##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 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(State or other jurisdiction of
    
    31-1718622incorporation or organization)
    
    (I.R.S. Employer Identification No.)465 Cleveland AvenueWesterville, Ohio
    
    43082(Address of principal executive offices)
    
    (Zip Code)
 (614) 895-2000
(Registrants telephone number, including area code)   Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. YES x NO o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES o NO x As of August 13, 2004, the registrant had 13,101,195 outstanding Common
Shares, without par value.




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PROCENTURY CORPORATION QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended June 30, 2004 INDEX PagePART I: FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated
Condensed Statements of Operations- For the three and six months ended June 30, 2004 and 2003
    
    
    3Consolidated Condensed Balance Sheets- June 30, 2004 and December 31, 2003
    
    
    4Consolidated
Condensed Statements of Shareholders Equity and Comprehensive
Income- For the six months
ended June 30, 2004 and 2003
    
    
    5Consolidated Condensed Statements of Cash Flows- For the six months ended June 30, 2004 and 2003
    
    
    6Notes to Consolidated Condensed Financial Statements- June 30, 2004
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    
    30SIGNATURE
    
    
    32EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I: FINANCIAL INFORMATION 
 Item 1. Financial Statements PROCENTURY CORPORATION AND SUBSIDIARIES  
 Consolidated Condensed Statements of Operations (Unaudited) (in thousands, except per share data) For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Premiums earned
    
$
    35,819
    
    
    
    26,586
    
    
    
    67,877
    
    
    
    49,531Net investment income
    
    
    2,410
    
    
    
    1,680
    
    
    
    4,375
    
    
    
    3,028Net realized investment gains
    
    
    21
    
    
    
    115
    
    
    
    144
    
    
    
    198Total revenues
    
    
    38,250
    
    
    
    28,381
    
    
    
    72,396
    
    
    
    52,757Losses and loss expenses
    
    
    20,986
    
    
    
    31,424
    
    
    
    39,888
    
    
    
    45,411Amortization of deferred policy acquisition costs
    
    
    8,643
    
    
    
    5,958
    
    
    
    15,493
    
    
    
    11,106Other operating expenses
    
    
    3,272
    
    
    
    2,001
    
    
    
    7,100
    
    
    
    5,661Interest expense
    
    
    345
    
    
    
    357
    
    
    
    760
    
    
    
    675Interest expense on the redemption of Class B Shares
    
    
    518
    
    
    
    
    
    
    
    518
    
    
    
    Total expenses
    
    
    33,764
    
    
    
    39,740
    
    
    
    63,759
    
    
    
    62,853Income (loss) before gain on sale of minority interest in
subsidiary, net
    
    
    4,486
    
    
    
    (11,359
    )
    
    
    8,637
    
    
    
    (10,096
    )Gain on sale of minority interest in subsidiary, net of transaction fees
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    107Income (loss) before minority interest and income tax expense
    
    
    4,486
    
    
    
    (11,350
    )
    
    
    8,637
    
    
    
    (9,989
    )Minority interest
    
    
    
    
    
    
    254
    
    
    
    
    
    
    
    545Income tax expense (benefit)
    
    
    1,500
    
    
    
    (4,024
    )
    
    
    2,763
    
    
    
    (3,513
    )Income (loss) from continuing operations
    
    
    2,986
    
    
    
    (7,580
    )
    
    
    5,874
    
    
    
    (7,021
    )Discontinued operations, net of minority interest and taxes
    
    
    
    
    
    
    274
    
    
    
    
    
    
    
    563Net income (loss)
    
    $
    2,986
    
    
    
    (7,306
    )
    
    
    5,874
    
    
    
    (6,458
    )Basic earnings (loss) per share:Earnings (loss) from continuing operations
    
    $
    0.27
    
    
    
    (1.51
    )
    
    
    0.73
    
    
    
    (1.40
    )Discontinued operations, net of minority interest and taxes
    
    
    
    
    
    
    0.05
    
    
    
    
    
    
    
    0.11Net earnings (loss)
    
    $
    0.27
    
    
    
    (1.46
    )
    
    
    0.73
    
    
    
    (1.29
    )Diluted net earnings (loss) per share:Earnings (loss) from continuing operations
    
    $
    0.26
    
    
    
    (1.51
    )
    
    
    0.72
    
    
    
    (1.40
    )Discontinued operations, net of minority interest and taxes
    
    
    
    
    
    
    0.05
    
    
    
    
    
    
    
    0.11Net earnings (loss)
    
    $
    0.26
    
    
    
    (1.46
    )
    
    
    0.72
    
    
    
    (1.29
    )Weighted average of shares outstanding  basic
    
    
    11,222,340
    
    
    
    5,000,532
    
    
    
    8,062,828
    
    
    
    5,000,532Weighted average of shares outstanding  diluted
    
    
    11,328,595
    
    
    
    5,000,532
    
    
    
    8,115,125
    
    
    
    5,000,532
 See accompanying notes to the unaudited consolidated condensed financial
statements. 3




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PROCENTURY CORPORATION AND SUBSIDIARIES  
 Consolidated Condensed Balance Sheets (Unaudited) (dollars in thousands) June 30, 2004
    
    December 31, 2003AssetsInvestments:Fixed maturities:Available-for-sale, at fair value (amortized cost 2004, $229,091; 2003, $120,701)
    
    $
    225,288
    
    
    
    121,270Held-to-maturity, at amortized cost (fair value 2004, $1,147; 2003, $1,511)
    
    
    1,148
    
    
    
    1,481Equities (available-for-sale):Equity securities, at fair value (cost 2004, $18,606; 2003, $16,041)
    
    
    18,105
    
    
    
    16,394Bond mutual funds, at fair value (cost 2004, $24,090; 2003, $8,882)
    
    
    23,980
    
    
    
    8,906Short-term investments, at amortized cost
    
    
    4,048
    
    
    
    17,336Total investments
    
    
    272,569
    
    
    
    165,387Cash
    
    
    4,566
    
    
    
    5,814Premiums in course of collection, net
    
    
    11,060
    
    
    
    9,686Deferred policy acquisition costs
    
    
    15,616
    
    
    
    11,714Prepaid reinsurance premiums
    
    
    8,635
    
    
    
    6,700Reinsurance recoverable on paid and unpaid losses, net
    
    
    49,334
    
    
    
    42,042Deferred federal income tax asset
    
    
    6,709
    
    
    
    1,774Receivable from subsidiary available for sale
    
    
    
    
    
    
    26,885Assets available for sale
    
    
    
    
    
    
    58,820Other assets
    
    
    5,880
    
    
    
    3,291Total assets
    
    $
    374,369
    
    
    
    332,113Liabilities and Shareholders EquityLoss and loss expense reserves
    
    $
    153,396
    
    
    
    129,236Unearned premiums
    
    
    75,762
    
    
    
    62,139Long term debt
    
    
    25,000
    
    
    
    34,133Accrued expenses and other liabilities
    
    
    5,253
    
    
    
    6,676Reinsurance balances payable
    
    
    2,374
    
    
    
    4,320Collateral held
    
    
    4,183
    
    
    
    5,716Federal income taxes payable
    
    
    5,597
    
    
    
    2,263Liabilities available for sale
    
    
    
    
    
    
    51,233Total liabilities
    
    
    271,565
    
    
    
    295,716Shareholders equity:Capital stock, without par value:Class A shares  Issued and outstanding 13,101,195 shares at June 30, 2004 and
4,999,995 shares at December 31, 2003
    
    
    
    
    
    
    Class B shares  None authorized at June 30, 2004 and issued and outstanding 531.68 shares at December 31, 2003
    
    
    
    
    
    
    Class C shares  None authorized at June 30, 2004 and issued and outstanding 0 shares at December 31, 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    98,499
    
    
    
    26,866Retained earnings
    
    
    7,147
    
    
    
    8,297Accumulated other comprehensive (loss) income, net of taxes
    
    
    (2,842
    )
    
    
    1,234Total shareholders equity
    
    
    102,804
    
    
    
    36,397Total liabilities and shareholders equity
    
    $
    374,369
    
    
    
    332,113
 See accompanying notes to the unaudited consolidated condensed financial
statements. 4




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PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation) 
 Consolidated Condensed Statements of Shareholders Equity
and Comprehensive Income (Unaudited) (dollars in thousands) For the Six Months Ended June 30,2004
    
    2003Shareholders EquityCapital stock:Beginning of period
    
    $
    
    
    
    
    Stock issued
    
    
    
    
    
    
    End of period
    
    
    
    
    
    
    Additional paid-in capital:Beginning of period
    
    
    26,866
    
    
    
    26,460Issuance of common shares
    
    
    77,931
    
    
    
    Issuance costs
    
    
    (1,298
    )
    
    
    Redemption of Class B shares
    
    
    (5,000
    )
    
    
    End of period
    
    
    98,499
    
    
    
    26,460Retained earnings:Beginning of period
    
    
    8,297
    
    
    
    7,983Net income (loss)
    
    
    5,874
    
    
    
    (6,458
    )Dividend of subsidiary available for sale
    
    
    (7,024
    )
    
    
    End of period
    
    
    7,147
    
    
    
    1,525Accumulated other comprehensive (losses) income, net of taxes:Beginning of period
    
    
    1,234
    
    
    
    1,952Unrealized holding (losses) gains arising during the period, net of reclassification adjustment
    
    
    (3,512
    )
    
    
    2,237Unrealized
holding gains arising during the period, discontinued operations
    
    
    
    
    
    
    (410
    )Dividend of subsidiary available for sale
    
    
    (564
    )
    
    
    End of period
    
    
    (2,842
    )
    
    
    3,779Total shareholders equity
    
    $
    102,804
    
    
    
    31,764Comprehensive IncomeNet income (loss)
    
    $
    5,874
    
    
    
    (6,458
    )Other comprehensive income:Unrealized gains on securities:Unrealized holding (losses) gains arising during the period:Gross
    
    
    (5,233
    )
    
    
    3,065Related federal income tax (expense) benefit
    
    
    1,815
    
    
    
    (699
    )Net unrealized (losses) gains
    
    
    (3,418
    )
    
    
    2,366Reclassification adjustment for gains included in net incomeGross
    
    
    144
    
    
    
    198Related federal income tax expense
    
    
    (50
    )
    
    
    (69
    )Net reclassification adjustment
    
    
    94
    
    
    
    129Other comprehensive (loss) income
    
    
    (3,512
    )
    
    
    2,237Total comprehensive income (loss)
    
    $
    2,362
    
    
    
    (4,221
    )
 See accompanying notes to the unaudited consolidated condensed financial
statements. 5




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PROCENTURY CORPORATION AND SUBSIDIARIES  
 Consolidated Condensed Statements of Cash Flows  (dollars in thousands) For the Six Months EndedJune 30,2004
    
    2003Cash flows provided by operating activities:Net income (loss)
    
    $
    5,874
    
    
    
    (6,458
    )Adjustments:Net realized investment gains
    
    
    (144
    )
    
    
    (198
    )Gain on the sale of minority interest in subsidiary
    
    
    
    
    
    
    (322
    )Deferred federal income tax benefit
    
    
    (3,070
    )
    
    
    (323
    )Changes in assets and liabilities:Premiums in course of collection, net
    
    
    (1,374
    )
    
    
    (5,225
    )Deferred policy acquisition costs
    
    
    (3,902
    )
    
    
    (3,236
    )Prepaid reinsurance premiums
    
    
    (1,935
    )
    
    
    (99
    )Reinsurance recoverable on paid and unpaid losses, net
    
    
    (7,292
    )
    
    
    (1,782
    )Federal income taxes payable
    
    
    3,334
    
    
    
    (5,162
    )Loss and loss expense reserves
    
    
    24,160
    
    
    
    24,902Unearned premiums
    
    
    13,623
    
    
    
    13,435Reinsurance balances payable
    
    
    (1,946
    )
    
    
    (2,090
    )Collateral held
    
    
    (1,533
    )
    
    
    (826
    )Receivable for subsidiary available for sale
    
    
    26,885
    
    
    
    Discontinued operations
    
    
    
    
    
    
    730Other, net
    
    
    (3,496
    )
    
    
    (2,159
    )Net cash provided by operating activities
    
    
    49,184
    
    
    
    11,187Cash flows used in investing activities:Purchases of equity securities
    
    
    (44,952
    )
    
    
    (59,974
    )Purchase of fixed maturity securities available-for-sale
    
    
    (131,314
    )
    
    
    (77,251
    )Proceeds from sales of equity securities
    
    
    27,217
    
    
    
    60,778Proceeds from sales and maturities of fixed maturity securities available-for-sale
    
    
    22,504
    
    
    
    45,862Proceeds from maturities of fixed maturities held-to-maturity
    
    
    325
    
    
    
    Discontinued operations
    
    
    
    
    
    
    (2,263
    )Short-term investments, net
    
    
    13,288
    
    
    
    10,602Net cash used in investing activities
    
    
    (112,932
    )
    
    
    (22,246
    )Cash flows provided by financing activities:Issuance of common shares
    
    
    77,931
    
    
    
    Issuance cost
    
    
    (1,298
    )
    
    
    Redemption of Class B common shares
    
    
    (5,000
    )
    
    
    Principal payment on long term debt
    
    
    (9,133
    )
    
    
    (228
    )Issuance of trust preferred securities
    
    
    
    
    
    
    10,000Discontinued operations
    
    
    
    
    
    
    2,500Net cash provided by financing activities
    
    
    62,500
    
    
    
    12,272(Decrease) increase in cash and cash equivalents
    
    
    (1,248
    )
    
    
    1,213Cash and equivalents at beginning of period
    
    
    5,814
    
    
    
    7,237Cash and equivalents at end of period
    
    $
    4,566
    
    
    
    8,450Supplemental disclosure of cash flow information:Interest paid
    
    $
    900
    
    
    
    955Federal income taxes paid
    
    $
    2,300
    
    
    
    3,200
 See accompanying notes to the unaudited consolidated condensed financial
statements. 6




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PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation) 
 Notes to Consolidated Condensed Financial Statements June 30, 2004 (Unaudited)  (1)
    
    Basis of PresentationThe accompanying interim unaudited consolidated condensed financial
statements and notes include the accounts of ProCentury Corporation, formerly
ProFinance Holdings Corporation, (the Company or ProCentury) and its
wholly owned and controlled insurance subsidiary, Century Surety Company
(Century). The interim unaudited consolidated condensed financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim
financial information and with the instructions to Article 10 of Regulation
S-X. Accordingly, the interim 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 final prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424 of the Securities Act
of 1933, as amended, (the Prospectus) (File No. 333-111294). The Companys
results of operations for interim periods are not necessarily indicative of
the results to be expected for the entire year.Immediately prior to the completion of the IPO, the common shares of
Evergreen National Indemnity Company (Evergreen) and its wholly owned
subsidiary, Continental Heritage Insurance Company (Continental) were
distributed as dividends from Century to ProCentury and then by ProCentury to
ProCenturys existing Class A shareholders. Prior to the dividends,
Evergreen was a 30.35% controlled subsidiary of Century. The operations of
Evergreen and Continental consisted of ProCenturys historical surety and
assumed workers compensation lines of insurance, which were re-classified
(net of minority interest and income taxes) as discontinued operations in the
accompanying interim unaudited consolidated condensed financial statements
and notes for all periods presented.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 and liabilities and disclosure of
contingent assets and liabilities as of the date of the interim unaudited
consolidated condensed financial statements, and the reported amounts of
revenue and expenses for the reporting period. Actual results could differ
significantly from those estimates.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 and deferred tax
assets, the net realizable value of reinsurance recoverables 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 adequate. These
estimates are continually reviewed and adjusted as necessary. Such
adjustments are generally reflected in current operations.On April 26, 2004, the Company issued 8,000,000 common shares in an initial
public offering (the IPO) and received net proceeds (before expenses) of
$77.9 million, based on an initial public offering price of $10.50. The
following transactions occurred in connection with the IPO:  
    
    Immediately prior to the completion of the IPO, each outstanding
Class A common share was converted into 500 common shares. After the
conversion, but prior to the completion of the IPO, the Company had
4,999,995 Class A common shares outstanding. The share conversion is
reflected for all periods presented.  
    
    Immediately prior to the completion of the IPO, the common shares
of Evergreen were distributed as dividends from Century to ProCentury
and then by ProCentury to ProCenturys existing Class A shareholders. 7




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
    
    The Company issued 8,000,000 Class A common shares and received
net proceeds (before expenses) of $77.9 million.  
    
    The Company granted 101,200 restricted common shares and 364,000
stock options to certain employees of ProCentury.  
    
    The Company repaid $8.7 million of bank
indebtedness outstanding at the closing of the IPO; and  
    
    The Company redeemed all of its outstanding Class B common shares
for an aggregate redemption price of $5.0 million and recorded
interest expense of $518,000 in connection with the redemption.  
    
    The Company amended its articles of incorporation to eliminate
the authority to issue Class B and Class C common shares.  All significant intercompany balances and transactions have been eliminated.Share Option AccountingThe Company follows the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees(APB 25), the Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation (an interpretation of APB
Opinion No. 25, and other related accounting interpretations for our share
option and restricted common share plans utilizing the intrinsic value
method. The Company also follows the disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensationfor our option and restricted common share plans, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure; an amendment of FASB Statement No. 123. This disclosure requires
pro forma net income (loss) and earnings (loss) per share information, which
is calculated assuming the Company has accounted for our stock option and
restricted common share plans under the fair value method described in SFAS
No. 123 and SFAS No. 148.If the Company recorded compensation expense for our share option and
restricted common share grants based on the fair value method, the
Companys net income (loss) and earnings (loss) per share would have been
adjusted to the pro forma amounts as indicated in the following table: For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands, except per share data)Net income (loss):As reported
    
    $
    2,986
    
    
    
    (7,306
    )
    
    
    5,874
    
    
    
    (6,458
    )Less: Additional share-based employee
compensation expense determined under
fair value-based method for all awards,
net of related tax effects
    
    
    (48
    )
    
    
    
    
    
    
    (48
    )
    
    
    Pro Forma
    
    $
    2,938
    
    
    
    (7,306
    )
    
    
    5,826
    
    
    
    (6,458
    )Basic earnings (loss) per common share:As reported
    
    $
    0.27
    
    
    
    (1.46
    )
    
    
    0.73
    
    
    
    (1.29
    )Pro Forma
    
    $
    0.26
    
    
    
    (1.46
    )
    
    
    0.72
    
    
    
    (1.29
    )Diluted earnings (loss) per common share:As reported
    
    $
    0.26
    
    
    
    (1.46
    )
    
    
    0.72
    
    
    
    (1.29
    )Pro Forma
    
    $
    0.26
    
    
    
    (1.46
    )
    
    
    0.72
    
    
    
    (1.29
    )
  No share option or restricted common share-based compensation expense
is included in as reported net income (loss) for any period presented. 8




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The fair values of the share options and restricted common shares are estimated
on the dates of grant using the Black Scholes option pricing model with the
following weighted average assumptions: Three Months and Six MonthsEnded June 30, 2004Risk free interest rate
    
    
    4.01
    %Dividend yield
    
    
    0.76
    %Volatility factor
    
    
    .239Weighted average expected option life
    
    7 Years
  (2)
    
    Earnings (loss) per Common ShareBasic earnings (loss) per share (EPS) excludes dilution and is calculated
by dividing income (loss) 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 earnings or net loss per share is computed
excluding the common share equivalents.On April 21, 2004, the Companys Class A common shares split on a 500 to 1
basis. Prior periods share and per share data has been adjusted to reflect
this split. In addition, on April 26, 2004, the Company issued 8,000,000
common shares, which is reflected in the Companys share and per share data
for all periods after April 26, 2004.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. For the Three-Months Ended June 30, 2004Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    2,985,903
    
    
    
    11,222,340
    
    
    $
    0.27Effect of Dilutive SecuritiesRestricted common shares
    
    
    
    
    
    
    106,255
    
    
    
    .01Diluted EPSIncome available to common shareholders
    
    $
    2,985,903
    
    
    
    11,328,595
    
    
    $
    0.26
 For the Six-Months Ended June 30, 2004Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    5,873,777
    
    
    
    8,062,828
    
    
    $
    0.73Effect of Dilutive SecuritiesRestricted common shares
    
    
    
    
    
    
    52,297
    
    
    
    .01Diluted EPSIncome available to common shareholders
    
    $
    5,873,777
    
    
    
    8,115,125
    
    
    $
    0.72
  Diluted EPS is the same as Basic EPS for the three months ended June 30, 2003
and the six months ended June 30, 2003, because the Company had no common share
equivalents granted during those periods. 9




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##### Table of Contents



(3)
    
    InvestmentsThe Company invests primarily in investment-grade fixed maturities. The
amortized cost, gross unrealized gains and losses and estimated fair value of
fixed maturity securities classified as held-to-maturity were as follows: June 30, 2004Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    faircost
    
    gains
    
    losses
    
    value(dollars in thousands)U.S. Treasury
securities and
obligations of U.S.
government
corporations and
agencies
    
    $
    1,148
    
    
    
    9
    
    
    
    (10
    )
    
    
    1,147Total
    
    $
    1,148
    
    
    
    9
    
    
    
    (10
    )
    
    
    1,147
 December 31, 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    faircost
    
    gains
    
    losses
    
    value(dollars in thousands)U.S. Treasury
securities and
obligations of U.S.
government
corporations and
agencies
    
    $
    1,481
    
    
    
    30
    
    
    
    
    
    
    
    1,511Total
    
    $
    1,481
    
    
    
    30
    
    
    
    
    
    
    
    1,511
 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: June 30, 2004Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    faircost
    
    gains
    
    losses
    
    value(dollars in thousands)Fixed maturity securities:U.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    24,116
    
    
    
    70
    
    
    
    (609
    )
    
    
    23,577Obligations of states and political subdivisions
    
    
    74,633
    
    
    
    86
    
    
    
    (1,540
    )
    
    
    73,179Corporate securities
    
    
    52,932
    
    
    
    76
    
    
    
    (984
    )
    
    
    52,024Mortgage-backed securities
    
    
    36,376
    
    
    
    156
    
    
    
    (392
    )
    
    
    36,140Collateralized mortgage obligations
    
    
    18,830
    
    
    
    27
    
    
    
    (388
    )
    
    
    18,469Asset-backed securities
    
    
    22,204
    
    
    
    111
    
    
    
    (416
    )
    
    
    21,899Total fixed maturity securities
    
    
    229,091
    
    
    
    526
    
    
    
    (4,329
    )
    
    
    225,288Equities:Equity securities
    
    
    18,606
    
    
    
    121
    
    
    
    (622
    )
    
    
    18,105Bond mutual funds
    
    
    24,090
    
    
    
    
    
    
    
    (110
    )
    
    
    23,980Total equities
    
    
    42,696
    
    
    
    121
    
    
    
    (732
    )
    
    
    42,085Total
    
    $
    271,787
    
    
    
    647
    
    
    
    (5,061
    )
    
    
    267,373
 10




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##### Table of Contents



December 31, 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    faircost
    
    gains
    
    losses
    
    value(dollars in thousands)Fixed maturity securities:U.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    22,300
    
    
    
    189
    
    
    
    (140
    )
    
    
    22,349Obligations of states and political subdivisions
    
    
    7,909
    
    
    
    16
    
    
    
    (145
    )
    
    
    7,780Corporate securities
    
    
    35,671
    
    
    
    382
    
    
    
    (122
    )
    
    
    35,931Mortgage-backed securities
    
    
    25,011
    
    
    
    356
    
    
    
    (6
    )
    
    
    25,361Collateralized mortgage obligations
    
    
    8,611
    
    
    
    38
    
    
    
    (74
    )
    
    
    8,575Asset-backed securities
    
    
    21,199
    
    
    
    196
    
    
    
    (121
    )
    
    
    21,274Total fixed maturity securities
    
    
    120,701
    
    
    
    1,177
    
    
    
    (608
    )
    
    
    121,270Equities:Equity securities
    
    
    16,041
    
    
    
    428
    
    
    
    (75
    )
    
    
    16,394Bond mutual funds
    
    
    8,882
    
    
    
    24
    
    
    
    
    
    
    
    8,906Total equities
    
    
    24,923
    
    
    
    452
    
    
    
    (75
    )
    
    
    25,300Total
    
    $
    145,624
    
    
    
    1,629
    
    
    
    (683
    )
    
    
    146,570
 The Company considers four factors in determining if an other-than-temporary
decline in fair value exists: (1) length of time and extent that a security has
been in an unrealized loss position; (2) the existence of an event that would
impair the issuers future earnings potential; (3) the near-term prospects for
recovery of the fair value of a security; and (4) the intent and ability of the
Company to hold the security until the fair value recovers. Realized losses,
including any provision for other-than-temporary declines in value, are
included in the unaudited consolidated condensed statements of operations. No
other-than-temporary declines were realized in the six month period ended June
30, 2004. For the six month period ended June 30, 2003, one fixed maturity
security was written down in the amount of $87,000, which was included as a
realized loss in the accompanying interim unaudited consolidated condensed
financial statements. The estimated fair value, related gross unrealized losses, and the length of
time that the securities have been impaired for held-to-maturity securities
that are considered temporarily impaired are presented in the following table: June 30, 2004Less than 12 months
    
    12 months or longer
    
    TotalEstimated
    
    Gross
    
    Estimated
    
    Gross
    
    Estimated
    
    Grossfair
    
    unrealized
    
    fair
    
    unrealized
    
    fair
    
    unrealizedvalue
    
    losses
    
    value
    
    losses
    
    value
    
    losses(dollars in thousands)Fixed maturity securities:U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies
    
    $
    1,048
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    1,048
    
    
    
    (10
    )Total
    
    $
    1,048
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    1,048
    
    
    
    (10
    )
 11




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##### Table of Contents



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 are as follows: June 30, 2004Less than 12 months
    
    12 months or longer
    
    TotalEstimated
    
    Gross
    
    Estimated
    
    Gross
    
    Estimated
    
    Grossfair
    
    unrealized
    
    fair
    
    unrealized
    
    fair
    
    unrealizedvalue
    
    losses
    
    value
    
    losses
    
    value
    
    losses(dollars in thousands)Fixed maturity
securities:U.S. Treasury
securities and
obligations of
U.S. government
corporations and
agencies
    
    $
    20,365
    
    
    
    (609
    )
    
    
    
    
    
    
    
    
    
    
    20,365
    
    
    
    (609
    )Obligations of
states and
political
subdivisions
    
    
    55,807
    
    
    
    (1,403
    )
    
    
    2,942
    
    
    
    (137
    )
    
    
    58,753
    
    
    
    (1,540
    )Corporate
securities
    
    
    45,916
    
    
    
    (952
    )
    
    
    870
    
    
    
    (32
    )
    
    
    46,786
    
    
    
    (984
    )Mortgage-backed
securities
    
    
    30,579
    
    
    
    (383
    )
    
    
    234
    
    
    
    (9
    )
    
    
    30,813
    
    
    
    (392
    )Collateralized
mortgage
obligations
    
    
    15,766
    
    
    
    (338
    )
    
    
    853
    
    
    
    (50
    )
    
    
    16,619
    
    
    
    (388
    )Asset-backed
securities
    
    
    15,416
    
    
    
    (388
    )
    
    
    572
    
    
    
    (28
    )
    
    
    15,988
    
    
    
    (416
    )Total fixed
maturity
securities
    
    
    183,849
    
    
    
    (4,073
    )
    
    
    5,475
    
    
    
    (256
    )
    
    
    189,324
    
    
    
    (4,329
    )Equities:Equity securities
    
    
    14,813
    
    
    
    (622
    )
    
    
    
    
    
    
    
    
    
    
    14,813
    
    
    
    (622
    )Bond mutual funds
    
    
    24,090
    
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    24,090
    
    
    
    (110
    )Total equities
    
    
    38,903
    
    
    
    (732
    )
    
    
    
    
    
    
    
    
    
    
    38,903
    
    
    
    (732
    )Total
    
    $
    222,752
    
    
    
    (4,805
    )
    
    
    5,475
    
    
    
    (256
    )
    
    
    228,227
    
    
    
    (5,061
    )
  At June 30, 2004, the Company had fifteen fixed maturity securities that have
been in an unrealized loss position for one year or longer. Fourteen of
these securities are investment grade, of which, ten of these securities are
rated A1/A+ or better (including six securities which are rated AAA). The
four remaining investment grade securities are rated BBB and have a fair
value equal to 96.2% of their book value as of June 30, 2004. The one
security that is not investment grade had a fair value equal to 99.6% of its
book value as of June 30, 2004. All fifteen securities are current on
interest and principal. Management believes that the declines are temporary
and are not indicative of other-than-temporary impairments.(4)
    
    Loss and Loss Expense ReservesLiability for losses and loss expenses represents the Companys best estimate
of the ultimate amounts needed to pay both reported and unreported claims.
These estimates are based on quarterly internal actuarial studies and
annually on an independent actuarial study. The Company continually reviews
these estimates and, based on new developments and information, the Company
includes adjustments of the probable ultimate liability in the operating
results for the periods in which the adjustments are made.Net loss and loss expenses incurred were $21.0 million for the quarter ended
June 30, 2004 compared to $31.4 million for the quarter ended June 30, 2003.
In the second quarter of 2004, the Company recorded $18.8 million of incurred
losses and loss expenses attributable to the 2004 accident year and
$2.2 million attributable to events of prior years. In the second quarter of
2003, the Company recorded $11.2 million of incurred losses and loss expenses
attributable to the 2003 accident year and $20.2 million attributable to
events of prior years.Net loss and loss expenses incurred were $39.9 million for the six months
ended June 30, 2004 compared to $45.4 million for the six months ended June
30, 2003. For the six months ended June 30, 2004, the Company
recorded $35.5
million of incurred losses 12




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##### Table of Contents



and loss expenses attributable to the 2004 accident year and
$4.4 million
attributable to events of prior years. In the first six months of 2003, the
Company recorded $22.4 million of incurred losses and loss expenses
attributable to the 2003 accident year and $23.0 million attributable to
events of prior years.A significant portion of the three months and six months ended June 30, 2004
and 2003 prior year increases resulted principally from construction defect
claims in the other liability line in the property and casualty segment.
During the first six months of 2004 and 2003, new construction defect claim
counts exceeded expectations. Based on the claim count experience that has
emerged, the Companys actuaries revised the factors used in the estimation
of ultimate construction defect claim counts. This re-estimation of claim
count projection factors produced an increase in the estimated ultimate cost
of construction defect claims. The prior year development recognized during
the three and six month periods ended June 30, 2003 and June 30, 2004 for construction
defect was substantially due to adverse claim count experience. In
addition,
in the three months ended June 30, 2004, increases in incurred amounts on
four claims also increased the amount of incurred development. As of June
30, 2004, we had 578 open claims relating to construction defect compared to
571 open claims as of March 31, 2004 and 597 open claims as of December 31,
2003. During the second quarter of 2004, 266 new claims were reported and
259 existing claims were settled or dismissed. During the six months ended
June 30, 2004, 516 new claims were reported and 535 existing claims were
settled or dismissed. Our net loss and loss expense reserves for
construction defect claims as of June 30, 2004 were $16.2 million compared to
$18.6 million as of December 31, 2003.Additionally, during the second quarter of 2004, the Company experienced
development related to 19 new contractors claim counts received in the second
quarter and development on pending claims in the 1994 through 1999 accident
years. The 19 new claim counts were higher than recent experience and the
development on pending claims exceeded our expectations. This development
does not arise from construction defect claims. A significant portion of the
2003 prior year development resulted from the non construction defect
casualty lines.During the first quarter of 2004, the Company observed increases in paid and
incurred losses and loss expenses on seven commercial auto liability claims.
The net incurred increases on these claims totaled $778,000. The increases
were related to one significant, unanticipated new claim ($155,000), reserve
increases related to coverage disputes on three claims ($297,000), and
unfavorable changes in conditions relating to three other claims ($326,000).Due to the development during the first quarter, the Company conducted
further analysis of the nature and impact of the commercial automobile
activity. In addition to its current methods for assessing the overall
reserve needs on this run-off business, the Companys actuaries have
undertaken a project with claims management to assess the range of potential
costs on the remaining commercial auto liability pending claims. Based on
this analysis, the Company did not record any additional net incurred losses
in the second quarter of 2004.As of June 30, 2004, the Company had 42 open claims relating to commercial
automobile compared to 51 open claims as of March 31, 2004 and 63 open claims
as of December 31, 2003. During the second quarter of 2004, two new claims
were reported and 11 existing claims were settled or dismissed. During the
six months ended June 30, 2004, six new claims were reported and 27 existing
claims were settled or dismissed. Our net loss and loss expense reserves for
commercial automobile as of June 30, 2004 were $3.2 million compared to $3.5
million as of December 31, 2003.(5)
    
    ReinsuranceIn the normal course of business, the Company has entered into various
reinsurance contracts with unrelated reinsurers. The Company participates in
such agreements for the purpose of limiting loss exposure and diversifying
business. Reinsurance contracts do not relieve the Company of its
obligations to policyholders. There have been no significant changes in the
Companys reinsurance program except that the Company is now retaining the
first $500,000 ($300,000 in 2003) of individual property and casualty losses
in our excess of loss contracts effective January 1, 2004.The effects of assumed and ceded reinsurance on premiums written, premiums
earned and loss and loss expenses incurred were as follows: 13




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Premiums written:Direct
    
    $
    48,713
    
    
    
    40,617
    
    
    
    91,578
    
    
    
    73,836Assumed
    
    
    223
    
    
    
    (1,240
    )
    
    
    194
    
    
    
    (897
    )Ceded
    
    
    (6,014
    )
    
    
    (4,923
    )
    
    
    (12,206
    )
    
    
    (10,363
    )Net premiums written
    
    $
    42,922
    
    
    
    34,454
    
    
    
    79,566
    
    
    
    62,576Premiums earned:Direct
    
    $
    40,986
    
    
    
    32,576
    
    
    
    77,909
    
    
    
    60,291Assumed
    
    
    230
    
    
    
    (981
    )
    
    
    240
    
    
    
    (466
    )Ceded
    
    
    (5,397
    )
    
    
    (5,009
    )
    
    
    (10,272
    )
    
    
    (10,294
    )Net premiums earned
    
    $
    35,819
    
    
    
    26,586
    
    
    
    67,877
    
    
    
    49,531Loss and loss expenses incurred:Direct
    
    $
    26,484
    
    
    
    35,492
    
    
    
    51,189
    
    
    
    54,354Assumed
    
    
    523
    
    
    
    (561
    )
    
    
    932
    
    
    
    (213
    )Ceded
    
    
    (6,021
    )
    
    
    (3,507
    )
    
    
    (12,233
    )
    
    
    (8,730
    )Net losses and loss expenses incurred
    
    $
    20,986
    
    
    
    31,424
    
    
    
    39,888
    
    
    
    45,411
 (6)
    
    Deferred Policy Acquisition CostsThe following table reflects the amounts of policy acquisitions costs deferred
and amortized: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Balance at beginning of period
    
    $
    14,317
    
    
    
    8,632
    
    
    $
    11,714
    
    
    
    7,218Policy acquisition costs deferred
    
    
    9,942
    
    
    
    7,585
    
    
    
    19,395
    
    
    
    14,147Amortization of deferred policy acquisition costs
    
    
    (8,643
    )
    
    
    (5,958
    )
    
    
    (15,493
    )
    
    
    (11,106
    )Balance at end of period
    
    $
    15,616
    
    
    
    10,259
    
    
    $
    15,616
    
    
    
    10,259
   Amortization of deferred policy acquisition cost for the six months ended June
30, 2004 includes a reduction of amortization expense of $2.5 million relating
to the transfer of capitalized acquisition costs from Evergreen and Continental
for the property and casualty segment, which was partially offset by $1.9
million of capitalized acquisition costs for the surety segment that was
transferred from Century to Evergreen and Continental. These transactions
occurred in conjunction with the termination of the intercompany pooling
agreement and the implementation of the loss portfolio agreements discussed in
the Companys Prospectus in The Evergreen and Continental Transactions.(7)
    
    Federal Income TaxesThe 2004 income tax provision has been computed based on our estimated annual
effective tax rate of 32%, which differs from the federal income tax rate of
35% principally because of tax-exempt investment income.(8)
    
    Commitments and ContingenciesThe Company is a defendant in various lawsuits. In the opinion of
management, the effects, if any, of such lawsuits are not expected to be
material to the Companys consolidated financial position or results from
operations.(9)
    
    Segment Reporting DisclosuresThe Company operates in the Property and Casualty Lines (P/C) (including
general liability, multi-peril, and commercial property) segment of the
specialty insurance market.All investment activities are included in the Investing segment. Exited
programs (including workers compensation and commercial auto) are included
in Other (Including Exited Lines) for purposes of segment reporting.The Company considers many factors, including economic similarity, the nature
of the underwriting units 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 14




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##### Table of Contents



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 segment is measured by net
investment income and net realized gains or losses.The Company does not allocate assets to the P/C and Other (including exited
lines) segments for management reporting purposes. The total investment
portfolio and cash are allocated to the Investment operating segment. The following is a summary of segment disclosures: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Segment revenue:P/C
    
    $
    35,824
    
    
    
    27,108
    
    
    
    67,877
    
    
    
    49,553Investing
    
    
    2,431
    
    
    
    1,795
    
    
    
    4,519
    
    
    
    3,226Other (including exited lines)
    
    
    (5
    )
    
    
    (522
    )
    
    
    
    
    
    
    (22
    )Segment revenue
    
    $
    38,250
    
    
    
    28,381
    
    
    
    72,396
    
    
    
    52,757Segment profit (loss):P/C
    
    $
    2,888
    
    
    
    (11,333
    )
    
    
    5,574
    
    
    
    (9,607
    )Investing
    
    
    2,431
    
    
    
    1,795
    
    
    
    4,519
    
    
    
    3,226Other (including exited lines)
    
    
    (372
    )
    
    
    (1,054
    )
    
    
    (1,115
    )
    
    
    (1,795
    )Segment profit (loss)
    
    $
    4,947
    
    
    
    (10,592
    )
    
    
    8,978
    
    
    
    (8,176
    )Segment assets:Investing
    
    $
    272,569
    
    
    
    145,663
    
    
    
    272,569
    
    
    
    145,663Assets not allocated
    
    
    101,800
    
    
    
    93,790
    
    
    
    101,800
    
    
    
    93,790Total consolidated assets
    
    $
    374,369
    
    
    
    239,453
    
    
    
    374,369
    
    
    
    239,453
  The following summary reconciles significant segment items to the Companys
interim unaudited consolidated condensed financial statements: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Income (loss) before income taxes:Segment
profit (loss)
    
    $
    4,947
    
    
    
    (10,592
    )
    
    
    8,978
    
    
    
    (8,176
    )Unallocated (expenses) income:Corporate expenses
    
    
    402
    
    
    
    (410
    )
    
    
    937
    
    
    
    (1,245
    )Gain on sale of minority interest in subsidiary, net
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    107Interest expense
    
    
    (345
    )
    
    
    (357
    )
    
    
    (760
    )
    
    
    (675
    )Interest expense on redemption of Class B shares
    
    
    (518
    )
    
    
    
    
    
    
    (518
    )
    
    
    Income (loss) before minority interest and income taxes
    
    $
    4,486
    
    
    
    (11,350
    )
    
    
    8,637
    
    
    
    (9,989
    )
 15




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##### Table of Contents



The following is a summary of segment earned premium by group of products: Property
    
    Casualty
    
    Other
    
    Consolidated(dollars in thousands)Three Months ended June 30, 2004:P/C
    
    $
    14,039
    
    
    
    21,785
    
    
    
    
    
    
    
    35,824Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Earned premiums
    
    $
    14,039
    
    
    
    21,785
    
    
    
    (5
    )
    
    
    35,819Three Months ended June 30, 2003:P/C
    
    $
    11,430
    
    
    
    15,678
    
    
    
    
    
    
    
    27,108Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    (522
    )
    
    
    (522
    )Earned premiums
    
    $
    11,430
    
    
    
    15,678
    
    
    
    (522
    )
    
    
    26,586Six Months ended June 30, 2004:P/C
    
    $
    27,294
    
    
    
    40,583
    
    
    
    
    
    
    
    67,877Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earned premiums
    
    $
    27,294
    
    
    
    40,583
    
    
    
    
    
    
    
    67,877Six Months ended June 30, 2003:P/C
    
    $
    20,959
    
    
    
    28,594
    
    
    
    
    
    
    
    49,553Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    (22
    )Earned premiums
    
    $
    20,959
    
    
    
    28,594
    
    
    
    (22
    )
    
    
    49,531
 The Company does not manage property and casualty products at this level of
detail.  (10)
    
    Initial Public Offering  On April 26, 2004, ProCentury issued 8,000,000 Class A common shares and
101,195 restricted Class A common shares in the IPO and received net proceeds
(before expenses) of $77.9 million. Immediately prior to the IPO, each
outstanding Class A common shares were converted into 500 common shares. After
the IPO the total number of Class A shares outstanding is 13,101,195. The following
transactions were completed in contemplation of or in connection with the IPO:  (a)
    
    Termination of the Intercompany Pooling AgreementEffective January 1, 2004, the intercompany pooling agreement among
ProCentury and its insurance subsidiaries was terminated. As a result of the
termination, the loss and loss expense reserves and unearned premiums were
reallocated with an equal amount of cash and investments to each insurance
subsidiary based on the insurance business it produced as an individual
company. This transaction did not have any impact on the consolidated
financial position or results of operations of the Company.Simultaneously with the termination, pursuant to reinsurance agreements, all
specialty surety business of Century, ProCenturys primary insurance
subsidiary, was transferred to Evergreen and all property and casualty
business and discontinued lines of Evergreen and Continental were transferred
to Century with an equal amount of cash. The initial transfer of this
business did not have any impact on the consolidated financial position or
results of operations of the Company.(b)
    
    Sale of ContinentalOn February 19, 2004, Evergreen bought 100% of the outstanding shares of
Centurys subsidiary Continental for GAAP book value. No gain or loss was
recorded by the Company from this transaction.(c)
    
    Transfer of Ownership of EvergreenPrior to the completion of the IPO, Century distributed to
ProCentury all Class A and B common shares of Evergreen owned by Century.
ProCentury then distributed these shares on a pro rata basis to the existing
Class A shareholders of ProCentury in the form of a $7.6 million stock
dividend. The dividend was approved by the Ohio Department of Insurance. 16




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##### Table of Contents



(d)
    
    Contribution of SurplusProCentury used a portion of the proceeds from the IPO to
make a $55.0 million cash capital contribution to Century to support
Centurys ongoing insurance operations.(e)
    
    Redemption of Class B sharesOn April 26, 2004, ProCentury used a portion of the proceeds from the IPO to
redeem all outstanding Class B common shares for $5.0 million. This
transaction resulted in $518,000 of interest expense that was recorded in
April 2004.(f)
    
    Repayment of Bank DebtOn April 27, 2004, ProCentury used a portion of the proceeds from the IPO to
repay all of its bank debt for $8.7 million. With the repayment of the bank
debt, the outstanding common shares of Century were released as collateral.(11)
    
    Discontinued OperationsIn connection with the IPO, the Company exited the surety and assumed
workers compensation lines of business written and assumed by Evergreen and
Continental. To effect the disposition of these lines of business, Evergreen
purchased the common shares of Continental owned by Century on February 19,
2004 for $6.3 million, representing its GAAP book value as of December 31,
2003. Immediately prior to the completion of the IPO, Century distributed to
ProCentury all of the Class A and B common shares of Evergreen owned by
Century. ProCentury then distributed these shares on a pro rata basis to
existing Class A shareholders of ProCentury in the form of a stock dividend.As a result of these transactions and the reinsurance transactions discussed
in Note 10(a), the surety and assumed workers compensation business were
classified as discontinued operations, which are recorded net of minority
interest and income taxes in all periods presented in the accompanying
interim unaudited consolidated condensed financial statements. The following
table summarizes the Companys discontinued operations for the following periods: For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)(Loss) income before minority interest and income taxes
    
    $
    (97
    )
    
    
    756
    
    
    
    760
    
    
    
    1,468Minority interest
    
    
    (46
    )
    
    
    217
    
    
    
    518
    
    
    
    415Income tax expense (benefit)
    
    
    (51
    )
    
    
    265
    
    
    
    242
    
    
    
    490Net income
    
    $
    
    
    
    
    274
    
    
    
    
    
    
    
    563
 As a result of the reinsurance transactions discussed in Note 10(a),
Evergreen and Continentals operations consist entirely of the Companys
surety and assumed workers compensation business. Prior to January 1, 2004,
Evergreen and Continental participated in an intercompany pooling agreement
with Century, pursuant to which each company was allocated a portion of the combined
operations of the three companies and therefore, all segments. As a result, the
minority interest owners of Evergreen not only shared in the discontinued
surety and assumed workers compensation businesses but also shared in
Evergreens share of the ongoing operations of Century. The method used to
determine the discontinued operations required management to identify the
portion of the minority interest related to the results from the discontinued
operations. 17




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##### Table of Contents



At December 31, 2003, the assets and liabilities available for sale are
broken out into the major categories as follows: December 31, 2003(dollars in thousands)Assets available for saleInvestments
    
    $
    61,357Receivable from subsidiary available for sale
    
    
    (26,885
    )Prepaid reinsurance premium
    
    
    8,226Reinsurance recoverable on paid and unpaid losses, net
    
    
    6,278Other assets
    
    
    9,844Assets available for sale
    
    $
    58,820Liabilities available for saleMinority interest
    
    $
    25,320Loss and loss expense reserves
    
    
    7,746Unearned premium
    
    
    12,595Other liabilities
    
    
    5,572Liabilities available for sale
    
    $
    51,233
 As of
June 30, 2003, accumulated other comprehensive income includes
$269,000 of unrealized gains, net of minority interest
and   taxes, on
investments available for sale. These investments were included in
the dividend of Evergreen. (12)   Subsequent Events In August 2004, the Board of Directors declared a dividend of $0.02 per
common share. 18




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##### Table of Contents



Item 2. Managements Discussion And Analysis Of Financial Condition And Results
Of Operations The following discussion of our financial condition and results of operations
should be read in conjunction with our interim unaudited consolidated condensed financial
statements and the notes to those statements included in this Form 10-Q. The
discussion and analysis below includes certain forward-looking statements that
are subject to risks, uncertainties and other factors described in -Cautionary
Statement Regarding Forward-Looking Statementsthat could cause our actual
growth, results of operations, performance and business prospects and
opportunities in 2004 and beyond to differ materially from those expressed in,
or implied by, those forward-looking statements. Overview ProCentury is a holding company that underwrites selected property and
casualty and surety insurance through its subsidiary, Century. On April 26,
2004, we issued 8,000,000 common shares in the IPO. Immediately prior to the
closing of the IPO we disposed of our subsidiaries, Evergreen
National Indemnity Company (Evergreen) and Continental
Heritage Insurance Company (Continental) and the related surety and assumed workers compensation business. As a niche company, we offer specialty insurance products designed to
meet specific insurance needs of targeted insured groups. The excess and
surplus lines market provides an alternative market for customers with
hard-to-place risks that are generally underserved by admitted insurers, or
insurance companies licensed by the state in which the insurance policy is
sold. We are very selective in the lines of business and types of risks we
choose to write. Typically, we market our specialty insurance products through
a select group of general agents and brokers seeking coverage for a specific
group of clients. Immediately prior to the completion of the IPO, the common shares of
Evergreen and its wholly owned
subsidiary, Continental were
distributed as dividends from Century to ProCentury and then by ProCentury to
ProCenturys existing Class A shareholders. Prior to the dividends, Evergreen
was a 30.35% controlled subsidiary of Century. The operations of Evergreen and
Continental consisted of ProCenturys historical surety and assumed workers
compensation lines of insurance, which were re-classified (net of minority
interest and income taxes) as discontinued operations in the accompanying
interim unaudited consolidated condensed financial statements and notes for all
periods presented. We evaluate our insurance operations by monitoring key measures of growth
and profitability. We measure our growth by examining our gross written
premiums. We generally measure our operating results by examining net income
(loss), return on equity and loss, expense and combined ratios. The following
discussion provides further explanation of the key measures that we use to
evaluate our results: Gross Written Premiums.Gross written premiums are the sum of direct
written premiums and assumed written premiums. We use gross written premiums,
which excludes the impact of premiums ceded to reinsurers, as a measure of the
underlying growth of our insurance business from period to period. Net Written Premiums.Net written premiums are the sum of direct written
premiums and assumed written premiums less ceded written premiums. We use net
written premiums, primarily in relation to gross written premiums, to measure
the amount of business retained after cessions to reinsurers. Loss Ratio.Loss ratio is the ratio (expressed as a percentage) of losses
and loss expenses incurred to premiums earned. Loss ratio generally is measured
on both a gross (direct and assumed) and net (gross less ceded) basis. We use
the gross loss ratio as a measure of the overall underwriting profitability of
the insurance business we write and to assess the adequacy of our pricing. Our
net loss ratio is meaningful in evaluating our financial results, which are net
of ceded reinsurance, as reflected in the accompanying interim unaudited
consolidated condensed financial statements Expense Ratio.Expense ratio is the ratio (expressed as a percentage) of
net operating expenses to premiums earned and measures a companys operational
efficiency in producing, underwriting and administering its insurance business.
We reduce our operating expenses by ancillary income (excluding net investment
income and realized gains (losses) on securities) to calculate our net
operating expenses. Due to our historically high levels of reinsurance, we
calculate our expense ratio on both a gross basis (before the effect of ceded
reinsurance) and a net basis (after the effect of ceded reinsurance). Although
the net basis is meaningful in evaluating our financial results that are net of
ceded reinsurance, as reflected in the accompanying interim unaudited
consolidated condensed financial statements, we believe that the gross expense
ratio better reflects the operational efficiency of the underlying business and
is a better measure of future trends. Interest expense is not included in the
calculation of the expense ratio. Combined Ratio.Combined ratio is the sum of the loss ratio and the
expense ratio and measures a companys overall underwriting profit. If the
combined ratio is at or above 100%, an insurance company cannot be profitable
without investment income (and may not be profitable if investment income is
insufficient). We use the GAAP combined ratio in evaluating our overall
underwriting profitability and as a measure for comparing our profitability
relative to the profitability of our competitors. Critical Accounting Policies It is important to understand our accounting policies in order to
understand our financial statements. Management considers certain of these
policies to be critical to the presentation of our financial results, since
they require management to make estimates and assumptions. These estimates and
assumptions 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. Our most critical accounting policies involve the reporting of loss and
loss expense reserves (including losses that have occurred but were not
reported to us by the financial reporting date (IBNR)), reinsurance
recoverables, the impairment of invested assets, deferred policy acquisition
costs and deferred taxes. Loss and Loss Expense Reserves.Loss and loss expense reserves represent
an estimate of the expected cost of the ultimate settlement and administration
of losses, based on facts and circumstances then known. We use actuarial
methodologies to assist us in establishing these estimates, including judgments
relative to estimates of future claims severity and frequency, length of time
to develop to ultimate resolution, judicial theories of liability and other
third-party factors that are often beyond our control. Due to the inherent
uncertainty associated with the cost of unsettled and unreported claims, the
ultimate liability may be different from 19




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##### Table of Contents



the original estimate. Such estimates
are regularly reviewed and updated and any resulting adjustments are included
in the current periods results. See Note 4 to our interim unaudited
consolidated condensed financial statements included in this Form 10-Q. Reinsurance Recoverables.Reinsurance recoverables on paid and unpaid
losses, net, are established for the portion of our loss and loss expense
reserves that are ceded to reinsurers. Reinsurance recoverables are determined
based in part on the terms and conditions of reinsurance contracts that could
be subject to interpretations that differ from our own based on judicial
theories of liability. In addition, we bear credit risk with respect to our
reinsurers that can be significant considering that certain of the reserves
remain outstanding for an extended period of time. We are required to pay
losses even if a reinsurer fails to meet its obligations under the applicable
reinsurance agreement. See Note 5 to our interim unaudited consolidated
condensed financial statements included in this Form 10-Q. Impairment of Invested Assets.Impairment of investment securities results
in a charge to operations when a market decline below cost is deemed to be
other-than-temporary. We regularly review our fixed maturity and equity
securities portfolios to evaluate the necessity of recording impairment losses
for other-than-temporary declines in the fair value of investments. A number
of criteria are considered during this process including, but not limited to:
(1) the current fair value as compared to amortized cost or cost, as
appropriate, of the security; (2) the length of time the securitys fair value
has been below amortized cost or cost; (3) specific credit issues related to
the issuer and current economic conditions; and (4) the intent and ability to
hold the security until the fair value recovers. In general, we focus our
attention on securities that have a fair value of less than 80% of their
amortized cost or cost, as appropriate, for six or more consecutive months. In
evaluating potential impairment, we also consider the current fair value
compared to amortized cost or cost, as appropriate, our intent and ability to
retain the investment for a period of time sufficient to allow for an
anticipated recovery in value, specific credit issues related to the issuer and
current economic conditions. Other-than-temporary impairment losses result in
a permanent reduction of the cost basis of the underlying investment.
Significant changes in the factors we consider when evaluating investments for
impairment losses could result in a significant change in impairment losses
reported in the interim unaudited consolidated condensed financial statements.
See Note 3 to our interim unaudited consolidated financial statements included
in this Form 10-Q. Deferred Policy Acquisition Costs.We defer commissions, premium taxes and
certain other costs that vary with and are primarily related to the acquisition
of insurance contracts. These costs are capitalized and charged as expenses in
proportion to premium revenue recognized. The method followed in computing
deferred policy acquisition costs limits the amount of such deferred costs to
their estimated realizable value, which gives effect to the premium to be
earned, related investment income, anticipated losses and settlement expenses
and certain other costs expected to be incurred as the premium is earned.
Judgments as to ultimate recoverability of such deferred costs are highly
dependent upon estimated future loss costs associated with the written
premiums. See Note 6 to our interim unaudited consolidated condensed financial
statements included in this Form 10-Q. Deferred Taxes.We utilize the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce the deferred tax assets to the amounts
more likely than not to be realized. Results of Operations The table below summarizes certain operating results and key measures we
use in monitoring and evaluating our operations. The information is intended
to summarize and supplement information contained in our interim unaudited
consolidated condensed financial statements and to assist the reader in gaining
a better understanding of our results of operations. 20




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Selected Financial Data:Gross written premiums
    
    $
    48,936
    
    
    
    39,377
    
    
    
    91,772
    
    
    
    72,939Net premiums earned
    
    
    35,819
    
    
    
    26,586
    
    
    
    67,877
    
    
    
    49,531Net investment income
    
    
    2,410
    
    
    
    1,680
    
    
    
    4,375
    
    
    
    3,028Net realized investment gains
    
    
    21
    
    
    
    115
    
    
    
    144
    
    
    
    198Total revenues
    
    
    38,250
    
    
    
    28,381
    
    
    
    72,396
    
    
    
    52,757Total expenses
    
    
    33,764
    
    
    
    39,740
    
    
    
    63,759
    
    
    
    62,853Other transactions:Gain on sale of minority interest in subsidiary, net
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    107Income (loss) before discontinued operations
    
    
    2,986
    
    
    
    (7,580
    )
    
    
    5,874
    
    
    
    (7,021
    )Discontinued operations, net of minority interest and taxes
    
    
    
    
    
    
    274
    
    
    
    
    
    
    
    563Net income (loss)
    
    $
    2,986
    
    
    
    (7,306
    )
    
    
    5,874
    
    
    
    (6,458
    )Key Financial Ratios:Loss and loss expense ratio
    
    
    58.6
    %
    
    
    118.2
    %
    
    
    58.8
    %
    
    
    91.7
    %Expense ratio
    
    
    33.3
    %
    
    
    29.9
    %
    
    
    33.3
    %
    
    
    33.9
    %Combined ratio
    
    
    91.9
    %
    
    
    148.1
    %
    
    
    92.1
    %
    
    
    125.6
    %
 Overview of Operating Results Net income increased to $3.0 million for the three months ended June 30,
2004, compared to net loss of $7.3 million for the same period in 2003. For
the first six months of 2004, ProCenturys net income was $5.9 million or $0.72
per diluted share, compared to a net loss of $6.5 million or a net loss of $1.29
per diluted share, for the same period in 2003. The increase in net income is attributable to several factors. Loss and
loss expenses in 2003 were significantly higher than the current year due to
development in our construction defect line and our non-construction defect
casualty lines. In the second quarter of 2003, we recorded loss and loss
expenses attributable to prior accident years of $20.2 million, resulting in an
overall loss and loss expense ratio of 118.2% for the quarter and 91.7% for the
six months ended June 30, 2003. Loss and loss expense ratios were 58.6% for
the three months ended June 30, 2004 and 58.8% for the six months ended June
30, 2004. Our 2004 accident year, property and casualty, loss and loss expense
ratio was 52.3% at June 30, 2004. In addition, the increase in net income for the six months ended June 30,
2004 was supplemented by an increase in premium volume and an increase of investment income due to higher invested assets, primarily
related to capital raising activities and increase in operating cash
flows. See Revenues. Net income for the three months ended June 30, 2004 includes $518,000, or
$337,000 net of taxes, of interest expense related to the redemption of our
Class B shares which occurred during the quarter. In addition, net income for the first six
months of 2004 includes $655,000, or $426,000 net of taxes, of reduced
amortization of deferred acquisition costs related to the termination of the
intercompany pooling agreement and implementation of the loss portfolio
transfers and $355,000, or $231,000 net of taxes, of nonrecurring expense
related to the IPO. Gross written premiums increased to $48.9 million for the quarter ended
June 30, 2004, an increase of 24.1 % from $39.4 million for the same period in
2003. The property and casualty segment represents 99.8% of our gross written
premium. Gross written premiums were $91.8 million for the six months ended
June 30, 2004, an increase of 25.8% from $73.0 million for the same period in
2003. Net premiums earned were $35.8 million in the second quarter of 2004, an
increase of 34.6% compared with the $26.6 million reported for the second
quarter of 2003. Net premiums earned were $67.9 million in the first six
months of 2004, an increase of 37.2% from $49.5 million for the same period in
2003. The increase in premium activity in the current year is primarily a result
of favorable market conditions in the casualty market that have allowed us to
increase our premium volume and prices for the fourth consecutive year. This
increase is offset by slightly decreasing property premiums. During the first
six months of 2004, the pricing environment on certain property lines began to
soften as a result of increased competition on our larger property accounts.
This rate competition has resulted in the loss of certain large property
accounts, as the rates did not produce the rate of return that we require.
While we have experienced market pressure to
maintain rate levels in some of our lines, we believe the rates being
obtained across all lines are at levels that support our underwriting profit
objectives. The combined ratio improved to 91.9% for the quarter ended June 30, 2004,
compared to 148.1% for the second quarter of 2003. The combined ratio for the
six months ended June 30, 2004 was 92.1% compared to 125.5% for the same period
of 2003. Discontinued operations represent our historical surety segment and
assumed workers compensation line, which we exited with the disposition of
Evergreen and Continental in April 2004. 21




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##### Table of Contents



Revenues Premiums Premiums include insurance premiums underwritten by Century (which we
refer to as direct premiums) and insurance premiums assumed from other insurers
generally in states where we do not currently have a licensed insurance
subsidiary (which we refer to as assumed premiums). We refer to direct and
assumed premiums together as gross premiums. Written premiums are the total amount of premiums billed to the
policyholder less the amount of premiums returned, generally as a result of
cancellations, during a given period. Written premiums become premiums earned
as the policy ages. Barring premium changes, if an insurance company writes
the same mix of business each year, written premiums and premiums earned will
be equal and the unearned premium reserve will remain constant. During periods
of growth, the unearned premium reserve will increase, causing premiums earned
to be less than written premiums. Conversely, during periods of decline, the
unearned premium reserve will decrease, causing premiums earned to be greater
than written premiums. We have historically relied on quota share, excess of loss and catastrophe
reinsurance to manage our regulatory capital requirements and also to limit our
exposure to loss. Our underwriting business is divided into two primary segments:
property/casualty and other (including exited lines). Our property/casualty segment primarily includes general liability,
commercial property and multi-peril insurance for small and mid-sized
businesses. The other (including exited lines) segment includes workers
compensation, which we exited in January 2002, and commercial auto, which we
exited in May 2000. Historically, we wrote surety through our subsidiaries,
Continental and Evergreen. Due to the disposition of those two companies
during the second quarter of 2004, the surety segment is no longer a material
part of our business. The following table presents a summary of gross, ceded and net written
premiums and net premiums earned for the periods indicated. Three Months Ended June 30,
    
    Six Months ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Gross written premiums
    
    $
    48,936
    
    
    
    39,377
    
    
    
    91,772
    
    
    
    72,939Ceded written premiums
    
    
    (6,014
    )
    
    
    (4,923
    )
    
    
    (12,206
    )
    
    
    (10,363
    )Net written premiums
    
    $
    42,922
    
    
    
    34,454
    
    
    
    79,566
    
    
    
    62,576Net premiums earned
    
    $
    35,819
    
    
    
    26,586
    
    
    
    67,877
    
    
    
    49,531Net written premiums to gross written premiums
    
    
    87.7
    %
    
    
    87.5
    %
    
    
    86.7
    %
    
    
    85.8
    %Net premiums earned to net written premiums
    
    
    83.5
    %
    
    
    77.2
    %
    
    
    85.3
    %
    
    
    79.2
    %
 Gross Written Premiums Gross written premiums increased $9.6 million, or 24.3%, for the three
months ended June 30, 2004, compared to the same period in 2003. For the six
months ended June 30, 2004 gross written premiums increased $18.8 million, or
25.8%, compared to the same period in 2003. The increase was due primarily a
result of favorable market conditions in the casualty market that have allowed
us to increase our casualty premium volume and prices for the fourth
consecutive year. The pricing environment began to soften on certain property
lines during the first six months of 2004 as a result of increased competition
on the larger property accounts. While property rates have softened, property
premiums were down only 0.5% for the six months ended June 30, 2004, compared
to the same period of
2003. Property premiums accounted for 36% of our gross written premiums
for the six months ended June 30, 2004, while casualty premiums accounted for
64%. For the six months ended June 30, 2003, property premiums accounted for
45% of our gross written premium and casualty accounted for the remaining 55%. Net Written Premiums and Net Premiums Earned Net written premiums for the three months ended June 30, 2004 were $42.9
million, representing an increase of 24.6% compared to the same period in 2003.
For the six months ended June 30, 2004, net written premiums were $79.6
million, representing an increase of 27.1% over the same period of 2003. Net
written premiums represented 87.7% of gross written premiums for the three 22




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##### Table of Contents



months ended June 30, 2004. For the six months ended June 30, 2004, net
written premiums represented 86.7% of gross written premiums. This is higher
than the relationship of net written premiums to gross written premiums during
the same periods in 2003, reflecting an increase in retention for the current
year and higher rate of retention due to the decrease in the use of facultative
reinsurance. This decrease is attributable to a lower number of property
accounts that have been historically ceded under the facultative treaty. Net premiums earned, a function of net written premiums, were $35.8
million for the three months ended June 30, 2004 and were 83.5% of net written
premiums. Net premiums earned were $67.9 million for the six months ended June
30, 2004, and were 85.3% of net written premiums. This is higher than the
relationship of net premiums earned to net written premiums during the same
periods in 2003, reflecting a higher rate of retention over 2003. Net Investment Income Our investment portfolio is generally highly liquid and consists
substantially of readily marketable, investment-grade fixed maturity and equity
securities. Net investment income is primarily comprised of interest and
dividends earned on these securities, net of related investment expenses. Net investment income increased to $2.4 million for the three months ended
June 30, 2004, compared to $1.7 million for the same period in 2003. For the
six months ended June 30, 2004, net investment income was $4.4 million,
compared to $3.0 million for the same period in 2003. The increase was due
primarily to an increase in invested assets, including cash, partially offset
by a lower investment yield. Invested assets, including cash, increased by
$105.9 million to $277.1 million as of June 30, 2004 from $171.2 million as of
June 30, 2003. Our pre-tax investment yield for the first six months ended
June 30, 2004 was 4.1%, compared to 4.4% for the same period in 2003. In the
six months ended June 30, 2004, our cash and short-term investments decreased
from 13.5% of invested assets, at December 31, 2003, to 3.1%. This decrease in
cash and short-term investments was part of an effort to increase our
investment yield for 2004 by investing in higher yield investment grade fixed
maturity securities while maintaining the targeted duration and credit quality
of our portfolio. In the second quarter of 2004, as part of our effort to improve our after
tax yield, we increased our allocation to tax exempt bonds. This increase has
allowed us to increase our tax equivalent yield from 4.1% at December 31, 2003
to 4.5% at June 30, 2004, which has created an overall tax savings of $265,000
for the six months ended June 30, 2004. Realized Gains (Losses) on Securities Realized gains and losses on securities are principally affected by
changes in interest rates, the timing of sales of investments and changes in
credit quality of the securities we hold as investments. For the three months ended June 30, 2004, we had net realized gains of $21,000, and
for the six months ended June 30, 2004, we had net realized gains of $144,000.
For the three months ended June 30, 2003, we had net realized
gains of $115,000, and for the six months ended June 30, 2003, we had net realized
gains of $198,000. No other-than-temporary declines were realized in the six
month period ended June 30, 2004. For the six month period ended June 30,
2003, one fixed maturity security was written down in the amount of $87,000,
which was included as a realized loss in the accompanying interim unaudited
consolidated condensed financial statements. Expenses Losses and Loss Expenses Losses and loss expenses represent our largest expense item and include
(1) payments made to settle claims, (2) estimates for future claim payments and
changes in those estimates for current and prior periods, and (3) costs
associated with settling claims. The items that influence the incurred losses
and loss expenses for a given period include, but are not limited to, the
following:  
    
    the number of exposures covered in the current year;  
    
    trends in claim frequency and claim severity; 23




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
    
    changes in the cost of adjusting claims;  
    
    changes in the legal environment relating to coverage interpretation, theories of liability and jury determinations; and  
    
    the re-estimation of prior years reserves in the current year. We continue to perform an internal quarterly actuarial analysis and
establish or adjust (for prior accident quarters) our best estimate of the
ultimate incurred losses and loss expenses to reflect loss development
information and trends that have been updated for the most recent quarters
activity. As of December 31 of each year, we have an independent actuarial
analysis performed of the adequacy of our reserves. Our estimate of ultimate
loss and loss expenses is evaluated and re-evaluated by accident year and by
major coverage grouping. Changes in estimates are reflected in the period the
additional information becomes known. Our reinsurance program significantly influences our net retained losses.
In exchange for premiums ceded to reinsurers under quota share and excess of
loss reinsurance agreements, our reinsurers assume a portion of the losses and
loss expenses incurred. Net losses and loss expenses decreased to $21.0 million for the three
months ended June 30, 2004 from $31.4 million for the same period in 2003. For
the six months ended June 30, 2004, net losses and loss expenses were $39.9
million, compared to $45.4 million for the same period in 2003. Net losses and
loss expense ratios for the three months ended June 30, 2004 and 2003 were
58.6% and 118.2%, respectively. The net losses and loss expense ratios for the
six months ended June 30, 2004 and 2003 were 58.6% and 91.7%, respectively. Our reserve for losses and loss expenses as of June 30, 2004 was $153.4
million (before the effects of reinsurance) and $107.8 million (after the
effects of reinsurance), as estimated through our internal actuarial analysis.
During 2004, we concluded through our actuarial analysis that the December 31,
2003 reserve for losses and loss expenses of $92.8 million (after the effects
of reinsurance) was deficient by $4.1 million primarily on our construction
defect and commercial auto reserves. Excluding construction defect, we had no
prior year development in our property and casualty segment for accident years
2003, 2002, or 2001. Our reserve for losses and loss expenses (net of the effects of
reinsurance) at June 30, 2004 and December 31, 2003 by line was as follows: December 31,June 30, 2004
    
    2003(in thousands)Property/casualty:Casualty
    
    $
    82,738
    
    
    
    71,478Property
    
    
    18,455
    
    
    
    13,806Other (including exited lines):Commercial auto
    
    
    3,261
    
    
    
    3,519Workers compensation
    
    
    3,390
    
    
    
    4,031Net reserves for losses and loss expenses
    
    
    107,844
    
    
    
    92,834Plus reinsurance recoverables on unpaid losses at end of period
    
    
    45,552
    
    
    
    36,402Gross reserves for losses and loss expenses
    
    $
    153,396
    
    
    
    129,236
 Based on the second quarter internal actuarial review, the Company
recorded $18.8 million of incurred losses and loss expenses attributable to the
2004 accident year and $2.2 million attributable to events of prior years for
the three months ended June 30, 2004.
For the six months ended June 30, 2004, the Company recorded
$35.5 million
of incurred losses and loss expenses attributable to the 2004 accident year and
$4.4 million attributable to events of prior years. The accident year losses
and loss expense ratios for the property and casualty segment for accident
years 2004, 2003 and 2002 were 52.3%, 48.6% and 53.4%, respectively. As of June 30, 2004, the
property and casualty segment combined accident year losses and loss expense
ratio in total for the 2004, 2003 and 2002 years was 50.9%. A significant portion of the three months and six months ended June 30,
2004 and 2003 prior year reserve for losses and loss expenses increases resulted principally from construction
defect claims in the other liability line in the property and casualty segment.
During the first six months of 2004 and 2003, new construction defect claim
counts exceeded expectations. Based on the claim count experience that has
emerged, the Companys actuaries revised the factors used in the estimation of
ultimate construction defect claim counts. This re-estimation of 24




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##### Table of Contents



claim count
projection factors produced an increase in the estimated ultimate cost of
construction defect claims. The prior year development recognized during the
three and six month periods ended June 30, 2003 and June 30, 2004 for construction defect
was substantially due to adverse claim count experience. In addition in the
second quarter ended June 30, 2004, increases in incurred amounts on four
claims also increased the amount of incurred development. As of June 30, 2004,
we had 578 open claims relating to construction defect compared to 571 open
claims as of March 31, 2004 and 597 open claims as of December 31, 2003.
During the second quarter of 2004, 266 new claims were reported and 259
existing claims were settled or dismissed. During the six months ended June
30, 2004, 516 new claims were reported and 535 existing claims were settled or
dismissed. Our net loss and loss expense reserves for construction defect
claims as of June 30, 2004 were $16.2 million compared to $18.6 million as of
December 31, 2003. Additionally, during the second quarter of 2004, the Company experienced
development related to 19 new contractors claims received in the second
quarter and development on pending claims in the 1994 through 1999 accident
years. The 19 new claims were higher than recent experience and the
development on pending claims exceeded our expectations. This development does
not arise from construction defect claims. A significant portion of the 2003
prior year development resulted from the non construction defect casualty
lines. During the first quarter of 2004, the Company observed increases in paid
and incurred losses and loss expenses on seven commercial auto liability
claims. The net incurred increases on these claims totaled $778,000. The
increases were related to one significant, unanticipated new claim ($155,000),
reserve increases related to coverage disputes on three claims ($297,000), and
unfavorable changes in conditions relating to three other claims ($326,000). Due to the development during the first quarter, the Company conducted
further analysis of the nature and impact of the commercial automobile
activity. In addition to its current methods for assessing the overall reserve
needs on this run-off business, the Companys actuaries have undertaken a
project with claims management to assess the range of potential costs on the
remaining commercial auto liability pending claims. Based on this analysis,
the Company did not record any additional net incurred losses in the second
quarter of 2004. As of June 30, 2004, the Company had 42 open claims relating to commercial
automobiles, compared to 51 open claims as of March 31, 2004 and 63 open claims
as of December 31, 2003. During the second quarter of 2004, two new claims
were reported and 11 existing claims were settled or dismissed. During the six
months ended June 30, 2004, six new claims were reported and 27 existing claims
were settled or dismissed. Our reserves for net losses and loss expenses for
commercial automobile as of June 30, 2004 were $3.2 million compared to $3.5
million as of December 31, 2003. Operating Expenses Operating expenses include the costs to acquire a policy (included in
amortization of deferred policy acquisition costs), other operating expenses
(including corporate expenses) and interest expense. The following table
presents our amortization of deferred policy acquisition costs, other operating
expenses and related ratios and interest expense for the periods indicated: Three Months ended June 30,
    
    Six Months ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Amortization of deferred policy acquisition costs
(ADAC)
    
    $
    8,643
    
    
    
    5,958
    
    
    
    15,493
    
    
    
    11,106Other operating expenses
    
    
    3,272
    
    
    
    2,001
    
    
    
    7,100
    
    
    
    5,661ADAC and other operating expenses
    
    
    11,915
    
    
    
    7,959
    
    
    
    22,593
    
    
    
    16,767Interest expense
    
    
    345
    
    
    
    357
    
    
    
    760
    
    
    
    675Interest expense on the redemption of Class B shares
    
    
    518
    
    
    
    
    
    
    
    518
    
    
    
    Total operating expenses
    
    $
    12,778
    
    
    
    8,316
    
    
    
    23,871
    
    
    
    17,442Expense ratio:ADAC
    
    
    24.1
    %
    
    
    22.4
    %
    
    
    22.8
    %
    
    
    22.4
    %Other operating expenses
    
    
    9.1
    %
    
    
    7.5
    %
    
    
    10.5
    %
    
    
    11.5
    %Total expense ratio (1)
    
    
    33.2
    %
    
    
    29.9
    %
    
    
    33.3
    %
    
    
    33.9
    %
   (1)
    
    Interest expense and interest expense on the redemption of the Class B
shares are not included in the calculation of the expense ratio. 25




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Operating expenses increased $4.5 million, or 54.2%, to $12.8 million for
the three month period ended June 30, 2004 from $8.3 million for the same
period in 2003. For the six months ended June 30, 2004, operating expenses
increased $6.4 million, or 36.8%, to $23.9 million. The increases are primarily
attributable to an increase in ADAC, including commission expenses. This
increase resulted from an increase in the volume of insurance written. For the
six months ended June 30, 2004, the increase is offset by $655,000 of
reductions to amortization expense that related to the termination of the
intercompany pooling agreement and the implementation of the loss portfolio
transfers that occurred on January 1, 2004. Additionally, for the three and six months ended June 30, 2004, other
operating expenses increased compared to the same period in 2003 due to a $1.2
million reduction in 2003 related to a bonus expense that was not paid due to
the projected overall 2003 net loss. Without the 2003 reduction of the 2002
bonus accrual, the overall expense ratio for the three months ended June 30,
2003 would have been 34.4%, which is 1.1% higher than that of the same period
in 2004. The lower expense ratio in 2004 is due to an increase in operational
efficiencies achieved through an increase in expense management. In addition,
the six months ended June 30, 2004 balance includes $250,000 of expenses
related to a non-recurring severance agreement and $105,000 of expenses related
to the IPO that could not be capitalized. Interest expense remained relatively stable for the three and six months
ended June 30, 2004 compared to the same periods in 2003. The decrease in interest expense related to the payoff of the $8.7
million bank loan in April 2004 is offset by the fact that the interest expense
in 2003 only included interest on the $10.0 million trust preferred security
subsequent to its issuance in May 2003. In addition, in April 2004, we used a portion
of the IPO proceeds to redeem our Class B shares. With this redemption, we
recorded $518,000 of interest expense that is included in operating expenses. Income Taxes The 2004 income tax provision has been computed based on our estimated
annual effective tax rate of 32%, which is lower than the federal income tax
rate of 35% principally because of tax-exempt investment income. Liquidity and Capital Resources ProCentury is a holding company, the principal assets of which are the
common shares of Century. Although we can generate cash through loans from
banks and issuances of equity securities, our primary source of funds to meet
our short-term liquidity needs, including the payment of dividends to our
shareholders and corporate expenses, is dividends from Century. Centurys
principal sources of funds are underwriting operations, investment income and
proceeds from sales and maturities of investments. Centurys primary use of
funds is to pay claims and operating expenses, to purchase investments and to
make dividend payments to us. ProCenturys future liquidity is dependent on the
ability of Century to pay dividends. Century is restricted by statute as to the amount of dividends it may pay
without the prior approval of regulatory authorities. It may pay dividends to
ProCentury without advance regulatory approval only from unassigned surplus and
only to the extent that all dividends in the current twelve months do not
exceed the greater of 10% of total statutory surplus as of the end of the prior
fiscal year or statutory net income for the prior year. Using these criteria,
the available ordinary dividend payable by Century to ProCentury for 2004 is
$6.0 million. Century distributed ordinary dividends of $3.7 million and $5.4
of extraordinary dividends for the six months ended June 30, 2004, $1.5 million
of ordinary dividends in the first six months of 2003 and $750,000 million of
ordinary dividends in the first six months of 2002. Of the total dividends in
2004, $7.6 million consisted of the dividend of Centurys interest in
Evergreen. Centurys ability to pay future dividends to ProCentury without
advance regulatory approval is dependent upon maintaining a positive level of
unassigned surplus, which in turn, is dependent upon Century generating net
income in excess of dividends to ProCentury. Century is required by law to maintain a certain minimum level of surplus
on a statutory basis. Surplus is calculated by subtracting
total liabilities from total admitted assets. The National Association of
Insurance Commissioners (NAIC) has a risk-based capital standard designed to
identify property and casualty insurers that may be inadequately capitalized
based on inherent risks of each insurers assets and liabilities and its mix of
net written premiums. Insurers falling below a calculated threshold may be
subject to varying degrees of regulatory action. As of December 31, 2003, the
statutory surplus of Century was in excess of the prescribed risk-based capital
requirements that correspond to any level of regulatory action. Centurys
statutory surplus at December 31, 2003 was $59.7 million and the regulatory
action level was $21.2 million. The statuary surplus at June 30, 2004 was
$105.3 million. Net cash provided by operating activities was $49.2 million for the six
months ended June 30, 2004, compared to $11.2 million for the six months ended
June 30, 2003. This improvement was primarily attributable to the increase in
net written premiums partially 26




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offset by an increase in paid losses. Net cash used by investing activities was $112.9 million for the six
months ended June 30, 2004, compared to net cash used by investing activities
of $22.2 million for the six months ended June 30, 2003. This increase was
primarily attributable to the increased level of purchases of fixed maturity. Net cash provided by financing activities was $62.5 million for the six
months ended June 30, 2004, compared to net cash provided by financing
activities of $12.3 million for the six months ended June 30, 2003. This
increase in cash provided by financing activities is directly related to the
proceeds from the IPO, which was reduced by the redemption of the Class B
shares, the repayment of the bank debt, and the dividend of Evergreen. During the quarter ended June 30, 2004 we repaid our $8.7 million of bank
debt with the proceeds from our IPO in April 2004. The Companys remaining
contractual obligations have not materially changed from the Companys
contractual obligations as of December 31, 2003, which are described in the
Prospectus. In addition, during the quarter, we redeemed all of our Class B
common shares for $5.0 million. Given our historical cash flow, we believe that cash flow from operating
activities through the end of 2004 will provide sufficient liquidity for our
operations, as well as to satisfy debt service obligations and pay other
operating expenses. Although we anticipate that we will be able to meet our
cash requirements, we can give no assurance in this regard. Investment Portfolio Our investment strategy is designed to capitalize on our strategy to
generate positive cash flow from our underwriting activities. Preservation of
capital is our first priority, with a secondary focus on maximizing appropriate
risk adjusted return. We seek to maintain sufficient liquidity from operations,
investing and financing activities to meet our anticipated insurance
obligations and operating and capital expenditure needs. The base fixed-income
portfolio is rated investment grade to protect invested assets. We believe that
our investment portfolio is highly liquid and consists substantially of readily
marketable, investment grade fixed-income and equity securities. Our investment
portfolio is managed by two independent investment advisors that operate under
investment guidelines approved by Centurys investment committee. Centurys
investment committee meets at least quarterly and reports to ProCenturys board
of directors. In addition, we employ stringent diversification rules and
balance our investment credit risk and related underwriting risks to minimize
total potential exposure to any one security or business sector. Our cash and investment portfolio increased to $277.1 million as of June
30, 2004 from $171.2 million as of December 31, 2003 and is summarized by type
of investment in note 3 to the interim unaudited consolidated condensed
financial statements. During the first six months of 2004, the Company made an
effort to increase its taxable equivalent yield by investing in higher yield
investment grade fixed-maturity securities and tax exempt municipal bonds while
maintaining the targeted duration and credit quality of our portfolio. Our
fixed maturity securities increased from $122.8 million as of December 31, 2003
to $226.4 million as of June 30, 2004, and equity securities from $25.3 million
as of December 31, 2003 to $42.1 million as of June 30, 2004. During the six
months ended June 30, 2004, we extended the duration of the fixed income
portfolio from 3.3 years at December 31, 2003 to 4.2 years at June 30, 2004,
and increased the allocation to municipals from 5.0% of the total investment
portfolio at December 31, 2003 to 27.0% at June 30, 2004. Despite the increase
in invested assets, the increase in the allocation to municipals and the
extension of the duration, the overall credit quality of the portfolio remained
unchanged from December 31, 2003. Accounting Standards The Emerging Issues Task Force (EITF) has reached a consensus regarding
Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, pursuant to which disclosures are
required for unrealized losses on fixed maturity and equity securities
accounted for under SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities,that are accounted for as either available-for-sale or
held-to-maturity. Effective December 31, 2003, we adopted the disclosure requirements of the EITFs consensus, which include quantitative information
regarding the aggregate amount of unrealized losses and the associated fair
value of the investments in an unrealized loss position, segregated into
periods for which the investments have been in an unrealized loss position.
The consensus also requires certain qualitative disclosures about the
unrealized holdings in order to provide additional information that we
considered in concluding that the unrealized losses were not
other-than-temporary. In addition, in March 2004 the EITF reached consensus on
additional guidance concerning the identification of and accounting for
other-than-temporary impairments and the disclosures required for cost method
investments. We will apply the additional guidance concerning
other-than-temporary impairments during our third quarter beginning July 1,
2004, 27




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##### Table of Contents



which is not expected to have a material impact on our consolidated
financial position and results of operations. Beginning with our Annual Report
on Form 10-K for the year ending December 31, 2004, we will make the required
disclosures for cost method investments. Cautionary Statement Regarding Forward-Looking Statements Some of the statements in this report are forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are derived from information that we currently have
and assumptions that we make and may be identified by words such as believes,
anticipates, expects, plans, should, estimates and similar
expressions. We cannot assure you that anticipated results will be achieved,
since actual results may differ materially because of both known and unknown
risks and uncertainties we face. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Factors that could cause actual
results to differ materially from our forward-looking statements include, but
are not limited to, the following factors:  
    
    our actual incurred losses and loss expenses may be greater than our
loss and loss expense reserves, which could have a material adverse
effect on our financial condition and results of operations;  
    
    a decline in our financial rating may result in a reduction of new or
renewal business;  
    
    we are subject to extensive regulation, which may adversely affect
our ability to achieve our business objectives, and if we fail to comply
with these regulations, we may be subject to penalties, including fines
and suspensions, which may adversely affect our financial condition and
results of operations;  
    
    changes in our operating environment may adversely affect our performance;  
    
    our general agents may exceed their authority and could bind us to business outside our underwriting guidelines;  
    
    if we lose key personnel or are unable to recruit qualified
personnel, our ability to implement our business strategies could be
delayed or hindered;  
    
    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
interest rates, government monetary policies, general economic
conditions and overall market conditions;  
    
    we distribute our products through a select group of general agents,
and there can be no assurance that such relationships will continue, or
if they do continue, that they will remain profitable for us;  
    
    we rely on our information technology and telecommunication systems,
and the failure of these systems could materially and adversely affect
our business;  
    
    our reinsurers may not pay claims made by us on losses in a timely
fashion;  
    
    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 business is cyclical in nature, which may affect our financial performance;
    
    we compete with a large number of companies in the insurance industry for underwriting revenues;  
    
    severe weather conditions and other catastrophes may result in an
increase in the number and amount of claims filed against us; and  
    
    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. 28




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##### Table of Contents



You are cautioned not to place undue reliance on forward-looking
statements, which speak only as of their respective dates. 
 Item 3. Quantitative And Qualitative Disclosures About Market Risk Market risk is the potential economic loss principally arising from
adverse changes in the fair value of financial instruments. The major
components of market risk affecting us are credit risk, equity price risk and
interest rate risk. Credit Risk.Credit risk is the potential economic loss principally
arising from adverse changes in the financial condition of a specific debt
issuer. We address this risk by investing in fixed-income securities that are
investment grade, which are those bonds rated BBB- or higher by Standard &
Poors. We also independently and through our outside independent investment
managers, monitor the financial condition of all of the issuers of fixed-income
securities in our portfolio. We utilize a ratings changes report, a ratings
watch list and an early warning report as part of this process. Finally, we
employ stringent diversification rules that limit our credit exposure to any
single issuer or business sector. Equity Price Risk.Equity price risk is the potential that we will incur
economic loss due to a decline in preferred and/or common stock prices. We
manage this risk by focusing on a long-term, conservative, value oriented and
dividend driven investment philosophy for our equity portfolio. The equity
securities in our portfolio are primarily mid-to-large capitalization issues
with strong dividend performance. Our strategy remains one of value investing,
with security selection taking precedence over market timing. We also employ
stringent diversification rules that limit our exposure to any individual stock
or business sector. Interest Rate Risk.We had fixed-income, preferred shares and bond mutual
fund investments with a fair value of $265.6 million at June 30, 2004 that are
subject to interest rate risk. We manage our exposure to interest rate risk
through a disciplined asset/liability matching and capital management process.
In the management of this risk, the characteristics of duration, credit quality
and variability of cash flows are critical elements. These risks are assessed
regularly and balanced within the context of our liability and capital
position. The Companys market risk associated with exposure to interest rate risk
has not materially changed from that identified in our Prospectus at December
31, 2003. 
 Item 4. Controls And Procedures As of the end of the period covered by this quarterly report, the Company
carried out an evaluation, under the supervision and with the participation of
the Companys management, including the Chairman and Chief Executive Officer
(CEO) and the Executive Vice President and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to Securities Exchange Act Rule 13a-15
(Disclosure Controls). The Companys management, including the CEO and CFO, does not expect that its
Disclosure Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Based upon the Companys controls evaluation, the CEO and CFO have concluded
that the Companys Disclosure Controls provide reasonable assurance that the
information required to be disclosed by the Company in its periodic reports is
accumulated and communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding disclosure and is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. There were no changes in the Companys internal control over financial
reporting during the Companys most recent fiscal quarter that materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. 29




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##### Table of Contents



PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings The Companys subsidiaries are regularly engaged in the defense of claims
arising out of the conduct of the insurance business. The Company does not
believe that such litigation, individually or in the aggregate, will have a
material effect on its consolidated financial condition or results of
operations. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities In connection with our IPO, we amended and
restated our articles of incorporation, effective April 21, 2004, and our code of regulations, effective April 26, 2004. See
Description of Capital Shares in our Prospectus for a description of the
rights of holders of our common shares. 
 Item 3. Defaults Upon Senior Securities Not applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 
 Item 5. Other Information Not applicable. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1
    
    
    Amended and Restated Articles of Incorporation of ProCentury (1)3.2
    
    
    Amended and Restated Code of Regulations of ProCentury (1)31.1
    
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act (2)31.2
    
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act (2)32.1
    
    
    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 (2)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 (2)
   (1) 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 on June 4, 2004.(2) 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. The registrant hereby undertakes to furnish supplementally a copy of any
omitted schedule or other attachment to the Securities and Exchange Commission
upon request. 30




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(b) Reports on Form 8-K  On June 8, 2004, the Company furnished a Current Report on Form 8-K
to the Securities and Exchange Commission, which reported information
under Items 7 and 12. 31




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized. PROCENTURY CORPORATIONDate: August 13, 2004
    
    By:
    
    /s/ Charles D. HammCharles D. HammChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 32