XL Capital, LTD.		4,157		0.2			A
Assured Guaranty Corp.		1,966		0.1			A
Total	$	1,046,271		62.2	%	AA

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At the time of purchase, each municipal bond is evaluated with regard to certain characteristics, including, but not limited to, the issuer, the underlying obligation and/or the revenue pledge/collateral. The presence of any “financial guarantee” insurance is not an attribute used in the purchase decision. The Company considers the “financial guarantee” insurance to be “additional” protection. As of September 30, 2008, the Company had no impairments or surveillance issues related to these insured municipal bonds.

Impairment Reviews as of December 31, 2007:

The following table identifies the period of time securities with an unrealized loss as of December 31, 2007 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 3.8% and 19.9%, respectively, of the total estimated fair value, or 9.0% and 20.5%, respectively, of the total gross unrealized loss included in the table below. The industry concentration as a percentage of total estimated fair value represents investments in a geographically diversified pool of investment grade Municipal securities issued by states, political subdivisions, and public authorities under general obligation and/or special district/purpose issuing authority.  The industry concentration as a percentage of the total gross unrealized loss primarily represents investments in equity securities issued by companies in the Diversified Financial Services industry.

	Less Than 12 Months				12 Months or More				Total
			Unrealized				Unrealized						Unrealized
	Fair Value		Losses		Fair Value		Losses			Fair Value			Losses
	(In Thousands)
December 31, 2007
Fixed Maturities Available for Sale:
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies	$	—	$	—	$	5,670	$	21		$	5,670	$	21
Obligations of States and Political Subdivisions		294,719		2,377		203,427		1,006			498,146		3,383
Corporate and Bank Debt Securities		7,835		33		58,709		570			66,544		603
Asset Backed Securities		50,574		138		13,989		81			64,563		219
Mortgage Pass-Through Securities		68,691		366		128,382		1,493			197,073		1,859
Collateralized Mortgage Obligations		30,731		236		65,252		725			95,983		961
Total Fixed Maturities Available for Sale		452,550		3,150		475,429		3,896			927,979		7,046
Equity Securities		118,095		22,159		—		—			118,095		22,159
Total Investments	$	570,645	$	25,309	$	475,429	$	3,896		$	1,046,074	$	29,205

The Company’s impairment evaluation as of December 31, 2007 for fixed maturities available for sale excluding interests in securitized assets resulted in the following conclusions:

US Treasury Securities and Obligations of U.S. Government Agencies:

The unrealized losses on the Company’s Aaa/AAA rated investments in U.S. Treasury Securities and Obligations of U.S. Government Agencies are attributable to interest rate fluctuations since the date of purchase. Of the 30 investment positions held, approximately 26.7% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

Obligations of States and Political Subdivisions:

The unrealized losses on the Company’s investments in long term tax exempt securities which have ratings of A1/A+ to Aaa/AAA are attributable to the spread widening. Of the 873 investment positions held, approximately 32.8% were in an unrealized loss position. The contractual terms of the investments do not

16

permit the issuer to settle the securities at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

Corporate and Bank Debt Securities:

The unrealized losses on the Company’s long term investments in Corporate bonds which have ratings from Baa3/BBB to Aaa/AAA are attributable to the spread widening. Of the 73 investment positions held, approximately 79.5% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

The Company’s impairment evaluation as of December 31, 2007 for interests in securitized assets resulted in the following conclusions:

Asset Backed Securities:

The unrealized losses on the Company’s investments in Asset Backed Securities which have ratings from A2/A to Aaa/AAA are attributable to the spread widening. Of the 116 investment positions held, approximately 40.5% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

Mortgage Pass-Through Securities:

The unrealized losses on the Company’s investments in U.S. Government Agency Issued Mortgage Pass-Through Securities which have ratings of Aaa/AAA are attributable to the spread widening. Of the 150 investment positions held the average rating was Aaa/AAA and approximately 38.7% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

Collateralized Mortgage Obligations:

The unrealized losses on the Company’s investments in Collateralized Mortgage Obligations which have ratings of Aa2/AA+ to Aaa/AAA are attributable to the spread widening. Of the 172 investment positions held the average rating was Aaa/AAA and approximately 41.3% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments. Therefore, it is expected that the securities would not be settled at a price less than the amortized cost of the investments.

The Company’s impairment evaluation as of December 31, 2007 for equity securities resulted in the conclusion that the Company does not consider the equity securities to be other than temporarily impaired. Of the 2,674 investment positions held, approximately 38.4% were in an unrealized loss position.

Receivables and Payables for Financial Security Sales and Purchases:

As of September 30, 2008 and December 31, 2007, included in Other Assets in the Consolidated Balance Sheets were $232.4 million and $0.4 million, respectively, of receivables related to unsettled financial security sales. As of September 30, 2008 and December 31, 2007, included in Other Liabilities in the Consolidated Balance Sheets were $103.0 million and $0.2 million, respectively, of payables related to unsettled financial security purchases.

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. As of September 30, 2008 and December 31, 2007, the carrying value of the securities on deposit totaled $15.1 million and $15.7 million, respectively.

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Additionally, as of September 30, 2008 the Insurance Subsidiaries had $130.6 million of borrowings outstanding with the FHLB. These borrowings are collateralized by investments, principally asset backed securities, with a carrying value of $131.2 million as of September 30, 2008. As of December 31, 2007, the Insurance Subsidiaries had no borrowings outstanding or investments pledged as collateral to FHLB.

5. Liability for Unpaid Loss and Loss Adjustment Expenses

The liability for unpaid loss and loss adjustment expenses reflects the Company’s best estimate for future amounts needed to pay losses and related settlement expenses with respect to insured events. 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. The 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 yet 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 it 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 internal and external factors. These factors include, but are not limited to, the Company’s growth, changes in the Company’s operations, and legal, social, and economic developments. These estimates are reviewed regularly and any resulting adjustments 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 as of September 30, 2008, the related adjustments could have a material adverse impact on the Company’s financial condition and results of operations.

Catastrophe Losses:

During the three and nine months ended September 30, 2008, the Company experienced catastrophe losses attributable to Hurricane Ike impacting its commercial lines segment. Under the Company’s catastrophe reinsurance program, the Company had a $20.0 million pre-tax per occurrence loss retention for its commercial lines catastrophe losses. For the three and nine months ended September 30, 2008, the Company’s estimated gross and net retained catastrophe losses attributable to Hurricane Ike were $120.0 million and $21.7 million, respectively.

Changes in Estimated Net Unpaid Loss and Loss Adjustment Expenses for Prior Accident Years:

During the three months ended September 30, 2008, the Company increased (decreased) the estimated net unpaid loss and loss adjustment expenses for accident years 2007 and prior by the following amounts:

(In Millions)	Net Increase (Decrease)
Accident Year 2007	$	8.4
Accident Year 2006		(6.3	)
Accident Year 2005		(7.1	)
Accident Years 2004 and prior		(7.2	)
Total	$	(12.2	)

For accident year 2007, the increase in estimated net unpaid loss and loss adjustment expenses was principally due to higher loss estimates for commercial automobile liability, involuntary pools and commercial property coverages. The higher loss estimate in commercial automobile liability and commercial property coverages was due to higher than expected case incurred loss development, primarily as a result of claim severity being greater than anticipated. Loss estimates for involuntary pools are reported to the Company by multiple residual market entities, and reasons for higher or lower estimates vary by entity. These higher loss estimates were partially offset by lower loss estimates for commercial general liability coverages. The lower estimate in commercial general liability was due to lower than expected case incurred loss development, primarily as a result of claim frequency being less than anticipated.

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For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, and management and professional liability coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated. These lower loss estimates were partially offset by higher loss estimates for commercial automobile coverages due to higher than expected case incurred loss development, primarily as a result of claim severity being greater than anticipated.

For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, and management liability and professional liability coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.

For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, commercial automobile liability, automobile rental leasing, and professional liability coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.

During the nine months ended September 30, 2008, the Company increased (decreased) the estimated net unpaid loss and loss adjustment expenses for accident years 2007 and prior by the following amounts:

(In Millions)	Net Increase (Decrease)
Accident Year 2007	$	3.7
Accident Year 2006		(15.2	)
Accident Year 2005		(12.4	)
Accident Years 2004 and prior		(12.7	)
Total	$	(36.6	)

For accident year 2007, the increase in estimated net unpaid loss and loss adjustment expenses was principally due to higher loss estimates for commercial automobile liability, involuntary pools, professional liability and commercial property coverages. The higher loss estimates in commercial automobile liability and commercial property coverages was due to higher than expected case incurred loss development as a result of both claim frequency and severity being greater than anticipated. The higher loss estimates in professional liability coverages was primarily due to higher than expected case incurred loss development, primarily as a result of claim severity being greater than anticipated. Loss estimates for involuntary pools are reported to the Company by multiple residual market entities, and reasons for higher or lower estimates vary by entity. These higher loss estimates were partially offset by lower loss estimates for commercial general liability and management liability coverages. The lower estimate in commercial general liability was due to lower than expected case incurred loss development, primarily as a result of claim frequency being less than anticipated. The lower estimate in management liability coverages was due to lower than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.

For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, commercial property, management and professional liability, and automobile rental leasing coverages. The lower estimates in commercial general liability and auto rental leasing coverages were due to better than expected case incurred loss development, primarily as a result of claim frequency being less than anticipated. The lower estimates in commercial property and management and professional liability coverages were due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated. These lower loss estimates were partially offset by higher loss estimates for commercial automobile coverages due to higher than expected case incurred loss development, primarily as a result of claim severity being greater than anticipated.

For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, commercial property, management and

19

professional liability, and automobile rental leasing coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.

For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, management and professional liability, and automobile rental leasing coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.

6. Shareholders’ Equity

The Philadelphia Consolidated Holding Corp. Amended and Restated Employees’ Stock Incentive and Performance Based Compensation Plan (the “Plan”) provides incentives and awards to those employees and members of the Board (“participants”) largely responsible for the long term success of the Company. Under the Plan, the Company issued 512,760 and 436,607 stock settled appreciation rights (“SARS”) during the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively. The Company also issued 263,507 and 146,884 shares of restricted stock awards during the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively.

7. Stock Repurchase

During the nine months ended September 30, 2008, the Company repurchased 1,353,200 shares of stock at a cost of $42.9 million under its stock repurchase authorization. As of September 30, 2008, $52.1 million remains available under previous stock purchase authorizations which aggregated $125.3 million. During the nine months ended September 30, 2007, the Company did not repurchase any shares of stock under its stock repurchase authorization.

8. Earnings Per Share

Earnings per common share have been calculated by dividing net income for the period by the weighted average number of common shares and common share equivalents outstanding during the period. The computation of earnings per share for the three and nine months ended September 30, 2008 and 2007, is as follows:

	As of and For the Three				As of and For the Nine
	Months Ended				Months Ended
	September 30,				September 30,
(In Thousands, Except Per Share Amounts)	2008		2007		2008		2007
Weighted-Average Common Shares Outstanding		69,996		70,458		70,084		70,324
Weighted-Average Potential Shares Issuable		3,602		3,599		2,885		3,857
Weighted-Average Shares and Potential Shares Issuable		73,598		74,057		72,969		74,181
Net Income	$	49,967	$	96,244	$	165,551	$	256,625
Basic Earnings per Share	$	0.71	$	1.37	$	2.36	$	3.65
Diluted Earnings per Share	$	0.68	$	1.30	$	2.27	$	3.46

The following tables present stock appreciation rights (“SARS”) that were outstanding during 2008 or 2007, but were not included in the computation of earnings per share as of or for the three or nine months ended September 30, 2008 and 2007 because the SARS’ hypothetical option price was greater than the average market prices of the Company’s common shares for the period:

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As of and For the Three Months Ended September 30, 2008					As of and For the Three Months Ended September 30, 2007
SARS Outstanding					SARS Outstanding
as of	Hypothetical		Expiration Date		as of		Hypothetical		Expiration Date
September 30, 2008	Option Price		of SAR		September 30, 2007		Option Price		of SAR
—		—		—		30,000	$	39.95	September 28, 2016
						407,446	$	47.52	February 21, 2017
						25,000	$	43.44	March 19, 2017
						661	$	42.41	May 1, 2017

As of and For the Nine Months Ended September 30, 2008				As of and For the Nine Months Ended September 30, 2007
SARS Outstanding				SARS Outstanding
as of	Hypothetical		Expiration Date	as of		Hypothetical		Expiration Date
September 30, 2008	Option Price		of SAR	September 30, 2007		Option Price		of SAR
407,446	$	47.52	February 21, 2017		407,446	$	47.52	February 21, 2017
25,000	$	43.44	March 19, 2017		25,000	$	43.44	March 19, 2017
661	$	42.41	May 1, 2017		661	$	42.41	May 1, 2017

9. Income Taxes

The Company’s liability for its unrecognized tax benefits was $0.1 million and $0.2 million as of September 30, 2008 and December 31, 2007, respectively. As of September 30, 2008 and December 31, 2007, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.1 million and $0.2 million, respectively. Interest and penalties accrued for the underpayment of taxes are recorded as a component of income tax expense. The liability for interest and penalties amounted to $40,000 and $72,000 as of September 30, 2008 and December 31, 2007, respectively.

The Company and its subsidiaries file Federal and State income tax returns as required. The Company and its subsidiaries are subject to Federal and State examinations for tax years 2005 through 2007.

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

10. Reinsurance

In the normal course of business, the Company has entered into various reinsurance contracts with unrelated reinsurers. The Company participates in such agreements for the purpose of limiting loss exposure and diversifying business. Reinsurance contracts do not relieve the Company from its obligations to policyholders. The effect of reinsurance on written and earned premiums is as follows:

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	For the Three Months Ended						For the Three Months Ended
	September 30, 2008						September 30, 2007
(In Thousands)	Written			Earned			Written			Earned
Direct Business	$	547,608		$	453,487		$	503,078		$	410,264
Reinsurance Assumed		6,245			4,490			1,550			1,393
Reinsurance Ceded		(57,304	)		(49,465	)		(62,138	)		(52,508	)
Net Premiums	$	496,549		$	408,512		$	442,490		$	359,149

	For the Nine Months Ended						For the Nine Months Ended
	September 30, 2008						September 30, 2007
	Written			Earned			Written			Earned
Direct Business	$	1,434,953		$	1,321,317		$	1,294,438		$	1,181,840
Reinsurance Assumed		7,266			5,915			2,816			2,931
Reinsurance Ceded		(141,256	)		(146,295	)		(178,143	)		(169,589	)
Net Premiums	$	1,300,963		$	1,180,937		$	1,119,111		$	1,015,182

11. Commitments and Contingencies

Legal Proceedings:

On February 26, 2008, the Company received a complaint filed on February 14, 2008 with the U.S. District Court for the Southern District of Florida by seven individuals. These individuals purported to act on behalf of a class of similarly situated persons who had been issued insurance policies by Liberty American Select Insurance Company, formerly known as Mobile USA Insurance Company (“LASIC”). The complaint, which is alleged to be a “class action complaint”, was filed against the Company and its subsidiaries, LASIC, Liberty American Insurance Company and Liberty American Insurance Group, Inc. The complaint requests an unspecified amount of damages “in excess of $5,000,000” and equitable relief to prevent the defendants from committing what are alleged to be unfair business practices. The plaintiffs allege that from the period from at least as early as September 1, 2003 through December 31, 2006 they and other policyholders sustained property damage covered under policies issued by LASIC, and that LASIC improperly denied or paid only a portion of the policyholders’ claims for which they were entitled to be reimbursed.

The Company believes that it has valid defenses to the claims made in the complaint, and that the claims may not be entitled to be brought as a class action. The Company will vigorously defend against such claims. Although there is no assurance as to the outcome of this litigation or as to its effect on the Company’s financial position, the Company believes, based on the facts currently known to it, that the outcome of this litigation will not have a material adverse effect on its financial position.

The Company is also subject to routine legal proceedings in connection with its property and casualty insurance business.

Credit Agreement:

Effective July 11, 2008, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with Bank of America, N.A. and Wachovia Bank, National Association. The Amended Credit Agreement amended and restated the Company’s existing unsecured Credit Agreement among the Company and such Banks. The Amended Credit Agreement changed the terms of the existing Credit Agreement by extending the maturity date to June 26, 2009, including a $10.0 million letter of credit facility as part of the aggregate $50.0 million revolving credit commitments of the Bank lenders, increasing the unused commitment fee from 6.0 basis points to 7.0 basis points per annum and increasing the Company’s Libor option per annum interest rate from Libor plus 0.35% to Libor plus 0.40%. As of September 30, 2008, no borrowings were outstanding under the Amended Credit Agreement.

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The Amended Credit Agreement contains various representations, covenants and events of default typical for credit facilities of this type. As of September 30, 2008, the Company was in compliance with all covenants contained in the Amended Credit Agreement. Additionally, the Company does not currently believe its ability to borrow under the Amended Credit Agreement has been adversely impacted by the increased volatility in the capital markets or the adverse conditions in the financial services industry.

State Insurance Guaranty Funds:

As of September 30, 2008 and December 31, 2007, included in Other Liabilities in the Consolidated Balance Sheets were $17.0 million and $13.2 million, respectively, of liabilities for state insurance guaranty funds. As of September 30, 2008 and December 31, 2007, included in Other Assets in the Consolidated Balance Sheets were $0.2 million 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 originally created by the state of Florida to provide insurance to property owners unable to obtain coverage in the private insurance market. Florida Citizens, at the discretion and direction of its Board of Governors (“Florida 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 6% of the deficit or 6% of Florida property premiums industry-wide for the prior year. The portion of the total assessment attributable to the Company is based on its market share. 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.

The Company also continues to monitor developments with respect to the Texas Windstorm Insurance Association (“TWIA”). During the three and nine months ended September 30, 2008, the Company accrued $3.6 million of TWIA assessments related to Hurricanes Dolly and Ike. Of this amount, $3.0 million is recoverable from certain of the Company’s reinsurers, resulting in $0.6 million of net TWIA assessment expense being recognized during the three and nine months ended September 30, 2008. Due to the uncertainty of the ultimate impact of these catastrophe losses on TWIA, TWIA could recognize a financial deficit greater than the level estimated by TWIA in calculating the Company’s assessments. If this occurs, TWIA has the ability to increase the Company’s assessments.

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 (“FLOIR”), companies are required to collect the FHCF assessments directly from their policyholders and remit them to the FHCF as they are collected.

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12. Comprehensive Income

Components of comprehensive income, as detailed in the Consolidated Statements of Operations and Comprehensive Income, are net of tax. The related tax effect of Holding Gains (Losses) arising during the three and nine months ended September 30, 2008 and 2007 was $(33.9) million and $11.7 million, respectively, and $(64.4) million and $10.1 million, respectively. The related tax effect of Reclassification Adjustments for the three and nine months ended September 30, 2008 and 2007 was $6.2 million and $(1.0) million, respectively, and $14.3 million and $(11.4) million, respectively.

13. New Accounting Pronouncements

In March 2008, the FASB issued Statement No. 161 Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”) to enhance disclosures about an entity’s derivative and hedging activities. SFAS 161 is effective for all financial statements issued in fiscal years and interim periods beginning after November 15, 2008 and early application is encouraged. SFAS 161 also encourages, but does not require comparative disclosures for earlier periods at initial adoption. As the Company does not currently engage in derivative transactions or hedging activities, the Company does not anticipate any significant financial statement disclosure impact resulting from its evaluation of SFAS 161.

In April 2008, the FASB issued Staff Position No. FAS 142-3 Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142 Goodwill and Other Intangible Assets (SFAS 142), in order to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R Business Combinations and other U.S. generally accepted accounting principles. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not anticipate any significant financial statement impact resulting from its evaluation of FSP FAS 142-3.

In May 2008, the FASB issued Statement No. 162 The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”) to identify the sources of accounting principles and provide a framework for selecting the principles to be used in the preparation of financial statements in accordance with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, which occurred on September 16, 2008. The Company does not anticipate any significant financial statement impact resulting from its evaluation of SFAS 162.

In May 2008, the FASB issued Statement No. 163 Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60 (“SFAS 163”) to eliminate diversity in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60 Accounting and Reporting by Insurance Enterprises. SFAS 163 is effective for all financial statements issued in fiscal years and interim periods beginning after December 15, 2008, with the exception of the new requirements relating to disclosures about insurance enterprises’ risk-management activities used to track and monitor deteriorating insured financial obligations, which are effective for the first period, including interim periods, after the issuance of SFAS 163. Except for these risk-management disclosures, early application is not permitted. As the Company does not currently enter into financial guarantee insurance contracts, the Company does not anticipate any significant financial statement or disclosure impact resulting from its evaluation of SFAS 163.

14. Segment Information

The Company’s operations are classified into three reportable business segments which are organized around its underwriting divisions:

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

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

• The Run-Off (previously the Personal Lines Group) business segment, which pursuant to approval received in February, 2008 from the Florida Office of Insurance Regulation, is currently in the process of non-renewing all personal lines policies, other than policies issued pursuant to the National Flood Insurance Program (“NFIP”). The non-renewal process began with policies expiring on July 23, 2008, and we currently expect the process to be completed by July 23, 2009.

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 yet 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 the three and nine months ended September 30, 2008 and 2007. Corporate information is included to reconcile segment data to the consolidated financial statements:

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	As of and For The Three Months Ended September 30,
	Commercial		Specialty			Personal
	Lines		Lines			Lines			Corporate			Total
2008:
Gross Written Premiums	$	467,627	$	75,073		$	11,153			—		$	553,853
Net Written Premiums	$	425,251	$	72,113		$	(815	)		—		$	496,549
Revenue:
Net Earned Premiums	$	342,005	$	63,250		$	3,257			—		$	408,512
Net Investment Income		—		—			—			33,273			33,273
Net Realized Investment Loss		—		—			—			(17,852	)		(17,852	)
Other Income		—		—			174			696			870
Total Revenue		342,005		63,250			3,431			16,117			424,803
Losses and Expenses:
Net Loss and Loss Adjustment Expenses		200,510		31,579			1,750			—			233,839
Acquisition Costs and Other Underwriting Expenses		—		—			—			117,640			117,640
Other Operating Expenses		—		—			87			4,227			4,314
Total Losses and Expenses		200,510		31,579			1,837			121,867			355,793
Income Before Income Taxes		141,495		31,671			1,594			(105,750	)		69,010
Total Income Tax Expense		—		—			—			19,043			19,043
Net Income	$	141,495	$	31,671		$	1,594		$	(124,793	)	$	49,967
Total Assets		—		—		$	87,811		$	4,728,644		$	4,816,455
2007:
Gross Written Premiums	$	425,131	$	68,476		$	11,021			—		$	504,628
Net Written Premiums	$	389,298	$	55,930		$	(2,738	)		—		$	442,490
Revenue:
Net Earned Premiums	$	303,381	$	48,675		$	7,093			—		$	359,149
Net Investment Income		—		—			—			30,199			30,199
Net Realized Investment Gain		—		—			—			2,817			2,817
Other Income		—		—			530			450			980
Total Revenue		303,381		48,675			7,623			33,466			393,145
Losses and Expenses:
Net Loss and Loss Adjustment Expenses		146,416		(3,149	)		1,538			—			144,805
Acquisition Costs and Other Underwriting Expenses		—		—			—			101,252			101,252
Other Operating Expenses		—		—			291			2,701			2,992
Total Losses and Expenses		146,416		(3,149	)		1,829			103,953			249,049
Income Before Income Taxes		156,965		51,824			5,794			(70,487	)		144,096
Total Income Tax Expense		—		—			—			47,852			47,852
Net Income	$	156,965	$	51,824		$	5,794		$	(118,339	)	$	96,244
Total Assets		—		—		$	100,385		$	3,897,402		$	3,997,787

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	As of and For The Nine Months Ended September 30,
	Commercial		Specialty		Personal
	Lines		Lines		Lines			Corporate			Total
2008:
Gross Written Premiums	$	1,190,605	$	209,403	$	42,211			—		$	1,442,219
Net Written Premiums	$	1,088,051	$	205,772	$	7,140			—		$	1,300,963
Revenue:
Net Earned Premiums	$	995,821	$	177,237	$	7,879			—		$	1,180,937
Net Investment Income		—		—		—			97,577			97,577
Net Realized Investment Loss		—		—		—			(40,759	)		(40,759	)
Other Income		—		—		2,230			3,647			5,877
Total Revenue		995,821		177,237		10,109			60,465			1,243,632
Losses and Expenses:
Net Loss and Loss Adjustment Expenses		566,596		79,548		4,384			—			650,528
Acquisition Costs and Other Underwriting Expenses		—		—		—			347,275			347,275
Other Operating Expenses		—		—		673			11,606			12,279
Total Losses and Expenses		566,596		79,548		5,057			358,881			1,010,082
Income Before Income Taxes		429,225		97,689		5,052			(298,416	)		233,550
Total Income Tax Expense		—		—		—			67,999			67,999
Net Income	$	429,225	$	97,689	$	5,052		$	(366,415	)	$	165,551
Total Assets		—		—	$	87,811		$	4,728,644		$	4,816,455
2007:
Gross Written Premiums	$	1,058,407	$	189,182	$	49,665			—		$	1,297,254
Net Written Premiums	$	968,264	$	155,827	$	(4,980	)		—		$	1,119,111
Revenue:
Net Earned Premiums	$	861,926	$	141,969	$	11,287			—		$	1,015,182
Net Investment Income		—		—		—			85,694			85,694
Net Realized Investment Gain		—		—		—			32,638			32,638
Other Income		—		—		1,978			682			2,660
Total Revenue		861,926		141,969		13,265			119,014			1,136,174
Losses and Expenses:
Net Loss and Loss Adjustment Expenses		385,122		51,651		7,126			—			443,899
Acquisition Costs and Other Underwriting Expenses		—		—		—			299,902			299,902
Other Operating Expenses		—		—		1,087			8,041			9,128
Total Losses and Expenses		385,122		51,651		8,213			307,943			752,929
Income Before Income Taxes		476,804		90,318		5,052			(188,929	)		383,245
Total Income Tax Expense		—		—		—			126,620			126,620
Net Income	$	476,804	$	90,318	$	5,052		$	(315,549	)	$	256,625
Total Assets		—		—	$	100,385		$	3,897,402		$	3,997,787

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Summarized revenue information by product grouping for the Company’s three reportable business segments for the three and nine months ended September 30, 2008 and 2007 is as follows:

	For The Three Months Ended					For The Nine Months Ended
	September 30,					September 30,
(In Thousands)	2008			2007		2008			2007
Commercial Lines Net Earned Premiums
Commercial Package	$	310,155		$	274,360	$	905,239		$	787,412
Specialty Property		12,246			15,468		42,287			43,225
Commercial Auto		6,776			6,552		18,526			17,790
Antique/Collector Auto		8,361			5,655		23,913			10,791
All Other		4,467			1,346		5,856			2,708
Total Commercial Lines		342,005			303,381		995,821			861,926
Specialty Lines Net Earned Premiums
Management Liability		38,804			26,927		106,359			76,586
Professional Liability		24,446			21,748		70,878			65,383
Total Specialty Lines		63,250			48,675		177,237			141,969
Run-Off Net Earned Premiums
Homeowners and Manufactured Housing		3,257			7,093		7,879			11,287
National Flood Insurance Program		—			—		—			—
Total Run-Off Net Earned Premiums		3,257			7,093		7,879			11,287
Other Income		174			530		2,230			1,978
Total Run-Off		3,431			7,623		10,109			13,265
Corporate
Net Investment Income		33,273			30,199		97,577			85,694
Net Realized Investment Gain (Loss)		(17,852	)		2,817		(40,759	)		32,638
Other Income		696			450		3,647			682
Total Corporate		16,117			33,466		60,465			119,014
Total Revenue	$	424,803		$	393,145	$	1,243,632		$	1,136,174

15. Proposed Merger

On July 23, 2008, the Company and Tokio Marine Holdings, Inc. (“TMHD”) entered into an Agreement and Plan of Merger under which, at the closing of the merger, TMHD would acquire all outstanding shares of the Company for $61.50 per share, in cash, through TMHD’s wholly owned subsidiary, Tokio Marine & Nichido Fire Insurance Co., Ltd. The total value of this transaction is approximately $4.7 billion. The transaction is expected to close in the fourth quarter of 2008. As set forth below, the closing of the merger is subject to approval of the Financial Services Agency of Japan, as well as other customary closing conditions.

On October 3, 2008, TMHD received approval from the Pennsylvania Department of Insurance to acquire control of the Company. On October 23, 2008, at a special meeting of the shareholders of the Company, the Company’s shareholders approved the Agreement and Plan of Merger. On November 3, 2008, TMHD received approval from the Florida Office of Insurance Regulation to acquire control of the Company. The proposed merger transaction remains subject to regulatory approval by the Financial Services Agency of Japan.

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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Certain information included in this report and other statements or materials published or to be published by us 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, we provide the following cautionary remarks regarding important factors which, among others, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of our business, and the other matters referred to below include, but are not limited to those matters set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Item 1A of Part II of this Report. We do not intend to publicly update any forward looking statement, except as may be required by law.

General

Although our financial performance is dependent upon our own specific business characteristics, certain risk factors can affect our profitability and/or our financial condition. These include, but are not limited to, the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Item 1A of Part II of this Report.

These risk factors should be read in conjunction with the Certain Critical Accounting Estimates and Judgments included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Our operations are classified into three reportable business segments which are organized as follows: the Commercial Lines Underwriting Group, the Specialty Lines Underwriting Group and the Run-Off (previously the Personal Lines Underwriting Group) business segments. The Run-Off business segment, pursuant to approval received in February, 2008 from the Florida Office of Insurance Regulation, is currently non-renewing all personal lines policies, other than policies issued pursuant to the National Flood Insurance Program (“NFIP”). The non-renewal process began with policies expiring on July 23, 2008, and we currently expect the process to be completed by July 23, 2009.

On July 23, 2008, we and Tokio Marine Holdings, Inc. (“TMHD”) entered into an Agreement and Plan of Merger under which, at the closing of the merger, TMHD would acquire all of our outstanding shares for $61.50 per share, in cash, through TMHD’s wholly owned subsidiary, Tokio Marine & Nichido Fire Insurance Co., Ltd. The total value of this transaction is approximately $4.7 billion. The transaction is expected to close in the fourth quarter of 2008. As set forth below, the closing of the merger is subject to approval of the Financial Services Agency of Japan, as well as other customary closing conditions.

On October 3, 2008, TMHD received approval from the Pennsylvania Department of Insurance to acquire control of the Company. On October 23, 2008, at a special meeting of the shareholders of the Company, our shareholders approved the Agreement and Plan of Merger. On November 3, 2008, TMHD received approval from the Florida Office of Insurance Regulation to acquire control of the Company. The proposed merger transaction remains subject to the regulatory approval by the Financial Services Agency of Japan.

Critical Accounting Estimates

The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles, or GAAP, requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. Accounting policies and estimates are periodically reviewed and adjustments are made when facts and circumstances dictate. Critical accounting policies that are affected by accounting estimates include:

29

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

• Investments – fair value;

• Investments – other than temporary impairments;

• Liability for unpaid loss and loss adjustment expenses;

• Reinsurance receivables;

• Liability for preferred agent profit sharing; and

• Share-based compensation expense.

On January 1, 2008, we adopted the provisions of SFAS 157. SFAS 157 defines fair value and provides a consistent framework for measuring items at fair value as previously permitted by existing accounting pronouncements. SFAS 157 provides a “fair value hierarchy” which prioritizes the quality of inputs used when measuring the items at fair value and requires expanded disclosures for fair value measurements. As of September 30, 2008, the fair value of our investments has been determined in accordance with the provisions of SFAS 157. A further discussion of this matter is included under the “Investments” section below.

Our accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements. Actual results could differ materially from these estimates. For a discussion of how these estimates and other factors may affect our business, see the Risk Factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Item 1A of Part II of this Report.

Results of Operations (Nine Months Ended September 30, 2008 compared to September 30, 2007)

     Premiums: Premium information for the nine months ended September 30, 2008 compared to September 30, 2007 for each of our business segments is as follows:

(Dollars In Millions)	Commercial Lines			Specialty Lines			Run-off			Total
2008 Gross Written Premiums	$	1,190.6		$	209.4		$	42.2		$	1,442.2
2007 Gross Written Premiums	$	1,058.4		$	189.2		$	49.7		$	1,297.3
Percentage Increase (Decrease)		12.5	%		10.7	%		(15.1	)%		11.2	%
2008 Gross Earned Premiums	$	1,095.7		$	190.1		$	41.4		$	1,327.2
2007 Gross Earned Premiums	$	946.0		$	175.1		$	63.7		$	1,184.8
Percentage Increase (Decrease)		15.8	%		8.6	%		(35.0	)%		12.0	%

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 our marketing Regional Vice Presidents continue to result in additional prospects and increased premium writings in existing product offerings, most notably for the following:

§	Our condominium and homeowners associations, religious organizations, non-profit, specialty schools, antique/collector vehicle, golf and country clubs, day care centers, and mental health products in the commercial package product grouping. These product offerings accounted for approximately $68.1 million of the $132.2 million total commercial lines segment gross written premiums increase.
§	Our consultant liability product in the professional liability product grouping, as well as our private company protection, directors and officers, and business owners products in the management liability product grouping. These product offerings accounted for all of the $20.2 million total specialty lines segment gross written premiums increase.

• The introduction of several new niche product offerings, such as the affordable housing, vehicle parks, special events, and museum commercial package products, as well as the difference in conditions inland

30

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

marine specialty property product. These new product offerings accounted for approximately $42.8 million of the $132.2 million total commercial lines segment gross written premiums increase.

• The acquisition of Gillingham & Associates, Inc. on March 10, 2008, which accounted for approximately $25.7 million of commercial lines segment gross written premium growth for the nine months ended September 30, 2008.

• An increase in our marketing personnel, as well as an increase in the number of our preferred agents.

• Our “Firemark Producer” program, which promotes our product offerings and underwriting philosophy in selected producers’ offices.

• As a result of the factors noted above, the commercial lines and specialty lines segments in-force policy counts increased by 17.3% and 72.7% respectively, for the nine months ended September 30, 2008.

The growth in gross written premiums was offset in part by:

• Realized average rate decreases on renewal business approximating 4.8% and 2.3% for the commercial lines and specialty lines segments, respectively.

• Continued price competition during the nine months ended September 30, 2008, particularly with respect to the following:

§	Large commercial property-driven accounts located in the non-coastal areas of the country;
§	Commercial package business with annual premiums in excess of $100,000; and
§	Professional liability accounts at all premium levels.

• A reduction in personal lines (run-off segment) production for our homeowners and rental dwelling policies. This reduction was imposed to reduce our exposure to catastrophe wind losses. On February 29, 2008, we received approval from the Florida Office of Insurance Regulation (“FLOIR”) to non-renew all of our Florida personal lines policies, other than policies issued pursuant to the National Flood Insurance Program. The non-renewal process began with policies expiring on July 23, 2008, and we currently expect the process to be completed by July 23, 2009. As of September 30, 2008, there were approximately 2,213 in-force policies with an aggregate in-force premium of approximately $1.6 million which expire between October 1, 2008 and December 31, 2008, which we will not renew during 2008.

• A decrease in bowling centers commercial package product gross written premium of $3.3 million as a result of non-renewing policies due to unacceptable underwriting results. For the nine months ended September 30, 2008, gross written premium for the bowling centers commercial package product was $0.9 million. The Company anticipates that it will continue to non-renew its remaining bowling centers commercial package business throughout 2008, which approximated $0.3 million of gross written premium for the three months ended December 31, 2007.

One of our preferred agents has terminated their preferred agency agreement with us effective August 1, 2008. It has been agreed that we will not compete for a period of one year on a mutually agreed upon list of accounts. The list of accounts is estimated to total approximately $30.0 million in annual gross written premium.

The respective net written premiums and net earned premiums for each of our business segments for the nine months ended September 30, 2008 compared to September 30, 2007 were as follows:

31

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

(Dollars In Millions)	Commercial Lines			Specialty Lines			Run-off			Total
2008 Net Written Premiums	$	1,088.1		$	205.8		$	7.1		$	1,301.0
2007 Net Written Premiums	$	968.3		$	155.8		$	(5.0	)	$	1,119.1
Percentage Increase		12.4	%		32.1	%		242.0	%		16.3	%
2008 Net Earned Premiums	$	995.8		$	177.2		$	7.9		$	1,180.9
2007 Net Earned Premiums	$	861.9		$	142.0		$	11.3		$	1,015.2
Percentage Increase (Decrease)		15.5	%		24.8	%		(30.1	)%		16.3	%

The differing percentage changes in net written premiums and/or net earned premiums versus gross written premiums and/or gross earned premiums for our commercial lines, specialty lines and run-off (personal lines) segments results primarily from the following:

• We experienced higher property catastrophe reinsurance rates, maintained the same catastrophe loss retention, and increased catastrophe coverage limits for our annual June 1, 2007 reinsurance renewal compared to the June 1, 2006 renewal. This resulted in increased property catastrophe costs for the nine month period ended September 30, 2008 compared to the nine month period ended September 30, 2007.

• For our June 1, 2008 commercial lines segment property catastrophe reinsurance renewal, we experienced higher reinsurance rates, purchased increased catastrophe limits due to higher exposures primarily in the northeastern portion of the country, and increased our catastrophe loss retention compared to the June 1, 2007 renewal. Our commercial lines segment property catastrophe reinsurance coverage, which is effective June 1, 2008 through May 31, 2009, is as follows:

§

Our open-market catastrophe reinsurance coverage is $480.0 million in excess of a $20.0 million per occurrence retention. The open-market catastrophe program (coverage principally provided by large reinsurers that are rated at least “A-” (Excellent) by A.M. Best Company) includes one mandatory reinstatement.

§

We also purchased a reinstatement premium protection contract for the First and Second Excess Layers of our commercial lines segment open-market catastrophe reinsurance coverage, effective June 1, 2008. This reinstatement premium protection contract provides coverage for reinstatement premiums which we may become liable to pay as a result of a loss occurrence between $20.0 million and $100.0 million (the First and Second Excess Layers of the commercial lines segment open-market catastrophe reinsurance program).

• For our run-off segment, our property catastrophe costs were significantly lower for the nine months ended September 30, 2008 compared to September 30, 2007. For our June 1, 2007 run-off segment property catastrophe reinsurance renewal, we experienced reduced reinsurance rates, lower catastrophe loss retention and purchased decreased catastrophe coverage limits due to lower exposures, compared to the June 1, 2006 renewal.

• For our June 1, 2008 run-off segment property catastrophe reinsurance renewal, we experienced lower reinsurance rates, maintained the same catastrophe loss retention, and purchased decreased catastrophe coverage limits due to lower exposures, compared to our June 1, 2007 renewal. Our run-off segment property catastrophe reinsurance coverage, which is effective June 1, 2008 through May 31, 2009 is as follows:

§ Our reinsurance coverage is approximately $43.3 million in excess of a $3.5 million per occurrence retention. Of this total amount, the Florida Hurricane Catastrophe Fund (“FHCF”) provides, on an aggregate basis for Liberty American Select Insurance Company and Liberty American Insurance Company, 90% coverage for approximately $26.8 million in excess of $6.4 million per occurrence. The FHCF coverage inures to the benefit of our open-market catastrophe program. The coverage

32

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

provided by our 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 reimbursement coverage cannot be reinstated, our open-market program is structured such that catastrophe reinsurance coverage in excess of the FHCF coverage will “drop down” and fill in any portion of the FHCF which has been utilized.

• For our commercial and specialty lines segments, we experienced rate reductions on our annual January 1, 2008 renewal of our casualty excess of loss reinsurance coverage compared to the rate on our January 1, 2007 renewal of this coverage.

• For our commercial lines segment, we experienced a rate increase on our annual January 1, 2008 renewal of our property excess of loss reinsurance coverage compared to the rate on our January 1, 2007 renewal of this coverage.

• For our specialty lines segment, the higher percentage increase in our net written premiums compared to the percentage increase in our gross written premiums for the nine months ended September 30, 2008 is primarily due to the January 1, 2008 renewal of our casualty excess of loss reinsurance coverage. We experienced rate reductions on our January 1, 2008 renewal of this coverage compared to our January 1, 2007 renewal of this coverage. This reduced rate was applied to our January 1, 2008 gross unearned premiums, which resulted in a reduction to ceded written premium as of January 1, 2008.

• An increase in accelerated and net reinstatement premium costs related to our catastrophe reinsurance coverages:

§ For our commercial lines segment, during the nine months ended September 30, 2008, we experienced catastrophe losses attributable to Hurricane Ike. These losses resulted in the recognition of accelerated and net reinstatement catastrophe reinsurance premium expense of $5.1 million during the nine months ended September 30, 2008 due to the utilization of certain of the catastrophe reinsurance coverages. This recognition of accelerated and net reinstatement reinsurance premium expense increases ceded written and earned premiums and reduces net written and earned premiums.

• Certain of our reinsurance contracts have reinstatement or additional premium provisions under which we must pay reinstatement or additional reinsurance premiums to reinstate coverage provisions upon utilization of initial reinsurance coverage. During the nine months ended September 30, 2008 and 2007, we increased (reduced) our reinstatement or additional premium accrual by $(4.9) million ($(1.4) million for the commercial lines segment and $(3.5) million for the specialty lines segment) and $2.6 million ($1.1 million for the commercial lines segment and $1.5 million for the specialty lines segment) respectively, under our excess of loss reinsurance treaties, as a result of changes in our ultimate loss estimates. Increases in these reinstatement and additional premium accruals increase ceded written and earned premiums and decrease net written and earned premiums, and decreases in these reinstatement and additional premium accruals decrease ceded written and earned premiums and increase net written and earned premiums.

     Net Investment Income: Net investment income increased 13.9% to $97.6 million for the nine months ended September 30, 2008 from $85.7 million for the same period of 2007. Total investments grew by 9.6% to $3,131.0 million as of September 30, 2008 from $2,857.3 million as of September 30, 2007. The growth in investment income is primarily due to our ability to invest increased net cash flows provided from our operating activities. In addition, despite a general decline in interest rates compared with the previous historical reporting period, the capital market spreads to U.S. Treasuries were generally wider, which also had a favorable impact on our ability to increase investment income through new investments. The taxable equivalent book yield on our fixed income holdings approximated 5.5% as of September 30, 2008 and September 30, 2007.

The average duration of our fixed maturity portfolio was 5.5 years and 4.9 years as of September 30, 2008 and 2007, respectively. Our decision to continue to increase the average duration of our fixed maturity portfolio was based

33

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

upon our strategic enterprise risk management analyses indicating our capacity to further refine the risk/return profile of our investment portfolio.

Effective January 1, 2008, we substituted a customized Merrill Lynch Enterprise Based Investment Benchmark Index (the “Index”) for the Lehman Brothers Intermediate Aggregate Index to evaluate the total return performance of our fixed income portfolio. This change was made in an effort to establish an Index that more closely represents our strategic enterprise -based risk and return profile, as reflected in a strategic optimal fixed maturity portfolio.

The total tax equivalent performance of our fixed income portfolio was 0.54% for the nine months ended September 30, 2008, compared to the Index tax equivalent performance of (0.25)% for the same period. This favorable variance is primarily due to the portfolio’s underweight allocation to Municipal securities compared to the Municipal security allocation percentage in the custom Index. While we continued to add to our Municipal portfolio given the attractive relative returns in this sector, the new investments have been added at a measured pace during the recent periods of general market disruption and, in particular, during the periods of volatility in the municipal markets caused by leveraged funds unwinding.

The total pre-tax return, which includes the effects of both income and price returns on securities, of our fixed income portfolio was 3.31% for the nine months ended September 30, 2007, compared to the Lehman Brothers Intermediate Aggregate Bond Index total pre-tax return of 4.01% for the same period.

We continue to expect some variation in our portfolio’s total return compared to the Index primarily because of the differing sector, security and duration composition of our portfolio as compared to the Index.

     Net Realized Investment Gain (Loss): Net realized investment (losses) gains were $(40.8) million and $32.6 million for the nine months ended September 30, 2008 and 2007, respectively.

For the nine months ended September 30, 2008, we realized net investment gains of $7.3 from the sale of fixed maturity securities. For the nine months ended September 30, 2008, we realized net investment losses of $5.9 million from the sale of equity securities. In addition, as a result of our impairment evaluations for the nine months ended September 30, 2008:

• We recognized $7.5 million in non-cash realized fixed maturity security investment losses primarily relating to our direct holdings in fixed maturity securities issued by Lehman Brothers Holdings Inc. and its subsidiaries (“Lehman”).

• We recognized $34.7 million in non-cash realized equity security investment losses.

For the nine months ended September 30, 2007, we realized net investment gains of $0.7 million and $35.6 million from the sale of fixed maturity and equity securities, respectively. In addition, for the nine months ended September 30, 2007, we recognized $0.5 million and $3.2 million in non-cash realized investment losses for fixed maturity and equity securities, respectively, as a result of our impairment evaluations. The $35.6 million net realized gains from the sale of equity securities included approximately $22.2 million of net realized gains as a result of the liquidation of one of our equity portfolios following our decision to change one of our common stock investment managers.

     Other Income: Other income approximated $5.9 million and $2.7 million for the nine months ended September 30, 2008 and 2007, respectively. Other income consists primarily of commissions and fees earned on servicing and brokering commercial lines business, and to a lesser extent commissions and fees earned on servicing and brokering personal lines business. In addition, other income for the nine months ended September 30, 2008 includes our recognition of a $1.2 million gain related to the sale of the headquarters building used by our Run-Off segment.

     Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $206.6 million (46.5%) to $650.5 million for the nine months ended September 30, 2008 from $443.9 million for the same period of 2007, and the loss ratio increased to 55.1% in 2008 from 43.7% in 2007.

34

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

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

• The growth in net earned premiums.

• Net reserve actions taken during the nine months ended September 30, 2008 which decreased net estimated unpaid loss and loss adjustment expenses for accident years 2007 and prior by $36.6 million, as compared to net reserve actions taken during the nine months ended September 30, 2007 which decreased estimated net unpaid loss and loss adjustment expenses for accident years 2006 and prior by $73.2 million. Increases/(decreases) in the estimated net unpaid loss and loss adjustment expenses for prior accident years during the nine months ended September 30, 2008 were as follows:

	Net Basis
(Dollars In Millions)	Increase/(Decrease)
Accident Year 2007	$	3.7
Accident Year 2006		(15.2	)
Accident Year 2005		(12.4	)
Accident Years 2004 and prior		(12.7	)
Total	$	(36.6	)

For accident year 2007, the increase in estimated net unpaid loss and loss adjustment expenses was principally due to higher loss estimates for commercial automobile liability, involuntary pools, professional liability and commercial property coverages. The higher loss estimates in commercial automobile liability and commercial property coverages was due to higher than expected case incurred loss development as a result of both claim frequency and severity being greater than anticipated. The higher loss estimates in professional liability coverages was primarily due to higher than expected case incurred loss development, primarily as a result of claim severity being greater than anticipated. Loss estimates for involuntary pools are reported to the Company by multiple residual market entities, and reasons for higher or lower estimates vary by entity. These higher loss estimates were partially offset by lower loss estimates for commercial general liability and management liability coverages. The lower estimate in commercial general liability was due to lower than expected case incurred loss development, primarily as a result of claim frequency being less than anticipated. The lower estimate in management liability coverages was due to lower than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.

For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, commercial property, management and professional liability, and automobile rental leasing coverages. The lower estimates in commercial general liability and auto rental leasing coverages were due to better than expected case incurred loss development, primarily as a result of claim frequency being less than anticipated. The lower estimates in commercial property and management and professional liability coverages were due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated. These lower loss estimates were partially offset by higher loss estimates for commercial automobile coverages due to higher than expected case incurred loss development, primarily as a result of claim severity being greater than anticipated.

For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, commercial property, management and professional liability, and automobile rental leasing coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.

For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, management and professional liability, and automobile rental leasing coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.

35

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

• An increase in the current accident year net ultimate loss and loss adjustment expense ratio for the nine months ended September 30, 2008 compared to 2007. During the nine months ended September 30, 2008, a net ultimate loss and loss adjustment expense ratio of 58.2% was estimated for the 2008 accident year. During the nine months ended September 30, 2007, a net ultimate loss and loss adjustment expense ratio of 50.9% was estimated for the 2007 accident year. The increase in the 2008 accident year loss and loss adjustment expense ratio is principally attributable to:

§	$20.6 million of loss and loss adjustment expenses during the nine months ended September 30, 2008 resulting from hail, tornado, and wind losses which occurred in Minnesota, Nebraska, Kansas, and Oklahoma during the period of May 22, 2008 through May 26, 2008, and which occurred in Illinois, Indiana, Kansas, Minnesota, Nebraska, and Oklahoma during the period of May 29, 2008 through June 1, 2008. We did not have similar losses during the nine months ended September 30, 2007.
§	$21.7 million of loss and loss adjustment expenses during the nine months ended September 30, 2008 resulting from losses attributable to Hurricane Ike. We did not have similar losses during the nine months ended September 30, 2007.
§	Realized average rate decreases on renewal business approximating 4.8% and 2.3% for the commercial and specialty lines segments, respectively, for the nine months ended September 30, 2008 compared to the same period in 2007.

Establishing loss reserve estimates is a complex and imprecise process. Our estimation procedures employ several generally accepted actuarial methods to determine net unpaid loss and loss adjustment expenses. Some of these methods are based on actual loss development, while others are based on expected loss development, and still others use a blend of both. Over time, more reliance is placed on actuarial methods based on actual loss development, and accordingly, over time, less reliance is placed on actuarial methods based on expected loss development.

          Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $47.4 million (15.8%) to $347.3 million for the nine months ended September 30, 2008 from $299.9 million for the same period of 2007, and the expense ratio decreased slightly to 29.4% in 2008 versus 29.6% in 2007. The increase in acquisition costs and other underwriting expenses was due primarily to the growth in net earned premiums.

          Income Tax Expense: Our effective tax rate for the nine months ended September 30, 2008 and 2007 was 29.1% and 33.0%, respectively. The effective rates for 2008 and 2007 differed from the 35% statutory rate principally due to investments in tax-exempt securities and the relative proportion of tax exempt income to our income before tax. The decrease in the effective tax rate during 2008 is due principally to increased investments in tax exempt securities.

Results of Operations (Three Months Ended September 30, 2008 compared to September 30, 2007)

          Premiums: Premium information for the three months ended September 30, 2008 compared to September 30, 2007 for each of our business segments is as follows:

(Dollars In Millions)	Commercial Lines			Specialty Lines			Run-off			Total
2008 Gross Written Premiums	$	467.6		$	75.1		$	11.2		$	553.9
2007 Gross Written Premiums	$	425.1		$	68.5		$	11.0		$	504.6
Percentage Increase		10.0	%		9.6	%		1.8	%		9.8	%
2008 Gross Earned Premiums	$	379.4		$	65.5		$	13.0		$	457.9
2007 Gross Earned Premiums	$	332.8		$	60.0		$	18.9		$	411.7
Percentage Increase (Decrease)		14.0	%		9.2	%		(31.2	)%		11.2	%

36

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

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 our marketing Regional Vice Presidents continue to result in additional prospects and increased premium writings in existing product offerings, most notably for the following:

§	Our religious organizations, specialty schools, non-profit, mental health, antique/collector vehicle, program business, and golf and country clubs products in the commercial package product grouping; These product offerings accounted for approximately $19.0 million of the $42.5 million total commercial lines segment gross written premiums increase.
§	Our private company protection, directors and officers, and business owners products in the management liability product grouping. These product offerings accounted for all of the $6.6 million total specialty lines segment gross written premiums increase.

• The introduction of several new niche product offerings, such as the affordable housing, vehicle parks, rehabilitation facilities, and museums commercial package products, as well as the difference in conditions inland marine specialty property product. These new product offerings accounted for approximately $13.5 million of the $42.5 million total commercial lines segment gross written premiums increase.

• The acquisition of Gillingham & Associates, Inc. on March 10, 2008, which accounted for approximately $16.8 million of commercial lines segment gross written premium growth for the three months ended September 30, 2008.

• An increase in our marketing personnel, as well as an increase in the number of our preferred agents.

• Our “Firemark Producer” program, which promotes our product offerings and underwriting philosophy in selected producers’ offices.

• As a result of the factors noted above the commercial and specialty lines segments in-force policy counts increased by 4.2% and 15.7%, respectively, for the three months ended September 30, 2008.

The growth in gross written premiums was offset in part by:

• Realized average rate decreases on renewal business approximating 5.1% and 2.3% for the commercial lines and specialty lines segments, respectively.

• Continued price competition during the three months ended September 30, 2008, particularly with respect to the following:

§	Large commercial property-driven accounts located in the non-coastal areas of the country;
§	Commercial package business with annual premiums in excess of $100,000; and
§	Professional liability accounts at all premium levels.

•

A reduction in personal lines (run-off segment) production for our homeowners and rental dwelling policies. This reduction was imposed to reduce our exposure to catastrophe wind losses.

On February 29, 2008, we received approval from the Florida Office of Insurance Regulation (“FLOIR”) to non-renew all of our Florida personal lines policies, other than policies issued pursuant to the National Flood Insurance Program. The non-renewal process began with policies expiring on July 23, 2008, and we currently expect the process to be completed by July 23, 2009. As of September 30, 2008, there were approximately 2,213 in-force policies with an aggregate in-force premium of approximately $1.6 million which expire between October 1, 2008 and December 31, 2008, which we will not renew during 2008.

37

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

One of our preferred agents has terminated their preferred agency agreement with us effective August 1, 2008. It has been agreed that we will not compete for a period of one year on a mutually agreed upon list of accounts. The list of accounts is estimated to total approximately $30.0 million in annual gross written premium.

The respective net written premiums and net earned premiums for each of our business segments for the three months ended September 30, 2008 compared to September 30, 2007 were as follows:

(Dollars In Millions)	Commercial Lines			Specialty Lines			Run-off			Total
2008 Net Written Premiums	$	425.2		$	72.1		$	(0.8	)	$	496.5
2007 Net Written Premiums	$	389.3		$	55.9		$	(2.7	)	$	442.5
Percentage Increase (Decrease)		9.2	%		29.0	%		70.4	%		12.2	%
2008 Net Earned Premiums	$	342.0		$	63.2		$	3.3		$	408.5
2007 Net Earned Premiums	$	303.3		$	48.7		$	7.1		$	359.1
Percentage Increase (Decrease)		12.8	%		29.8	%		(53.5	)%		13.8	%

The differing percentage changes in net written premiums and/or net earned premiums versus gross written premiums and/or gross earned premiums for our commercial lines, specialty lines and run-off (personal lines) segments results primarily from the following:

• For our June 1, 2008 commercial lines segment property catastrophe reinsurance renewal, we experienced higher reinsurance rates, purchased increased catastrophe limits due to higher exposures primarily in the northeastern portion of the country, and increased our catastrophe loss retention compared to our June 1, 2007 renewal.

• For our June 1, 2008 run-off segment property catastrophe reinsurance renewal, we experienced reduced reinsurance rates, maintained the same catastrophe loss retention, and purchased decreased catastrophe coverage limits due to lower exposures compared to our June 1, 2007 renewal.

• For our commercial and specialty lines segments, we experienced rate reductions on our annual January 1, 2008 renewal of our casualty excess of loss reinsurance coverage compared to the rate on our January 1, 2007 renewal of this coverage.

• For our commercial lines segment, we experienced a rate increase on our annual January 1, 2008 renewal of our property excess of loss reinsurance coverage compared to the rate on our January 1, 2007 renewal of this coverage.

• An increase in accelerated and net reinstatement premium costs related to our catastrophe reinsurance coverages:

§ For our commercial lines segment, during the three months ended September 30, 2008, we experienced catastrophe losses attributable to Hurricane Ike. These losses resulted in the recognition of accelerated and net reinstatement catastrophe reinsurance premium expense of $5.1 million during the three months ended September 30, 2008 due to the utilization of certain of the catastrophe reinsurance coverages. This recognition of accelerated and net reinstatement premium expense increases ceded written and earned premiums and reduces net written and earned premiums.

• Certain of our reinsurance contracts have reinstatement or additional premium provisions under which we must pay reinstatement or additional reinsurance premiums to reinstate coverage provisions upon utilization of initial reinsurance coverage. During the three months ended September 30, 2008 and 2007, we increased (reduced) our reinstatement or additional premium accrual by $(5.8) million ($(2.4) million for the commercial lines segment and $(3.4) million for the specialty lines segment) and $0.7 million ($0.3

38

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

million for the commercial lines segment and $0.4 million for the specialty lines segment) respectively, under our excess of loss reinsurance treaties, as a result of changes in our ultimate loss estimates. Increases in these reinstatement and additional premium accruals increase ceded written and earned premiums and decrease net written and earned premiums, and decreases in these reinstatement and additional premium accruals decrease ceded written and earned premiums and increase net written and earned premiums.

          Net Investment Income: Net investment income increased 10.3% to $33.3 million for the three months ended September 30, 2008 from $30.2 million for the same period of 2007. Total investments grew by 9.6% to $3,131.0 million as of September 30, 2008 from $2,857.3 million as of September 30, 2007. The growth in investment income is primarily due to our ability to invest increased net cash flows provided from our operating activities. In addition, despite a general decline in interest rates compared with the previous historical reporting period, the capital market spreads to U.S. Treasuries were generally wider, which also had a favorable impact on our ability to increase investment income through new investments. The taxable equivalent book yield on our fixed income holdings approximated 5.5% as of September 30, 2008 and September 30, 2007.

The average duration of our fixed maturity portfolio was 5.5 years and 4.9 years as of September 30, 2008 and 2007, respectively. Our decision to continue to increase the average duration of our fixed maturity portfolio was based on our enterprise risk management analyses indicating our capacity to further refine the risk/return profile of our investment portfolio.

Effective January 1, 2008, we substituted a customized Merrill Lynch Enterprise Based Investment Benchmark Index (the “Index”) for the Lehman Brothers Intermediate Aggregate Index to evaluate the total return performance of our fixed income portfolio. This change was made in an effort to establish an Index that more closely represents our strategic enterprise -based risk and return profile, as reflected in a strategic optimal fixed maturity portfolio.

The total tax equivalent performance of our fixed income portfolio was (0.71)% for the three months ended September 30, 2008, compared to the Index tax equivalent performance of (1.70)% for the same period. This favorable variance is primarily due to the portfolio’s underweight allocation to Municipal securities compared to the Municipal security allocation percentage in the custom Index. While we continued to add to our Municipal security portfolio during the three months ended September 30, 2008, given the attractive relative returns in this sector, the new investments have been added at a measured pace during the recent periods of general market disruption and, in particular, during the periods of volatility in the municipal markets caused by leveraged funds unwinding.

The total pre-tax return, which includes the effects of both income and price returns on securities, of our fixed income portfolio was 2.52% for the three months ended September 30, 2007, compared to the Lehman Brothers Intermediate Aggregate Bond Index total pre-tax return of 2.76% for the same period.

We continue to expect some variation in our portfolio’s total return compared to the Index primarily because of the differing sector, security and duration composition of our portfolio as compared to the Index.

          Net Realized Investment Gain (Loss): Net realized investment gains (losses) were $(17.9) million and $2.8 million for the three months ended September 30, 2008 and 2007, respectively.

For the three months ended September 30, 2008, we realized net investment gains of $7.3 from the sale of fixed maturity securities. For the three months ended September 30, 2008, we realized net investment losses of $6.3 million from the sale of equity securities. In addition, as a result of our impairment evaluations for the three months ended September 30, 2008:

• We recognized $7.4 in non-cash realized fixed maturity security investment losses relating to our direct holdings in fixed maturity securities issued by Lehman.

• We recognized $11.4 million in non-cash realized equity security investment losses.

For the three months ended September 30, 2007, we realized net investment gains of $0.6 million and $3.3 million from the sale of fixed maturity and equity securities, respectively. In addition, for the three months ended

39

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

September 30, 2007, we recognized no non-cash realized investment losses for fixed maturity securities and $1.1 million in non-cash realized investment losses for equity securities, respectively, as a result of our impairment evaluations.

          Other Income: Other income approximated $0.9 million and $1.0 million for the three months ended September 30, 2008 and 2007, respectively. Other income consists primarily of commissions and fees earned on servicing and brokering commercial lines business, and to a lesser extent commissions and fees earned on servicing and brokering personal lines business.

          Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $89.0 million (61.5%) to $233.8 million for the three months ended September 30, 2008 from $144.8 million for the same period of 2007, and the loss ratio increased to 57.2% in 2008 from 40.3% in 2007.

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

• The growth in net earned premiums.

• Net reserve actions taken during the three months ended September 30, 2008 which decreased net estimated unpaid loss and loss adjustment expenses for accident years 2007 and prior by $12.2 million, as compared to net reserve actions taken during the three months ended September 30, 2007 which decreased estimated net unpaid loss and loss adjustment expenses for accident years 2006 and prior by $39.5 million. Increases/(decreases) in the estimated net unpaid loss and loss adjustment expenses for prior accident years during the three months ended September 30, 2008 were as follows:

	Net Basis
(Dollars In Millions)	Increase/(Decrease)
Accident Year 2007	$	8.4
Accident Year 2006		(6.3	)
Accident Year 2005		(7.1	)
Accident Years 2004 and prior		(7.2	)
Total	$	(12.2	)

For accident year 2007, the increase in estimated net unpaid loss and loss adjustment expenses was principally due to higher loss estimates for commercial automobile liability, involuntary pools and commercial property coverages. The higher loss estimate in commercial automobile liability and commercial property coverages was due to higher than expected case incurred loss development, primarily as a result of claim severity being greater than anticipated. Loss estimates for involuntary pools are reported to the Company by multiple residual market entities, and reasons for higher or lower estimates vary by entity. These higher loss estimates were partially offset by lower loss estimates for commercial general liability coverages. The lower estimate in commercial general liability was due to lower than expected case incurred loss development, primarily as a result of claim frequency being less than anticipated.

For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, and management and professional liability coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated. These lower loss estimates were partially offset by higher loss estimates for commercial automobile coverages due to higher than expected case incurred loss development, primarily as a result of claim severity being greater than anticipated.

For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, and management liability and

40

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

	professional liability coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.
	For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss adjustment expenses was principally due to lower loss estimates for commercial general liability, commercial automobile liability, automobile rental leasing, and professional liability coverages due to better than expected case incurred loss development, primarily as a result of claim severity being less than anticipated.
•	An increase in the current accident year net ultimate loss and loss adjustment expense ratio for the three months ended September 30, 2008 compared to 2007. During the three months ended September 30, 2008, a net ultimate loss and loss adjustment expense ratio of 60.2% was estimated for the 2008 accident year. During the three months ended September 30, 2007, a net ultimate loss and loss adjustment expense ratio of 51.3% was estimated for the 2007 accident year. The increase in the 2008 accident year loss and loss adjustment expense ratio is principally attributable to:

§	$21.7 million of loss and loss adjustment expenses during the three months ended September 30, 2008 resulting from losses attributable to Hurricane Ike. We did not have similar losses during the three months ended September 30, 2007.
§	Realized average rate decreases on renewal business approximating 5.1% and 2.3% for the commercial and specialty lines segments, respectively, for the three months ended September 30, 2008 compared to the same period in 2007.

Establishing loss reserve estimates is a complex and imprecise process. Our estimation procedures employ several generally accepted actuarial methods to determine net unpaid loss and loss adjustment expenses. Some of these methods are based on actual loss development, while others are based on expected loss development, and still others use a blend of both. Over time, more reliance is placed on actuarial methods based on actual loss development, and accordingly, over time, less reliance is placed on actuarial methods based on expected loss development.

          Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $16.3 million (16.1%) to $117.6 million for the three months ended September 30, 2008 from $101.3 million for the same period of 2007, and the expense ratio increased slightly to 28.8% in 2008 versus 28.2% in 2007. The increase in acquisition costs and other underwriting expenses was due primarily to the growth in net earned premiums. The increase in the expense ratio for the three months ended September 30, 2008 is primarily due to $3.6 million of assessments from the Texas Windstorm Insurance Association for losses related to Hurricanes Dolly and Ike.

          Income Tax Expense: Our effective tax rate for the three months ended September 30, 2008 and 2007 was 27.6% and 33.2%, respectively. The effective rates for 2008 and 2007 differed from the 35% statutory rate principally due to investments in tax-exempt securities and the relative proportion of tax exempt income to our income before tax. The decrease in the effective tax rate during 2008 is due principally to increased investments in tax exempt securities.

Investments

On January 1, 2008, we adopted the provisions of SFAS 157. SFAS 157 defines fair value and provides a consistent framework for measuring items at fair value as previously permitted by existing accounting pronouncements. SFAS 157 provides a “fair value hierarchy” which prioritizes the quality of inputs utilized when measuring the items at fair value and requires expanded disclosures for fair value measurements. As of September 30, 2008, the fair value of our total invested assets (financial assets consisting of total investments plus cash equivalents) has been determined in accordance with the provisions of SFAS 157. As a result of the adoption of SFAS 157, we note the following:

§ The fair value of our total invested assets is primarily measured utilizing a market based valuation methodology (“Market Approach”). A Market Approach utilizes prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities to measure fair value. We determine a market

41

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

	to be active if securities have traded on it in the last 7 business days. We have consistently applied the Market Approach as of and for the three and nine months ended September 30, 2008.
§	Because we have consistently used “matrix pricing” as the primary valuation method for determining the fair value of our fixed maturity securities, the lack of market activity or liquidity in certain fixed maturity markets did not affect the determination of the fair value our fixed maturity investments as of September 30, 2008.
§	Approximately 98.9% of our total invested assets are measured utilizing significant observable inputs (Level 1 or Level 2 per SFAS 157). Approximately 1.1% of our total invested assets are measured utilizing significant unobservable inputs (Level 3 per SFAS 157).
§	Approximately 99.7% of our fixed maturity investments are measured utilizing significant observable inputs (Level 1 or Level 2 per SFAS 157).
§	We have one investment grade asset backed security where the fair value is determined using unadjusted broker pricing relying on unobservable inputs. Due to the use of unobservable inputs, we classify this measurement within Level 3 of the “fair value hierarchy.” We obtain this broker pricing from the lead manager of the issue and we consider the pricing to be indicative of fair value. We do not consider our use of unobservable inputs (Level 3 per SFAS 157) in our fair value measurements to be significant to our financial position, results of operations, or liquidity.
§	Approximately 92.3% of our equity investments are measured utilizing significant observable inputs (Level 1 or Level 2 per SFAS 157).
§	Significant observable inputs utilized to measure fair value include “matrix pricing” for fixed maturity investments (Level 2 per SFAS 157) and quoted market prices for equity investments (Level 1 per SFAS 157). “Matrix pricing” relies on observable inputs from active markets other than quoted market prices including, but not limited to, benchmark securities and yields, latest reported trades, quotes from brokers or dealers, issuer spreads, bids, offers, and other relevant reference data to determine fair value. “Matrix pricing” is used to measure the fair value of fixed maturity securities where obtaining individual quoted market prices is impractical.
§	The significant unobservable inputs utilized to measure fair value include broker pricing and net asset value calculations.
§	We use the lowest level of the most significant input utilized to categorize a measurement within the “fair value hierarchy.” Consequently, a fair value measurement categorized as having level 3 unobservable inputs may also contain Level 1 or Level 2 observable inputs.
§	We do not adjust quotes or prices received from brokers.
§	Except for our fixed maturity holdings in Lehman Brothers Holdings, Inc. and in certain other equity securities that we impaired as of September 30, 2008, we made no other material adjustments to the fair value of our invested assets as of and for the three and nine months ended September 30, 2008.

We utilize external independent investment managers in obtaining the pricing inputs noted above for our fixed maturity and equity investments. In order to ensure we are maximizing our use of observable pricing inputs and minimizing our use of unobservable pricing inputs, we verify with our external investment managers that pricing for our fixed maturity and equity investments is obtained from external market sources. In the event that pricing is obtained from sources other than external market sources, we review the pricing inputs and reasons in order to determine that the fair value measurements resulting from these inputs are properly categorized within the “fair value hierarchy.” As our fair value measurements are primarily measured using external market information, they are sensitive to changes in market conditions.

Our investment objectives are the realization of relatively high levels of after-tax net investment income with competitive after-tax total rates of return subject to established specific guidelines and objectives based on our

42

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

enterprise based asset allocation methods. We utilize external independent professional investment managers for our fixed maturity and equity investments to help us achieve these objectives. These investments consist of diversified issuers and issues, and as of September 30, 2008 approximately 84.1% and 10.5% of our total invested assets on a cost basis consisted of investments in fixed maturity and equity securities, respectively, versus 87.8% and 10.7%, respectively, as of December 31, 2007.

Of our total fixed maturity investments, asset backed, mortgage pass-through, and collateralized mortgage obligation securities, on a cost basis, amounted to $271.9 million, $408.0 million and $275.5 million, respectively, as of September 30, 2008, and $199.3 million, $604.3 million and $329.5 million, respectively, as of December 31, 2007.

We regularly perform impairment reviews with respect to our investments. For investments other than interests in securitized assets, these reviews include identifying any security whose fair value is below its cost and an analysis of securities meeting predetermined impairment thresholds to determine whether such decline is other than temporary. If we do not intend to hold a security to maturity or determine a decline in value to be other than temporary, the cost basis of the security is written down to its fair value with the amount of the write down reflected in our earnings as a realized loss in the period the impairment arose. These evaluations, for investments other than interests in securitized assets, resulted in non-cash realized investment losses of $18.8 million and $1.1 million, respectively, for the three months ended September 30, 2008 and 2007, and $42.2 million and $3.7 million, respectively, for the nine months ended September 30, 2008 and 2007. Our impairment review also includes an impairment evaluation for interests in securitized assets conducted in accordance with the guidance provided by the Emerging Issues Task Force of the FASB. As a result of our impairment evaluations for investments in securitized assets, there were no non-cash realized investment losses recorded for the three and nine months ended September 30, 2008 and 2007.

Our fixed maturity portfolio amounted to $2,779.0 million and $2,659.2 million, as of September 30, 2008 and December 31, 2007, respectively. 99.9% of the portfolio was comprised of investment grade securities as of September 30, 2008 and December 31, 2007. We had fixed maturity investments with gross unrealized losses amounting to $97.1 million and $7.0 million as of September 30, 2008 and December 31, 2007, respectively. Of these amounts, interests in securitized assets had gross unrealized losses amounting to $22.3 million and $3.0 million as of September 30, 2008 and December 31, 2007, respectively.

As a result of the systemic financial, credit and liquidity crises impacting financial and capital markets across the world and virtually all asset classes, we expect fixed income and equity markets, in general, to continue to experience more volatility than during most prior historical reporting periods. As of September 30, 2008, we had $7.5 million in non-cash realized fixed maturity security investment losses and $34.7 million in non-cash realized equity security investment losses related to these market conditions as a result of our impairment evaluations. We expect that ongoing volatility in these sectors, in particular, and in spread related sectors, in general, will continue to impact the prices of securities held in our average AA+ rated investment portfolio, including our average AAA rated structured securities portfolio.

Securities with an Unrealized Loss as of September 30, 2008:

The following table identifies the period of time securities with an unrealized loss as of September 30, 2008 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 3.5% and 22.3%, respectively, of the total estimated fair value, or 6.3% and 18.9%, respectively, of the total gross unrealized loss included in the table below.

• The industry concentration as a percentage of total estimated fair value represents investments in a geographically diversified pool of investment grade municipal securities issued by states, political subdivisions, and public authorities under general obligation and/or special district/purpose issuing authority.  The unrealized losses on these securities are generally attributable to changes both in market spreads and in the level of Treasury yields.  The primary factor underlying the spread widening is the increasing market risk aversion to issues surrounding the monoline financial guarantors, given such guarantors’ significant participation in the municipal sector through their financial guarantee insurance.

43

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

• The industry concentration as a percentage of the total gross unrealized loss primarily represents investments in equity securities issued by companies in the diversified financial services industry. The unrealized losses on these securities are generally attributable to the recent correction in the financial services industry primarily caused by the deterioration of credit conditions and increased risk aversion in the marketplace during the second half of 2007 and the first nine months of 2008. As of September 30, 2008, these securities were evaluated for other than temporary impairment in accordance with the Company’s impairment policy, and the Company concluded that these securities were not other than temporarily impaired.

The contractual repayment of the municipal securities is backed either by the general taxing authority of the state or political subdivision or by general or specific revenues of the public authorities and, in addition, a portion is pre-refunded and supported by collateral consisting of US Government securities.  Additionally, a portion of the securities is backed by financial guarantee insurance issued by monoline financial guarantors.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investments. Given the investment grade credit quality of the issuers represented in the municipal portfolio, without considering any monoline financial guarantee, we believe we will be able to collect all amounts due according to the contractual terms of the investments. At the present time, we have the ability and intent to hold these securities until a recovery of fair value, which may be maturity; therefore, we do not consider these investments to be other than temporarily impaired as of September 30, 2008.

	Gross Unrealized Losses as of September 30, 2008
	Fixed Maturities
	Available for Sale
(In Millions)	Excluding Interests		Interests in
Continuous time in	in Securitized		Securitized		Fixed Maturities				Total
Unrealized loss position	Assets		Assets		Available for Sale		Equity Securities		Investments
0 – 3 months	$	21.0	$	5.2	$	26.2	$	14.1	$	40.3
4 – 6 months		12.0		4.8		16.8		12.6		29.4
7 – 9 months		21.2		7.6		28.8		4.7		33.5
10 – 12 months		3.8		0.7		4.6		1.6		6.2
13 – 18 months		8.0		1.2		9.1		—		9.1
19 – 24 months		8.0		0.2		8.2		—		8.2
> 24 months		0.8		2.6		3.4		—		3.4
Total Gross Unrealized Losses	$	74.8	$	22.3	$	97.1	$	33.0	$	130.1
Estimated fair value of securities with a gross unrealized loss	$	1,328.4	$	611.5	$	1,939.9	$	156.3	$	2,096.2

Our impairment evaluation as of September 30, 2008 for fixed maturities available for sale excluding interests in securitized assets resulted in the following conclusions:

US Treasury Securities and Obligations of U.S. Government Agencies:

The unrealized losses on our investments in U.S. Treasury Securities and Obligations of U.S. Government Agencies which have ratings of Aaa/AAA are attributable to the general level of interest rates. Of the 29 investment positions held, approximately 10.3% were in an unrealized loss position as of September 30, 2008.

Obligations of States and Political Subdivisions:

The unrealized losses on our investments in long term tax exempt securities, which have ratings of A1/A to Aaa/AAA, except for one security which has a rating of Baa3/BBB-, are attributable to changes both in market spreads and in the level of Treasury yields. Of the 990 investment positions held, approximately 66.2% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments.

44

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

Corporate and Bank Debt Securities:

The unrealized losses on our long term investments in corporate bonds, which have ratings from Baa3/BBB to Aaa/AAA, except for one security which has a rating of Ca/CCC and matured on October 6, 2008, are attributable primarily to changes in market spreads. Of the 64 investment positions held, approximately 70.3% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments.

Our evaluation as of September 30, 2008 for interests in securitized assets resulted in the following conclusions:

Asset Backed Securities:

The unrealized losses on our investments in Asset Backed Securities which have ratings of Baa2/BBB to Aaa/AAA, are attributable primarily to changes in market spreads. Of 114 investment positions held, approximately 90.4% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments.

Mortgage Pass-Through Securities:

The unrealized losses on our investments in Mortgage Pass-Through Securities which have ratings of Aaa/AAA, are attributable primarily to changes in market spreads. Of the 128 investment positions held, approximately 44.5% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments.

Collateralized Mortgage Obligations:

The unrealized losses on our investments in Collateralized Mortgage Obligations which have ratings of Aa2/AA+ to Aaa/AAA, are attributable primarily to changes in market spreads. Of the 165 investment positions held, approximately 41.8% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments.

Our impairment evaluation as of September 30, 2008 for equity securities resulted in the conclusion that we do not consider the equity securities remaining in an unrealized loss position to be other than temporarily impaired. Of the 3,114 investment positions held, approximately 45.7% were in an unrealized loss position.

Structured Securities Portfolio:

The fair value of our structured securities investment portfolio (Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation securities) amounted to $939.4 million as of September 30, 2008. AAA rated securities represented approximately 98.2% of our September 30, 2008 structured securities portfolio.

Approximately $688.8 million of our structured securities investment portfolio is backed by residential collateral, consisting of:

• $407.8 million of U.S. government agency backed Mortgage Pass-Through Securities;

• $195.9 million of U.S. government agency backed Collateralized Mortgage Obligations;

• $67.9 million of non-U.S. government agency Collateralized Mortgage Obligations backed by pools of prime loans (generally consists of loans made to the highest credit quality borrowers with Fair Isaac Corporation (“FICO”) scores generally greater than 720);

• $14.4 million of structured securities backed by pools of ALT A loans (loans with less than normal documentation and borrowers with FICO scores in the approximated range of 650 to the low 700’s); and

• $2.8 million of structured securities backed by pools of subprime loans (loans with less than normal documentation, higher combined loan-to-value ratios and borrowers with FICO scores capped at approximately 650).

Our $17.2 million ALT-A and subprime loan portfolio includes 19 securities with net unrealized losses of $1.6 million as of September 30, 2008. These securities have the following characteristics:

45

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

• first to pay or among the first cash flow tranches of their respective transactions;

• weighted average life of 1.6 years;

• spread across multiple vintages (origination year of underlying collateral pool), and

• an average AAA rating, with one holding experiencing a rating downgrade by Moody’s during the quarter to A2 from Aaa based on increased delinquencies and lower coverage levels. Based on our analysis of the collateral underlying the security, we expect to receive full return of our investment.

Our ALT-A and subprime loan portfolio has paid down to $17.2 million as of September 30, 2008, from $27.6 million as of December 31, 2007, and $35.7 million as of September 30, 2007.

As of September 30, 2008, we hold no investments in Collateralized Debt Obligations or Net Interest Margin securities.

Municipal Bond Portfolio:

Our average AA+ rated $1,681.3 million municipal bond portfolio includes $1,046.3 million of insured securities, or 62.2% of our total municipal bond portfolio. The average underlying rating of the insured portion of our municipal bond portfolio is AA and the average rating of the uninsured portion of our municipal bond portfolio is AA+. The following table represents our insured bond portfolio by monoline insurer as of September 30, 2008:

						Weighted Average
	Market Value of Insured		Percentage of			Underlying Rating of
	Municipal Bonds		Municipal Bond			Insured Municipal
Monoline Insurer	(In Millions)		Portfolio			Bonds
Financial Security Assurance, Inc.	$	341.0		20.3	%	AA
MBIA, Inc.		308.1		18.3		AA
FGIC Corporation.		208.1		12.4		AA-
AMBAC Financial Group, Inc.		178.3		10.6		AA-
Berkshire Hathaway Assurance Company		4.7		0.3		A+
XL Capital, LTD.		4.2		0.2		A
Assured Guaranty Corp.		1.9		0.1		A
Total	$	1046.3		62.2	%	AA

At the time of purchase, each municipal bond is evaluated with regard to certain characteristics, including, but not limited to, the issuer, the underlying obligation and/or the revenue pledge/collateral. The presence of any “financial guarantee” insurance is not an attribute used in the purchase decision. We consider the “financial guarantee” insurance to be “additional” protection. As of September 30, 2008, we had no impairments or surveillance issues related to these insured municipal bonds.

Securities with an Unrealized Loss as of December 31, 2007:

The following table identifies the period of time securities with an unrealized loss as of December 31, 2007 have continuously been in an unrealized loss position. None of the amounts shown in the table include unrealized losses due to non-investment grade fixed maturity securities. No issuer of securities or industry represents more than 3.8% and 19.9%, respectively, of the total estimated fair value, or 9.0% and 20.5%, respectively, of the total gross unrealized loss:

• The industry concentration as a percentage of total estimated fair value represents investments in a geographically diversified pool of investment grade municipal securities issued by states, political subdivisions, and public authorities under general obligation and/or special district/purpose issuing authority.  The unrealized

46

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

losses on these securities are generally attributable to spread widening.  The primary factor underlying the spread widening is the increasing market risk aversion to issues surrounding the monoline financial guarantors, given the monolines’ significant participation in the municipal sector through their financial guarantee insurance.

•

The industry concentration as a percentage of the total gross unrealized loss primarily represents investments in equity securities issued by companies in the Diversified Financial Services industry. The unrealized losses on these securities are generally attributable to the recent correction in the Financial Services industry primarily caused by the deterioration of credit conditions in the marketplace during the third and fourth quarters of 2007. As of December 31, 2007, these equity securities were evaluated for other than temporary impairment in accordance with the Company’s impairment policy and the Company concluded that these securities were not other than temporarily impaired.

The contractual repayment of the Municipal securities is backed either by the general taxing authority of the state or political subdivision or by general or specific revenues of the public authorities.  Additionally, a portion of the securities are backed by financial guarantee insurance issued by the monoline financial guarantors.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investments. Given the investment grade credit quality of the issuers represented in the Municipal portfolio, without considering any monoline financial guarantee, we believe we will be able to collect all amounts due according to the contractual terms of the investments. At the present time, we have the ability and intent to hold these securities until a recovery of fair value, which may be maturity; therefore, we do not consider these investments to be other than temporarily impaired as of December 31, 2007.

	Gross Unrealized Losses as of December 31, 2007
	Fixed Maturities
	Available for Sale
(In Millions)	Excluding Interests		Interests in		Fixed Maturities
Continuous time in	in Securitized		Securitized		Available		Equity		Total
Unrealized loss position	Assets		Assets		for Sale		Securities		Investments
0 – 3 months	$	0.2	$	0.7	$	0.9	$	8.1	$	9.0
>3 – 6 months		—		0.1		0.1		6.5		6.6
>6 – 9 months		0.8		—		0.8		7.6		8.4
>9 – 12 months		1.3		—		1.3		—		1.3
>12 – 18 months		0.2		—		0.2		—		0.2
>18 – 24 months		0.1		—		0.1		—		0.1
> 24 months		1.4		2.2		3.6		—		3.6
Total Gross Unrealized Losses	$	4.0	$	3.0	$	7.0	$	22.2	$	29.2
Estimated fair value of securities with a gross unrealized loss	$	570.4	$	357.6	$	928.0	$	118.1	$	1,046.1

Our impairment evaluation as of December 31, 2007 for fixed maturities available for sale excluding interests in securitized assets resulted in the following conclusions:

US Treasury Securities and Obligations of U.S. Government Agencies:

The unrealized losses on our Aaa/AAA rated investments in U.S. Treasury Securities and Obligations of U.S. Government Agencies are attributable to interest rate fluctuations since the date of purchase. Of the 30 investment positions held, approximately 26.7% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments.

Obligations of States and Political Subdivisions:

The unrealized losses on our investments in long term tax exempt securities, which have ratings of A1/A+ to AAA/Aaa, are generally caused by spread widening. Of the 873 investment positions held, approximately 32.8% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments.

47

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

Corporate and Bank Debt Securities:

The unrealized losses on our long term investments in Corporate bonds, which have ratings from Baa3/BBB to Aaa/AAA, are generally caused by spread widening. Of the 73 investment positions held, approximately 79.5% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments.

Our impairment evaluation as of December 31, 2007 for interests in securitized assets resulted in the following conclusions:

Asset Backed Securities:

The unrealized losses on our investments in Asset Backed Securities, which have ratings from A2/A to Aaa/AAA are generally caused by spread widening. Of the 116 investment positions held, approximately 40.5% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments.

Mortgage Pass-Through Securities:

The unrealized losses on our investments in Mortgage Pass-Through Securities which have ratings of Aaa/AAA are generally caused by spread widening. Of the 150 investment positions held, approximately 38.7% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments.

Collateralized Mortgage Obligations:

The unrealized losses on our investments in Collateralized Mortgage Obligations which have ratings of Aa2/AA+ to Aaa/AAA are generally caused by spread widening. Of the 172 investment positions held, approximately 41.3% were in an unrealized loss position. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the amortized cost of the investments.

Our impairment evaluation as of December 31, 2007 for equity securities resulted in the conclusion that we do not consider the equity securities to be other than temporarily impaired. Of the 2,674 investment positions held, approximately 38.4% were in an unrealized loss position.

Gross Realized Losses:

For the three months ended September 30, 2008, we did not have a gross loss on the sale of fixed maturity securities. For the three months ended September 30, 2008, our gross loss on the sale of equity securities was $9.0 million. The fair value of the equity securities at the time of sale was $6.1 million.

For the three months ended September 30, 2007, our gross loss on the sale of fixed maturity and equity securities was $0 million and $0.4 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $0 million and $3.4 million, respectively.

For the nine months ended September 30, 2008, we did not have a gross loss on the sale of fixed maturity securities. For the nine months ended September 30, 2008, our gross loss on the sale of equity securities was $15.3 million. The fair value of the equity securities at the time of sale was $19.7 million. $2.7 million of the $15.3 million gross loss on the sale of equity securities for the nine months ended September 30, 2008 resulted from the sale during the three months ended March 31, 2008 of the common stock we held in The Bear Stearns Companies, Inc., while $6.4 and $1.4 million of the $15.3 million gross loss resulted from the sale during the three months ended September 30, 2008 of the common stock we held in American International Group, Inc. and Washington Mutual, Inc., respectively.

For the nine months ended September 30, 2007, our gross loss on the sale of fixed maturity and equity securities amounted to $0.3 million and $2.5 million, respectively. $1.2 million of the $2.5 million gross loss on the sale of equity securities for the nine months ended September 30, 2007 was a result of the liquidation of one of our equity portfolios following the decision to change one of our common stock investment managers. The $1.2 million realized gross loss on the sale of equity securities was in addition to the $1.6 million impairment loss recognized during the three months ended March 31, 2007 arising from the initial decision to change one of our common stock

48

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

investment managers and no longer hold the securities to recovery. The fair value of the fixed maturity and equity securities at the time of sale was $33.7 million and $31.3 million, respectively.

Liquidity and Capital Resources

For the nine months ended September 30, 2008, our fixed maturity investments experienced unrealized investment depreciation of $67.8 million, net of the related deferred tax benefit of $36.5 million, and our equity investments experienced unrealized investment depreciation of $25.4 million, net of the related deferred tax benefit of $13.7 million.

As of September 30, 2008, we had total investments with a carrying value of $3,131.0 million, of which 88.8% consisted of investments in fixed maturity securities, including U.S. treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate debt securities, collateralized mortgage, mortgage pass-through and asset backed securities. The remaining 11.2% of our total investments consisted primarily of publicly traded common stock securities.

We produced net cash from operations of $422.7 million and $403.3 million for the nine months ended September 30, 2008 and 2007, respectively. Sources of operating funds consist primarily of net premiums written and investment income. Funds are used primarily to pay claims and operating expenses and for the purchase of investments. Cash from operations for the nine months ended September 30, 2008 was primarily generated from premium growth during the current year as a result of increases in the number of policies written. Net loss and loss expense payments were $448.8 million and $321.0 million, respectively, for the nine months ended September 30, 2008 and 2007. We believe we have adequate liquidity to pay all claims and meet all other cash needs.

We generated $103.8 million of net cash from financing activities during the nine months ended September 30, 2008.

Cash provided by financing activities consisted of:

• $130.6 million of cash provided from borrowings from the Federal Home Loan Bank of Pittsburgh (“FHLB”),

• $45.0 million of cash provided from borrowings from our unsecured $50.0 million credit agreement,

• $7.4 million of cash provided from proceeds from the issuance of shares pursuant to our stock based compensation plans and stock purchase plans,

• $5.7 million of cash provided from excess tax benefit from the issuance of shares pursuant to stock based compensation plans, and

• $3.0 million of cash provided from the collection of notes receivable associated with our employee stock purchase plans.

Cash used for financing activities included:

• $42.9 million of cash used to repurchase common stock under our stock purchase authorization;

• $45.0 million of cash used for repayments on our unsecured $50.0 million credit agreement.

During the nine months ended September 30, 2008, Philadelphia Consolidated Holding Corp. received $80.0 million of dividend payments from Philadelphia Indemnity Insurance Company, one of our Insurance Subsidiaries.

On July 11, 2008, we entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with Bank of America, N.A. and Wachovia Bank, National Association. The Amended Credit Agreement amended and restated our existing unsecured Credit Agreement. The Amended Credit Agreement changed the terms of our existing Credit Agreement by extending the maturity date of our revolving credit facility to June 26, 2009, including a $10.0 million letter of credit facility as part of the aggregate $50.0 million revolving credit commitments of the Bank lenders, and increasing the unused commitment fee from .06% to .07% per annum. The Amended Credit Agreement provides capacity for working capital and other general corporate purposes and contains various representations, covenants and events of default typical for credit facilities of this type. As of September 30, 2008,

49

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

no borrowings were outstanding under the Amended Credit Agreement. Additionally, we not do believe our ability to borrow under our Amended Credit Agreement has been adversely impacted by the recent increased volatility in the capital markets or the adverse conditions in the financial services industry.

Two of our Insurance Subsidiaries are members of 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. Our Insurance Subsidiaries have utilized a portion of their borrowing capacity to purchase a diversified portfolio in investment grade floating rate securities. These purchases were funded by floating rate FHLB borrowing to achieve a positive spread between the rate of interest on these securities and borrowing rates. As of September 30, 2008 our Insurance Subsidiaries’ unused borrowing capacity was $334.1 million. The remaining borrowing capacity will provide an immediately available line of credit. As of September 30, 2008, our Insurance Subsidiaries had $130.6 million of borrowings outstanding at interest rates ranging from LIBOR plus 0.15% to LIBOR plus 0.41% which mature twelve months or less from inception and are collateralized by $131.2 million of our fixed maturity securities. We do not believe our ability to borrow from the FHLB has been adversely impacted by the recent increased volatility in the capital markets or the adverse conditions in the financial services industry.

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

New Accounting Pronouncements

In March 2008, the FASB issued Statement No. 161 Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”) to enhance disclosures about an entity’s derivative and hedging activities. SFAS 161 is effective for all financial statements issued in fiscal years and interim periods beginning after November 15, 2008 and early application is encouraged. SFAS 161 also encourages, but does not require comparative disclosures for earlier periods at initial adoption. Because we do not currently engage in derivative transactions or hedging activities, we do not anticipate any significant financial statement disclosure impact resulting from SFAS 161.

In April 2008, the FASB issued Staff Position No. FAS 142-3 Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142 Goodwill and Other Intangible Assets (SFAS 142), in order to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R Business Combinations and other U.S. generally accepted accounting principles. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. We do not anticipate any significant financial statement impact resulting from FSP FAS 142-3.

In May 2008, the FASB issued Statement No. 162 The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”) to identify the sources of accounting principles and provide a framework for selecting the principles to be used in the preparation of financial statements in accordance with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, which occurred on September 16, 2008. We do not anticipate any significant financial statement impact resulting from SFAS 162.

In May 2008, the FASB issued Statement No. 163 Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60 (“SFAS 163”) to eliminate diversity in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60 Accounting and Reporting by Insurance Enterprises. SFAS 163 is effective for all financial statements issued in fiscal years and interim periods beginning after December 15, 2008, with the exception of the new requirements relating to disclosures about insurance enterprises’ risk-management activities used to track and monitor deteriorating insured financial

50

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

obligations, which are effective for the first period, including interim periods, after the issuance of SFAS 163. Except for these risk-management disclosures, early application is not permitted. As we do not currently enter into financial guarantee insurance contracts, we do not anticipate any significant financial statement or disclosure impact resulting from SFAS 163.

51

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our financial instruments are subject to the market risk of potential losses from adverse changes in market rates and prices. The primary market risks to us are equity price risks associated with investments in equity securities and interest rate and spread risks associated with investments in fixed maturities. We have established, among other criteria, duration, asset quality and asset allocation guidelines for managing our investment portfolio market risk exposure. Our investments are classified as Available for Sale and consist of diversified issuers and issues.

The table below provides information about our financial instruments that are sensitive to changes in interest rates and shows the effect of hypothetical changes in interest rates as of September 30, 2008 and 2007. 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 our reporting currency.

				Estimated		Hypothetical Percentage
			Hypothetical Change	Fair Value after		Increase (Decrease) in
	Estimated		in Interest Rates	Hypothetical Changes					Shareholders’
	Fair Value		(bp=basis points)	in Interest Rates		Fair Value			Equity
				(Dollars in Thousands)
September 30, 2008:
Investments
Total Fixed Maturities Available For Sale	$	2,778,992	200 bp decrease	$	3,096,112		11.4	%		12.8	%
			100 bp decrease	$	2,937,059		5.7	%		6.4	%
			50 bp decrease	$	2,857,388		2.8	%		3.2	%
			50 bp  increase	$	2,702,522		(2.8	)%		(3.1	)%
			100 bp  increase	$	2,628,298		(5.4	)%		(6.1	)%
			200 bp  increase	$	2,487,892		(10.5	)%		(11.8	)%
September 30, 2007:
Investments
Total Fixed Maturities Available For Sale	$	2,495,045	200 bp decrease	$	2,716,811		8.9	%		9.8	%
			100 bp decrease	$	2,615,041		4.8	%		5.3	%
			50 bp decrease	$	2,556,403		2.5	%		2.7	%
			50 bp  increase	$	2,432,864		(2.5	)%		(2.8	)%
			100 bp  increase	$	2,371,115		(5.0	)%		(5.5	)%
			200 bp  increase	$	2,251,758		(9.7	)%		(10.8	)%

52

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

Item 4. Controls and Procedures

     (a) Evaluation of Disclosure Controls and Procedures. Our 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 our 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 our disclosure controls and procedures, our 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 our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and made known to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

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

53

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

There were no material changes to the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, except for risks related to the proposed merger with an indirect wholly-owned subsidiary of Tokio Marine Holdings, Inc. (“TMHD”), referred in Note 15 to the consolidated financial statements included in this Form 10-Q. The Company is subject to several risks relating to the proposed merger, including the following:

(a) if the merger is not completed, the share price of our common stock may decline significantly;

(b) the occurrence of any circumstance that could give rise to the termination of the Merger Agreement; in certain circumstances we may, in the event of such termination, be obligated to pay to TMHD (i) a termination fee of $141.0 million and (ii) an expense reimbursement of up to $15.0 million;

(c) failure of TMHD to obtain certain required regulatory approvals, or the failure to satisfy certain other conditions would prevent the closing of the merger;

(d) the failure of the merger to be completed for any reason;

(e) the risk that the proposed merger could disrupt our operations and that our management’s and employees’ attention may be diverted from day-to-day operations; and

(f) the effect of the announcement of the merger on our employee, agency and broker relationships, operating results and business generally.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company’s purchases of its common stock during the third quarter of 2008 are shown in the following table:

						(c) Total		(d)
						Number of		Approximate
						Shares		Dollar Value of
						Purchased as		Shares That
						Part of		May Yet Be
						Publicly		Purchased
	(a) Total Number			(b) Average		Announced		Under the
	of Shares			Price Paid per		Plans or		Plans or
Period	Purchased			Share		Programs		Programs
July 1 – July 31		800	(1)	$	43.76		—		—
		—			—		—	$	52,100,000	(2)
August 1 – August 31		1,910	(1)	$	36.61		—		—
		—			—		—	$	52,100,000	(2)
September 1 – September 30		2,726	(1)	$	35.51		—		—
		—			—		—	$	52,100,000	(2)

(1)	Such shares were issued under the Company’s Employee Stock Purchase Plan and Amended and Restated Employees’ Stock Incentive and Performance Based Compensation Plan and were repurchased by the Company upon the employee’s termination.
(2)	The Company’s total stock purchase authorization, which was publicly announced in August 1998 and subsequently increased, was $125.3 million as of September 30, 2008. As of September 30, 2008, $73.2 million has been utilized.

54

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibits:

Exhibit No.	Description
10.1*	Interest and Liabilities Agreement to the Property Fourth Per Risk Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation effective January 1, 2008
10.2*	Interest and Liabilities Agreement to the Property Fifth Per Risk Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation effective January 1, 2008
10.3*	Property Facultative Agreement of Reinsurance No. P304 with General Reinsurance Corporation effective January 1, 2008
31.1*	Certification of the Company’s chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of the Company’s chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of the Company’s chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of the Company’s chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

55

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PHILADELPHIA CONSOLIDATED HOLDING CORP.
	Registrant
Date November 10, 2008		James J. Maguire, Jr. James J. Maguire, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)
Date November 10, 2008		Craig P. Keller
		Craig P. Keller
		Executive Vice President, Secretary,
		Treasurer and Chief Financial Officer
		(Principal Financial and Accounting Officer)

56

EX-10.1

EXHIBIT 10.1

INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the “Agreement”)

to the

PROPERTY FOURTH PER RISK EXCESS OF LOSS
REINSURANCE AGREEMENT

between

PHILADELPHIA INSURANCE COMPANY
PHILADELPHIA INDEMNITY INSURANCE COMPANY
both of Bala Cynwyd, Pennsylvania

(hereinafter collectively referred to as the “Company’)

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York
(hereinafter referred to as the “Subscribing Reinsurer”)

It is hereby agreed that the Subscribing Reinsurer shall have a 75% share in the interests and liabilities of all reinsurers participating in the attached Property Fourth Per Risk Excess of Loss Reinsurance Agreement effective from 12:01 a.m., Eastern Standard Time, January 1, 2008.

The share of the Subscribing Reinsurer in the interests and liabilities of all reinsurers participating in said Contract shall be separate and apart from the shares of such other reinsurers to the said Contract. The interests and liabilities of the Subscribing Reinsurer shall not be joint with those of the other reinsurers and in no event shall the Subscribing Reinsurer participate in the interests and liabilities of the other reinsurers participating in said Contract.

It is further agreed that the following shall apply to the Subscribing Reinsurer’s share in the interests and liabilities of all the reinsurers participating in the Property Fourth Per Risk Excess of Loss Reinsurance Agreement:

Page 1 of 9 Pages

1. The Preamble is revised to read:

PROPERTY FOURTH PER RISK EXCESS OF LOSS
REINSURANCE AGREEMENT
(the “Contract”)

between

PHILADELPHIA INSURANCE COMPANY
PHILADELPHIA INDEMNITY INSURANCE COMPANY
both of Bala Cynwyd, Pennsylvania
(the “Company”)

and

THE SUBSCRIBING REINSURER(S) EXECUTING THE
INTERESTS AND LIABILITIES AGREEMENT(S)
ATTACHED HERETO
(the “Reinsurer”)

2. Paragraph E. is added to Article III — Special Termination:

E. This Article shall not apply to those Reinsurers with an A.M. Best’s rating of “A+” or better at the inception of this Contract.

3. Paragraph C.1. of Article IV— Definitions is revised to read:

1. Extra Contractual Obligations

“Extra Contractual Obligations” are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action.

The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence.

Page 2 of 9 Pages

4. Paragraph C.3. and Paragraph C.4. of Article IV — Definitions are revised to read:

3.

This paragraph C. shall not apply where an Extra Contractual Obligation and/or Loss in Excess of policy limits has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

4.

Recoveries, collectibles or retention from any other form of insurance or reinsurance including deductibles or self— insured retention which protect the Company against claims which are the subject matter of this paragraph C., whether collectible or not, shall inure to the benefit of the Reinsurer and shall be deducted from the total amount of such claims for purposes of determining the loss hereunder.

5. Paragraph D. of Article IV — Definitions is revised to read:

D. “Loss Adjustment Expense” as used herein shall mean all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including 1} pre-judgment interest, unless included as part of the award or judgment; 2) post-judgment interest; 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including Declaratory Judgment Expense; and 4) a pro rata share of salaries and expenses of Company field employees, and expenses of other company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss Adjustment Expense does not include the salaries and expenses of Company employees, other than (4) above, office expenses and other overhead expenses.

6. Paragraph F. of Article IV— Definitions is revised to read:

F. Net Earned Premium

“Net Earned Premium” as used herein is defined as gross earned premium of the Company during the term of the Contract for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of the Reinsurer.

Page 3 of 9 Pages

7. Paragraph J. of Article IV — Definitions is revised to read:

J. Ultimate Net Loss

The term “Ultimate Net Loss” shall mean the actual loss, including any pre—judgment interest which is included as part of the award or judgment, Loss Adjustment Expense, 90% of Loss in Excess of Policy Limits, and 90% of Extra Contractual Obligations, paid by the Company on its net retained liability after making deductions for all recoveries, salvages, subrogations and all claims on inuring reinsurance, whether collectible or not; provided, however, that in the event of the insolvency of the Company, payment by the Reinsurer shall be made in accordance with the provisions of the INSOLVENCY ARTICLE. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company’s Ultimate Net Loss has been ascertained.

8. Exclusion H. of Article VI — Exclusions is revised to read:

H. Pollution and Seepage as per the attached Pollution and Seepage Exclusion Clause.

9. Exclusion Q. of Article VI — Exclusions is revised to read:

i.	Loss, damage or expense of whatsoever nature caused directly or indirectly by any of the following, regardless of any other cause or event contributing concurrently or in any other sequence to the loss: nuclear reaction or radiation, or radioactive contamination, however caused.
ii.	However, if nuclear reaction or radiation, or radioactive contamination results in fire it is specifically agreed herewith that this Agreement will pay for such fire loss or damage subject to all of the terms, conditions and limitations of this Agreement.
iii.	This exclusion shall not apply to loss, damage or expense originating from and occurring at risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

10. The following exclusions X., Y. and Z. are added to of Article VI — Exclusions:

X.	Risks where at the time of cession the Total Insured Value over all interests exceeds $250,000,000.
Y.	Ex-gratia payments.
Z.	Any incident that involves the use, release or escape of pathogenic or poisonous biological or chemical materials. However, this exclusion does not apply to the Terrorism Annual Aggregate Limit for the excess layer stated in paragraph B of the Coverage Article.

Page 4 of 9 Pages

11.	The penultimate paragraph of Article VI — Exclusions is revised to read:
	If the Company is bound without knowledge of or contrary to the instructions of the Company’s supervisory underwriting personnel, or any business falling within the scope of one or more of the exclusions set forth in this section, these exclusions, except A, B, C, D, E, F, H, J, L, M, O, X, Y, Z, shall suspend with respect to such business until 60 days after an underwriting supervisor of the Company acquires knowledge of such business.
12.	The following Paragraph D is added to Article IX— Reinsurance Premium:
	D. As respects this Article:

1. All statements shall be sent to the Reinsurer at:

a.	E-Mail/XML or EDT Formats: reaccount_armonk@swissre.com, or
b.	Standard Mail:

Swiss Reinsurance America Corporation
Accounting Department
175 King Street
Armonk, NY 10504
Telephone: 914-828-8000
Facsimile:   914-828-5919

2. All checks and supporting documentation shall be sent to the Reinsurer through one of the options set forth below:

a. WIRE TRANSFER

(i) As respects payments in United States dollars, all wires should be sent to:

The Bank of New York
1 Wall Street
New York, NY 10286
Account Name:      Swiss Reinsurance America Corporation
Account Number:   8900489197
ABA Number:         021000018
SWIFT:                   IRVTUS3N

(ii) All supporting documentation should be Sent to:

Swiss Reinsurance America Corporation
Accounting Department
175 King Street
Armonk, NY 10504

Page 5 of 9 Pages

b.	LOCK BOX
	As respects payments in United States dollars, both checks and supporting documentation shall be sent to:

Swiss Reinsurance America Corporation
P.O. Box 7247-7281
Philadelphia, PA 19170-7281

13.	Paragraph D of Article X, Notice of Loss and Loss Settlements shall be deleted.
14.	Article XI — Agency Agreement is revised to read:

ARTICLE XI

AGENCY AGREEMENT

For purposes of sending and receiving notices and payments required by this Agreement, the reinsured company that is set forth first in the Preamble to this Agreement shall be deemed the agent of all other reinsured companies referenced in the Preamble. In no event, however, shall any reinsured company be deemed the agent of another with respect to the terms of Article XXVII — Insolvency.

15. Article XII — Salvage and Subrogations is revised to read:

A.

In the event of the payment of any indemnity by the Reinsurer under this Agreement, the Reinsurer shall be subrogated, to the extent of such payment, to all of the rights of the Company against any person or entity legally responsible for damages of the loss. The Company agrees to enforce such rights; but, in case the Company refuses or neglects to do so, the Reinsurer is hereby authorized and empowered to bring any appropriate action in the name of the Company or their policyholders or otherwise to enforce such rights.

B.

The Reinsurer shall be credited with salvage or subrogation recoveries (i.e., reimbursement obtained or recovery made by the Company, less Loss Adjustment Expense incurred in obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage and subrogation recoveries thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary lose.

16. Article XXII — Mortgagee Reinsurance Endorsements shall be deleted in its entirety.

Page 6 of 9 Pages

17. Article XXIII — Third Party Rights (BRMA 52C Modified) is revised to read as follows and, accordingly, the Table of Contents is revised to show deletion of the word “Modified” after the reference to BRMA 52C.

ARTICLE XXIII

THIRD PARTY RIGHTS (BRMA 52C)

This Contract is solely between the Company and the Reinsurer, and in no instance shall any other party have any rights under this Contract except as expressly provided otherwise in the Insolvency Article.

18. Article XXVI — Access to Records (BRMA 1E) is revised to read as follows and, accordingly, the Table of Contents is revised to show the deletion of the reference to (BRMA 1E).

ARTICLE XXVI

ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the right to examine, at the offices of the Company at a reasonable time, during the currency of this Agreement or anytime thereafter, all books and records of the Company relating to business which is the subject of this Agreement.

19. Paragraph F. of Article XXVIII — Arbitration shall be deleted in its entirety and the remaining paragraph shall be realphabetized. Furthermore, the previous paragraph G. is revised as paragraph F., as shall read as follows:

F. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel.

20. Article XXXI — Intermediary (WINT8) shall be deleted in its entirety.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate, by their duly authorized representatives as of the following dates:

Page 7 of 9 Pages

In BALA Cynwyd. PA , this 12TH day of SEPTEMBER          , 2008.
ATTEST:	PHILADELPHIA INSURANCE COMPANY
	PHILADELPHIA INDEMNITY INSURANCE COMPANY
/s/ William A. McKenna	/s/ Christopher J. Maguire
WILLIAM A. McKENNA	CHRISTOPHER J. MAGUIRE
Name	Name
AVP – REINSURANCE	EVP & COO
Title	Title
And in Philadelphia , this 15th day of AUGUST          , 2008.
ATTEST:	SWISS REINSURANCE AMERICA CORPORATION
/s/ M. NINGEN	/s/ M. JOSEPH COOK
M. NINGEN	M. JOSEPH COOK
Name	Name
Sr. VP	Vice President
Title	Title

Page 8 of 9 Pages

POLLUTION AND SEEPAGE EXCLUSION CLAUSE

This Reinsurance does not apply to:

1.	Pollution, seepage, contamination or environmental impairment (hereinafter collectively referred to as “pollution”) insurances, however styled;
2.	Loss or damage caused directly or indirectly by pollution, unless said loss or damage follows as a result of a loss caused directly by a peril covered hereunder;
3.	Expenses resulting from any governmental direction or request that material present in or part of or utilized on an insured’s property be removed or modified, except as provided in 5. below;
4.	Expenses incurred in testing for and/or monitoring pollutants;
5.	Expenses incurred in removing debris, unless (A) the debris results from a loss caused directly by a peril covered hereunder, and (B) the debris to be removed is itself covered hereunder, and (C) the debris is on the insured’s premises, subject, however, to a limit of $5,000 plus 25% of (i) the property damage loss, any risk, any one location, any one original insured, and (ii) any deductible applicable to the loss;
6.	Expenses incurred to extract pollutants from land or water at the insured’s premises unless (A) the release, discharge, or dispersal of pollutants results from a loss caused directly by a peril covered hereunder, and (B) such expenses shall not exceed $10,000;
7.	Loss of income due to any increased period of time required to resume operations resulting from enforcement of any law regulating the prevention, control, repair, clean-up or restoration of environmental damage;
8.	Claims under 5. and/or 6. above, unless notice thereof is given to the Company by the insured within 180 days after the date of the loss occurrence to which such claims relate.

“Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Where no pollution exclusion has been accepted or approved by an insurance regulatory authority for use in a policy that is subject to this Agreement or where a pollution exclusion that has been used in a policy is overturned, either in whole or in part, by a court having jurisdiction, there shall be no recovery for pollution under this Agreement unless said pollution loss or damage follows as a result of a loss caused directly by a peril covered hereunder.

Nothing herein shall be deemed to extend the coverage afforded by this reinsurance to property or perils specifically excluded or not covered under the terms and conditions of the original policy involved.

Page 9 of 9 Pages

EX-10.2

EXHIBIT 10.2

INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the “Agreement”)

to the

PROPERTY FIFTH PER RISK EXCESS OF LOSS
REINSURANCE AGREEMENT

between

PHILADELPHIA INSURANCE COMPANY
PHILADELPHIA INDEMNITY INSURANCE COMPANY
both of Bala Cynwyd, Pennsylvania

(hereinafter collectively referred to as the “Company’)

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York
(hereinafter referred to as the “Subscribing Reinsurer”)

It is hereby agreed that the Subscribing Reinsurer shall have a 50% share in the interests and liabilities of all reinsurers participating in the attached Property Fifth Per Risk Excess of Loss Reinsurance Agreement effective from 12:01 a.m., Eastern Standard Time, January 1, 2008.

The share of the Subscribing Reinsurer in the interests and liabilities of all reinsurers participating in said Contract shall be separate and apart from the shares of such other reinsurers to the said Contract. The interests and liabilities of the Subscribing Reinsurer shall not be joint with those of the other reinsurers and in no event shall the Subscribing Reinsurer participate in the interests and liabilities of the other reinsurers participating in said Contract.

It is further agreed that the following shall apply to the Subscribing Reinsurer’s share in the interests and liabilities of all the reinsurers participating in the Property Fifth Per Risk Excess of Loss Reinsurance Agreement:

Page 1 of 9 Pages

1. The Preamble is revised to read:

PROPERTY FIFTH PER RISK EXCESS OF LOSS
REINSURANCE AGREEMENT
(the “Contract”)

between

PHILADELPHIA INSURANCE COMPANY
PHILADELPHIA INDEMNITY INSURANCE COMPANY
both of Bala Cynwyd, Pennsylvania
(the “Company”)

and

THE SUBSCRIBING REINSURER(S) EXECUTING THE
INTERESTS AND LIABILITIES AGREEMENT(S)
ATTACHED HERETO
(the “Reinsurer”)

2. Paragraph E. is added to Article III — Special Termination:

E. This Article shall not apply to those Reinsurers with an A.M. Best’s rating of “A+” or better at the inception of this Contract.

3. Paragraph C.1. of Article IV — Definitions is revised to read:

1.	Extra Contractual Obligations
	“Extra Contractual Obligations” are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action.
	The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence.

Page 2 of 9 Pages

4. Paragraph C.3. and Paragraph C.4. of Article IV — Definitions are revised to read:

3.

This paragraph C. shall not apply where an Extra Contractual Obligation and/or Loss in Excess of policy limits has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

4.

Recoveries, collectibles or retention from any other form of insurance or reinsurance including deductibles or self— insured retention which protect the Company against claims which are the subject matter of this paragraph C., whether collectible or not, shall inure to the benefit of the Reinsurer and shall be deducted from the total amount of such claims for purposes of determining the loss hereunder.

5. Paragraph D. of Article IV — Definitions is revised to read:

D. “Loss Adjustment Expense” as used herein shall mean all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including 1) pre-judgment interest, unless included as part of the award or judgment; 2) post-judgment interest; 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including Declaratory Judgment Expense; and 4) a pro rata share of salaries and expenses of Company field employees, and expenses of other company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss Adjustment Expense does not include the salaries and expenses of Company employees, other than (4) above, office expenses and other overhead expenses.

6. Paragraph F. of Article IV — Definitions is revised to read:

F.	Net Earned Premium
	“Net Earned Premium” as used herein is defined as gross earned premium of the Company during the term of the Contract for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of the Reinsurer.

7. Paragraph J. of Article IV — Definitions is revised to read:

J.	Ultimate Net Loss
	The term “Ultimate Net Loss” shall mean the actual loss, including any prejudgment interest which is included as part of the award or judgment, Loss Adjustment Expense, 90% of Loss in Excess of Policy Limits, and 90% of Extra

Page 3 of 9 Pages

Contractual Obligations, paid by the Company on its net retained liability after making deductions for all recoveries, salvages, subrogations and all claims on inuring reinsurance, whether collectible or not; provided, however, that in the event of the insolvency of the Company, payment by the Reinsurer shall be made in accordance with the provisions of the INSOLVENCY ARTICLE. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company’s Ultimate Net Loss has been ascertained.

8. Exclusion H. of Article VI — Exclusions is revised to read:

H. Pollution and Seepage as per the attached Pollution and Seepage Exclusion Clause.

9. Exclusion Q. of Article VI — Exclusions is revised to read:

i.	Loss, damage or expense of whatsoever nature caused directly or indirectly by any of the following, regardless of any other cause or event contributing concurrently or in any other sequence to the loss: nuclear reaction or radiation, or radioactive contamination, however caused.
ii.	However, if nuclear reaction or radiation, or radioactive contamination results in fire it is specifically agreed herewith that this Agreement will pay for such fire loss or damage subject to all of the terms, conditions and limitations of this Agreement.
iii.	This exclusion shall not apply to loss, damage or expense originating from and occurring at risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

10. The following exclusions X., Y. and Z. are added to of Article VI — Exclusions:

X.	Risks where at the time of cession the Total Insured Value over all interests exceeds $250,000,000.
Y.	Ex-gratia payments.
Z.	Any incident that involves the use, release or escape of pathogenic or poisonous biological or chemical materials. However, this exclusion does not apply to the Terrorism Annual Aggregate Limit for the excess layer stated in paragraph B of the Coverage Article.

11.

The penultimate paragraph of Article VI — Exclusions is revised to read:

If the Company is bound without knowledge of or contrary to the instructions of the Company’s supervisory underwriting personnel, or any business falling within the scope of one or more of the exclusions set forth in this section, these exclusions, except A, B, C, D, E, F, H, J, L, M, O, X, Y, Z, shall suspend with respect to such business until 60 days after an underwriting supervisor of the Company acquires knowledge of such business.

Page 4 of 9 Pages

12. The following Paragraph D is added to Article IX — Reinsurance Premium:

D.	As respects this Article:
1.	All statements shall be sent to the Reinsurer at:

a.	E-Mail/XML or EDT Formats: reaccount_armonk@swissre.com, or
b.	Standard Mail:
	Swiss Reinsurance America Corporation Accounting Department 175 King Street Armonk, NY 10504 Telephone: 914-828-8000 Facsimile:  914-828-5919

2. All checks and supporting documentation shall be sent to the Reinsurer through one of the options set forth below:

a. WIRE TRANSFER

(i)	As respects payments in United States dollars, all wires should be sent to:
	The Bank of New York 1 Wall Street New York, NY 10286 Account Name:     Swiss Reinsurance America Corporation Account Number:  8900489197 ABA Number:        021000018 SWIFT:                  IRVTUS3N
(ii)	All supporting documentation should be Sent to:
	Swiss Reinsurance America Corporation Accounting Department 175 King Street Armonk, NY 10504

Page 5 of 9 Pages

b.	LOCK BOX
	As respects payments in United States dollars, both checks and supporting documentation shall be sent to:

Swiss Reinsurance America Corporation
P.O. Box 7247—7281
Philadelphia, PA 19170—7281

13.	Paragraph D of Article X, Notice of Loss and Loss Settlements shall be deleted.
14.	Article XI — Agency Agreement is revised to read:

ARTICLE XI

	AGENCY AGREEMENT
	For purposes of sending and receiving notices and payments required by this Agreement, the reinsured company that is set forth first in the Preamble to this Agreement shall be deemed the agent of all other reinsured companies referenced in the Preamble. In no event, however, shall any reinsured company be deemed the agent of another with respect to the terms of Article XXVII — Insolvency.
15.	Article XII — Salvage and Subrogations is revised to read:

A.

In the event of the payment of any indemnity by the Reinsurer under this Agreement, the Reinsurer shall be subrogated, to the extent of such payment, to all of the rights of the Company against any person or entity legally responsible for damages of the loss. The Company agrees to enforce such rights; but, in case the Company refuses or neglects to do so, the Reinsurer is hereby authorized and empowered to bring any appropriate action in the name of the Company or their policyholders or otherwise to enforce such rights.

B.

The Reinsurer shall be credited with salvage or subrogation recoveries (i.e., reimbursement obtained or recovery made by the Company, less Loss Adjustment Expense incurred in obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage and subrogation recoveries thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary lose.

16.	Article XXII — Mortgagee Reinsurance Endorsements shall be deleted in its entirety.
17.	Article XXIII — Third Party Rights (BRMA 52C Modified) is revised to read as follows and, accordingly, the Table of Contents is revised to show deletion of the word “Modified” after the reference to BRMA 52C.

Page 6 of 9 Pages

ARTICLE XXIII

	THIRD PARTY RIGHTS (BRMA 52C)
	This Contract is solely between the Company and the Reinsurer, and in no instance shall any other party have any rights under this Contract except as expressly provided otherwise in the Insolvency Article.
18.	Article XXVI — Access to Records (BRMA 1E) is revised to read as follows and, accordingly, the Table of Contents is revised to show the deletion of the reference to (BRMA 1E).

ARTICLE XXVI

	ACCESS TO RECORDS
	The Reinsurer or its duly authorized representatives shall have the right to examine, at the offices of the Company at a reasonable time, during the currency of this Agreement or anytime thereafter, all books and records of the Company relating to business which is the subject of this Agreement.
19.	Paragraph F. of Article XXVIII — Arbitration shall be deleted in its entirety and the remaining paragraph shall be realphabetized. Furthermore, the previous paragraph G. is revised as paragraph F., as shall read as follows:

F. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate, by their duly authorized representatives as of the following dates:

Page 7 of 9 Pages

In BALA CYNWYD, PA, this 12^TH day of SEPTEMBER, 2008.

ATTEST:	PHILADELPHIA INSURANCE COMPANY PHILADELPHIA INDEMNITY INSURANCE COMPANY
/s/ William A. McKenna	/s/ Christopher J. Maguire
WILLIAM A. MCKENNA	CHRISTOPHER J. MAGUIRE
Name	Name
AVP — REINSURANCE Title	EVP & COO Title
And in Philadelphia, this 15th day of August, 2008.
ATTEST:	SWISS REINSURANCE AMERICA CORPORATION
/s/ M Ningen	/s/ M. JOSEPH COOK
M NINGEN Name	M. Joseph Cook Name
Sr. VP Title	Vice President Title

Page 8 of 9 Pages

POLLUTION AND SEEPAGE EXCLUSION CLAUSE

This Reinsurance does not apply to:

1.	Pollution, seepage, contamination or environmental impairment (hereinafter collectively referred to as “pollution”) insurances, however styled;
2.	Loss or damage caused directly or indirectly by pollution, unless said loss or damage follows as a result of a loss caused directly by a peril covered hereunder;
3.	Expenses resulting from any governmental direction or request that material present in or part of or utilized on an insured’s property be removed or modified, except as provided in 5. below;
4.	Expenses incurred in testing for and/or monitoring pollutants;
5.	Expenses incurred in removing debris, unless (A) the debris results from a loss caused directly by a peril covered hereunder, and (B) the debris to be removed is itself covered hereunder, and (C) the debris is on the insured’s premises, subject, however, to a limit of $5,000 plus 25% of (i) the property damage loss, any risk, any one location, any one original insured, and (ii) any deductible applicable to the loss;
6.	Expenses incurred to extract pollutants from land or water at the insured’s premises unless (A) the release, discharge, or dispersal of pollutants results from a loss caused directly by a peril covered hereunder, and (B) such expenses shall not exceed $10,000;
7.	Loss of income due to any increased period of time required to resume operations resulting from enforcement of any law regulating the prevention, control, repair, clean-up or restoration of environmental damage;
8.	Claims under 5. and/or 6. above, unless notice thereof is given to the Company by the insured within 180 days after the date of the loss occurrence to which such claims relate.

“Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Where no pollution exclusion has been accepted or approved by an insurance regulatory authority for use in a policy that is subject to this Agreement or where a pollution exclusion that has been used in a policy is overturned, either in whole or in part, by a court having jurisdiction, there shall be no recovery for pollution under this Agreement unless said pollution loss or damage follows as a result of a loss caused directly by a peril covered hereunder.

Nothing herein shall be deemed to extend the coverage afforded by this reinsurance to property or perils specifically excluded or not covered under the terms and conditions of the original policy involved.

Page 9 of 9 Pages

EX-10.3

EXHIBIT 10.3

PHILADELPHIA INDEMNITY
INSURANCE COMPANY
PHILADELPHIA INSURANCE COMPANY

Agreement No. P304

GENERAL REINSURANCE CORPORATION
A Berkshire Hathaway Company

TABLE OF CONTENTS

to

PROPERTY FACULTATIVE AGREEMENT OF REINSURANCE
NO. P304
between
PHILADELPHIA INDEMNITY INSURANCE COMPANY
PHILADELPHIA INSURANCE COMPANY
and
GENERAL REINSURANCE CORPORATION

Article			Page #
Article I	—	SCOPE OF AGREEMENT		1
Article II	—	PARTIES TO THE AGREEMENT		1
Article III	—	COMMENCEMENT AND TERMINATION		1
Article IV	—	BUSINESS SUBJECT TO THIS AGREEMENT		2
Article V	—	LIABILITY OF THE REINSURER		2
Article VI	—	ALLOCATION OF ADJUSTMENT EXPENSE		3
Article VII	—	DEFINITIONS		3
Article VIII	—	EXCLUSIONS		5
Article IX	—	OTHER REINSURANCE		8
Article X	—	REINSURANCE PREMIUM		9
Article XI	—	RISK REPORTS AND REMITTANCES		9
Article XII	—	REPORTS AND CLAIM REMITTANCES		10
Article XIII	—	ERRORS AND OMISSIONS		11
Article XIV	—	SPECIAL ACCEPTANCES		11
Article XV	—	MANAGEMENT OF CLAIMS AND LOSSES		11
Article XVI	—	RECOVERIES		11
Article XVII	—	TRIA EXCESS RECOVERY		11
Article XVIII	—	RESERVES AND TAXES		12
Article XIX	—	OFFSET		12
Article XX	—	INSPECTION OF RECORDS		12
Article XXI	—	ARBITRATION		13
Article XXII	—	INSOLVENCY OF THE COMPANY		13
Article XXIII	—	ENTIRE AGREEMENT		14

Attachments

Appendix A
Nuclear Incident Exclusion Clause — Physical Damage

GENERAL REINSURANCE CORPORATION

PROPERTY FACULTATIVE AGREEMENT OF REINSURANCE
NO. P304

between

PHILADELPHIA INDEMNITY INSURANCE COMPANY
PHILADELPHIA INSURANCE COMPANY
One Bala Plaza, Suite 100
Bala Cynwyd, Pennsylvania 19004
(herein collectively referred to as the “Company”)

and

GENERAL REINSURANCE CORPORATION
a Delaware corporation
having its principal offices at
Financial Centre
695 East Main Street P.O. Box 10350
Stamford, Connecticut 06904-2350
(herein referred to as the “Reinsurer”)

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

Article I — SCOPE OF AGREEMENT

As a condition precedent to the Reinsurer’s obligations under this Agreement, the Company shall cede to the Reinsurer, subject to the terms of the article entitled RISK REPORTS AND REMITTANCES, the business described in the article entitled BUSINESS SUBJECT TO THIS AGREEMENT, and the Reinsurer shall accept such business as reinsurance from the Company. The terms of this Agreement shall determine the rights and obligations of the parties.

Article II — PARTIES TO THE AGREEMENT

This Agreement is solely between the Company and the Reinsurer. When more than one Company is named as a party to this Agreement, the first Company named shall be the agent of the other companies as to all matters pertaining to this. Agreement. Performance of the obligations of each party under this Agreement shall be rendered solely to the other party. However, if the Company becomes insolvent, the liability of the Reinsurer shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. In no instance shall any insured of the Company or any claimant against an insured of the Company have any rights under this Agreement.

Article III — COMMENCEMENT AND TERMINATION

This Agreement shall apply to claims and losses insured under new and renewal policies of the Company becoming effective at and after 12:01 A.M., January 1, 2008 and shall continue in force until terminated.

GENERAL REINSURANCE CORPORATION
A Berkshire Hathaway Company

Either party may terminate this Agreement by sending to the other, by certified mail to its principal office, notice stating the time and date when, not less than 90 days after the date of mailing of such notice, termination shall be effective. Upon termination of this Agreement, the Reinsurer shall continue to be liable, with respect to policies in force at the time and date of termination, for claims and losses resulting from Occurrences taking place until the expiration, cancellation, or next anniversary date, not to exceed one year, of each such policy of the Company, whichever occurs first.

When all reinsurance is expired or terminated, the Reinsurer shall return to the Company the reinsurance premium unearned, if any, calculated on the monthly pro rata basis.

Article IV — BUSINESS SUBJECT TO THIS AGREEMENT

Subject to the terms of the article entitled RISK REPORTS AND REMITTANCES, this Agreement shall apply to Property Business written by the Company, which is defined as insurance which is classified in the NAIC form of annual statement as fire, allied lines, inland marine, commercial multiple peril (property coverages), homeowners multiple peril (property coverages) or automobile physical damage (comprehensive and collision), except those lines specifically excluded in the section entitled EXCLUSIONS, on Risks wherever located in the 50 states of the United States of America including the District of Columbia.

The business subject to this Agreement shall be defined further as Property Business as written on the Company’s policy forms on file with the Reinsurer.

Article V — LIABILITY OF THE REINSURER

The Reinsurer shall pay to the Company, with respect to each Risk of the Company ceded hereunder, the amount of Net Loss sustained by the Company in excess of the Company Retention but not exceeding the Limits of Liability of the Reinsurer as set forth in the Schedule of Reinsurance or the amount of reinsurance ceded to the Reinsurer on the monthly bordereau report, whichever is less. However, in no event shall Net Loss include payments made by the Company under “unlimited” or “non ceded” coverages unless specific limits of liability have been included in the total amount of insurance reported and ceded on the monthly bordereau reports.

SCHEDULE OF REINSURANCE

			Limits of Liability
Class of Business	Company Retention		of the Reinsurer
Property Business
Risks located in Florida, Hawaii or Harris County, Texas	$	75,000,000	$	30,000,000
All other Risks	$	75,000,000	$	50,000,000
Wood Frame Builders Risks	$	25,000,000	$	25,000,000

GENERAL REINSURANCE CORPORATION

-2-

The liability of the Reinsurer shall not exceed $50,000,000 under this Agreement and all individual facultative certificates issued by the Reinsurer to the Company during each Agreement Year that this Agreement is in effect with respect to all Net Loss and Adjustment Expenses combined arising out of all loss or damage directly or indirectly arising out of, caused by, or resulting from all Terrorism Occurrences taking place during each Agreement, Year regardless of any other cause or event contributing to such loss or damage in any way or at any time, or whether such loss or damage is accidental or intentional.

Article VI — ALLOCATION OF ADJUSTMENT EXPENSE

In addition to payments for its share of Net Loss, the Reinsurer shall pay to the Company a share of Adjustment Expenses proportionate to the Reinsurer’s share of Net Loss.

Article VII — DEFINITIONS

(a)	Company Retention
	This term shall mean the amount the Company and its treaty reinsurers shall retain for their own account; however, this requirement shall be satisfied if this amount is retained by the Company or its affiliated companies under common management or common ownership.
	Recoveries from catastrophe reinsurance shall be deemed not to reduce the amount required with respect to the Company Retention.
(b)	Net Loss
	This term shall mean all payments by the Company within the terms and limits of its policies in settlement of claims or losses after deduction of salvage and other recoveries and after deduction of amounts due from all other reinsurance, except catastrophe reinsurance and except treaty reinsurance within the Company Retention, whether collectible or not. This term shall not include Adjustment Expense. If the Company becomes insolvent, this definition shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY.
(c)	Adjustment Expense
	This term shall mean expenditures by the Company within the terms of its policies in the direct defense of claims and as allocated to an individual claim or loss (other than for office expenses and for the salaries and expenses of employees of the Company or of any subsidiary or related or wholly owned company of the Company) made in connection with the disposition of a claim, loss, or legal proceeding including investigation, negotiation, and legal expenses; court costs; prejudgment interest; and postjudgment interest.
(d)	Risk
	The Company shall establish what constitutes one Risk provided:

GENERAL REINSURANCE CORPORATION

-3-

(1)	A Building and its contents, including time element coverages, shall never be considered more than one Risk;
(2)	When two or more Buildings and their contents are situated at the same general location, the Company shall identify on its records at the time of acceptance by the Company those individual Buildings and their contents that are considered to constitute each Risk; if such identification is not made, each Building and its contents shall be considered to be a separate Risk;
(3)	Multiple general locations shall never be combined and considered one Risk.

(e)	Building
	This term shall mean each separately roofed structure enclosed within exterior walls.
(f)	Total Insured Value
	This term shall mean the sum total of property values for the Risk ceded according to the policy form written.
(g)	Terrorism Occurrence

(1)

An Act of Terrorism means an activity, including the threat of an activity or any preparation for an activity, that (a) causes either (i) damage to property, or (ii) injury to persons; and (b) appears to be intended to: (i) intimidate or coerce a civilian population, or (ii) disrupt any segment of an economy, or (iii) influence the policy of a government by intimidation or coercion, or (iv) affect the conduct of a government by destruction, assassination, kidnapping or hostage-taking, or (v) advance a political, religious or ideological cause; provided, however, that an Act of Terrorism for purposes of this definition shall not include any act or threat as described above perpetrated by an official, employee or agent of a foreign state acting for or on behalf of such state.

(2)

An Act of Terrorism is also deemed to include any act authorized by a governmental authority for the purpose of preventing, terminating, countering or responding to any act or threat of terrorism or for the purpose of preventing or minimizing the consequences of any act or threat of terrorism.

(h)	Agreement Year
	This term shall mean each twelve month period commencing on January 1st.

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Article VIII — EXCLUSIONS

This Agreement shall not apply to:

(a)	Business assumed by the Company other than reinsurance assumed from affiliated companies;
(b)	Nuclear incident per the Nuclear Incident Exclusion — Physical Damage - Reinsurance attached hereto;
(c)	Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations;
(d)	Any liability of the Company arising from its participation or membership in any insolvency fund;
(e)	Any loss or damage directly or indirectly arising out of, caused by, or resulting from war, including undeclared or civil war; warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign or other authority using military personnel or other agents; or insurrection, rebellion, revolution, usurped power or action taken by governmental authority in hindering or defending against any of these. War includes any activity that would be included as an Act of Terrorism, but for the fact that such activity was perpetrated by an official, employee or agent of a foreign state acting for or on behalf of such state. Such loss or damage is excluded regardless of (i) any other cause or event contributing to such loss or damage in any way or at any time, or (ii) whether such loss or damage is accidental or intentional.
(f)	Business written on a layered basis, whether primary or excess of loss and business written on a co-indemnity, co-insurance or shared basis;
(g)	Business not written 100% by the Company;
(h)	Risks or policies written with a deductible or franchise of more than $100,000; however, this exclusion shall not apply to Risks or policies which provide a percentage deductible or franchise in connection with windstorm;
(i)	Wood Frame Builders Risks which have a Total Insured Value of more than $50,000,000 and all other Risks which have a Total Insured Value of more than $200,000,000, unless submitted to the Reinsurer for special acceptance and accepted by the Reinsurer in accordance with the provisions of the article entitled SPECIAL ACCEPTANCES;
(j)	Insurance against:

(1) Any earth movement (other than sinkhole collapse), such as earthquake, landslide, mine subsidence or earth sinking, rising

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	or shifting; however, this exclusion shall not apply to ensuing loss by fire or explosion not otherwise excluded;
(2)	Volcanic eruption, explosion or effusion; however, this exclusion shall not apply to ensuing loss by fire or volcanic action not otherwise excluded.

Except for Risks located in the State of California, this exclusion shall not apply to the coverages of accounts receivable, fine arts, valuable papers or electronic data processing equipment, media and extra expense when the perils set forth in (1) and (2) above are written in conjunction with otherwise eligible perils;

(k)	Insurance against flood, surface water, waves, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not;
(I)	Difference in conditions insurance and similar kinds of insurance, howsoever styled;
(m)	Insurance against earthquake sprinkler leakage;
(n)	Loss, damage, costs or expenses arising out of the release, discharge, dispersal, or escape of pollutants; the extraction, removal, clean up, containment, monitoring, or detoxification of pollutants; or the removal, restoration, or replacement of polluted land or water, but this exclusion does not preclude coverage for loss, damage, costs, or expenses which are covered under Insurance Services Office basic wordings promulgated on or after April 1, 1986. However, this exclusion does not apply to any Risk located in a jurisdiction which has not approved the Insurance Services Office wordings or where other regulatory constraints prohibit the Company from implementing such wordings. If the Company elects to file an endorsement independent of ISO, such endorsement will be deemed a suitable substitute provided the Company has submitted the wording to the Reinsurer and received the Reinsurer’s prior approval. Nevertheless, if the insured elects to purchase any “buy back” or additional coverage options, such options shall not be covered hereunder even if such options are provided by or covered under ISO wordings;
(o)	Any loss or damage caused by or resulting from:

(1)

Explosion of steam boilers, steam pipes, steam engines or steam turbines owned by, leased by or operated under the control of the insured; however, this exclusion shall not apply to loss or damage resulting from fire or combustion explosion, nor to loss or damage caused by or resulting from the explosion of gases or fuel within the furnace of any fired vessel or within the flues or passages through which the gases of combustion pass;

(2)

Artificially generated electric current, including electric arcing, that disturbs electrical devices, appliances or wires; however,

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	this exclusion shall not apply to ensuing loss by fire not otherwise excluded;
(3)	Mechanical breakdown, including rupture or bursting caused by centrifugal force; however, this exclusion shall not apply to any resulting loss or damage caused by elevator collision;

(p)	Vacant or unoccupied properties;
(q)	Losses with respect to overhead transmission and distribution lines (including those used by cable operators and telecommunications providers) and their supporting structures, other than those on or within 1,000 feet of the insured premises. However, public utilities extension and/or suppliers extension and/or contingent business interruption coverage are not subject to this exclusion, provided these are not part of a transmitters’ or distributors’ policy;
(r)	Petrochemical Risks, including oil refining and processing, petrochemical operations, pipelines, tank farms, gas processing, and any hydrocarbon processing;
(s)	Railroad property;
(t)	Offshore property Risks;
(u)	Mobile homes unless written as part of a commercial multiple peril policy;
(v)	Watercraft, other than watercraft insured under a standard homeowners policy;
(w)	Insurance on growing crops;
(x)	Inland marine business with respect to the following:

(1)	All bridges, dams, tunnels, piers and wharves;
(2)	Cargo insurance when written as such with respect to ocean, lake, or inland waterways vessels;
(3)	Faulty film, tape, processing and editing insurance and cast insurance;
(4)	Drilling rigs for natural fuels;
(5)	Furriers’ customers policies;
(6)	Garment contractors policies;
(7)	Insurance on livestock under so-called “mortality policies”;
(8)	Jewelers’ block policies and furriers’ block policies;

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(9)	Mining equipment while underground;
(10)	Transit;
(11)	Radio, television, telephone towers or other towers used in communications;
(12)	Registered mail and armored car insurance;

(y)	Risks that involve the manufacture or fabrication of chips and or integrated circuits that operate in a clean room environment.
(z)	Risks which have an insurable value of $5,000,000 or more on any of the following coverages:

(1)	Accounts receivable;
(2)	Valuable papers;
(3)	Fine arts;
(4)	Electronic data processing equipment, media, and extra expense;

(aa)	Business classified as fidelity;
(bb)	Credit insurance;
(cc)	Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property;
(dd)	Contingent business interruption insurance;
(ee)	Risks located on the keys and islands listed in Appendix A attached hereto;
(ff)	Risks located within 1,000 feet of tidal waters in Hawaii and Risks located within one mile of tidal water including the Intracoastal Waterway, as respects the Gulf of Mexico from Brownsville, Texas to Key West, Florida and the Atlantic Ocean from Key West, Florida through Cape Cod, Massachusetts and Risks excluded by the Company’s “2008 Property Guidelines-Florida” edition 1-2008 and the Company’s “Windstorm Underwriting Guidelines” edition 11-2007.

Article IX — OTHER REINSURANCE

The obligations of the Company to reinsure business falling within the scope of this Agreement and of the Reinsurer to accept such reinsurance are mandatory and no other reinsurance (either facultative or treaty) is permitted, except treaty reinsurance within the Company

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Retention. In no event, however, shall the amount required with respect to the Company Retention be reduced.

Article X — REINSURANCE PREMIUM

The Company shall pay to the Reinsurer, with respect to each Risk reinsured hereunder, a reinsurance premium calculated per the “Extranet Tool” provided to the Company by the Reinsurer.

Article XI — RISK REPORTS AND REMITTANCES

Risks subject to this Agreement shall be reported by the Company to the Reinsurer no later than 185 days after the close of the month in which the Company’s liability attaches, increases, or renews.

If the Company fails to notify the Reinsurer within 185 days after the close of the month in which the Company’s liability attaches, increases, or renews, of an otherwise eligible Risk, the Risk may be specially accepted in accordance with the article entitled SPECIAL ACCEPTANCES.

The bordereau report provided through the “Extranet Tool” shall include for each Risk ceded:

(1)	Name(s) of insured(s);
(2)	Location(s);
(3)	Policy number(s);
(4)	Transaction description (new, renewal, endorsement);
(5)	Reinsurance term (multi year policies must be ceded annually to this Agreement);
(6)	Total Insured Value;
(7)	Construction;
(8)	Sprinklered or non sprinklered;
(9)	ISO protection class;
(10)	Risk occupancy;
(11)	Company Retention;
(12)	Reinsurance limit;
(13)	Pro rata ceded premium.

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The amount due the Reinsurer shall be remitted within 45 days after the close of the month.

Article XII — REPORTS AND CLAIM REMITTANCES

(a)	Claims and Losses
	The Company shall report promptly to the Reinsurer, but within no more than 25 days, each claim or loss which, in the Company’s opinion, may involve the reinsurance afforded by this Agreement. The Company shall advise the Reinsurer of the estimated amount of Net Loss and Adjustment Expense in connection with each such claim or loss and of any subsequent changes in such estimates.
	Promptly upon receipt of a definitive statement of Net Loss and Adjustment Expense from the Company, but within no more than 25 days, the Reinsurer shall promptly pay to the Company the Reinsurer’s portion of Net Loss and the Reinsurer’s portion of Adjustment Expense, if any. Any subsequent changes in the amount of Net Loss and/or Adjustment Expense shall be reported by the Company to the Reinsurer and the amount due either party shall be remitted promptly, but within no more than 25 days.
(b)	P.C.S. Catastrophe Bulletins
	The Company shall furnish to the Reinsurer, upon request, the following information with respect to each catastrophe set forth in the Catastrophe Bulletins published by the Property Claim Services:

(1)	The preliminary estimates of the amount recoverable from the Reinsurer;
(2)	The Reinsurer’s portion of claims, losses and Adjustment Expenses paid less salvage recovered during each calendar quarter;
(3)	The Reinsurer’s portion of reserves for claims, losses, and Adjustment Expenses at the end of each calendar quarter.

(c)	General
	In addition to the reports required by (a) and (b) above, the Company shall furnish such other information as may be required by the Reinsurer for the completion of the Reinsurer’s quarterly and annual statements and internal records.
	All reports shall be rendered on forms or in format acceptable to the Company and the Reinsurer.

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Article XIII — ERRORS AND OMISSIONS

The Reinsurer shall not be relieved of liability because of an error or accidental omission, that is transcriptional in nature, of the Company, in reporting any claim or loss or any business reinsured under this Agreement, provided that the Risk(s) involving such error or accidental omission is (are) reported to the Reinsurer in accordance with the article entitled RISK REPORTS AND REMITTANCES and provided that such error or accidental omission is rectified immediately after discovery.

The Reinsurer shall be obligated only for the return of the premium paid for business reported but not reinsured under this Agreement.

Article XIV — SPECIAL ACCEPTANCES

Business not within the terms of this Agreement may be submitted to the Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be subject to all of the terms of this Agreement except as modified by the special acceptance.

Article XV — MANAGEMENT OF CLAIMS AND LOSSES

The Company shall investigate and settle or defend all claims and losses. When requested by the Reinsurer, the Company shall permit the Reinsurer, at the expense of the Reinsurer, to be associated with the Company in the defense or control of any claim, loss, or legal proceeding which involves or is likely to involve the Reinsurer. All payments of claims or losses by the Company within the terms and limits of its policies which are within the limits set forth in this Agreement shall be binding on the Reinsurer, subject to the terms of this Agreement.

Article XVI — RECOVERIES

The Company shall pay to or credit the Reinsurer with the Reinsurer’s portion of any recovery obtained from salvage, subrogation, or other insurance. Adjustment Expense for recoveries shall be deducted from the amount recovered. However, if the Adjustment Expense incurred in obtaining recoveries exceeds the amount recovered, if any, the excess Adjustment Expense shall be apportioned between the parties in proportion to the liability of each party for the loss before the recovery was obtained.

The Reinsurer shall be subrogated to the rights of the Company to the extent of its loss payments to the Company. The Company agrees to enforce its rights of salvage, subrogation, and its rights against insurers or to assign these rights to the Reinsurer.

Recoveries shall be distributed to the parties in an order inverse to that in which their liabilities accrued.

Article XVII — TRIA EXCESS RECOVERY

As respects any “Insured Loss”, as defined in the Terrorism Risk Insurance Act of 2002 as subsequently amended (the “Act”), for which the Reinsurer makes a payment to the Company under this Agreement, the following provisions shall apply:

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1.	These provisions shall apply separately to each “Program Year” (as defined in the Act).
2.	The term “Affiliated Companies” shall mean the Company named in this Agreement and all of its affiliates (as “affiliate” is defined under the Act).
3.	If the sum of:

(a)	Financial assistance provided under the Act to the Affiliated Companies with respect to all Insured Loss that applies to the Program Year; and
(b)	Amounts recovered by or credited to the Affiliated Companies under all reinsurance which the Affiliated Companies purchase, including but not limited to this reinsurance, all other treaty reinsurance and all facultative, in respect of any of the Affiliated Companies’ Insured Loss that applies to the Program Year,

exceeds the amount of the Affiliated Companies’ gross Insured Loss that applies to the Program Year, this excess shall be the “Excess Amount”.

The Reinsurer’s proportion of the Excess Amount shall be in the ratio that the Reinsurer’s part of Insured Loss payable under this Agreement bears to the sum of the Affiliated Companies’ total collectable reinsurance recoverables for all Insured Loss.

Upon receipt of payment under the Act by Affiliated Companies, the Company shall pay to or credit the Reinsurer under this Agreement with its share of the Excess Amount as set forth in the preceding paragraph.

Article XVIII — RESERVES AND TAXES

The Reinsurer shall maintain the required reserves as to the Reinsurer’s portion of unearned premium, claims, losses, and Adjustment Expense.

The Company shall be liable for all premium taxes on premium ceded to the Reinsurer under this Agreement. If the Reinsurer is obligated to pay any premium taxes on this premium, the Company shall reimburse the Reinsurer; however, the Company shall not be required to pay taxes twice on the same premium.

Article XIX — OFFSET

The Company or the Reinsurer may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvage, or otherwise, due from one party to the other under this Agreement or under any other agreement heretofore or hereafter entered into between the Company and the Reinsurer.

Article XX — INSPECTION OF RECORDS

The Company shall allow the Reinsurer to inspect, at reasonable times, the records of the Company relevant to the business reinsured under this Agreement, including Company files

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concerning claims, losses, or legal proceedings which involve or are likely to involve the Reinsurer. The Reinsurer’s right of inspection shall continue after the termination of this Agreement.

Article XXI — ARBITRATION

All unresolved differences of opinion between the Company and the Reinsurer relating to this Agreement, including its formation and validity, shall be submitted to arbitration consisting of one arbitrator chosen by the Company, one arbitrator chosen by the Reinsurer, and a third arbitrator chosen by the first two arbitrators.

The party demanding arbitration shall communicate its demand for arbitration to the other party by registered or certified mail, identifying the nature of the dispute and the name of its arbitrator, and the other party shall then be bound to name its arbitrator within 30 days after receipt of the demand.

Failure or refusal of the other party to so name its arbitrator shall empower the demanding party to name the second arbitrator. If the first two arbitrators are unable to agree upon a third arbitrator after the second arbitrator is named, each arbitrator shall name three candidates, two of whom shall be declined by the other arbitrator, and the choice shall be made between the two remaining candidates by drawing lots. The arbitrators shall be disinterested and shall be active or retired officers of property or casualty insurance or reinsurance companies.

The arbitrators shall adopt their own rules and procedures and are relieved from judicial formalities. In addition to considering the rules of law and the customs and practices of the insurance and reinsurance business, the arbitrators shall make their award with a view to effecting the intent of this Agreement.

The decision of the majority of the arbitrators shall be in writing and shall be final and binding upon the parties.

Each party shall bear the cost of its own arbitrator and shall jointly and equally bear with the other party the expense of the third arbitrator and other costs of the arbitration. In the event both arbitrators are chosen by one party, the fees of all arbitrators shall be equally divided between the parties.

The arbitration shall be held at the times and places agreed upon by the arbitrators.

Article XXII — INSOLVENCY OF THE COMPANY

In the event of the insolvency of the Company, the reinsurance proceeds will be paid to the Company or the liquidator, with reasonable provision for verification, on the basis of the claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or part of the claim, except as otherwise specified in the statutes of any state having jurisdiction of the insolvency proceedings or except where the Agreement, or other written agreement, specifically provides another payee of such reinsurance in the event of insolvency.

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The Reinsurer shall be given written notice of the pendency of each claim against the Company on the policy(ies) reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim and to interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defenses which it may deem available to the Company or its liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

Article XXIII — ENTIRE AGREEMENT

This Agreement constitutes the entire Agreement between the parties with respect to the business reinsured hereunder. Any change or modification to this Agreement shall be made by written amendment to this Agreement and signed by the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate.

this 1^ST day of August, 2008.

PHILADELPHIA INDEMNITY INSURANCE
COMPANY
PHILADELPHIA INSURANCE COMPANY
 

/s/ Christopher J. Maguire  

EVP & COO 

Title 

Attest: /s/ William A. McKenna           

and this 28 day of July, 2008.

GENERAL REINSURANCE CORPORATION
 

/s/ Andrew Castro 

Vice President 

Title 

Attest: /s/ Lavren McDermott           

Agreement No. P304
GENERAL REINSURANCE CORPORATION

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APPENDIX A

Attached to and made a part of
AGREEMENT NO. P304

EXCLUDED KEYS AND ISLANDS

ALABAMA:

     Aux Herbes Island
     Dauphin island

FLORIDA:

     Amelia Island
     Anclote Island
     Anna Marie Island
     Big Pine Key
     Big Torch Key
     Bush Key
     Cabbage Key
     Captiva Island
     Caladesi Island
     Casey Key
     Cayo Costa Island
     Cedar Key
     Coquina Key
     Crooked Key
     Cudjoe Key
     Elliott Key
     Estero Island
     Gasparilla Island
     Hog Island
     Honeymoon Island
     Hutchinson Island
     J.N. Ding Darling NWR
     Johnston Key
     Jupiter Island
     Key Biscayne
     Key Largo
     Key West
     Long Key
     Longboat Key
     Lower Matecumbe Key
     Marco Island
     Merritt Island
     Meed Keys
     Mullet Key
     No Name Key
     North Captiva Island
     Old Rhodes Key
     Oyster Keys
     Piney Island
     Plantation Key
     St. George Island

     St. Vincent Island
     Sand Keys
     Santa Rosa Island
     Sanibel Island
     Siesta Key
     Snead Island
     Snipe Keys
     Stock Island
     Sugarloaf Key
     Ten Thousands Islands
     Treasure Island
     Upper Matecumbe Key
     Vaca Key

GEORGIA:

     Cumberland Island
     Jekyll Island
     Ossabaw Island
     St. Catherines Island
     St. Simons Island
     Sapelo Island
     Skidaway Island
     Tybee Island
     Wassaw Island

LOUISIANA:

Breton Island
Chandeleur Island
Curlew Island
Freemason Island
Grand Gosier Island
Grand Isle
Grand Terre Island
Isle au Pitre
Marsh Island
North Island
Shell Keys

MISSISSIPPI:

Cat Island
Horn Island
Petit Bois Island
Ship Island

GENERAL REINSURANCE CORPORATION

NORTH CAROLINA:

Cedar Island
Durant Island
Harkers Island
Knotts Island
Mackay Island
Ocean Isle Island
Ocracoke Island
Pea Island
Roanoke Island (Nags Head)
Portsmounth Island
Smith Island

SOUTH CAROLINA:

Cape Island
Capers Island
Cedar Island
Daufuskie Island
Dewees Island
Edisto Island
Fripp Island
Folly Island
Hilton Head Island
Hunting Island
Isle of Palms
John Island
Kiawah Island
Morgan Island
Morris Island
Murphy Island
North Island
Pritchards Island
Seabrook Island
South Island
The Grand Strand

TEXAS:

Brazos Island
Galveston Island
High Island
Matagorda Island Mustang
Island
Padre Island
San Jose Island
South Padre Island

VIRGINIA:

Cedar Island
Cobb Island
Fishermans Island
Hog Island
Metomkin Island
Myrite Island
Parramore Island
Plum Tree Island
Ship Shoal Island
Tangier Island
Wallops Island
Wreck Island

Appendix A
Agreement No. P304
GENERAL REINSURANCE CORPORATION

Page 2 of 2

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE — REINSURANCE — USA

     (1) This Agreement does not cover any loss or liability accruing to the Company directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

     (2) Without in any way restricting the operation of paragraph (1) of this Clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

(i)	Nuclear reactor power plants including all auxiliary property on the site, or
(ii)	Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or
(iii)	Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material”, and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or
(iv)	Installations other than those listed in paragraph (2) (iii) above using substantial quantities of radioactive isotopes or other products of nuclear fission.

     (3) Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate:

(a)	where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or
(b)	where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

     (4) Without in any way restricting the operations of paragraphs (1),(2) and (3) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

     (5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

     (6) The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

     (7) The Company to be sole judge of what constitutes:

(a)	substantial quantities, and
(b)	the extent of installation, plant or site.

Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that:

(a)	all policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.
(b)	with respect to any risk located in Canada policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

N.M.A. 1119

GENERAL REINSURANCE CORPORATION

EX-31.1

Exhibit 31.1

CERTIFICATION

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

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

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

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

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

Signed:	James J. Maguire, Jr.
	Name:	James J. Maguire, Jr.
	Title:	Chief Executive Officer

November 10, 2008

EX-31.2

Exhibit 31.2

CERTIFICATION

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

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

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

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

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

	Signed:	Craig P. Keller
		Name:	Craig P. Keller
November 10, 2008		Title:	Chief Financial Officer

EX-32.1

Exhibit 32.1

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

In connection with the Quarterly Report of Philadelphia Consolidated Holding Corp. (the “Company”) on Form 10-Q for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James J. Maguire, Jr., chief executive officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

James J. Maguire, Jr.
James J. Maguire, Jr.
President and Chief Executive Officer
November 10, 2008

EX-32.2

Exhibit 32.2

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

In connection with the Quarterly Report of Philadelphia Consolidated Holding Corp. (the “Company”) on Form 10-Q for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Craig P. Keller, chief financial officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Craig P. Keller
Craig P. Keller
Chief Financial Officer
November 10, 2008