##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  .
 000-50641
 (Commission File Number)
 
 PROCENTURY CORPORATION
  
 Ohio
    
    31-1718622(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)465 Cleveland AvenueWesterville, Ohio
    
    43082(Address of principal executive offices)
    
    (Zip Code)
 (614) 895-2000
  þ o
  o þ o
  o þ




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##### 



PROCENTURY CORPORATION
 QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2007
 INDEX
 PagePART I: FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Condensed Statements of Operations (unaudited)  For the three and nine months
ended September 30, 2007 and 2006
    
    3Consolidated Condensed Balance Sheets  September 30, 2007 (unaudited) and December 31, 2006
    
    4Consolidated Condensed Statements of Shareholders Equity and Comprehensive Income
(unaudited)  For the nine months ended September 30, 2007 and 2006
    
    5Consolidated Condensed Statements of Cash Flows (unaudited)  For the nine months ended
September 30, 2007 and 2006
    
    6Notes to Consolidated Condensed Financial Statements (unaudited)  September 30, 2007
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    34Item 4. Controls and Procedures
    
    34PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    35Item 1A. Risk Factors
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    37Item 3. Defaults Upon Senior Securities
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    37Item 5. Other Information
    
    37Item 6. Exhibits
    
    37SIGNATURES
    
    38EX-31.1EX-31.2EX-32.1EX-32.2
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PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PROCENTURY CORPORATION AND SUBSIDIARIES
 
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Premiums earned
    
    $
    55,873
    
    
    
    55,425
    
    
    
    166,958
    
    
    
    156,992Net investment income
    
    
    5,571
    
    
    
    4,999
    
    
    
    16,497
    
    
    
    14,114Net realized investment (losses) gains
    
    
    (355
    )
    
    
    4
    
    
    
    (593
    )
    
    
    (37
    )Other income
    
    
    159
    
    
    
    101
    
    
    
    379
    
    
    
    353Total revenues
    
    
    61,248
    
    
    
    60,529
    
    
    
    183,241
    
    
    
    171,422Losses and loss expenses
    
    
    33,037
    
    
    
    34,393
    
    
    
    100,038
    
    
    
    97,407Amortization of deferred policy acquisition costs
    
    
    14,068
    
    
    
    14,440
    
    
    
    42,456
    
    
    
    39,402Other operating expenses
    
    
    5,190
    
    
    
    3,719
    
    
    
    13,394
    
    
    
    11,969Interest expense
    
    
    684
    
    
    
    608
    
    
    
    2,038
    
    
    
    1,718Total expenses
    
    
    52,979
    
    
    
    53,160
    
    
    
    157,926
    
    
    
    150,496Income before income tax expense
    
    
    8,269
    
    
    
    7,369
    
    
    
    25,315
    
    
    
    20,926Income tax expense
    
    
    2,510
    
    
    
    2,236
    
    
    
    7,709
    
    
    
    6,168Net income
    
    $
    5,759
    
    
    
    5,133
    
    
    
    17,606
    
    
    
    14,758Basic net income per share
    
    $
    0.43
    
    
    
    0.39
    
    
    
    1.33
    
    
    
    1.13Diluted net income per share
    
    $
    0.43
    
    
    
    0.39
    
    
    
    1.31
    
    
    
    1.11Weighted average of shares outstanding  basic
    
    
    13,252,010
    
    
    
    13,133,711
    
    
    
    13,237,198
    
    
    
    13,116,317Weighted average of shares outstanding  diluted
    
    
    13,365,584
    
    
    
    13,270,589
    
    
    
    13,402,224
    
    
    
    13,239,563
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
   September 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006AssetsInvestmentsFixed maturities:Available-for-sale, at fair value (amortized cost 2007, $397,587; 2006, $362,066)
    
    $
    387,969
    
    
    
    358,422Held-to-maturity, at amortized cost (fair value 2007, $1,106; 2006, $1,101)
    
    
    1,103
    
    
    
    1,114Equities (available-for-sale):Equity securities, at fair value (cost 2007, $31,851; 2006, $28,112)
    
    
    29,437
    
    
    
    28,188Bond mutual funds, at fair value (cost 2007, $14,706; 2006, $14,876)
    
    
    14,297
    
    
    
    14,755Short-term investments, at amortized cost
    
    
    24,258
    
    
    
    25,623Total investments
    
    
    457,064
    
    
    
    428,102Cash and equivalents
    
    
    13,183
    
    
    
    7,960Premiums in course of collection, net
    
    
    37,813
    
    
    
    37,428Deferred policy acquisition costs
    
    
    26,497
    
    
    
    26,915Prepaid reinsurance premiums
    
    
    15,631
    
    
    
    14,051Reinsurance recoverable on paid losses, net
    
    
    5,808
    
    
    
    7,524Reinsurance recoverable on unpaid losses, net
    
    
    37,757
    
    
    
    36,104Deferred federal income tax asset
    
    
    15,235
    
    
    
    11,561Income taxes recoverable
    
    
    644
    
    
    
    Other assets
    
    
    10,338
    
    
    
    9,403Total assets
    
    $
    619,970
    
    
    
    579,048Liabilities and Shareholders EquityLoss and loss expense reserves
    
    $
    275,082
    
    
    
    250,672Unearned premiums
    
    
    126,717
    
    
    
    127,620Long term debt
    
    
    25,000
    
    
    
    25,000Line of credit
    
    
    4,650
    
    
    
    4,000Accrued expenses and other liabilities
    
    
    16,614
    
    
    
    9,778Reinsurance balances payable
    
    
    6,307
    
    
    
    7,706Collateral held
    
    
    10,888
    
    
    
    10,370Income taxes payable
    
    
    
    
    
    
    1,514Total liabilities
    
    
    465,258
    
    
    
    436,660Shareholders equity:Common stock, without par value:Common shares  Issued and outstanding 13,358,867 shares at
September 30, 2007 and 13,248,323 shares issued and
outstanding at December 31, 2006
    
    
    
    
    
    
    Additional paid-in capital
    
    
    102,967
    
    
    
    100,954Retained earnings
    
    
    59,833
    
    
    
    43,830Accumulated other comprehensive loss, net of taxes
    
    
    (8,088
    )
    
    
    (2,396
    )Total shareholders equity
    
    
    154,712
    
    
    
    142,388Total liabilities and shareholders equity
    
    $
    619,970
    
    
    
    579,048
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
   Nine Months Ended September 30,2007
    
    
    2006Shareholders EquityCapital stock:Beginning of period
    
    $
    
    
    
    
    Stock issued
    
    
    
    
    
    
    End of period
    
    
    
    
    
    
    Additional paid-in capital:Beginning of period
    
    
    100,954
    
    
    
    100,202Impact of adoption of SFAS 123R
    
    
    
    
    
    
    (695
    )Shares issued under share compensation plans
    
    
    985
    
    
    
    989Tax benefit on share compensation plans
    
    
    331
    
    
    
    6Exercise of share options
    
    
    697
    
    
    
    91End of period
    
    
    102,967
    
    
    
    100,593Retained earnings:Beginning of period
    
    
    43,830
    
    
    
    24,846Net income
    
    
    17,606
    
    
    
    14,758Dividend declared (2007, $0.12/share and 2006, $0.105/share)
    
    
    (1,603
    )
    
    
    (1,389
    )End of period
    
    
    59,833
    
    
    
    38,215Unearned share compensation:Beginning of period
    
    
    
    
    
    
    (695
    )Impact of adoption of SFAS 123R
    
    
    
    
    
    
    695End of period
    
    
    
    
    
    
    Accumulated other comprehensive loss, net of taxes:Beginning of period
    
    
    (2,396
    )
    
    
    (3,150
    )Unrealized holding (losses) gains arising during the period,
net of reclassification adjustment
    
    
    (5,692
    )
    
    
    1,247End of period
    
    
    (8,088
    )
    
    
    (1,903
    )Total shareholders equity
    
    $
    154,712
    
    
    
    136,905Comprehensive (Loss) IncomeNet income
    
    $
    17,606
    
    
    
    14,758Other comprehensive (loss) income:Unrealized (losses) gains on securities:Unrealized holding (losses) gains arising during the period:Gross
    
    
    (9,345
    )
    
    
    1,772Related federal income tax benefit (expense)
    
    
    3,268
    
    
    
    (549
    )Net unrealized (losses) gains
    
    
    (6,077
    )
    
    
    1,223Reclassification adjustment for losses included in net incomeGross
    
    
    (593
    )
    
    
    (37
    )Related federal income tax benefit
    
    
    208
    
    
    
    13Net reclassification adjustment
    
    
    (385
    )
    
    
    (24
    )Other comprehensive (loss) income
    
    
    (5,692
    )
    
    
    1,247Total comprehensive income
    
    $
    11,914
    
    
    
    16,005
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
    Nine Months Ended September 30,2007
    
    
    2006Cash flows provided by operating activities:Net income
    
    $
    17,606
    
    
    
    14,758Adjustments:Net realized investment losses
    
    
    593
    
    
    
    37Deferred federal income tax benefit
    
    
    (614
    )
    
    
    (1,280
    )Share-based compensation expense
    
    
    985
    
    
    
    989Changes in assets and liabilities:Premiums in course of collection, net
    
    
    (385
    )
    
    
    (3,724
    )Deferred policy acquisition costs
    
    
    418
    
    
    
    (2,828
    )Prepaid reinsurance premiums
    
    
    (1,580
    )
    
    
    (2
    )Reinsurance recoverable on paid and unpaid losses, net
    
    
    63
    
    
    
    (2,065
    )Income taxes payable/receivable
    
    
    (2,158
    )
    
    
    (491
    )Losses and loss expense reserves
    
    
    24,410
    
    
    
    29,272Collateral held
    
    
    518
    
    
    
    155Unearned premiums
    
    
    (903
    )
    
    
    12,595Other, net
    
    
    (2,053
    )
    
    
    377Net cash provided by operating activities
    
    
    36,900
    
    
    
    47,793Cash flows used in investing activities:Purchases of equity securities
    
    
    (12,574
    )
    
    
    (8,829
    )Purchases of fixed maturity securities available-for-sale
    
    
    (163,046
    )
    
    
    (90,998
    )Proceeds from sales of equity securities
    
    
    8,914
    
    
    
    10,056Proceeds from sales and maturities of fixed maturities available-for-sale
    
    
    126,196
    
    
    
    52,393Change in short-term investments
    
    
    1,365
    
    
    
    (14,958
    )Change in securities receivable/payable
    
    
    7,393
    
    
    
    8,590Net cash used in investing activities
    
    
    (31,752
    )
    
    
    (43,746
    )Cash flows provided by (used in) financing activities:Dividend paid to shareholders
    
    
    (1,603
    )
    
    
    (1,389
    )Exercise of share options
    
    
    697
    
    
    
    6Tax benefit on share compensation plans
    
    
    331
    
    
    
    91Draw on line of credit
    
    
    650
    
    
    
    1,000Principal payment on line of credit
    
    
    
    
    
    
    (1,000
    )Net cash provided by (used in) financing activities
    
    
    75
    
    
    
    (1,292
    )Increase in cash and equivalents
    
    
    5,223
    
    
    
    2,755Cash and equivalents at beginning of period
    
    
    7,960
    
    
    
    5,628Cash and equivalents at end of period
    
    $
    13,183
    
    
    
    8,383Supplemental disclosure of cash flow information:Interest paid
    
    $
    2,339
    
    
    
    1,734Federal income taxes paid
    
    $
    10,150
    
    
    
    7,850
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
    (1)
    
    Basis of PresentationThe accompanying interim unaudited consolidated condensed financial statements and notes include
the accounts of ProCentury Corporation (the Company or ProCentury), and its wholly owned
insurance subsidiaries, Century Surety Company (Century) and ProCentury Insurance Company
(PIC). The interim unaudited consolidated condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and the instructions to Article 10 of Regulation S-X. Accordingly, the interim
unaudited consolidated condensed financial statements do not include all of the information and
notes required by GAAP for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation of results for the interim periods have
been included. These interim unaudited consolidated condensed financial statements and related
notes should be read in conjunction with the consolidated financial statements and related notes
in the Companys audited consolidated financial statements, included in the Companys annual
report on Form 10-K for the year ended December 31, 2006. The Companys results of operations
for interim periods are not necessarily indicative of the results to be expected for the entire
year.In preparing the interim unaudited consolidated condensed financial statements, management was
required to make certain estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures at the financial reporting date and
throughout the period being reported upon. Certain of the estimates result from judgments that
can be subjective and complex and consequently actual results may differ from these estimates,
which would be reflected in future periods.Material estimates that are particularly susceptible to significant change in the near-term
relate to the determination of loss and loss expense reserves, the recoverability of deferred
policy acquisition costs, the determination of federal income taxes, the net realizable value of
reinsurance recoverables, the valuation of investments and the determination of
other-than-temporary declines in the fair value of investments. Although considerable
variability is inherent in these estimates, management believes that the amounts provided are
reasonable. These estimates are continually reviewed and adjusted as necessary. Such adjustments
are reflected in current operations.All significant intercompany balances and transactions have been eliminated.(2)
    
    Income per Common ShareBasic income per share (EPS) excludes dilution and is calculated by dividing income available
to common shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the dilution that could occur if securities or other contracts to
issue common shares (common share equivalents) were exercised. When inclusion of common share
equivalents increases the EPS or reduces the loss per share, the effect on earnings is
antidilutive. Under these circumstances, diluted net income or net loss per share is computed
excluding the common share equivalents.Based on the above and pursuant to disclosure requirements contained in SFAS No. 128, Earnings
Per Share, the following information represents a reconciliation of the numerator and
denominator of the basic and diluted EPS computations contained in the Companys interim
unaudited consolidated condensed financial statements:
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Three Months Ended September 30, 2007(Dollars in thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    5,759
    
    
    
    13,252,010
    
    
    $
    0.43Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    113,574
    
    
    
    Diluted EPSNet income
    
    $
    5,759
    
    
    
    13,365,584
    
    
    $
    0.43
 Three Months Ended September 30, 2006(Dollars in thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    5,133
    
    
    
    13,133,711
    
    
    $
    0.39Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    136,878
    
    
    
    Diluted EPSNet income
    
    $
    5,133
    
    
    
    13,270,589
    
    
    $
    0.39
 Nine Months Ended September 30, 2007(Dollars in thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    17,606
    
    
    
    13,237,198
    
    
    $
    1.33Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    165,026
    
    
    
    (0.02
    )Diluted EPSNet income
    
    $
    17,606
    
    
    
    13,402,224
    
    
    $
    1.31
 Nine Months Ended September 30, 2006(Dollars in thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    14,758
    
    
    
    13,116,317
    
    
    $
    1.13Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    123,246
    
    
    
    (0.02
    )Diluted EPSNet income
    
    $
    14,758
    
    
    
    13,239,563
    
    
    $
    1.11
 (3)
    
    InvestmentsThe Company invests primarily in investment-grade fixed income securities. The amortized cost,
gross unrealized gains and losses and estimated fair value of fixed maturities classified as
held-to-maturity were as follows:
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September 30, 2007(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    87
    
    
    
    10
    
    
    
    
    
    
    
    97Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,016
    
    
    
    
    
    
    
    (7
    )
    
    
    1,009Total
    
    $
    1,103
    
    
    
    10
    
    
    
    (7
    )
    
    
    1,106
 December 31, 2006(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    88
    
    
    
    10
    
    
    
    
    
    
    
    98Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,026
    
    
    
    
    
    
    
    (23
    )
    
    
    1,003Total
    
    $
    1,114
    
    
    
    10
    
    
    
    (23
    )
    
    
    1,101
 The amortized cost, gross unrealized gains and losses, and estimated fair value of
fixed-maturity and equity securities classified as available-for-sale were as follows:
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September 30, 2007(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturities:U.S. Treasury securities
    
    $
    2,403
    
    
    
    17
    
    
    
    (13
    )
    
    
    2,407Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    14,562
    
    
    
    42
    
    
    
    (76
    )
    
    
    14,528Obligations of states and political subdivisions
    
    
    181,158
    
    
    
    336
    
    
    
    (1,237
    )
    
    
    180,257Corporate securities
    
    
    36,398
    
    
    
    43
    
    
    
    (565
    )
    
    
    35,876Mortgage-backed securities
    
    
    69,469
    
    
    
    26
    
    
    
    (1,456
    )
    
    
    68,039Collateralized mortgage obligations
    
    
    55,794
    
    
    
    186
    
    
    
    (1,462
    )
    
    
    54,518Asset-backed securities
    
    
    37,803
    
    
    
    194
    
    
    
    (5,653
    )
    
    
    32,344Total fixed maturities
    
    
    397,587
    
    
    
    844
    
    
    
    (10,462
    )
    
    
    387,969Equities:Equity securities
    
    
    31,851
    
    
    
    12
    
    
    
    (2,426
    )
    
    
    29,437Bond mutual funds
    
    
    14,706
    
    
    
    1
    
    
    
    (410
    )
    
    
    14,297Total equities
    
    
    46,557
    
    
    
    13
    
    
    
    (2,836
    )
    
    
    43,734Total
    
    $
    444,144
    
    
    
    857
    
    
    
    (13,298
    )
    
    
    431,703
 December 31, 2006(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturities:U.S. Treasury securities
    
    $
    3,636
    
    
    
    
    
    
    
    (49
    )
    
    
    3,587Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    13,793
    
    
    
    
    
    
    
    (258
    )
    
    
    13,535Obligations of states and political subdivisions
    
    
    150,981
    
    
    
    445
    
    
    
    (795
    )
    
    
    150,631Corporate securities
    
    
    35,058
    
    
    
    125
    
    
    
    (730
    )
    
    
    34,453Mortgage-backed securities
    
    
    59,599
    
    
    
    34
    
    
    
    (1,108
    )
    
    
    58,525Collateralized mortgage obligations
    
    
    49,486
    
    
    
    152
    
    
    
    (622
    )
    
    
    49,016Asset-backed securities
    
    
    49,513
    
    
    
    316
    
    
    
    (1,154
    )
    
    
    48,675Total fixed maturities
    
    
    362,066
    
    
    
    1,072
    
    
    
    (4,716
    )
    
    
    358,422Equities:Equity securities
    
    
    28,112
    
    
    
    346
    
    
    
    (270
    )
    
    
    28,188Bond mutual funds
    
    
    14,876
    
    
    
    62
    
    
    
    (183
    )
    
    
    14,755Total equities
    
    
    42,988
    
    
    
    408
    
    
    
    (453
    )
    
    
    42,943Total
    
    $
    405,054
    
    
    
    1,480
    
    
    
    (5,169
    )
    
    
    401,365
 Other-than-temporary impairment losses result in permanent reductions to the cost basis of the
underlying investments and are recorded as realized losses in the interim unaudited consolidated
condensed statements of operations. Other-than-temporary losses of $764,000 and $1.6 million
were realized on fixed maturity securities during the three and nine months ended September 30, 2007. These losses related
to ten and twenty eight asset-backed securities that were written down in accordance with EITF
99-20 in the three and nine months ended September 30, 2007, respectively. In addition, five equity securities were written down in the amount of $308,000 during the three and nine months ended September 30, 2007. Other-than-temporary
impairments of $202,000 were realized during the three and nine months ended September 30, 2006.The estimated fair value, related gross unrealized loss, and the length of time that the
securities have been impaired for held-to-
 10




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##### Table of Contents



maturity securities that are considered temporarily impaired at September 30, 2007 are as follows:
 September 30, 2007Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Gross
    
    
    Estimated
    
    
    Gross
    
    
    Estimated
    
    
    Grossfair
    
    
    unrealized
    
    
    fair
    
    
    unrealized
    
    
    fair
    
    
    unrealizedvalue
    
    
    loss
    
    
    value
    
    
    loss
    
    
    value
    
    
    loss(In thousands)Fixed Maturity Securities:U.S. Treasury Securities
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    
    
    
    
    
    
    
    
    1,009
    
    
    
    (7
    )
    
    
    1,009
    
    
    
    (7
    )Total
    
    $
    
    
    
    
    
    
    
    
    1,009
    
    
    
    (7
    )
    
    
    1,009
    
    
    
    (7
    )
 The estimated fair value, related gross unrealized losses, and the length of time that the
securities have been impaired for available-for-sale securities that are considered temporarily
impaired at September 30, 2007 are as follows:
 September 30, 2007Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Gross
    
    
    Estimated
    
    
    Gross
    
    
    Estimated
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss(In thousands)Fixed maturity securities:U.S. Treasury securities
    
    $
    0
    
    
    
    0
    
    
    
    1,302
    
    
    
    (13
    )
    
    
    1,302
    
    
    
    (13
    )Obligations of U.S. government
corporations and agencies
    
    
    0
    
    
    
    0
    
    
    
    6,714
    
    
    
    (76
    )
    
    
    6,714
    
    
    
    (76
    )Obligations of states and political
subdivisions
    
    
    88,149
    
    
    
    (836
    )
    
    
    37,650
    
    
    
    (401
    )
    
    
    125,799
    
    
    
    (1,237
    )Corporate securities
    
    
    5,906
    
    
    
    (122
    )
    
    
    25,933
    
    
    
    (443
    )
    
    
    31,839
    
    
    
    (565
    )Mortgage-backed securities
    
    
    37,195
    
    
    
    (564
    )
    
    
    29,716
    
    
    
    (892
    )
    
    
    66,911
    
    
    
    (1,456
    )Collateralized mortgage obligations
    
    
    15,450
    
    
    
    (1,071
    )
    
    
    16,432
    
    
    
    (391
    )
    
    
    31,882
    
    
    
    (1,462
    )Asset-backed securities
    
    
    10,925
    
    
    
    (3,108
    )
    
    
    10,690
    
    
    
    (2,545
    )
    
    
    21,615
    
    
    
    (5,653
    )Total
    
    
    157,625
    
    
    
    (5,701
    )
    
    
    128,437
    
    
    
    (4,761
    )
    
    
    286,062
    
    
    
    (10,462
    )Equities:Equity securities
    
    
    24,757
    
    
    
    (2,301
    )
    
    
    3,830
    
    
    
    (125
    )
    
    
    28,587
    
    
    
    (2,426
    )Bond mutual funds
    
    
    8,743
    
    
    
    (243
    )
    
    
    5,258
    
    
    
    (167
    )
    
    
    14,001
    
    
    
    (410
    )Total
    
    
    33,500
    
    
    
    (2,544
    )
    
    
    9,088
    
    
    
    (293
    )
    
    
    42,588
    
    
    
    (2,836
    )Grand Total
    
    $
    191,125
    
    
    
    (8,245
    )
    
    
    137,525
    
    
    
    (5,054
    )
    
    
    328,650
    
    
    
    (13,298
    )
 At September 30, 2007, the Company had 182 fixed income securities and 8 equity securities that
have been in an unrealized loss position for one year or longer. Of the fixed income
securities, 160 are investment grade, of which 147 of these securities are rated A1/A or better
(including 106 securities which are rated AAA). The 22 remaining non-investment grade fixed
income securities have an aggregate fair value equal to 69.3% of their book value as of
September 30, 2007. Of the equity securities, three that have been in an unrealized loss
position for one year or longer relate to investments in closed or open ended bond or preferred
stock funds. Each of these investments continues to pay its regularly scheduled monthly dividend
and there have been no material changes in credit quality for any of these funds over the past
twelve months. Finally, the five remaining equity securities that have been in an unrealized
loss position for one year or longer relate to preferred share investments in issuers each of
which has shown an improved or stable financial performance during the past twelve months. In
addition, these five equity securities have an aggregate fair market value equal to 93.1% of
their book value as of September 30, 2007. All 182 of the fixed income securities are current
on interest and principal and all of the equity securities continue to pay dividends at a
level consistent with the prior year. Management believes that it is probable that all contract
terms of each security will be satisfied. The unrealized loss position for all investments,
including equity securities, is due to the changes in interest rate environment and current
capital market conditions and the Company has the positive intent and ability to hold these
securities until they mature or recover in value.
 11




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(4)
    
    Loss and Loss Expense ReservesLoss and loss expense reserves represent our best estimate of ultimate amounts for losses and
related expenses from claims that have been reported but not paid, and those losses that have
occurred but have not yet been reported to us. Loss reserves do not represent an exact
calculation of liability, but instead represent our estimates, generally utilizing individual
claim estimates, actuarial expertise and estimation techniques at a given accounting date. The
loss reserve estimates are expectations of what ultimate settlement and administration of claims
will cost upon final resolution. These estimates are based on facts and circumstances then known
to us, a review of historical settlement patterns, estimates of trends in claims frequency and
severity, projections of loss costs, expected interpretations of legal theories of liability, and
many other factors. In establishing reserves, we also take into account estimated recoveries,
reinsurance, salvage and subrogation. The reserves are reviewed regularly by a team of actuaries
we employ.Net loss and loss expenses incurred were $33.0 million for the quarter ended September 30, 2007,
compared to $34.4 million for the quarter ended September 30, 2006. In the third quarter of
2007, the Company recorded $34.0 million of incurred losses and loss expenses attributable to the
2007 accident year, which was partially offset by favorable development of $946,000 attributable
to events of prior years. In the third quarter of 2006, the Company recorded $35.6 million of
incurred losses and loss expenses attributable to the 2006 accident year and $1.2 million of
favorable development attributable to events of prior years.Net loss and loss expenses incurred were $100.0 million for the nine months ended September 30,
2007, compared to $97.4 million for the nine months ended September 30, 2006. In the first nine
months of 2007, the Company recorded $104.5 million of incurred losses and loss expenses
attributable to the 2007 accident year, which were partially offset by favorable development of
$4.5 million attributable to events of prior years, as discussed below. For the nine months ended
September 30, 2006, the Company recorded $97.0 million of incurred losses and loss expenses
attributable to the 2006 accident year and $353,000 attributable to events of prior years.For the three months ended September 30, 2007, the Company experienced favorable
non-catastrophe case reserve development within the property line, producing a reduction in
ultimate loss and loss expenses by $1.8 million primarily for the 2005 and 2006 accident years.
Within the casualty line, the Company experienced $981,000 of unfavorable development primarily
related to the settlement of one claim and an increase in projected construction defect claim
counts.For the three months ended September 30, 2006, the Company experienced favorable non-catastrophe
case reserve development within the property line, producing a reduction in ultimate loss and
loss expenses by $3.3 million, primarily for the 2004 and 2005 accident years. This favorable
development was offset by an increase of $200,000 in casualty reserves during the three month
period as a result of a small amount of adverse development in the casualty line related to one
specific claim. Additionally, the Company recorded approximately $1.9 million of unfavorable
development during the three months ended September 30, 2006 primarily related to estimated costs
associated with possible reinsurance collection issues on the 1998 through 1999 workers
compensation reinsurance treaties.The favorable development during the nine months ended September 30, 2007 resulted primarily from
reductions in the ultimate loss ratios for accident years 2005 and 2006 on the claims made
contractor liability business included in our property and casualty segment. The Company reduced
carried reserves related to the 2005 and 2006 casualty business based on the Companys internal
actuarial reserve recommendations. The 2005 and 2006 casualty reserves have performed better
than expected to date, and previously carried reserves exceeded the current indications for each
of the estimation methods applied in the Companys internal actuarial analysis. At the beginning
of 2005, the Company began writing certain contractors liability business on a claims made form,
replacing the occurrence form which had previously been utilized through 2004. The Company wrote
a significant volume of claims made contractor business in both 2005 and 2006, and this business
has continued to perform better than expected. The Company continues to monitor loss emergence
on this book and adjusts assumptions and estimates as needed. The Company continues to write
contractor business on an occurrence form on a limited basis, in certain jurisdictions and for
certain classes of business. In addition, this favorable development was supplemented in the
third quarter of 2007 by $1.8 million of favorable development in our property line as a result
of favorable case reserve development that was below our expectations, resulting in a reduction
of our ultimate loss and loss expenses for the 2005 and 2006 accident years.For the nine months ended September 30, 2006, the Company experienced favorable non-catastrophe
property case reserve development producing a reduction in ultimate loss and loss expenses by
$7.0 million primarily for the 2004 and 2005 accident years. The Company also changed its
estimates during such nine month period on catastrophe losses by reducing its estimates on
Hurricane Wilma by $1.2 million due to actual incurred losses being lower than original
estimates. This favorable development
 12




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was offset by an increase of $4.3 million in casualty
reserves during such nine-month period as a result of a small amount of adverse development in
the casualty line and a result of a refinement to the internal actuarial reserving technique
concerning the weighting of reserve indications and supplemental information concerning claims
severities. The Companys casualty reserves moved to a higher point on the range of loss and
loss expense reserve estimate, despite the fact that overall, the Companys casualty book of
business performed within the range of expectations for the quarter and nine months ended
September 30, 2006. The Company also incurred approximately $1.4 million of adverse development
during the nine months ended September 30, 2006 due to an increase in legal severities on
construction defect claims. Additionally, the Company recorded approximately $2.9 million of
unfavorable development during the nine months ended September 30, 2006 related to estimated
costs associated with possible reinsurance collection issues on two separate casualty claims and
the 1998 and 1999 workers compensation reinsurance treaties.Management believes the loss and loss expense reserves make a reasonable provision for expected
losses, however, ultimate settlement of these amounts could vary significantly from the amounts
recorded.
 (5)
    
    ReinsuranceIn the ordinary course of business, Century and PIC assume and cede reinsurance with other
insurers and reinsurers. These arrangements provide greater diversification of business and
limit the maximum net loss potential on large risks. There have been no significant changes in
the Companys reinsurance program, since December 31, 2006. The amounts of ceded loss and loss
expense reserves and ceded unearned premiums would represent a liability of the Company in the
event that its reinsurers would be unable to meet existing obligations under reinsurance
agreements.The effects of assumed and ceded reinsurance on premiums written, premiums earned and loss and
loss expenses incurred were as follows:
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Premiums written:Direct
    
    $
    63,934
    
    
    
    68,849
    
    
    
    186,950
    
    
    
    190,612Assumed
    
    
    1,202
    
    
    
    454
    
    
    
    4,425
    
    
    
    2,400Ceded
    
    
    (9,304
    )
    
    
    (8,638
    )
    
    
    (26,899
    )
    
    
    (23,426
    )Net premiums written
    
    $
    55,832
    
    
    
    60,665
    
    
    
    164,476
    
    
    
    169,586Premiums earned:Direct
    
    
    63,019
    
    
    
    62,831
    
    
    
    187,206
    
    
    
    177,977Assumed
    
    
    1,567
    
    
    
    523
    
    
    
    5,072
    
    
    
    2,440Ceded
    
    
    (8,713
    )
    
    
    (7,929
    )
    
    
    (25,320
    )
    
    
    (23,425
    )Net premiums earned
    
    $
    55,873
    
    
    
    55,425
    
    
    
    166,958
    
    
    
    156,992Losses and loss expenses incurred:Direct
    
    $
    36,468
    
    
    
    34,133
    
    
    
    107,982
    
    
    
    106,993Assumed
    
    
    213
    
    
    
    481
    
    
    
    974
    
    
    
    838Ceded
    
    
    (3,644
    )
    
    
    (221
    )
    
    
    (8,918
    )
    
    
    (10,424
    )Net losses and loss expenses incurred
    
    $
    33,037
    
    
    
    34,393
    
    
    
    100,038
    
    
    
    97,407
 The Companys allowance for uncollectible reinsurance was $3.4 million at September 30, 2007.
The allowance for uncollectible reinsurance was $4.1 million at December 31, 2006. During the
third quarter of 2007, the Company settled with one of its reinsurers and established a $200,000
allowance related to arbitration costs associated with a dispute with another reinsurer.Management believes that the reserves for uncollectible reinsurance constitute a reasonable
provision for expected costs and recoveries related to the collection of the recoverables on
these claims; however, actual legal costs and settlements of these claims could vary
significantly from the current estimates recorded.
 13




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##### Table of Contents



(6)
    
    Deferred Policy Acquisition CostsThe following reflects the amounts of policy acquisition costs deferred and amortized:
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    26,782
    
    
    
    22,906
    
    
    
    26,915
    
    
    
    20,649Policy acquisition costs deferred
    
    
    13,783
    
    
    
    15,011
    
    
    
    42,038
    
    
    
    42,230Amortization of deferred policy acquisition costs
    
    
    (14,068
    )
    
    
    (14,440
    )
    
    
    (42,456
    )
    
    
    (39,402
    )Balance at end of period
    
    $
    26,497
    
    
    
    23,477
    
    
    
    26,497
    
    
    
    23,477
 As of September 30, 2007, the Company expensed $41,000 of unamortized deferred policy
acquisition costs related to the auto physical damage program. This expense was a result of the
fact that the programs loss and loss expense ratio exceeded our expectations causing the program
to fall below the profitability levels required for continued deferral of the additional policy
acquisition costs. As of September 30, 2006, the Company expensed $766,000 of unamortized
deferred policy acquisition costs related to the auto physical damage program.(7)
    
    Federal Income TaxesThe income tax provision for the three and nine months ended September 30, 2007 has been computed
based on our estimated annual effective tax rate of 30.5% which differs from the federal income
tax rate of 35% principally because of tax-exempt investment income. The income tax provision
for the three and nine months ended September 30, 2006 of 30.3% and 29.5%, respectively, was
computed based on our estimated annual effective tax rate of 29.5% which differs from the federal
income tax rate of 35% principally because of tax-exempt investment income.(8)
    
    Commitments and ContingenciesWe are party to lawsuits, arbitrations and other proceedings that arise in the normal course of
our business. Certain of the lawsuits, arbitrations and other proceedings involve claims under
policies that we underwrite as an insurer, the liabilities for which we believe have been
adequately included in our loss and loss adjustment expense reserves. Also, from time to time, we
are party to lawsuits, arbitrations and other proceedings that relate to disputes over
contractual relationships with third parties or that involve alleged errors and omissions on the
part of our insurance subsidiaries. We provide accruals for these items to the extent we deem the
losses probable and reasonably estimable.The outcome of litigation is subject to numerous uncertainties. Although the ultimate outcome of
pending matters cannot be determined at this time, based on present information, we believe the
resolution of these matters will not have a material adverse effect on our financial position,
results of operations or cash flows.In August of 2007, the Board of Directors approved a $10.0
million  share repurchase plan. As of September 30, 2007, no shares
have been repurchased under this plan.
(9)
    
    Employee BenefitsDuring 2004, the Company adopted and the shareholders approved a stock option plan that provided
for tax-favored incentive share options (qualified options), non-qualified share options to
employees and board members that do not qualify as tax-favored incentive share options
(non-qualified options), time-based restricted shares that vest solely on service provided,
restricted shares that vest based on achieved performance metrics and non-restricted shares that
are issued in conjunction with the Companys annual bonus plan. The Company accounts for this
plan in accordance with FAS 123R. Any compensation cost recorded in accordance with FAS 123R is
recorded in the same captions as the salary expense of the employee (i.e. the compensation cost
for the Chief Investment Officer is recorded in net investment income). The Company will issue
authorized but unissued shares or treasury shares to satisfy restricted share awards or the
exercise of share options.With respect to qualified options, an employee may be granted an option to purchase shares at the
grant date fair market value, payable as determined by the Companys board of directors. An
optionee must exercise an option within 10 years from the grant date. Full vesting of option
grants occurs at the end of four years.With respect to non-qualified options, an employee or a board member may be granted an option to
purchase shares at the grant date fair market value, payable as determined by the Companys board
of directors. An optionee must exercise an option within 10
 14




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##### Table of Contents



years from the grant date. Full
vesting of option grants occurs at the end of three years for the board of directors and four
years for employees.For both non-qualified and qualified options, the option exercise price equals the stocks fair
market value on the date of the grant. Compensation expense is measured on the grant date fair
value using a Black Scholes model. The compensation cost is recognized over the respective
service period, which typically matches the vesting period.The time-based restricted shares are granted to key executives and vest in equal installments
upon the lapse of a period of time, typically over four-and five-year periods; and include both
monthly and annual vesting periods. Compensation expense for time-based restricted shares is
measured on the grant date fair value and then recognized over the respective service period,
which typically matches the vesting period.The performance-based restricted shares are granted to key executives and vest annually over a
four-year period based on achieved specified performance metrics. Compensation expense for
performance-based restricted share awards is recognized based on the fair value of the awards on
the date of grant.The non-restricted shares are granted to key executives pursuant to the stock option plan in
conjunction with the Companys annual bonus plan and are fully vested on the date of grant.
These shares are granted to the executive when the annual bonus plan calculation exceeds the
employees target bonus. Under the annual bonus plan the portion of the bonus that is less than
or equal to the executives target bonus is paid in cash and any amount greater than the target
bonus is paid in non-restricted shares. Compensation expense for non-restricted shares is
recognized based on the grant date fair value.The Company may grant awards for up to 1.2 million shares under the plan. Through September 30,
2007, the Company had granted 311,000 non-qualified options, 292,500 qualified options, 156,000
time-based restricted shares, 127,353 performance- based restricted shares, and 8,661
non-restricted shares under the share plan.The Company did not grant any awards during the three months ended September 30, 2007. During
the second quarter of 2007, the Company granted 12,000 non-qualified options to members of its
board of directors which vest monthly over a three-year period. During the quarter ended March
31, 2007, the Company awarded certain employees 85,000 share options which vest monthly over a
four-year period. The weighted average fair value of options granted during the nine months
ended September 30, 2007 was $6.46. A summary of the status of the option plan at September 30,
2007, and changes during the three and nine months then ended is presented in the following
table:
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2007Weighted-
    
    
    
    
    
    
    Weighted-Number of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    536,642
    
    
    $
    12.26
    
    
    
    505,900
    
    
    $
    10.58Changes during the period:Granted
    
    
    
    
    
    
    
    
    
    
    97,000
    
    
    
    19.81Exercised
    
    
    
    
    
    
    
    
    
    
    (66,258
    )
    
    
    10.51Forfeited
    
    
    (4,088
    )
    
    
    15.15
    
    
    
    (4,088
    )
    
    
    15.15Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    532,554
    
    
    $
    12.24
    
    
    
    532,554
    
    
    $
    12.24Exercisable at end of period
    
    
    367,774
    
    
    $
    10.84
    
    
    
    367,774
    
    
    $
    10.84
 The fair market value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions used for
grants issued during the nine months ended September 30, 2007:
 15




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##### Table of Contents



Nine MonthsEnded September 30,2007Risk-free interest rate
    
    
    4.51
    %Expected dividends
    
    
    0.74
    %Expected volatility
    
    
    25.45
    %Weighted average expected term
    
    6.28
    Years
  Options OutstandingWeighted
    
    
    
    
    
    
    
    
    
    
    Options ExcercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    AggregateOutstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Intrinsic
    
    
    Exercisable
    
    
    Exercise
    
    
    IntrinsicPrice Range
    
    Options
    
    
    Term
    
    
    Price
    
    
    Value
    
    
    Options
    
    
    Price
    
    
    Value$10.20
    
    
    11,386
    
    
    
    7.7
    
    
    $
    10.20
    
    
    $
    50,440
    
    
    
    9,156
    
    
    $
    10.20
    
    
    $
    40,561$10.50
    
    
    309,349
    
    
    
    6.6
    
    
    $
    10.50
    
    
    $
    1,277,611
    
    
    
    296,112
    
    
    $
    10.50
    
    
    $
    1,222,944$10.64
    
    
    106,042
    
    
    
    8.3
    
    
    $
    10.64
    
    
    $
    423,108
    
    
    
    45,562
    
    
    $
    10.64
    
    
    $
    181,792$13.04
    
    
    10,721
    
    
    
    8.7
    
    
    $
    13.04
    
    
    $
    17,046
    
    
    
    5,156
    
    
    $
    13.04
    
    
    $
    8,198$18.70
    
    
    10,056
    
    
    
    9.7
    
    
    $
    18.70
    
    
    $
    (40,928
    )
    
    
    1,176
    
    
    $
    18.70
    
    
    $
    (4,786
    )$19.97
    
    
    85,000
    
    
    
    9.4
    
    
    $
    19.97
    
    
    $
    (453,900
    )
    
    
    10,612
    
    
    $
    19.97
    
    
    $
    (56,668
    )$
    1,273,377
    
    
    
    
    
    
    
    
    
    
    $
    1,392,041
 A summary of all employee time-based restricted share activity during the three and nine months
ended September 30, 2007 is as follows:
 For the Three Months
Ended September 30, 2007
    
    

For the Nine Months
Ended September 30, 2007Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Grant Price
    
    
    Shares
    
    
    Grant PriceOutstanding at beginning of period
    
    
    35,699
    
    
    $
    10.15
    
    
    
    45,156
    
    
    $
    10.19Changes during the period:Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    (10,678
    )
    
    
    10.15
    
    
    
    (20,135
    )
    
    
    10.24Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    25,021
    
    
    $
    10.15
    
    
    
    25,021
    
    
    $
    10.15
 In March 2007, the Company granted 35,625 performance-based restricted shares to certain
executives that vest annually over a four-year period subject to the achievement of certain
performance metrics. The Company accounts for these awards as fixed awards that are recorded
at fair value on the date of grant. A summary of all employee performance-based restricted
share activity during the three and nine months ended September 30, 2007 is as follows:
 16




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##### Table of Contents



For the Three Months
    
    
    For the Nine MonthsEnded September 30, 2007
    
    
    Ended September 30, 2007Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Grant Price
    
    
    Shares
    
    
    Grant PriceOutstanding at beginning of period
    
    
    91,012
    
    
    $
    15.82
    
    
    
    64,728
    
    
    $
    12.76Changes during the period:Granted
    
    
    
    
    
    
    
    
    
    
    35,625
    
    
    
    19.97Vested
    
    
    (9,176
    )
    
    
    14.49
    
    
    
    (18,517
    )
    
    
    12.48Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    81,836
    
    
    $
    15.96
    
    
    
    81,836
    
    
    $
    15.96
 As of September 30, 2007, total compensation cost related to nonvested share options or
restricted shares was $1.7 million, which is expected be recorded over 2.4 years. Total
compensation cost for share-based awards was $281,000 and $376,000 for the three months ended
September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and
2006, total compensation cost was $985,000 and $989,000, respectively. The tax benefit
included in the accompanying statements of operations related to the compensation cost was
$11,000 and $46,000 for the three months ended September 30, 2007 and 2006, respectively. For
the nine months ended September 30, 2007 and 2006 the tax benefit included in the accompanying
statements of operations related to the compensation cost was $331,000 and $91,000,
respectively. For the three and nine months ended September 30, 2007, the Company had $47,000
and $165,000 of compensation cost for share-based awards capitalized with deferred policy
acquisition costs.(10)
    
    Segment Reporting DisclosuresThe Company operates in the Property and Casualty Segment (including general liability,
multi-peril, commercial property, garage liability and auto physical damage).The Companys Other Segment (including exited lines) includes the surety business and the
Companys exited lines, such as workers compensation and commercial auto/trucking. A limited
amount of surety business is written in order to maintain Centurys U.S. Treasury listing.All investment activities are included in the Investing operating segment.The Company considers many factors, including economic similarity, the nature of the underwriting
units insurance products, production sources, distribution strategies and regulatory environment
in determining how to aggregate operating segments.Segment profit or loss for each of the Companys segments is measured by underwriting profit or
loss. The property and casualty insurance industry commonly defines underwriting profit or loss
as earned premium net of loss and loss expenses and underwriting, acquisition and insurance
expenses. Underwriting profit or loss does not replace operating income or net income computed in
accordance with GAAP as a measure of profitability. Segment profit for the Investing operating
segment is measured by net investment income and net realized gains or losses. The Company does
not allocate assets, including goodwill, to the Property and Casualty and Other operating
segments for management reporting purposes. The total investment portfolio and cash are allocated
to the Investing operating segment.Following is a summary of segment disclosures:
 17




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##### Table of Contents



For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Segment revenue:Property and Casualty
    
    $
    54,474
    
    
    
    55,044
    
    
    
    162,501
    
    
    
    155,005Investing
    
    
    5,216
    
    
    
    5,003
    
    
    
    15,904
    
    
    
    14,077Other (including exited lines)
    
    
    1,399
    
    
    
    381
    
    
    
    4,457
    
    
    
    1,987Segment revenue
    
    $
    61,089
    
    
    
    60,428
    
    
    
    182,862
    
    
    
    171,069Segment profit:Property and Casualty
    
    $
    3,459
    
    
    
    4,208
    
    
    
    11,177
    
    
    
    9,088Investing
    
    
    5,216
    
    
    
    5,003
    
    
    
    15,904
    
    
    
    14,077Other (including exited lines)
    
    
    380
    
    
    
    (994
    )
    
    
    914
    
    
    
    (276
    )Segment profit
    
    $
    9,055
    
    
    
    8,217
    
    
    
    27,995
    
    
    
    22,889Segment assets:Investing
    
    $
    457,064
    
    
    
    413,606
    
    
    
    457,064
    
    
    
    413,606Assets not allocated
    
    
    162,906
    
    
    
    127,028
    
    
    
    162,906
    
    
    
    127,028Total consolidated assets
    
    $
    619,970
    
    
    
    540,634
    
    
    
    619,970
    
    
    
    540,634
 The following summary reconciles significant segment items to the Companys interim unaudited
consolidated
condensed financial statements:
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Total revenues:Segment revenues
    
    $
    61,089
    
    
    
    60,428
    
    
    
    182,862
    
    
    
    171,069Other
    
    
    159
    
    
    
    101
    
    
    
    379
    
    
    
    353Total consolidated revenues
    
    $
    61,248
    
    
    
    60,529
    
    
    
    183,241
    
    
    
    171,422Income before income tax expense:Segment profit
    
    $
    9,055
    
    
    
    8,217
    
    
    
    27,995
    
    
    
    22,889Unallocated amounts:Other income
    
    
    159
    
    
    
    101
    
    
    
    379
    
    
    
    353Corporate expenses
    
    
    (261
    )
    
    
    (341
    )
    
    
    (1,021
    )
    
    
    (598
    )Interest expense
    
    
    (684
    )
    
    
    (608
    )
    
    
    (2,038
    )
    
    
    (1,718
    )Income before income tax expense
    
    $
    8,269
    
    
    
    7,369
    
    
    
    25,315
    
    
    
    20,926
 18




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##### Table of Contents



The following is a summary of earned premium by group of products:
 Property
    
    
    Casualty
    
    
    Other
    
    
    Consolidated(In thousands)Three Months Ended September 30, 2007Property and Casualty
    
    $
    19,019
    
    
    
    35,455
    
    
    
    
    
    
    
    54,474Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    1,399
    
    
    
    1,399Earned premiums
    
    $
    19,019
    
    
    
    35,455
    
    
    
    1,399
    
    
    
    55,873Three Months Ended September 30, 2006Property and Casualty
    
    $
    15,779
    
    
    
    39,265
    
    
    
    
    
    
    
    55,044Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    381
    
    
    
    381Earned premiums
    
    $
    15,779
    
    
    
    39,265
    
    
    
    381
    
    
    
    55,425
 Property
    
    
    Casualty
    
    
    Other
    
    
    Consolidated(In thousands)Nine Months Ended September 30, 2007Property and Casualty
    
    $
    57,391
    
    
    
    105,110
    
    
    
    
    
    
    
    162,501Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    4,457
    
    
    
    4,457Earned premiums
    
    $
    57,391
    
    
    
    105,110
    
    
    
    4,457
    
    
    
    166,958Nine Months Ended September 30, 2006Property and Casualty
    
    $
    45,251
    
    
    
    109,754
    
    
    
    
    
    
    
    155,005Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    1,987
    
    
    
    1,987Earned premiums
    
    $
    45,251
    
    
    
    109,754
    
    
    
    1,987
    
    
    
    156,992
 The Company does not manage property and casualty products at this level of detail.(11)
    
    Dividends to Common ShareholdersOn March 8, 2007, the Board of Directors declared a dividend of $0.04 per common share that was
paid on April 18, 2007 to shareholders of record as of March 27, 2007. In addition, on May 17,
2007, the Board of Directors declared a dividend of $0.04 per common share that was paid on June
6, 2007 to shareholders of record as of May 24, 2007. On August 16, 2007, the Board of Directors
declared a dividend of $0.04 per common share was paid on September 19, 2007 to shareholders of
record as of August 29, 2007.On March 13, 2006, the Board of Directors declared a dividend of $0.03 per common share that was
paid on April 17, 2006 to shareholders of record as of March 27, 2006. In addition, on May 15,
2006, the Board of Directors declared a dividend of $0.035 per common share that was paid on June
7, 2006 to shareholders of record as of May 24, 2006. On August 16, 2006, the Board of
Directors declared a dividend of $0.04 per common share that was paid on September 20, 2006 to
shareholders of record as of August 30, 2006.
 (12)
    
    Line of CreditThe Company has a $10.0 million line of credit with a maturity date of September 30, 2009, and
interest only payments due quarterly based on LIBOR plus 1.2% of the outstanding balance. All of
the outstanding shares of Century are pledged as collateral. The Company did not make any draws
on the line of credit during the third quarter of 2007. During the first nine months of 2007,
the Company made draws totaling $650,000 on the line of credit for general corporate purposes.
At September 30, 2007, there was $4.7 million outstanding under the line of credit. Interest
expense for the three and nine months ended September 30, 2007 was approximately $77,000 and
$246,000, respectively. The Company did not have any borrowings outstanding under the line of
credit at September 30, 2006. Interest expense for the three and nine months ended September 30,
2006 was $6,000.
 19




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##### Table of Contents



Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
  
    
    our business is cyclical in nature and our industry is currently experiencing softening
market conditions which may affect our financial performance, our ability to grow and the
price of our common shares;
    
    our success depends on our ability to appropriately price the risks we underwrite;
    
    our actual incurred losses may be greater than our loss and loss expense reserves, which
could cause our future earnings, liquidity and financial rating to decline;
    
    severe weather conditions and other catastrophes, including the wild fires in Southern
California, may result in an increase in the number and amount of claims experienced by our
insureds;
    
    a decline in our financial rating assigned by A.M. Best & Company may result in a
reduction of new or renewal business;
    
    if we are unable to compete effectively with the large number of companies in the
insurance industry for underwriting revenues, we may incur increased costs and our
underwriting revenues and net income may decline;
    
    we distribute our products through a select group of general agents, five of which
account for a significant part of our business, and such relationships could be
discontinued or cease to be profitable;
    
    we may not be successful in developing our new specialty lines or new classes of
insureds through our program unit that could cause us to experience losses;
    
    we may not find suitable acquisition candidates or new insurance ventures and even if we
do, we may not successfully integrate any such acquired companies or successfully invest in
such ventures;
    
    our investment results and, therefore, our financial condition may be impacted by
changes in the business, financial condition or operating results of the entities in which
we invest, as well as changes in government monetary policies, general economic conditions
and overall capital market conditions, all of which impact interest rates;
    
    our investment performance may suffer as a result of adverse capital market developments
or other factors, which may affect our financial results and ability to conduct business;
    
    if we are not able to renew our existing reinsurance or obtain new reinsurance, either
our net exposure would increase or we would have to reduce the level of our underwriting
commitment;
    
    our reinsurers may not pay claims made by us on losses in a timely fashion or may not
pay some or all of these claims, in each case causing our costs to increase and our
revenues to decline;
    
    we are subject to extensive regulation and judicial decisions affecting insurance and
tort law, which may adversely affect our ability to achieve our business objectives. In
addition, if we fail to comply with such regulations, we may be subject to penalties,
including fines and suspensions, which may adversely affect our financial condition and
results of operations;
 20




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##### Table of Contents




    
    as a holding company, we are dependent on the results of operations of our insurance
subsidiaries and the regulatory and contractual capacity of our subsidiaries to pay
dividends to us. Some states limit the aggregate amount of dividends our subsidiaries may
pay to us in any twelve-month period, thereby limiting our funds to pay expenses and
dividends;
    
    although we have paid cash dividends in the past, we may not pay cash dividends in the
future;
    
    if we lose key personnel or are unable to recruit qualified personnel, our ability to
implement our business strategies could be delayed or hindered;
    
    managing technology initiatives and meeting new data security requirements present
significant challenges to us;
    
    our general agents may exceed their authority and bind us to policies outside our
underwriting guidelines, and until we effect a cancellation of a policy, we may incur loss
and loss expenses related to that policy;
    
    our reliance on our agents subjects us to credit risk; and
    
    we are exposed to risks relating to evaluations of controls required by Section 404 of
the Sarbanes-Oxley Act of 2002.
  Overview
 ®
  Written and Unearned Premium.
 Loss and Loss Expense Ratio.
 Expense Ratio.
 Combined Ratio.
 21




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##### Table of Contents



Critical Accounting Policies
   Loss and Loss Expense Reserves.
 Reinsurance Recoverables.
 Impairment of Investments.
  Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,
  22




---



##### Table of Contents



Deferred Policy Acquisition Costs.
 Federal Income Taxes.
  Results of Operations
  For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Selected Financial Data:Gross written premiums
    
    $
    65,136
    
    
    
    69,303
    
    
    
    191,375
    
    
    
    193,012Premiums earned
    
    
    55,873
    
    
    
    55,425
    
    
    
    166,958
    
    
    
    156,992Net investment income
    
    
    5,571
    
    
    
    4,999
    
    
    
    16,497
    
    
    
    14,114Net realized investment (losses) gains
    
    
    (355
    )
    
    
    4
    
    
    
    (593
    )
    
    
    (37
    )Total revenues
    
    
    61,248
    
    
    
    60,529
    
    
    
    183,241
    
    
    
    171,422Total expenses
    
    
    52,979
    
    
    
    53,160
    
    
    
    157,926
    
    
    
    150,496Net income
    
    
    5,759
    
    
    
    5,133
    
    
    
    17,606
    
    
    
    14,758Key Financial Ratios:Loss and loss expense ratio
    
    
    59.1
    %
    
    
    62.1
    %
    
    
    59.9
    %
    
    
    62.0
    %Expense ratio
    
    
    34.5
    %
    
    
    32.8
    %
    
    
    33.5
    %
    
    
    32.7
    %Combined ratio
    
    
    93.6
    %
    
    
    94.9
    %
    
    
    93.4
    %
    
    
    94.7
    %
 23




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##### Table of Contents



Overview of Operating Results
     Revenues
 Premiums
   24




---



##### Table of Contents




    
    property/casualty; and
    
    other (including exited lines).
   For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Gross written premiums
Property/casualty
    
    $
    63,597
    
    
    
    68,442
    
    
    
    186,896
    
    
    
    190,322Other (including exited lines)
    
    
    1,539
    
    
    
    861
    
    
    
    4,479
    
    
    
    2,690Total gross written premiums
    
    
    65,136
    
    
    
    69,303
    
    
    
    191,375
    
    
    
    193,012Ceded written premiums
    
    
    9,304
    
    
    
    8,638
    
    
    
    26,899
    
    
    
    23,426Net written premiums
    
    $
    55,832
    
    
    
    60,665
    
    
    
    164,476
    
    
    
    169,586Net premiums earned
    
    $
    55,873
    
    
    
    55,425
    
    
    
    166,958
    
    
    
    156,992Net written premiums to gross written premiums
    
    
    85.7
    %
    
    
    87.5
    %
    
    
    85.9
    %
    
    
    87.9
    %Net premiums earned to net written premiums
    
    
    100.1
    %
    
    
    91.4
    %
    
    
    101.5
    %
    
    
    92.6
    %Net writings ratio (1)
    
    
    1.5
    
    
    
    1.8
    
    
    
    1.4
    
    
    
    1.7
 
 (1)
    
    The ratio of net written premiums to our insurance subsidiaries combined statutory
surplus. Management believes this measure is useful in gauging our exposure to pricing
errors in the current book of business. It may not be comparable to the definition of net
writings ratio used by other companies. Gross Written Premiums
 25




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##### Table of Contents



Net Written and Earned Premiums
    Net Investment Income
   Realized Gains (Losses) on Securities
   26




---



##### Table of Contents



Expenses
 Losses and Loss Expenses
         27




---



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28




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##### Table of Contents



September 30, 2007
    
    
    December 31, 2006Case
    
    
    IBNR
    
    
    Total
    
    
    Case
    
    
    IBNR
    
    
    TotalProperty and Casualty:Casualty
    
    $
    55,529
    
    
    
    152,204
    
    
    
    207,733
    
    
    
    59,801
    
    
    
    128,569
    
    
    
    188,370Property
    
    
    12,326
    
    
    
    13,571
    
    
    
    25,897
    
    
    
    13,506
    
    
    
    8,796
    
    
    
    22,302Other (including exited lines):Commercial auto
    
    
    98
    
    
    
    4
    
    
    
    102
    
    
    
    147
    
    
    
    
    
    
    
    147Workers compensation
    
    
    1,033
    
    
    
    2,040
    
    
    
    3,073
    
    
    
    1,164
    
    
    
    2,056
    
    
    
    3,220Surety
    
    
    
    
    
    
    519
    
    
    
    519
    
    
    
    
    
    
    
    529
    
    
    
    529Net reserves for losses and loss expenses
    
    
    68,986
    
    
    
    168,338
    
    
    
    237,324
    
    
    
    74,618
    
    
    
    139,950
    
    
    
    214,568Plus reinsurance recoverables on unpaid
losses at end of period
    
    
    9,632
    
    
    
    28,126
    
    
    
    37,758
    
    
    
    11,723
    
    
    
    24,381
    
    
    
    36,104Gross reserves for losses and loss expenses
    
    $
    78,618
    
    
    
    196,464
    
    
    
    275,082
    
    
    
    86,341
    
    
    
    164,331
    
    
    
    250,672
      29




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##### Table of Contents



Operating Expenses
  For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Amortization of deferred policy acquisition costs (ADAC)
    
    $
    14,068
    
    
    
    14,440
    
    
    
    42,456
    
    
    
    39,402Other operating expenses
    
    
    5,190
    
    
    
    3,719
    
    
    
    13,394
    
    
    
    11,969ADAC and other operating expenses
    
    
    19,258
    
    
    
    18,159
    
    
    
    55,850
    
    
    
    51,371Interest expense
    
    
    684
    
    
    
    608
    
    
    
    2,038
    
    
    
    1,718Total operating expenses
    
    $
    19,942
    
    
    
    18,767
    
    
    
    57,888
    
    
    
    53,089Expense ratio:ADAC
    
    
    25.2
    %
    
    
    26.1
    %
    
    
    25.4
    %
    
    
    25.1
    %Other operating expenses
    
    
    9.3
    %
    
    
    6.7
    %
    
    
    8.1
    %
    
    
    7.6
    %Total expense ratio (1)
    
    
    34.5
    %
    
    
    32.8
    %
    
    
    33.5
    %
    
    
    32.7
    %
 
 (1)
    
    Interest expense is not included in the calculation of the expense ratio.   30




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##### Table of Contents



Income Taxes
  Liquidity and Capital Resources
      Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006.
 31




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##### Table of Contents



Line of Credit.
  Investment Portfolio
   Accounting Standards
  32




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
    33




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Item 3. Quantitative And Qualitative Disclosures About Market Risk
   
 Item 4. Controls And Procedures
     34




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##### Table of Contents



PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  Our success depends on our ability to appropriately price the risks we underwrite.
  
    
    the availability of sufficient reliable data and our ability to properly analyze
available data;
    
    the uncertainties that inherently characterize estimates and assumptions;
    
    our selection and application of appropriate rating and pricing techniques; and
    
    changes in legal standards, claim settlement practices, medical care expenses and
restoration costs.
  We may not find suitable acquisition candidates or new insurance ventures and even if we do, we may
not successfully integrate any such acquired companies or successfully invest in such ventures.
  35




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##### Table of Contents



Our investment performance may suffer as a result of adverse capital market developments or other
factors, which may affect our financial results and ability to conduct business.
  We are subject to judicial decisions affecting insurance and tort law, which may adversely affect
our ability to achieve our business objectives.
  Although we have paid cash dividends in the past, we may not pay cash dividends in the future.
  Our reliance on our agents subjects us to credit risk.
  We are exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act of 2002.
  36




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   Item 6. Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation of ProCentury (Incorporated by reference
from the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004,
filed with the Securities and Exchange Commission SEC on September 4, 2004.)3.2
    
    Amended and Restated Code of Regulations of ProCentury (Incorporated by reference from the
Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed with
the SEC on September 4, 2004.)31.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act32.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)32.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)
 
 (1)
    
    These certifications are not deemed to be filed for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section. These certifications will not be
deemed to be incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically incorporates them by
reference. 37




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##### Table of Contents



SIGNATURE
  PROCENTURY CORPORATIONDate November 9, 2007
    By:
    /s/ Erin E. WestErin E. WestChief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 
 38




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##### Table of Contents



EXHIBIT INDEX
 3.1
    
    Amended and Restated Articles of Incorporation of ProCentury (Incorporated by reference
from the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004,
filed with the Securities and Exchange Commission (SEC) on September 4, 2004.)3.2
    
    Amended and Restated Code of Regulations of ProCentury (Incorporated by reference from the
Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed with
the SEC on September 4, 2004.)31.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act32.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)32.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)
 
 (1)
    
    These certifications are not deemed to be filed for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section. These certifications will not be
deemed to be incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically incorporates them by
reference. 39