Summary of PHILADELPHIA CONSOLIDATED HOLDING CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Forward-Looking Information
Certain information included in this report and other statements or materials published or to be published by us are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors which, among others, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of our business, and the other matters referred to below include, but are not limited to those matters set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Item 1A of Part II of this Report. We do not intend to publicly update any forward looking statement, except as may be required by law.
General
Although our financial performance is dependent upon our own specific business characteristics, certain risk factors can affect our profitability and/or our financial condition. These include, but are not limited to, the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Item 1A of Part II of this Report.
These risk factors should be read in conjunction with the Certain Critical Accounting Estimates and Judgments included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Our operations are classified into three reportable business segments which are organized as follows: the Commercial Lines Underwriting Group, the Specialty Lines Underwriting Group and the Run-Off (previously the Personal Lines Underwriting Group) business segments. The Run-Off business segment, pursuant to approval received in February, 2008 from the Florida Office of Insurance Regulation, is currently non-renewing all personal lines policies, other than policies issued pursuant to the National Flood Insurance Program ("NFIP"). The non-renewal process began with policies expiring on July 23, 2008, and we currently expect the process to be completed by July 23, 2009.
On July 23, 2008, we and Tokio Marine Holdings, Inc. ("TMHD") entered into an Agreement and Plan of Merger under which, at the closing of the merger, TMHD would acquire all of our outstanding shares for $61.50 per share, in cash, through TMHD's wholly owned subsidiary, Tokio Marine & Nichido Fire Insurance Co., Ltd. The total value of this transaction is approximately $4.7 billion. The transaction is expected to close in the fourth quarter of 2008. As set forth below, the closing of the merger is subject to approval of the Financial Services Agency of Japan, as well as other customary closing conditions. On October 3, 2008, TMHD received approval from the Pennsylvania Department of Insurance to acquire control of the Company. On October 23, 2008, at a special meeting of the shareholders of the Company, our shareholders approved the Agreement and Plan of Merger. On November 3, 2008, TMHD received approval from the Florida Office of Insurance Regulation to acquire control of the Company. The proposed merger transaction remains subject to the regulatory approval by the Financial Services Agency of Japan.
Critical Accounting Estimates
The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles, or GAAP, requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. Accounting policies and estimates are periodically reviewed and adjustments are made when facts and circumstances dictate. Critical accounting policies that are affected by accounting estimates include:

• Investments - other than temporary impairments;

• Liability for unpaid loss and loss adjustment expenses;

• Reinsurance receivables;

• Liability for preferred agent profit sharing; and

• Share-based compensation expense.

On January 1, 2008, we adopted the provisions of SFAS 157. SFAS 157 defines fair value and provides a consistent framework for measuring items at fair value as previously permitted by existing accounting pronouncements. SFAS 157 provides a "fair value hierarchy" which prioritizes the quality of inputs used when measuring the items at fair value and requires expanded disclosures for fair value measurements. As of September 30, 2008, the fair value of our investments has been determined in accordance with the provisions of SFAS 157. A further discussion of this matter is included under the "Investments" section below. Our accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements. Actual results could differ materially from these estimates. For a discussion of how these estimates and other factors may affect our business, see the Risk Factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Item 1A of Part II of this Report. Results of Operations (Nine Months Ended September 30, 2008 compared to September 30, 2007)
Premiums: Premium information for the nine months ended September 30, 2008 compared to September 30, 2007 for each of our business segments is as follows:

(Dollars In Millions)                        Commercial Lines         Specialty Lines          Run-off              Total
2008 Gross Written Premiums                  $       1,190.6           $       209.4          $  42.2            $ 1,442.2
2007 Gross Written Premiums                  $       1,058.4           $       189.2          $  49.7            $ 1,297.3
Percentage Increase (Decrease)                          12.5 %                  10.7 %          (15.1 )%              11.2 %

2008 Gross Earned Premiums                   $       1,095.7           $       190.1          $  41.4            $ 1,327.2
2007 Gross Earned Premiums                   $         946.0           $       175.1          $  63.7            $ 1,184.8
Percentage Increase (Decrease)                          15.8 %                   8.6 %          (35.0 )%              12.0 %

The overall growth in gross written premiums is primarily attributable to the following:
• Prospecting efforts by marketing personnel in conjunction with long term relationships formed by our marketing Regional Vice Presidents continue to result in additional prospects and increased premium writings in existing product offerings, most notably for the following:

† Our condominium and homeowners associations, religious organizations, non-profit, specialty schools, antique/collector vehicle, golf and country clubs, day care centers, and mental health products in the commercial package product grouping. These product offerings accounted for approximately $68.1 million of the $132.2 million total commercial lines segment gross written premiums increase.

† Our consultant liability product in the professional liability product grouping, as well as our private company protection, directors and officers, and business owners products in the management liability product grouping. These product offerings accounted for all of the $20.2 million total specialty lines segment gross written premiums increase.

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

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
marine specialty property product. These new product offerings accounted for approximately $42.8 million of the $132.2 million total commercial lines segment gross written premiums increase.

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

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

• Our "Firemark Producer" program, which promotes our product offerings and underwriting philosophy in selected producers' offices.

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

The growth in gross written premiums was offset in part by:
• Realized average rate decreases on renewal business approximating 4.8% and 2.3% for the commercial lines and specialty lines segments, respectively.

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

† Large commercial property-driven accounts located in the non-coastal areas of the country;

† Commercial package business with annual premiums in excess of $100,000; and

† Professional liability accounts at all premium levels.

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

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

One of our preferred agents has terminated their preferred agency agreement with us effective August 1, 2008. It has been agreed that we will not compete for a period of one year on a mutually agreed upon list of accounts. The list of accounts is estimated to total approximately $30.0 million in annual gross written premium.
The respective net written premiums and net earned premiums for each of our business segments for the nine months ended September 30, 2008 compared to September 30, 2007 were as follows:

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

(Dollars In Millions)                        Commercial Lines         Specialty Lines          Run-off              Total
2008 Net Written Premiums                    $       1,088.1           $       205.8          $   7.1            $ 1,301.0
2007 Net Written Premiums                    $         968.3           $       155.8          $  (5.0 )          $ 1,119.1
Percentage Increase                                     12.4 %                  32.1 %          242.0 %               16.3 %

2008 Net Earned Premiums                     $         995.8           $       177.2          $   7.9            $ 1,180.9
2007 Net Earned Premiums                     $         861.9           $       142.0          $  11.3            $ 1,015.2
Percentage Increase (Decrease)                          15.5 %                  24.8 %          (30.1 )%              16.3 %

The differing percentage changes in net written premiums and/or net earned premiums versus gross written premiums and/or gross earned premiums for our commercial lines, specialty lines and run-off (personal lines) segments results primarily from the following:
• We experienced higher property catastrophe reinsurance rates, maintained the same catastrophe loss retention, and increased catastrophe coverage limits for our annual June 1, 2007 reinsurance renewal compared to the June 1, 2006 renewal. This resulted in increased property catastrophe costs for the nine month period ended September 30, 2008 compared to the nine month period ended September 30, 2007.

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

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

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

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

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

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

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
provided by our open-market catastrophe program (large reinsurers that are rated at least "A-" (Excellent) by A.M. Best Company) includes one mandatory reinstatement, but the FHCF coverage does not reinstate. Since the FHCF reimbursement coverage cannot be reinstated, our open-market program is structured such that catastrophe reinsurance coverage in excess of the FHCF coverage will "drop down" and fill in any portion of the FHCF which has been utilized.

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

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

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

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

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

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

Net Investment Income: Net investment income increased 13.9% to $97.6 million for the nine months ended September 30, 2008 from $85.7 million for the same period of 2007. Total investments grew by 9.6% to $3,131.0 million as of September 30, 2008 from $2,857.3 million as of September 30, 2007. The growth in investment income is primarily due to our ability to invest increased net cash flows provided from our operating activities. In addition, despite a general decline in interest rates compared with the previous historical reporting period, the capital market spreads to U.S. Treasuries were generally wider, which also had a favorable impact on our ability to increase investment income through new investments. The taxable equivalent book yield on our fixed income holdings approximated 5.5% as of September 30, 2008 and September 30, 2007. The average duration of our fixed maturity portfolio was 5.5 years and 4.9 years as of September 30, 2008 and 2007, respectively. Our decision to continue to increase the average duration of our fixed maturity portfolio was based

PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
upon our strategic enterprise risk management analyses indicating our capacity to further refine the risk/return profile of our investment portfolio. Effective January 1, 2008, we substituted a customized Merrill Lynch Enterprise Based Investment Benchmark Index (the "Index") for the Lehman Brothers Intermediate Aggregate Index to evaluate the total return performance of our fixed income portfolio. This change was made in an effort to establish an Index that more closely represents our strategic enterprise -based risk and return profile, as reflected in a strategic optimal fixed maturity portfolio. The total tax equivalent performance of our fixed income portfolio was 0.54% for the nine months ended September 30, 2008, compared to the Index tax equivalent performance of (0.25)% for the same period. This favorable variance is primarily due to the portfolio's underweight allocation to Municipal securities compared to the Municipal security allocation percentage in the custom Index. While we continued to add to our Municipal portfolio given the attractive relative returns in this sector, the new investments have been added at a measured pace during the recent periods of general market disruption and, in particular, during the periods of volatility in the municipal markets caused by leveraged funds unwinding.
The total pre-tax return, which includes the effects of both income and price returns on securities, of our fixed income portfolio was 3.31% for the nine months ended September 30, 2007, compared to the Lehman Brothers Intermediate Aggregate Bond Index total pre-tax return of 4.01% for the same period. We continue to expect some variation in our portfolio's total return compared to the Index primarily because of the differing sector, security and duration composition of our portfolio as compared to the Index.
Net Realized Investment Gain (Loss): Net realized investment (losses) gains were $(40.8) million and $32.6 million for the nine months ended September 30, 2008 and 2007, respectively.
For the nine months ended September 30, 2008, we realized net investment gains of $7.3 from the sale of fixed maturity securities. For the nine months ended September 30, 2008, we realized net investment losses of $5.9 million from the sale of equity securities. In addition, as a result of our impairment evaluations for the nine months ended September 30, 2008:
• We recognized $7.5 million in non-cash realized fixed maturity security investment losses primarily relating to our direct holdings in fixed maturity securities issued by Lehman Brothers Holdings Inc. and its subsidiaries ("Lehman").

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

For the nine months ended September 30, 2007, we realized net investment gains of $0.7 million and $35.6 million from the sale of fixed maturity and equity securities, respectively. In addition, for the nine months ended September 30, 2007, we recognized $0.5 million and $3.2 million in non-cash realized investment losses for fixed maturity and equity securities, respectively, as a result of our impairment evaluations. The $35.6 million net realized gains from the sale of equity securities included approximately $22.2 million of net realized gains as a result of the liquidation of one of our equity portfolios following our decision to change one of our common stock investment managers.
Other Income: Other income approximated $5.9 million and $2.7 million for the nine months ended September 30, 2008 and 2007, respectively. Other income consists primarily of commissions and fees earned on servicing and brokering commercial lines business, and to a lesser extent commissions and fees earned on servicing and brokering personal lines business. In addition, other income for the nine months ended September 30, 2008 includes our recognition of a $1.2 million gain related to the sale of the headquarters building used by our Run-Off segment.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $206.6 million (46.5%) to $650.5 million for the nine months ended September 30, 2008 from $443.9 million for the same period of 2007, and the loss ratio increased to 55.1% in 2008 from 43.7% in 2007.

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

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

              Total                           $               (36.6 )

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