It was probably done to increase her length at the waterline, which in turn increases her top speed. This is the same reason you see the huge bulbs at the the bow on modern commercial ships (and some warships) and was the theory behind the reverse transoms seen on many yachts. Marine designers have long come up with tricks to increase LWL for that extra speed.
I certainly hope something can be done to save the Olympia. I grew up in Philadelphia, and my father was very involved in the group that originally brought the Olympia to the City. This ship is an important piece of history that really ought to be preserved. There is no shortage of old vessels that can become reefs off of Cape May.
Is the Olympia wood framed?
An idea prevalent at the time was that ramming would sometimes come into play. Look at the bow shapes of ancient Greek Triremes.