PHLY Philadelphia Consolidated Corp (MM)

 

 

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

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.

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.

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.

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.

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.

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

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:

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:

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

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.

		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

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.

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

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

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.

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.

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

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:

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:

		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.

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.

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:

	•		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:

		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