Philadelphia Consolidated Holding (PHLY) 10-Q/A 2003 Q3 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

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

For the Quarterly Period Ended September 30, 2003

Commission File Number 0-22280

PHILADELPHIA CONSOLIDATED HOLDING CORP.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES:x NO:o

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

YES:x NO:o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 10, 2003.

Common Stock, no par value, 21,982,995 shares outstanding

EXPLANATORY NOTE

The Company has included its restated consolidated balance sheet as of September 30, 2003, restated consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2003 and nine months ended September 30, 2002, restated consolidated statements of changes in shareholders’ equity for the nine months ended September 30, 2003 and the year ended December 31, 2002, and restated consolidated statements of cash flows for the nine months ended September 30, 2003 and September 30, 2002 in this Form 10-Q/A. The restatement records in prior periods a portion of the revenue and net income arising from profit commissions under three reinsurance contracts, one of which originally had been recorded in the second quarter 2002, another of which originally had been recorded in the fourth quarter 2003, and another of which should have been recorded in previous periods. These profit commissions were due to the Company from reinsurers under a 2001 accident year aggregate stop loss reinsurance contract effective during the period January 1, 2001 through December 31, 2001, a quota share reinsurance contract effective during the period April 1, 2003 through December 31, 2003 and an excess catastrophe reinsurance contract effective during the period June 1, 2003 through May 31, 2004. The restatement is more fully described in Part I herein under “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Item 1 of Part I in our consolidated unaudited financial statements and related notes, including, without limitation, in Note 2. Any amounts shown herein as restated are the restated amounts.

This Amendment No. 1 to Quarterly Report on Form 10-Q/A amends Part I, Items 1, 2 and 4 and, Part II, Item 6, of the Company’s previously filed Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 2003 to reflect the aforementioned restatement and related changes. The applicable rules require that each of these Items be entirely restated upon amendment. Items other than those listed above have not been changed and therefore have not been included in this Amendment No. 1 to Quarterly Report on Form 10-Q/A.

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

2

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX

For the Quarterly Period Ended September 30, 2003

Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets – September 30, 2003 (Restated) and December 31, 2002	4
Consolidated Statements of Operations and Comprehensive Income - For the three and nine months ended September 30, 2003 (Restated) and 2002 (Restated)	5
Consolidated Statements of Changes in Shareholders’ Equity - For the nine months ended September 30, 2003 (Restated) and year ended December 31, 2002 (Restated)	6
Consolidated Statements of Cash Flows - For the nine months ended September 30, 2003 (Restated) and 2002 (Restated)	7
Notes to Consolidated Financial Statements	8-16
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-26
Item 4.
Controls and Procedures	27
Part II - Other Information
Item 6.
Exhibits and Reports on Form 8-K	28
Signatures	29
CERTIFICATION OF THE COMPANY'S CHIEF EXECUTIVE OFFICER
CERTIFICATION OF THE COMPANY'S CHIEF FINANCIAL OFFICER
CERTIFICATION OF THE COMPANY'S CEO, SECTION 906
CERTIFICATION OF THE COMPANY'S CFO, SECTION 906

3

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

	As of
	September 30,
	2003
	(Restated)			December 31,
	(Unaudited)			2002
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET (AMORTIZED COST $1,054,193 AND $832,701)	$	1,074,520		$	854,513
EQUITY SECURITIES AT MARKET (COST $78,665 AND $51,257)		86,441			54,346
TOTAL INVESTMENTS		1,160,961			908,859
CASH AND CASH EQUIVALENTS		90,891			42,002
ACCRUED INVESTMENT INCOME		10,512			8,571
PREMIUMS RECEIVABLE		181,861			130,007
PREPAID REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES		275,328			151,352
DEFERRED INCOME TAXES		13,252			7,541
DEFERRED ACQUISITION COSTS		54,161			61,272
PROPERTY AND EQUIPMENT, NET		15,182			12,794
GOODWILL		25,724			25,724
OTHER ASSETS		14,655			10,212
TOTAL ASSETS	$	1,842,527		$	1,358,334
LIABILITIES AND SHAREHOLDERS’ EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES	$	593,527		$	445,548
UNEARNED PREMIUMS		431,791			306,093
TOTAL POLICY LIABILITIES AND ACCRUALS		1,025,318			751,641
FUNDS HELD PAYABLE TO REINSURER		90,587			—
LOANS PAYABLE		49,750			39,113
PREMIUMS PAYABLE		32,489			33,553
PAYABLE FOR SECURITIES PURCHASE		46,690			6,100
OTHER LIABILITIES		72,567			50,104
TOTAL LIABILITIES		1,317,401			880,511
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES AUTHORIZED, NONE ISSUED AND OUTSTANDING		—			—
COMMON STOCK, NO PAR VALUE, 100,000,000 SHARES AUTHORIZED, 21,984,492 AND 21,868,877 SHARES ISSUED AND OUTSTANDING		280,286			276,945
NOTES RECEIVABLE FROM SHAREHOLDERS		(6,197	)		(6,407	)
ACCUMULATED OTHER COMPREHENSIVE INCOME		18,267			16,185
RETAINED EARNINGS		232,770			191,100
TOTAL SHAREHOLDERS’ EQUITY		525,126			477,823
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,842,527		$	1,358,334

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

4

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,
	2003						2003			2002
	(Restated)			2002			(Restated)			(Restated)
REVENUE:
NET EARNED PREMIUMS	$	146,676		$	106,146		$	418,387		$	292,199
NET INVESTMENT INCOME		9,173			9,497			28,348			27,727
NET REALIZED INVESTMENT GAIN (LOSS)		474			199			(1,309	)		(2,935	)
OTHER INCOME		1,988			419			3,689			435
TOTAL REVENUE		158,311			116,261			449,115			317,426
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES		100,645			114,325			328,023			252,003
NET REINSURANCE RECOVERIES		(21,240	)		(35,976	)		(65,232	)		(59,773	)
NET LOSS AND LOSS ADJUSTMENT EXPENSES		79,405			78,349			262,791			192,230
ACQUISITION COSTS AND OTHER UNDERWRITING EXPENSES		41,542			32,343			120,120			91,221
OTHER OPERATING EXPENSES		2,668			1,632			5,974			4,570
TOTAL LOSSES AND EXPENSES		123,615			112,324			388,885			288,021
INCOME BEFORE INCOME TAXES		34,696			3,937			60,230			29,405
INCOME TAX EXPENSE (BENEFIT):
CURRENT		10,403			2,044			25,392			14,413
DEFERRED		718			(999	)		(6,832	)		(5,278	)
TOTAL INCOME TAX EXPENSE		11,121			1,045			18,560			9,135
NET INCOME	$	23,575		$	2,892		$	41,670		$	20,270
OTHER COMPREHENSIVE INCOME, NET OF TAX:
HOLDING GAIN (LOSS) ARISING DURING PERIOD		(1,568	)		6,364			1,231			7,639
RECLASSIFICATION ADJUSTMENT		(308	)		(129	)		851			1,908
OTHER COMPREHENSIVE INCOME (LOSS)		(1,876	)		6,235			2,082			9,547
COMPREHENSIVE INCOME	$	21,699		$	9,127		$	43,752		$	29,817
PER AVERAGE SHARE DATA:
BASIC EARNINGS PER SHARE	$	1.08		$	0.13		$	1.90		$	0.94
DILUTED EARNINGS PER SHARE	$	1.04		$	0.13		$	1.85		$	0.91
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING		21,913,053			21,625,799			21,879,748			21,577,670
WEIGHTED-AVERAGE SHARE EQUIVALENTS OUTSTANDING		787,627			636,828			681,716			716,017
WEIGHTED-AVERAGE SHARES AND SHARE EQUIVALENTS OUTSTANDING		22,700,680			22,262,627			22,561,464			22,293,687

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

5

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

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

	For the Nine Months
	Ended			For the Year Ended
	September 30, 2003			December 31,
	(Restated)			2002
	(Unaudited)			(Restated)
COMMON SHARES:
BALANCE AT BEGINNING OF YEAR		21,868,877			21,509,723
EXERCISE OF EMPLOYEE STOCK OPTIONS		75,125			107,000
ISSUANCES OF SHARES PURSUANT TO STOCK PURCHASE PLANS, NET		40,490			252,154
BALANCE AT END OF PERIOD		21,984,492			21,868,877
TREASURY SHARES:
BALANCE AT BEGINNING OF YEAR		—			—
SHARES REPURCHASED PURSUANT TO AUTHORIZATION		10,000			75,000
EXERCISE OF EMPLOYEE STOCK OPTIONS		(6,500	)		—
ISSUANCES OF SHARES PURSUANT TO STOCK PURCHASE PLANS		(3,500	)		(75,000	)
BALANCE AT END OF PERIOD		—			—
COMMON STOCK:
BALANCE AT BEGINNING OF YEAR	$	276,945		$	268,509
EXERCISE OF EMPLOYEE STOCK OPTIONS		1,991			2,115
ISSUANCES OF SHARES PURSUANT TO STOCK PURCHASE PLANS		1,350			6,321
BALANCE AT END OF PERIOD		280,286			276,945
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF YEAR		(6,407	)		(3,373	)
NOTES RECEIVABLE ISSUED PURSUANT TO EMPLOYEE STOCK PURCHASE PLANS		(1,154	)		(4,017	)
COLLECTION OF NOTES RECEIVABLE		1,364			983
BALANCE AT END OF PERIOD		(6,197	)		(6,407	)
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED INCOME TAXES:
BALANCE AT BEGINNING OF YEAR		16,185			8,461
OTHER COMPREHENSIVE INCOME, NET OF TAXES		2,082			7,724
BALANCE AT END OF PERIOD		18,267			16,185
RETAINED EARNINGS:
BALANCE AT BEGINNING OF YEAR		191,100			157,347
NET INCOME		41,670			33,753
BALANCE AT END OF PERIOD		232,770			191,100
COMMON STOCK HELD IN TREASURY:
BALANCE AT BEGINNING OF YEAR		—			—
EXERCISE OF EMPLOYEE STOCK OPTIONS		94			—
COMMON SHARES REPURCHASED		(300	)		(2,023	)
ISSUANCES OF SHARES PURSUANT TO STOCK PURCHASE PLANS		206			2,023
BALANCE AT END OF PERIOD		—			—
TOTAL SHAREHOLDERS’ EQUITY	$	525,126		$	477,823

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

6

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

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

	For the Nine Months Ended September 30,
	2003			2002
	(Restated)			(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME	$	41,670		$	20,270
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT LOSS		1,309			2,935
DEPRECIATION AND AMORTIZATION EXPENSE		6,148			1,345
DEFERRED INCOME TAX BENEFIT		(6,832	)		(5,278	)
CHANGE IN PREMIUMS RECEIVABLE		(51,854	)		(36,720	)
CHANGE IN PREPAID REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES, NET OF FUNDS HELD PAYABLE TO REINSURER		(33,389	)		(35,759	)
CHANGE IN OTHER RECEIVABLES		(1,941	)		(1,013	)
CHANGE IN INCOME TAXES PAYABLE		636			(5,520	)
CHANGE IN DEFERRED ACQUISITION COSTS		7,111			(18,686	)
CHANGE IN OTHER ASSETS		(4,750	)		3,006
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES		147,979			96,769
CHANGE IN UNEARNED PREMIUMS		125,698			108,443
CHANGE IN OTHER LIABILITIES		20,763			32,490
TAX BENEFIT FROM EXERCISE OF EMPLOYEE STOCK OPTIONS		495			1,251
NET CASH PROVIDED BY OPERATING ACTIVITIES		253,043			163,533
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES		71,674			188,746
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES		162,032			82,793
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES		10,936			13,898
COST OF FIXED MATURITIES ACQUIRED		(419,264	)		(422,182	)
COST OF EQUITY SECURITIES ACQUIRED		(38,593	)		(26,703	)
PURCHASE OF PROPERTY AND EQUIPMENT, NET		(4,632	)		(2,484	)
NET CASH USED BY INVESTING ACTIVITIES		(217,847	)		(165,932	)
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENTS ON LOANS PAYABLE		(34,245	)		(29,842	)
PROCEEDS FROM LOANS PAYABLE		44,882			29,381
PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS.		1,590			864
PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE		1,364			617
PROCEEDS FROM SHARES ISSUED PURSUANT TO STOCK PURCHASE PLANS		402			410
COST OF COMMON STOCK REPURCHASED		(300	)		—
NET CASH PROVIDED BY FINANCING ACTIVITIES		13,693			1,430
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		48,889			(969	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		42,002			49,910
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	90,891		$	48,941
CASH PAID DURING THE PERIOD FOR:
INCOME TAXES	$	23,635		$	18,412
INTEREST	$	487		$	466
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR NOTES RECEIVABLE	$	1,154		$	(84	)

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

7

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

1.	Basis of Presentation
	The consolidated financial statements as of and for the nine months ended September 30, 2003 and 2002 are unaudited, but in the opinion of management have been prepared on the same basis as the annual audited consolidated financial statements and reflect all adjustments (consisting of normal recurring adjustments and accruals and adjustments necessary to reflect the restatement discussed in Note 2), necessary for a fair statement of the information set forth therein. The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the operating results to be expected for the full year or any other period. Certain prior years’ amounts have been reclassified for comparative purposes.
	The consolidated financial statements for the periods ended September 30, 2003 and September 30, 2002 have been restated as further described in Note 2.
	These financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2002.
2.	Restatement of Financial Statements
	The Company’s previously issued consolidated balance sheet as of September 30, 2003, consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2003 and nine months ended September 30, 2002, changes in shareholders’ equity for the nine months ended September 30, 2003 and year ended December 31, 2002, and cash flows for the nine months ended September 30, 2003 and September 30, 2002 have been restated to include a portion of the revenue and net income in prior periods arising from profit commissions under three reinsurance contracts. The revenue and net income of one of the contracts had originally been recorded in the second quarter of 2002 and portions of such revenue and net income should have been recorded during each quarter of 2001. The revenue and net income of another contract had originally been fully recorded in the fourth quarter 2003 although portions of such revenue and net income should have been recorded in the quarters ended June 30, 2003, September 30, 2003 and March 31, 2004. Portions of the revenue and net income for the other contract should have been recorded in the quarters ended June 30, 2003, September 30, 2003, December 31, 2003 and March 31, 2004. These profit commissions were due to the Company from reinsurers under a 2001 aggregate stop loss reinsurance contact effective during the period January 1, 2001 through December 31, 2001, a quota share reinsurance contract effective during the period April 1, 2003 through December 31, 2003 and an excess catastrophe reinsurance contract effective during the period June 1, 2003 through May 31, 2004.
	The decision to restate resulted from an analysis of the accounting effect at the expiration of one of these reinsurance contracts. Based upon the provisions of Emerging Issues Task Force No. 93-6, “Accounting for Multiple – Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises,” the Company determined that under generally acceptable accounting principles there was an error in the prior period financial statements and it should have been accruing a profit commission for each period since the inception of the contracts based on the actual experience of the underlying business. As a result, the Company has restated its aforementioned previously issued financial statements to include a portion of the revenue and net income arising from the profit commissions in each of the prior quarters that the contracts were in effect.

8

The effect of this restatement on the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2003 and for the nine months ended September 30, 2002 and on the consolidated balance sheet as of September 30, 2003 is shown in the tables below (in thousands, except per share amounts):

Consolidated Statements of Operations and Comprehensive Income Data

	Three Months Ended September 30, 2003							Nine Months Ended September 30, 2003
	As							As
	Previously			Restatement		As		Previously			Restatement		As
	Reported			Adjustment		Restated		Reported			Adjustment		Restated
Net earned premiums	$	142,688		$	3,988	$	146,676	$	412,499		$	5,888	$	418,387
Total revenue	$	154,323		$	3,988	$	158,311	$	443,227		$	5,888	$	449,115
Income before income taxes	$	30,708		$	3,988	$	34,696	$	54,342		$	5,888	$	60,230
Income tax expense: deferred	$	(678	)	$	1,396	$	718	$	(8,893	)	$	2,061	$	(6,832	)
Total income tax expense	$	9,725		$	1,396	$	11,121	$	16,499		$	2,061	$	18,560
Net income	$	20,983		$	2,592	$	23,575	$	37,843		$	3,827	$	41,670
Basic earnings per share	$	0.96		$	0.12	$	1.08	$	1.73		$	0.17	$	1.90
Diluted earnings per share	$	0.92		$	0.12	$	1.04	$	1.68		$	0.17	$	1.85

	Nine Months Ended September 30, 2002
	As
	Previously			Restatement			As
	Reported			Adjustment			Restated
Net earned premiums	$	295,663		$	(3,464	)	$	292,199
Total revenue	$	320,890		$	(3,464	)	$	317,426
Income before income taxes	$	32,869		$	(3,464	)	$	29,405
Income tax expense: deferred	$	(4,066	)	$	(1,212	)	$	(5,278	)
Total income tax expense	$	10,347		$	(1,212	)	$	9,135
Net income	$	22,522		$	(2,252	)	$	20,270
Basic earnings per share	$	1.04		$	(0.10	)	$	0.94
Diluted earnings per share	$	1.01		$	(0.10	)	$	0.91

Consolidated Balance Sheet Data

	As of September 30, 2003
	As
	Previously		Restatement			As
	Reported		Adjustment			Restated
Deferred income taxes	$	15,313	$	(2,061	)	$	13,252
Other assets	$	8,767	$	5,888		$	14,655
Total assets	$	1,838,700	$	3,827		$	1,842,527
Retained earnings	$	228,943	$	3,827		$	232,770
Total shareholders’ equity	$	521,299	$	3,827		$	525,126
Total liabilities and shareholders’ equity	$	1,838,700	$	3,827		$	1,842,527

3.	Investments
	The carrying amounts for the Company’s investments approximates their estimated fair value. The Company measures the fair value of investments based upon quoted market prices or by obtaining quotes from dealers. At September 30, 2003, the Company held no derivative financial instruments or embedded financial derivatives.

9

	The Company performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed for such securities, except interests in securitized assets, meeting predetermined thresholds to determine whether a decline in fair value below a security’s cost basis is other than temporary. If the Company determines a decline in value to be other than temporary, the cost basis of the security is written down to its fair value with the amount of the write down included in earnings as a realized loss in the period the impairment arose. Non-cash realized investment losses recorded for the three and nine months ended September 30, 2003 were $0 million and $0.9 million, respectively, as a result of the Company’s other than temporary impairment evaluation. There were no non-cash realized investment losses recorded for the three and nine months ended September 30, 2002 as a result of the Company’s other than temporary impairment evaluation.
	The Company’s impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. Non-cash realized investment losses recorded for the three and nine months ended September 30, 2003 and 2002 were $0.4 million and $0.3 million, respectively, and $2.6 million and $1.5 million, respectively, as a result of the Company’s impairment evaluation for investments in securitized assets.
4.	Restricted Assets
	The Insurance Subsidiaries have investments, principally U.S. Treasury securities, on deposit with the various states in which they are licensed insurers. At September, 30, 2003 and December 31, 2002, the carrying value of the securities on deposit totaled $17.0 million and $13.5 million, respectively.
	Additionally, the Insurance Subsidiaries have investments, principally asset backed securities, which collateralize the borrowings from the Federal Home Loan Bank of Pittsburgh, see Note 7. The carrying value of these investments was $62.2 million and $49.2 million as of September 30, 2003 and December 31, 2002, respectively.
5.	Goodwill
	The carrying amount of goodwill is subject to an annual impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). As a result of the impairment analysis, no change in the carrying amount of goodwill was recorded by the Company for the year ended December 31, 2002. No events have occurred or circumstances have arisen subsequent to December 31, 2002 that would necessitate the Company to perform an interim impairment test. Consequently no change in the carrying amount of goodwill has been recorded for the nine months ended September 30, 2003.
6.	Liability for Unpaid Loss and Loss Adjustment Expenses
	The liability for unpaid loss and loss adjustment expenses reflects the Company’s best estimate for future amounts needed to pay losses and related settlement expenses with respect to insured events. Estimating the ultimate claims liability is necessarily a complex and judgmental process, inasmuch as the amounts are based on management’s informed estimates and judgments using data currently available. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid loss and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as legal, social, and economic developments. As additional experience and data become available the Company’s estimate for the liability for unpaid loss and loss adjustment expenses is revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at September 30, 2003, the related adjustments could have a material adverse impact on the Company’s results of operations.

10

	During the second quarter of 2003, the Company increased the estimated gross and net loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2002 by $33.0 million. As of September 30, 2003 the Company has estimated a total liability for unpaid loss and loss adjustment expenses for these policies of $51.5 million ($51.3 million net of reinsurance) and approximately 48,000 leases were outstanding under the Company’s residual value policies. As of June 30, 2003 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for these policies of $59.8 million ($57.9 million net of reinsurance) and approximately 61,000 leases were outstanding under the residual value policies. The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination, which can be up to five years from lease inception. Adverse trends further deteriorated in both frequency and severity on leases expiring in 2003. As part of the Company’s monitoring and evaluation process, a consulting firm was engaged during the second quarter of 2003 to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the result of the subsequent evaluation by the Company and changes in the Company’s assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this deterioration to the following factors that led to a softening of prices in the used car market subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and other incentives which increased new car sales and the volume of trade-ins, daily rental units being sold into the market earlier and in greater numbers than expected further adding to the over supply of used cars; and the overall general economic conditions.
	During the second quarter of 2003, the Company also decreased the gross and net liability for unpaid loss and loss adjustment expenses for accident year 2002, principally in the property line of its commercial package products, by approximately $9.0 million due to better than expected loss experience.
7.	Funds Held Payable To Reinsurer
	Effective April 1, 2003, the Company entered into a quota share reinsurance agreement. Under this agreement, the Company ceded 22% of its net written premiums and loss and loss adjustment expenses for substantially all of the Company’s lines of business on policies effective April 1, 2003 through December 31, 2003. The Company receives a provisional commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium due the reinsurers reduced by the reinsurers’ expense allowance, and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. In addition, the agreement provides that a profit commission will be paid to the Company upon commutation equal to the positive balance in the Funds Held Payable to Reinsurer account.
	Pursuant to the quota share reinsurance agreement, the Company ceded $55.4 million and $159.0 million of net written premiums, $40.2 million and $74.5 million of net earned premiums, $21.3 million and $40.3 million in net loss and loss adjustment expenses, and earned $16.3 million and $29.6 million in ceding commissions, for the three and nine months ended September 30, 2003, respectively. In addition, the interest credit (expense), which is included in net investment income, for the three and nine months ended September 30, 2003 was $0.8 million and $1.3 million, respectively. The Company has also accrued a profit commission based upon the experience of the underlying business ceded to this reinsurance agreement, in the amounts of $1.8 million and $3.0 million for the three and nine months ended September 30, 2003, respectively. The profit commission reduces ceded written and earned premiums.
8.	Loans Payable
	As of September 30, 2003, the Company had aggregate borrowings of $49.7 million from the Federal Home Loan Bank. These borrowings bear interest at adjusted LIBOR and mature twelve months from inception. The proceeds from these borrowings are invested in collateralized mortgage obligation and asset backed securities to achieve a positive spread between the rate of interest on these securities and the borrowing rates.

11

9.	Earnings Per Share
	Earnings per common share has been calculated by dividing net income for the period by the weighted average number of common shares and common share equivalents outstanding during the period. Following is the computation of earnings per share for the three and nine months ended September 30, 2003 and 2002, respectively (in thousands, except per share data):

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2003				2003		2002
	(Restated)		2002		(Restated)		(Restated)
Weighted-Average Common Shares Outstanding		21,913		21,626		21,880		21,578
Weighted-Average Share Equivalents Outstanding		788		637		681		716
Weighted-Average Shares and Share Equivalents Outstanding		22,701		22,263		22,561		22,294
Net Income	$	23,575	$	2,892	$	41,670	$	20,270
Basic Earnings per Share	$	1.08	$	0.13	$	1.90	$	0.94
Diluted Earnings per Share	$	1.04	$	0.13	$	1.85	$	0.91

10.	Income Taxes
	The effective tax rate differs from the 35% marginal tax rate principally as a result of tax-exempt interest income, the dividend received deduction and other differences in the recognition of revenues and expenses for tax and financial reporting purposes.
11.	Stock-Based Compensation
	Stock-based compensation plans are accounted for under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense is recognized for fixed stock option grants and the Company’s stock purchase plans. The following table illustrates the effect on net income and earnings per share as if the provisions of statement of Financial Accounting Standards (SFAS) No. 123 (as amended by SFAS No. 148), “Accounting for Stock-Based Compensation,” had been applied for the three and nine months ended September 30, 2003 and 2002, respectively:

(In thousands, except per share data)	Three Months Ended Sept. 30,				Nine Months Ended Sept. 30,
	2003				2003		2002
	(Restated)		2002		(Restated)		(Restated)
Net Income As Reported	$	23,575	$	2,892	$	41,670	$	20,270
Assumed Stock Compensation Cost		783		609		1,510		1,114
Pro Forma Net Income	$	22,792	$	2,283	$	40,160	$	19,156
Basic Earnings Per Share:
As Reported	$	1.08	$	0.13	$	1.90	$	0.94
Pro Forma	$	1.04	$	0.11	$	1.83	$	0.89
Diluted Earnings Per Share:
As Reported	$	1.04	$	0.13	$	1.85	$	0.91
Pro Forma	$	1.01	$	0.10	$	1.78	$	0.86

12

12.	Commitments and Contingencies
	On April 30, 2002, U.S. Bank, N.A. d/b/a Firstar Bank (“Firstar”), a bank to which one of the Company’s insurance subsidiaries, Philadelphia Indemnity Insurance Company (“PIIC”), issued insurance coverages, filed a complaint against PIIC in the United States District Court for the Southern District of Ohio (Western Division). This matter was reported in Part II, Item 1 of the Company’s Form 10-Q for the period ended June 30, 2002. Firstar subsequently has requested that the court permit Firstar to amend its complaint against PIIC, which amended complaint would add a bad faith claim for compensatory damages and punitive damages in three times the amount of any compensatory damage award. Firstar’s original complaint indicated that its projected damage estimates exceed $75.0 million. The proposed amended complaint does not specify the amount of Firstar’s alleged or projected damages. The Court has not ruled on Firstar’s request to amend its complaint.
	On July 30, 2003, PIIC requested the court to allow PIIC to file a counterclaim to Firstar’s complaint against PIIC seeking money damages and equitable relief relating to certain residual value insurance policies issued by PIIC to Firstar for policy years 1994, 1995, 1996, 1997 and 1998, as a result of material misrepresentations by Firstar in its applications for residual value insurance coverage. The counterclaim seeks money damages representing the amount of claim payments to date under the policies, less the amount of premium paid by Firstar, and a declaratory judgment that PIIC has no obligation to pay pending or future claims arising under the policies. The Court has not ruled on PIIC’s request to file a counterclaim to Firstar’s complaint.
	The Company has not recorded a litigation reserve with respect to the Firstar litigation.
	The Company is subject to routine legal proceedings in connection with its property and casualty insurance business. The Company is not involved in any other pending or threatened legal or administrative proceedings which management believes can reasonably be expected to have a material adverse effect on the Company’s financial condition or results of operations.
13.	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, 2003 and 2002 was ($0.8) million and $3.4 million, respectively and $0.7 million and $4.1 million, respectively. The related tax effect of Reclassification Adjustments for the three and nine months ended September 30, 2003 and 2002 was ($0.2) million and ($0.1) million, respectively and $0.5 million and $1.0 million, respectively.
14.	Segment Information
	The Company’s operations are classified into three reportable business segments which are organized around its three underwriting divisions: The Commercial Lines Underwriting Group, which has underwriting responsibility for the Commercial Automobile and Commercial Property and Commercial multi-peril package insurance products; The Specialty Lines Underwriting Group, which has underwriting responsibility for the professional liability insurance products; and The Personal Lines Group, which designs, markets and underwrites personal property and casualty insurance products for the Manufactured Housing and Homeowners markets. Each business segment’s responsibilities include: pricing, managing the risk selection process and monitoring the loss ratios by product and insured. The reportable segments operate solely within the United States and have not been aggregated.
	The segments follow the same accounting policies used for the Company’s consolidated financial statements as described in the summary of significant accounting policies. Management evaluates a segment’s performance based upon premium production and the associated loss experience which includes paid losses, an amount determined on the basis of claim adjusters’ evaluation with respect to insured events that have occurred and an amount for losses incurred that have not been reported. Investments and investment performance including investment income and net realized investment gain (loss), acquisition costs and other underwriting expenses including commissions, premium taxes and other acquisition costs, and other operating expenses are managed at

13

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 nine and three months ended September 30, 2003 and 2002. Corporate information is included to reconcile segment data to the consolidated financial statements (in thousands):

14

	Nine Months Ended,
	Commercial		Specialty		Personal
	Lines		Lines		Lines		Corporate			Total
September 30, 2003 (Restated):
Gross Written Premiums	$	512,871	$	106,818	$	70,926	$	—		$	690,615
Net Written Premiums	$	354,297	$	73,132	$	24,687	$	—		$	452,116
Revenue:
Net Earned Premiums	$	315,010	$	76,981	$	26,396	$	—		$	418,387
Net Investment Income		—		—		—		28,348			28,348
Net Realized Investment Loss		—		—		—		(1,309	)		(1,309	)
Other Income		—		—		3,361		328			3,689
Total Revenue		315,010		76,981		29,757		27,367			449,115
Losses and Expenses:
Net Loss and Loss Adjustment Expenses		202,357		45,941		14,493		—			262,791
Acquisition Costs and Other Underwriting Expenses		—		—		—		120,120			120,120
Other Operating Expenses		—		—		2,422		3,552			5,974
Total Losses and Expenses		202,357		45,941		16,915		123,672			388,885
Income Before Income Taxes		112,653		31,040		12,842		(96,305	)		60,230
Total Income Tax Expense		—		—		—		18,560			18,560
Net Income	$	112,653	$	31,040	$	12,842	$	(114,865	)	$	41,670
Total Assets	$	—	$	—	$	283,625	$	1,558,902		$	1,842,527
September 30, 2002 (Restated):
Gross Written Premiums	$	360,169	$	82,427	$	65,125	$	—		$	507,721
Net Written Premiums	$	285,533	$	75,825	$	31,270	$	—		$	392,628
Revenue:
Net Earned Premiums	$	206,132	$	60,357	$	25,710	$	—		$	292,199
Net Investment Income		—		—		—		27,727			27,727
Net Realized Investment Loss		—		—		—		(2,935	)		(2,935	)
Other Income		—		—		1,294		(859	)		435
Total Revenue		206,132		60,357		27,004		23,933			317,426
Losses and Expenses:
Net Loss and Loss Adjustment Expenses		147,723		30,551		13,956		—			192,230
Acquisition Costs and Other Underwriting Expenses		—		—		—		91,221			91,221
Other Operating Expenses		—		—		140		4,430			4,570
Total Losses and Expenses		147,723		30,551		14,096		95,651			288,021
Income Before Income Taxes		58,409		29,806		12,908		(71,718	)		29,405
Total Income Tax Expense		—		—		—		9,135			9,135
Net Income	$	58,409	$	29,806	$	12,908	$	(80,853	)	$	20,270
Total Assets	$	—	$	—	$	215,058	$	1,081,182		$	1,296,240

15

	Three Months Ended,
	Commercial		Specialty		Personal
	Lines		Lines		Lines		Corporate			Total
September 30, 2003 (Restated):
Gross Written Premiums	$	231,169	$	35,071	$	20,186	$	—		$	286,426
Net Written Premiums	$	168,262	$	25,765	$	6,338	$	—		$	200,365
Revenue:
Net Earned Premiums	$	114,191	$	24,418	$	8,067	$	—		$	146,676
Net Investment Income		—		—		—		9,173			9,173
Net Realized Investment Gain		—		—		—		474			474
Other Income		—		—		1,807		181			1,988
Total Revenue		114,191		24,418		9,874		9,828			158,311
Losses and Expenses:
Net Loss and Loss Adjustment Expenses		61,277		13,948		4,180		—			79,405
Acquisition Costs and Other Underwriting Expenses		—		—		—		41,542			41,542
Other Operating Expenses		—		—		1,364		1,304			2,668
Total Losses and Expenses		61,277		13,948		5,544		42,846			123,615
Income Before Income Taxes		52,914		10,470		4,330		(33,018	)		34,696
Total Income Tax Expense		—		—		—		11,121			11,121
Net Income	$	52,914	$	10,470	$	4,330	$	(44,139	)	$	23,575
Total Assets	$	—	$	—	$	283,507	$	1,558,902		$	1,842,527
September 30, 2002:
Gross Written Premiums	$	161,139	$	30,103	$	19,232	$	—		$	210,474
Net Written Premiums	$	126,595	$	28,137	$	6,501	$	—		$	161,233
Revenue:
Net Earned Premiums	$	77,051	$	21,748	$	7,347	$	—		$	106,146
Net Investment Income		—		—		—		9,497			9,497
Net Realized Investment Gain		—		—		—		199			199
Other Income		—		—		372		47			419
Total Revenue		77,051		21,748		7,719		9,743			116,261
Losses and Expenses:
Net Loss and Loss Adjustment Expenses		66,457		7,398		4,494		—			78,349
Acquisition Costs and Other Underwriting Expenses		—		—		—		32,343			32,343
Other Operating Expenses		—		—		78		1,554			1,632
Total Losses and Expenses		66,457		7,398		4,572		33,897			112,324
Income Before Income Taxes		10,594		14,350		3,147		(24,154	)		3,937
Total Income Tax Expense		—		—		—		1,045			1,045
Net Income	$	10,594	$	14,350	$	3,147	$	(25,199	)	$	2,892
Total Assets	$	—	$	—	$	215,058	$	1,081,182		$	1,296,240

16

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

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

Restatement of Financial Statements

The Company’s previously issued financial statements for the quarterly periods ended September 30, 2003 and September 30, 2002 have been restated to record a portion of the revenue and net income arising from profit commissions under three reinsurance contracts, one of which had originally been recorded in the second quarter 2002, another of which had originally been recorded in the fourth quarter 2003 and another of which should have been recorded in previous periods. These profit commissions were due to the Company from reinsurers under a 2001 aggregate stop loss reinsurance contract effective during the period January 1, 2001 through December 31, 2001, a quota share reinsurance contract effective during the period April 1, 2003 through December 31, 2003, and an excess catastrophe reinsurance contract effective during the period June 1, 2003 through May 31, 2004. See Note 2 of Notes to Consolidated Financial Statements for more information.

The impact of this restatement on the previously reported results of operations for the three and nine months ended September 30, 2003 was to increase net income by $2.6 million ($0.12 diluted earnings per share) and $3.8 million ($0.17 diluted earnings per share), respectively. The impact of this restatement on the previously reported results of operations for the nine months ended September 30, 2002 was to decrease net income by $2.3 million ($0.10 diluted earnings per share). The restatement also resulted in an increase to net earned premium in the amount of $4.0 million and $5.9 million for the three and nine months ended September 30, 2003, respectively, and a decrease to net earned premium in the amount of $3.5 million for the nine months ended September 30, 2002. References herein to those fiscal periods that have been restated are to the restated amounts.

General

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

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

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

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

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

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

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

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

17

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

• weather conditions and may include terrorist events. It is possible that a catastrophic event could adversely impact profitability.

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

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

Investments

The Company’s investment objective is the realization of relatively high levels of investment income while generating competitive after-tax total rates of return within a prudent level of risk and within the constraints of maintaining adequate securities in amount and duration to meet cash requirements of current operations and long-term liabilities, as well as maintaining and improving the Company’s A.M. Best rating. The Company utilizes external independent professional investment managers for its fixed maturity and equity investments. These investments consist of diversified issuers and issues, and as of September 30, 2003, approximately 86.2% and 6.4% of the total invested assets (total investments plus cash equivalents) on a cost basis consisted of investments in fixed maturity and equity securities, respectively, versus 90.2% and 5.6%, respectively, at December 31, 2002.

During 2003, the relative percentage investment in tax-exempt fixed maturity securities versus taxable fixed maturity securities increased due to the Company taking advantage of the more favorable after-tax yields. As of September 30, 2003, on a cost basis, investment grade tax-exempt fixed maturity securities represented 36.4% of the total invested assets, compared to 30.3% as December 31, 2002.

Collateralized mortgage and asset backed securities, on a cost basis, amounted to $63.7 million and $357.3 million, respectively, as of September 30, 2003, and $89.2 and $284.1, respectively, as of December 31, 2002. The collateralized mortgage and asset backed investments are amortizing securities possessing favorable prepayment and/or extension risk profiles.

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

Additionally, the Company conducts its impairment evaluation and recognition for interests in securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board (“EITF”). Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is

18

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

included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $0.4 million and $0.3 million, respectively, and $2.6 million and $1.5 million, respectively, for the three and nine months ended September 30, 2003 and 2002, respectively. These non-cash realized investment losses were primarily due to investments in collateralized bond obligations as a result of the non investment grade default rates which remain higher than historic averages.

The Company’s fixed maturity portfolio amounted to $1,074.5 million and $854.5 million, as of September 30, 2003 and December 31, 2002, respectively, of which 98.3% of the portfolio is comprised of investment grade securities. Since the fourth quarter of 2001, U.S. investment grade securities have experienced varying price and ratings volatility, having been affected by the uncertain economic climate corporate governance issues, and the subsequent stream of corporate scandals and high profile bankruptcies. While these circumstances have the potential to impact investment grade securities, the high quality of the Company’s overall “AA+” rated fixed maturity portfolio have mitigated potential volatility. The Company had fixed maturity investments with unrealized losses amounting to $12.7 million and $9.2 million as of September 30, 2003 and December 31, 2002, respectively. Of these amounts, interests in securitized assets had unrealized losses amounting to $10.6 million and $7.3 million as of September 30, 2003 and December 31, 2002, respectively, and investments in aircraft collateralized Enhanced Equipment Trust Certificates (EETCs) had unrealized losses amounting to $0.7 and $1.3 million as of September 30, 2003 and December 31, 2002, respectively. As discussed above, the Company’s impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the EITF. With respect to the EETCs, these investments are current on interest and sinking fund payments, and are subjected to a quarterly impairment review which includes performing a liquidation collateral analysis that incorporates various stress scenarios impacting the security’s implied loan-to-value levels.

The following table identifies the period of time securities with an unrealized loss at September 30, 2003 have continuously been in an unrealized loss position. Included in the amounts shown in the table are $8.8 million of unrealized losses due to non-investment grade fixed maturity securities having a fair value of $17.8 million. No issuer of securities or industry represents more than 4.3% and 10.7%, respectively, of the total estimated fair value, or 19.0% and 37.4%, respectively, of the total gross unrealized loss included in the table below. As previously discussed, there are certain risks and uncertainties inherent in the Company’s impairment methodology such as the financial condition of specific industry sectors and resultant effect on underlying security collateral values. Should the Company subsequently determine a decline in the fair value below the cost basis to be other than temporary, the security would be written down to its fair value and the difference would be included in earnings as a realized loss for the period such determination was made.

	Gross Unrealized Losses
	(in millions)
	Fixed Maturities
Continuous	Available for Sale				Total
time in unrealized	Excluding Interests		Interests in		Fixed Maturities
loss position	in Securitized Assets		Securitized Assets		Available for Sale		Equity Securities		Total Investments
0 – 3 months	$	0.2	$	0.4	$	0.6	$	0.3	$	0.9
4 – 6 months		0.6		1.3		1.9		0.1		2.0
7 – 9 months		—		—		—		0.4		0.4
10 – 12 months		—		—		—		—		—
13 – 18 months		—		3.2		3.2		—		3.2
19 – 24 months		1.3		2.6		3.9		—		3.9
> 24 months		—		3.1		3.1		—		3.1
Total Gross Unrealized Losses	$	2.1	$	10.6	$	12.7	$	0.8	$	13.5
Estimated fair value of securities with a gross unrealized loss	$	70.7	$	92.7	$	163.4	$	16.4	$	179.8

19

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

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

	Significant Unrealized Losses by Security
	(in millions)
Issuer	Security Type	Carrying Value		Unrealized Loss
Continental Airlines 2000-1-C-2	Fixed Maturity	$	2.4	$	0.6
Conseco Fin SEC Corp 2000-4 M1	Fixed Maturity – Interest in Securitized Assets		0.5		1.5
Conseco Fin SEC Corp SER 2000-4 M2	Fixed Maturity – Interest in Securitized Assets		0.2		1.0
Greentree Financial Corp. 99-2 B1	Fixed Maturity – Interest in Securitized Assets		0.4		2.6
Nextcard CRCN MNT 2001-1 CLB144A	Fixed Maturity – Interest in Securitized Assets		3.2		1.7
Scotia Pacific Co LLC	Fixed Maturity		1.4		0.7
Waterside Loan TR JR NT CLO 144A	Fixed Maturity – Interest in Securitized Assets		2.2		0.8
		$	10.3	$	8.9

For the nine months ended September 30, 2003 the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.3 million and $0.7 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $14.5 million and $3.5 million, respectively. During the three months ended September 30, 2003 the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.2 million and $0 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $13.0 million and $0.1 million, respectively. The decision to sell these securities was based upon management’s assessment of economic conditions.

Results of Operations (Nine Months ended September 30, 2003 (Restated) vs. September 30, 2002 (Restated))

     Premiums:Gross written premiums grew $182.9 million (36.0%) to $690.6 million for the nine months ended September 30, 2003 from $507.7 million for the same period of 2002; gross earned premiums grew $165.2 million (41.3%) to $564.9 million for the nine months ended September 30, 2003 from $399.7 million for the same period of 2002; net written premiums increased $59.5 million (15.2%) to $452.1 million for the nine months ended September 30, 2003 from $392.6 million for the same period of 2002; and net earned premiums grew $126.2 million (43.2%) to $418.4 million in 2003 from $292.2 million in 2002.

The respective gross written premium increases for commercial lines, specialty lines and personal lines segments for the nine months ended September 30, 2003 vs. September 30, 2002 amount to $152.7 million (42.4%), $24.4 million (29.6%) and $5.8 million (8.9%), respectively. The overall growth in gross written premiums is primarily attributable to the following:

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

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

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

• In-force policy counts have increased 22.6% and 37.6% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts have decreased approximately 1.0% for the personal lines segment as a result of restricting new business and not renewing certain business to manage overall property exposures and the related catastrophe loss considerations. Firming prices in the

20

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

property and casualty industry resulting in weighted average rate increases on renewal business approximating 4.9%, 11.8%, and 9.2% for the commercial, specialty and the personal lines segments, respectively.

The respective net written premium changes for commercial lines, specialty lines and personal lines segments for the nine months ended September 30, 2003 vs. September 30, 2002 amount to $68.8 million (24.1%), -$2.7 million (-3.6%) and -$6.6 million (-21.1%) respectively. The differing percentage changes in net written premiums versus gross written premiums for the commercial lines, specialty lines and personal lines segments during the period results from:

• The Company entering into a Quota Share reinsurance agreement (effective April 1, 2003) covering all of the Company’s lines of business. Under this agreement, the Company cedes 22% of its net written premium (including 22% of the net unearned premium reserves at April 1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium reduced by the reinsurers’ expense allowance and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. In addition, the agreement provides that a profit commission will be paid to the Company upon commutation equal to the positive balance in the Funds Held Payable to Reinsurer account. During the nine months ended September 30, 2003, the Company ceded $156.0 million of written premium, which included unearned premium reserves of $63.6 million at April 1, 2003.

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

     Net Investment IncomeNet investment income approximated $28.3 million for the nine months ended September 30, 2003 and $27.7 million for the same period of 2002. Total investments grew to $1,161.0 million at September 30, 2003 from $859.6 million at September 30, 2002. The growth in investment income is due to investing net cash flows provided from operating activities. The Company’s average duration of its fixed income portfolio increased to approximately 4.0 years at September 30, 2003, compared to 3.3 years at September 30, 2002 as a result of investing in intermediate to long tax exempt fixed income securities due to perceived value. Additionally, the Company has invested approximately $57.5 million in overall “AAA” rated floating rate and shorter amortizing securities to reduce interest rate risk with the expectation of reinvesting these funds into longer duration investments at higher future fixed income rates. The Company’s tax equivalent book yield on its fixed income holdings was 5.0% at September 30, 2003, compared to 5.7% at September 30, 2002 as a result of investing in the capital market environment which has existed during most of 2002 and 2003 (low U.S. Treasury yields). Net investment income was reduced by $1.3 million due to the interest credit on the Funds Held Account balance pursuant to the Company’s quota share reinsurance agreement (see Premiums).

     The total return, which includes the effects of both income and price returns on securities, of the Company’s fixed income portfolio was 3.27% and 8.01% for the nine months ended September 30, 2003 and 2002, respectively, and was similar to the Lehman Brothers Intermediate Aggregate Bond Index (“the Index”) total return of 3.37% and 7.87% for the same periods, respectively.

     Net Realized Investment Gain (Loss):Net realized investment losses were $1.3 million for the nine months ended September 30, 2003 and $2.9 million for the same period in 2002. The Company realized net investment gains of $1.5 million and $0.7 million from the sale of fixed maturity and equity securities, respectively, for the nine months ended September 30, 2003, and $2.6 million and $0.9 million in non-cash realized investment losses for fixed maturity and common stock investments, respectively, as a result of the Company’s impairment evaluation.

     The Company realized $1.2 million in net investment gains from the sale of fixed maturity securities and $2.6 million in net investment losses from the sale of common stock equity securities for the nine months ended September 30, 2002. Additionally, $1.5 million in non-cash realized losses were recorded for fixed maturity investments as a result of the Company’s impairment evaluation.

21

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

     Other Income: Other income approximated $3.7 million for the nine months ended September 30, 2003 and $0.4 million for the same period of 2002. Other income primarily consists of commissions earned on brokered personal lines business, and to a lesser extent brokered commercial lines business. The Company is seeking to increase brokering activities in its personal lines segment as it is restricting new business and not renewing certain policies in designated areas of Florida as a result of its property exposures in these areas and related catastrophe loss considerations.

     Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment expenses increased $70.6 million (36.7%) to $262.8 million for the nine months ended September 30, 2003 from $192.2 million for the same period of 2002 and the loss ratio increased to 65.8% in 2003 from 65.0% in 2002. This increase in net loss and loss adjustment expenses was due to the 43.2% growth in net earned premiums, the $33.0 million increase in the estimated gross and net loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2002 and offset in part by the 2002 and 2003 price increases which have exceeded loss trends (see Premiums).

Additionally, during the period the Company ceded $40.3 million in net loss and loss adjustment expenses pursuant to the quota share reinsurance agreement (see Premiums) and decreased the gross and net liability for unpaid loss and loss adjustment expenses for accident year 2002, principally in the property line of its commercial package products, by approximately $9.0 million due to better than expected loss experience.

As of September 30, 2003, the Company has estimated a total liability for unpaid loss and loss adjustment expenses for the residual value policies of $51.5 million ($51.3 million net of reinsurance). The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination, which can be up to five years from lease inception. As part of the Company’s monitoring and evaluation process, a consulting firm was engaged during the second quarter of 2003 to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the result of the indications and subsequent evaluation by the Company and changes in the Company’s assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this deterioration to the following factors that led to a softening of prices in the used car market subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and other incentives which increased new car sales and the volume of trade-ins, daily rental units being sold into the market earlier and in greater numbers than expected further adding to the oversupply of used cars; and the overall general economic conditions. As of September 30, 2003, approximately 48,000 leases were outstanding under the Company’s residual value policies.

     Acquisition Costs and Other Underwriting Expenses:Acquisition costs and other underwriting expenses increased $28.9 million (31.7%) to $120.1 million for the nine months ended September 30, 2003 from $91.2 million for the same period of 2002. This increase was due primarily to the 43.2% growth in net earned premiums and in part to the Company establishing a $1.4 million allowance for doubtful reinsurance receivables based upon its review of collectibility from its reinsurers. During the period the Company ceded $71.5 million of net earned premium and earned $29.6 million in ceding commission under the quota share reinsurance agreement (see Premiums).

     Other Operating Expenses: Other operating expenses increased $1.4 million to $6.0 million for the nine months ended September 30, 2003 from $4.6 million for the same period of 2002 as the Company continues to control its expenses during this period of premium growth.

     Income Tax Expense:The Company’s effective tax rate for the nine months ended September 30, 2003 and 2002 was 30.8% and 31.1%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities and the relative proportion of tax exempt income to total income before tax.

22

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

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

     Premiums:Gross written premiums grew $75.9 million (36.1%) to $286.4 million for the three months ended September 30, 2003 from $210.5 million for the same period of 2002; gross earned premiums grew $62.4 million (41.8%) to $211.7 million for the three months ended September 30, 2003 from $149.3 million for the same period of 2002; net written premiums increased $39.2 million (24.3%) to $200.4 million for the three months ended September 30, 2003 from $161.2 million for the same period of 2002; and net earned premiums grew $40.6 million (38.3%) to $146.7 million in 2003 from $106.1 million in 2002.

The respective gross written premium increases for commercial lines, specialty lines and personal lines segments for the three months ended September 30, 2003 vs. September 30, 2002 amount to $69.9 million (43.5%), $5.0 million (16.5%) and $1.0 million (5.0%), respectively. The overall growth in gross written premiums is primarily attributable to the following:

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

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

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

• In force policy counts have increased 22.6% and 37.6% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts have decreased approximately 1.0% for the personal lines segment as a result of restricting new business and not renewing certain business to manage overall property exposures and the related catastrophe loss considerations. Rate increases on renewal business have approximated 3.7%, 7.4%, and 11.7% for the commercial, specialty and the personal lines segments, respectively. As a result of recent increased competition in the Company’s commercial and specialty lines segment price increases have moderated. The Company anticipates this trend of moderating price increases to continue for the foreseeable future.

Additionally, the respective net written premium changes for commercial lines, specialty lines and personal lines segments for the three months ended September 30, 2003 vs. September 30, 2002 amount to $41.7 million (32.9%), ($2.4) million (-8.4%) and ($0.2) million (-2.5%) respectively. The differing percentage changes in net written premiums versus gross written premiums during the period results from:

• The Company entering into a Quota Share reinsurance agreement (effective April 1, 2003) covering all of the Company’s lines of business. Under this agreement, the Company cedes 22% of its net written premium (including 22% of net unearned premium reserves at April 1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional commission of 33.0%, adjusted prorata based upon the ratio of losses incurred to premiums earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium reduced by the reinsurers’ expense allowance, and the Company’s ceding commission allowance in a Funds Held Payable to Reinsurer account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. In addition, the agreement provides that a profit commission will be paid to the Company upon commutation equal to the positive balance in the Funds Held Payable to Reinsurer account. During the three months ended September 30, 2003, the Company ceded $53.6 million of written premium.

23

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

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

     Net Investment IncomeNet investment income approximated $9.2 million for the three months ended September 30, 2003 and $9.5 million for the same period of 2002. Total investments grew to $1,161.0 million at September 30, 2003 from $859.6 million at September 30, 2002. The Company’s average duration of its fixed income portfolio approximated 4.0 years at September 30, 2003, compared to 3.3 years at September 30, 2002 as a result of investing in intermediate to long tax exempt fixed income securities due to perceived value. Additionally, the Company has invested approximately $57.5 million in overall “AAA” rated floating rate and shorter amortizing securities to reduce interest rate risk with the expectation of reinvesting these funds into longer duration investments at higher future fixed income rates. The Company’s tax equivalent book yield on its fixed income holdings was 5.0% at September 30, 2003, compared to 5.7% at September 30, 2002 as a result of investing in the capital market environment which has existed during most of 2002 and 2003 (low vs. treasury yields). Net investment income was reduced by $0.8 million due to the interest credit on the Funds Held to Reinsurer Account balance pursuant to the Company’s quota share reinsurance agreement (see Premiums).

The total return, which includes the effect of realized and unrealized gains and losses, of the Company’s fixed income portfolio was 0.58% and 3.72% for the three months ended September 30, 2003 and 2002, respectively, was similar to the Lehman Brothers Intermediate Aggregate Bond Index (“the Index”) total return of 0.18% and 3.79% for the same periods, respectively.

     Net Realized Investment Gain (Loss):Net realized investment gains were $0.5 million for the three months ended September 30, 2003 and $0.2 million for the same period in 2002. The Company realized net investment gains of $0.3 million and $0.6 million from the sale of fixed maturity and equity securities, respectively, for the three months ended September 30, 2003, and $0.4 million in non-cash realized investment losses for fixed maturity investments as a result of the Company’s impairment evaluation.

The Company realized net investment losses of $0.3 million, from the sales of common stock equity securities and $0.8 million in net investment gains from the sales of fixed maturity securities during the three months ended September 30, 2002. Additionally, $0.3 million in non-cash realized investment losses were recorded for fixed maturity investments as a result of the Company’s impairment evaluation during the three months ended September 30, 2002.

     Other Income: Other income approximated $2.0 million for the three months ended September 30, 2003 and $0.4 million for the same period of 2002. Other income primarily consists of commissions earned on brokered personal lines business, and to a lesser extent brokered commercial lines business. The Company is seeking to increase brokering activities in its personal lines segment as it is restricting new business and not renewing certain policies in designated areas of Florida as a result of its property exposures in these areas and related catastrophe loss considerations.

     Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment expenses increased $1.1 million (1.4%) to $79.4 million for the three months ended September 30, 2003 from $78.3 million for the same period of 2002 and the loss ratio decreased to 54.1% in 2003 from 73.8% in 2002. This increase in net loss and loss adjustment expenses was due to the 38.3% growth in net earned premiums, partially offset by 2002 and 2003 price increases which have exceeded loss trends and the Company increasing loss and loss adjustment expenses incurred by $27.0 million ($15.0 million net of reinsurance recoverables) for the three months ended September 30, 2002 as a result of changes in estimates of insured events in prior years. Such adverse loss development was due to losses emerging at a higher rate on automobile leases expiring on residual value policies than had been originally anticipated when the reserves were estimated, primarily as a result of the deterioration in the value of used cars.

24

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

Additionally, during the period the Company ceded $21.3 million in net loss and loss adjustment expenses pursuant to the quota share reinsurance agreement (see Premiums).

     Acquisition Costs and Other Underwriting Expenses:Acquisition costs and other underwriting expenses increased $9.2 million (28.5%) to $41.5 million for the three months ended September 30, 2003 from $32.3 million for the same period of 2002. This increase was due primarily to the 38.3% growth in net earned premiums and in part to the Company establishing a $1.4 million allowance for doubtful reinsurance receivables based upon its review of collectibility from its reinsurers. During the period the company ceded $38.4 million in net earned premiums and earned $16.3 million in ceding commission under the quota share reinsurance agreement (see Premiums).

     Other Operating Expenses: Other operating expenses increased $1.1 million to $2.7 million for the three months ended September 30, 2003 from $1.6 million for the same period of 2002. The increase in other operating expenses was primarily due to the increase in brokering activities resulting in an increase in the amount of broker commissions paid (see “Other Income” above).

     Income Tax Expense:The Company’s effective tax rate for the three months ended September 30, 2003 and 2002 was 32.1% and 26.5%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities. The lower effective tax rates are principally due to the relative proportion of tax exempt income to total income before tax.

Liquidity and Capital Resources

     For the nine months ended September 30, 2003, the Company’s investments experienced unrealized investment appreciation of $2.1 million, net of the related deferred tax expense of $1.1 million. At September 30, 2003, the Company had total investments with a carrying value of $1,161.0 million, of which 92.6% consisted of investments in fixed maturity securities, including U.S. treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate debt securities, collateralized mortgage securities and asset backed securities. The collateralized mortgage securities and asset backed securities consist of amortizing securities possessing favorable pre-payment and/or extension risk profiles. The remaining 7.4% of the Company’s total investments consisted primarily of publicly traded common stock securities.

     The Company produced net cash from operations of $253.0 million and $163.5 million, respectively, for the nine months ended September 30, 2003 and 2002. Sources of operating funds consist primarily of net premiums collected and investment income. Funds are used primarily to pay claims and operating expenses and for the purchase of investments. The source of cash from operations for the nine months ended September 30, 2003 was primarily generated from strong premium growth during the current year due to increases in the number of policies written and price increases realized on renewal business. Net loss and loss expense payments were $148.7 million and $115.6 million, respectively, for the nine months ended September 30, 2003 and 2002. Management believes that the Company has adequate liquidity to pay all claims and meet all other cash needs.

     Two of the Company’s insurance subsidiaries are members of the Federal Home Loan Bank of Pittsburgh (“FHLB”). A primary advantage of FHLB membership is the ability of members to access credit products from a reliable capital markets provider. The availability of any one member’s access to credit is based upon its FHLB eligible collateral. At September 30, 2003 the insurance subsidiaries’ borrowing capacity was $73.2 million. The insurance subsidiaries have utilized a portion of their borrowing capacity to purchase a diversified portfolio in investment grade floating rate securities. These purchases were funded by floating rate FHLB borrowings to achieve a positive spread between the rate of interest on these securities and borrowing rates. The remaining borrowing capacity will provide an immediately available line of credit. Borrowings aggregated $49.7 million at September 30, 2003, bear interest at adjusted LIBOR, mature twelve months from inception and are collateralized by $62.2 million of the Company’s fixed maturity securities. The weighted-average interest rate on borrowings outstanding as of September 30, 2003 was 1.2%.

25

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

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

Forward-Looking Information

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

26

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

Item 4. Controls and Procedures

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

     An evaluation was performed in October 2003 by management, with the participation of the Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s previously filed Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 2003. Based on this evaluation, the CEO and CFO had concluded that, as of the end of the period covered by such Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within such entities, particularly during the period in which such Quarterly Report on Form 10-Q was being prepared.

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

     As a result of the Company’s restatement of certain of its financial statements, as referred to in Item 2 — Restatement of Financial Statements of this report, to include a portion of its revenue and net income in prior periods arising from profit commissions under two reinsurance contracts, the Company has determined that it should enhance its documentation and research as to its understanding of appropriate accounting for reinsurance transactions. In connection therewith, the Company:

1.	Formed a new reinsurance contract subcommittee with senior members from appropriate departments within the Company to review, discuss and make appropriate conclusions with respect to the documentation requirements and the accounting for the Company’s reinsurance contracts;
2.	Will, as promptly as practicable, add an additional accounting professional to its staff whose responsibility will be to spend substantially all of his or her working time researching and documenting technical accounting matters (including reinsurance matters), as well as supporting other members of the Company’s accounting staff and the reinsurance contract subcommittee.

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

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

27

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

a. Exhibits:

Exhibit No.	Description
31.1*	Certification of the Company’s chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 19, 2004
31.2*	Certification of the Company’s chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 19, 2004
32.1*	Certification of the Company’s chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 19, 2004
32.2*	Certification of the Company’s chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 19, 2004

*	Filed herewith.
b.	The Company did not file any reports on Form 8-K during the quarterly period ended September 30, 2003 but did furnish the following report:

Date of Report	Item Reported
July 15, 2003	Second Quarter Results June 30, 2003 and Regulation FD Disclosure

28

SIGNATURE

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

	PHILADELPHIA CONSOLIDATED HOLDING CORP.
	Registrant
Date August 19, 2004		Craig P. Keller
		Craig P. Keller
		Executive Vice President, Secretary,
		Treasurer and Chief Financial Officer
		(Principal Financial and Accounting
		Officer)

29