##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended September 30, 2005
 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
 
  þ o
  o þ
 o þ




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##### 



PROCENTURY CORPORATION
 QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2005
 INDEX
 PagePART I: FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Condensed Statements of Operations  For the three and nine months ended
September 30, 2005 and 2004
    
    
    3Consolidated Condensed Balance Sheets  September 30, 2005 and December 31, 2004
    
    
    4Consolidated Condensed Statements of Shareholders Equity and Comprehensive Income  For
the nine months ended September 30, 2005 and 2004
    
    
    5Consolidated Condensed Statements of Cash Flows  For the nine months ended September 30,
2005 and 2004
    
    
    6Notes to Consolidated Condensed Financial Statements  September 30, 2005
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31
 2




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##### 



PART I: FINANCIAL INFORMATION
 Item 1. Financial Statements
 PROCENTURY CORPORATION AND SUBSIDIARIES
 
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Premiums earned
    
    $
    44,934
    
    
    
    39,543
    
    
    
    129,479
    
    
    
    107,421Net investment income
    
    
    3,866
    
    
    
    2,719
    
    
    
    10,520
    
    
    
    7,094Net realized investment (losses) gains
    
    
    (66
    )
    
    
    (22
    )
    
    
    (219
    )
    
    
    122Total revenues
    
    
    48,734
    
    
    
    42,240
    
    
    
    139,780
    
    
    
    114,637Losses and loss expenses
    
    
    36,410
    
    
    
    24,518
    
    
    
    88,724
    
    
    
    64,406Amortization of deferred policy acquisition costs
    
    
    10,941
    
    
    
    8,526
    
    
    
    31,496
    
    
    
    24,019Other operating expenses
    
    
    3,821
    
    
    
    3,385
    
    
    
    10,360
    
    
    
    10,236Severance expense
    
    
    
    
    
    
    
    
    
    
    793
    
    
    
    250Interest expense
    
    
    483
    
    
    
    352
    
    
    
    1,359
    
    
    
    1,113Interest expense on the redemption of Class B Shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518Total expenses
    
    
    51,655
    
    
    
    36,781
    
    
    
    132,732
    
    
    
    100,542(Loss) income before income tax
    
    
    (2,921
    )
    
    
    5,459
    
    
    
    7,048
    
    
    
    14,095Income tax (benefit) expense
    
    
    (1,128
    )
    
    
    1,747
    
    
    
    1,763
    
    
    
    4,510Net (loss) income
    
    $
    (1,793
    )
    
    
    3,712
    
    
    
    5,285
    
    
    
    9,585Basic net (loss) income per share
    
    $
    (0.14
    )
    
    
    0.28
    
    
    
    0.40
    
    
    
    0.98Diluted net (loss) income per share
    
    $
    (0.14
    )
    
    
    0.28
    
    
    
    0.40
    
    
    
    0.98Weighted average of shares outstanding  basic
    
    
    13,064,909
    
    
    
    13,135,450
    
    
    
    13,054,764
    
    
    
    9,779,529Weighted average of shares outstanding  diluted
    
    
    13,124,487
    
    
    
    13,179,052
    
    
    
    13,126,632
    
    
    
    9,803,101Cash dividend per share
    
    $
    0.02
    
    
    
    0.02
    
    
    
    0.06
    
    
    
    0.02
  3




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##### 



PROCENTURY CORPORATION AND SUBSIDIARIES
 
 September 30, 2005
    
    
    December 31, 2004AssetsInvestments:Fixed maturities:Available-for-sale, at fair value (amortized cost 2005, $298,444; 2004, $262,470)
    
    $
    296,160
    
    
    
    263,401Held-to-maturity, at amortized cost (fair value 2005, $1,127; 2004, $1,156)
    
    
    1,132
    
    
    
    1,142Equities (available-for-sale):Equity
securities, at
fair value (cost 2005, $25,987; 2004, $17,944)
    
    
    25,676
    
    
    
    18,228Bond mutual
funds, at fair
value (cost 2005, $18,261; 2004, $18,943)
    
    
    17,821
    
    
    
    18,921Short-term investments, at amortized cost
    
    
    4,199
    
    
    
    4,026Total investments
    
    
    344,988
    
    
    
    305,718Cash
    
    
    11,100
    
    
    
    6,681Premiums in course of collection, net
    
    
    13,859
    
    
    
    11,747Deferred policy acquisition costs
    
    
    19,389
    
    
    
    17,411Prepaid reinsurance premiums
    
    
    10,481
    
    
    
    9,382Reinsurance recoverable on paid losses, net
    
    
    2,919
    
    
    
    3,897Reinsurance recoverable on unpaid losses, net
    
    
    51,042
    
    
    
    29,485Deferred federal income tax asset
    
    
    8,242
    
    
    
    5,442Federal income taxes recoverable
    
    
    1,700
    
    
    
    Other assets
    
    
    6,797
    
    
    
    5,164Total assets
    
    $
    470,517
    
    
    
    394,927Liabilities and Shareholders EquityLoss and loss expense reserves
    
    $
    215,343
    
    
    
    153,236Unearned premiums
    
    
    90,179
    
    
    
    82,135Long term debt
    
    
    25,000
    
    
    
    25,000Accrued expenses and other liabilities
    
    
    5,308
    
    
    
    6,703Reinsurance balances payable
    
    
    3,268
    
    
    
    2,348Collateral held
    
    
    13,818
    
    
    
    7,008Federal income taxes payable
    
    
    
    
    
    
    3,260Total liabilities
    
    
    352,916
    
    
    
    279,690Shareholders equity:Capital stock, without par value
    
    
    
    
    
    
    Additional paid-in capital
    
    
    100,239
    
    
    
    100,103Retained earnings
    
    
    20,219
    
    
    
    15,727Unearned share compensation
    
    
    (925
    )
    
    
    (1,413
    )Accumulated other comprehensive (loss) income, net of taxes
    
    
    (1,932
    )
    
    
    820Total
shareholders
equity
    
    
    117,601
    
    
    
    115,237Total liabilities and shareholders equity
    
    $
    470,517
    
    
    
    394,927
  
 4




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##### 



PROCENTURY CORPORATION AND SUBSIDIARIES
 
 For the Nine Months Ended September 30,2005
    
    
    2004Shareholders EquityCapital stock:Beginning of period
    
    $
    
    
    
    
    Stock issued
    
    
    
    
    
    
    End of period
    
    
    
    
    
    
    Additional paid-in capital:Beginning of period
    
    
    100,103
    
    
    
    26,866Issuance of common shares
    
    
    
    
    
    
    77,931Issuance cost
    
    
    
    
    
    
    (1,298
    )Redemption of Class B shares
    
    
    
    
    
    
    (5,000
    )Shares issued under share compensation plans
    
    
    136
    
    
    
    Vesting of restricted common shares
    
    
    
    
    
    
    111End of period
    
    
    100,239
    
    
    
    98,610Retained earnings:Beginning of period
    
    
    15,727
    
    
    
    8,297Net income (loss)
    
    
    5,285
    
    
    
    9,585Dividend of subsidiary available for sale
    
    
    
    
    
    
    (7,024
    )Dividends
    
    
    (793
    )
    
    
    (262
    )End of period
    
    
    20,219
    
    
    
    10,596Unearned share compensation:Beginning of period
    
    
    (1,413
    )
    
    
    Vesting of restricted shares
    
    
    488
    
    
    
    End of period
    
    
    (925
    )
    
    
    Accumulated other comprehensive income, net of taxes:Beginning of period
    
    
    820
    
    
    
    1,234Unrealized holding (losses) gains arising during period, net of reclassification adjustment
    
    
    (2,752
    )
    
    
    370Dividend of subsidiary available for sale
    
    
    
    
    
    
    (564
    )End of period
    
    
    (1,932
    )
    
    
    1,040Total shareholders equity
    
    $
    117,601
    
    
    
    110,246Comprehensive IncomeNet income
    
    $
    5,285
    
    
    
    9,585Other comprehensive income:Unrealized gains (losses) on securities:Unrealized holding (losses) gains arising during the period:Gross
    
    
    (4,445
    )
    
    
    708Related federal income tax (expense) benefit
    
    
    1,550
    
    
    
    (259
    )Net unrealized gains (losses)
    
    
    (2,895
    )
    
    
    449Reclassification adjustment for (losses) gains included in net income:Gross
    
    
    (219
    )
    
    
    122Related federal income tax benefit (expense)
    
    
    77
    
    
    
    (43
    )Net reclassification adjustment
    
    
    (142
    )
    
    
    79Other comprehensive (loss) income
    
    
    (2,752
    )
    
    
    370Total comprehensive income (loss)
    
    $
    2,533
    
    
    
    9,955
  5




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##### 



PROCENTURY CORPORATION AND SUBSIDIARIES
 
 For the Nine Months Ended September 30,2005
    
    
    2004Cash flows provided by operating activities:Net income
    
    $
    5,285
    
    
    
    9,585Adjustments:Net realized investment losses (gains)
    
    
    219
    
    
    
    (122
    )Deferred federal income tax benefit
    
    
    (1,470
    )
    
    
    (3,413
    )Restricted share compensation
    
    
    624
    
    
    
    111Changes in assets and liabilities:Premiums in course of collection, net
    
    
    (2,112
    )
    
    
    (780
    )Deferred policy acquisition costs
    
    
    (1,978
    )
    
    
    (5,365
    )Prepaid reinsurance premiums
    
    
    (1,099
    )
    
    
    (2,673
    )Reinsurance recoverable on paid and unpaid losses, net
    
    
    (20,579
    )
    
    
    6,616Federal income taxes payable/recoverable
    
    
    (4,960
    )
    
    
    1,623Losses and loss expense reserves
    
    
    62,107
    
    
    
    17,333Unearned premiums
    
    
    8,044
    
    
    
    18,284Reinsurance balances payable
    
    
    920
    
    
    
    (1,683
    )Collateral held
    
    
    6,810
    
    
    
    (1,820
    )Receivable from subsidiary available for sale
    
    
    
    
    
    
    26,687Other, net
    
    
    (949
    )
    
    
    (1,328
    )Net cash provided by operating activities
    
    
    50,862
    
    
    
    63,055Cash flows used in investing activities:Purchases of equity securities
    
    
    (50,594
    )
    
    
    (50,591
    )Purchases of fixed maturity securities available-for-sale
    
    
    (98,324
    )
    
    
    (161,417
    )Proceeds from sales of equity securities
    
    
    42,849
    
    
    
    41,132Proceeds from sales and maturities of fixed maturities available-for-sale
    
    
    61,594
    
    
    
    30,170Proceeds from maturities of fixed maturities held-to-maturity
    
    
    
    
    
    
    325Acquisition, net of cash acquired
    
    
    (1,002
    )
    
    
    Net change in short-term investments
    
    
    (173
    )
    
    
    14,482Net cash used in investing activities
    
    
    (45,650
    )
    
    
    (125,899
    )Cash flows (used in) provided by financing activities:Issuance of common shares
    
    
    
    
    
    
    77,931Issuance cost
    
    
    
    
    
    
    (1,298
    )Redemption of Class B common shares
    
    
    
    
    
    
    (5,000
    )Principal payment on long term debt
    
    
    
    
    
    
    (9,133
    )Dividend of subsidiary
    
    
    
    
    
    
    (262
    )Draw on line of credit
    
    
    2,300
    
    
    
    Principal payment on line of credit
    
    
    (2,300
    )
    
    
    Dividend paid to shareholders
    
    
    (793
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (793
    )
    
    
    62,238Increase (decrease) in cash and cash equivalents
    
    
    4,419
    
    
    
    (606
    )Cash and equivalents at beginning of year
    
    
    6,681
    
    
    
    5,814Cash and equivalents at end of year
    
    $
    11,100
    
    
    
    5,208Supplemental disclosure of cash flow information:Interest paid
    
    $
    1,357
    
    
    
    1,234Federal income taxes paid
    
    $
    8,191
    
    
    
    6,300
  6




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##### 



PROCENTURY CORPORATION AND SUBSIDIARIES
    (1)
    
    Basis of PresentationThe accompanying interim unaudited consolidated condensed financial statements and notes
include the accounts of ProCentury Corporation , (the Company or ProCentury) and its wholly
owned insurance subsidiary, Century Surety Company (Century). The interim unaudited
consolidated condensed financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP) for interim financial information and with
the instructions to Article 10 of Regulation S-X. Accordingly, the interim unaudited
consolidated condensed financial statements do not include all of the information and notes
required by GAAP for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation of results for the interim periods
have been included. These interim unaudited consolidated condensed financial statements and
related notes should be read in conjunction with the consolidated financial statements and
related notes in the Companys audited consolidated financial statements, included in the
Companys annual report on Form 10-K Filing as of December 31, 2004. The Companys results of
operations for interim periods are not necessarily indicative of the results to be expected for
the entire year.On April 20, 2004, the common shares of Evergreen National Indemnity Company (Evergreen) and
its wholly owned subsidiary, Continental Heritage Insurance Company (Continental) (formerly
controlled subsidiaries of Century) 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 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 2004.On April 26, 2004, the Company issued 8,000,000 common shares at $10.50 per share in the IPO
and received net proceeds (before expenses) of $77.9 million. 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
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 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.
    
    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.
    
    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; and
    
    The Company amended its articles of incorporation to eliminate the authority to
issue Class B and Class C common shares.
 
 7




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##### 



Share Option Accounting
 Accounting
for Stock Issued to Employees Accounting for Certain Transactions involving Stock Compensation (an
interpretation of APB Opinion No. 25) Accounting for
Stock-Based Compensation, Accounting for Stock-Based Compensation  Transition and Disclosure; an amendment of FASB
Statement No. 123
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands, except per share data)Net (loss) income:As reported
    
    $
    (1,793
    )
    
    
    3,712
    
    
    
    5,285
    
    
    
    9,585Add: Share-based employee
compensation expense included in
reported net income, net of related
tax effects
    
    
    97
    
    
    
    111
    
    
    
    398
    
    
    
    111Less: Additional share-based employee
compensation expense determined under
fair value-based method for all
awards, net of related tax effects
    
    
    (150
    )
    
    
    (169
    )
    
    
    (649
    )
    
    
    (217
    )Pro Forma
    
    $
    (1,846
    )
    
    
    3,654
    
    
    
    5,034
    
    
    
    9,479Basic (loss) income per common share:As reported
    
    $
    (0.14
    )
    
    
    0.28
    
    
    
    0.40
    
    
    
    0.98Pro Forma
    
    $
    (0.14
    )
    
    
    0.28
    
    
    
    0.39
    
    
    
    0.97Diluted (loss) income per common share:As reported
    
    $
    (0.14
    )
    
    
    0.28
    
    
    
    0.40
    
    
    
    0.98Pro Forma
    
    $
    (0.14
    )
    
    
    0.28
    
    
    
    0.38
    
    
    
    0.97
 8




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##### 



The fair values of the share options are estimated on the dates of grant using the Black
Scholes option pricing model with the following weighted average assumptions:
 For the Three and Nine MonthsEnded September 30, 2005Risk free interest rate
    
    
    3.97
    %Dividend yield
    
    
    0.76
    %Volatility factor
    
    
    23.15
    %Weighted average expected option life
    

7.00 Years
 In December 2004, the FASB revised Statement No. 123 (SFAS 123R), Share-Based Payment, which
requires companies to expense the estimated fair value of employee stock options and similar
awards, for all options vesting, granted, or modified after the effective date of this revised
statement. The accounting provisions of SFAS 123R were to become effective for interim periods
beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (SEC)
adopted a final rule amending Rule 4-01(a) of Regulation S-X regarding the compliance date for
SFAS 123R. This ruling delays the effective date of SFAS 123R to the first interim or annual
reporting period of the registrants first fiscal year beginning on or after June 15, 2005. As
a result, the accounting provisions of SFAS 123R will become effective beginning in 2006 for
the Companys financial statements. The Company is evaluating the impact of implementing SFAS
123R and anticipates it will be material to the financial statements.(2)
    
    Income per Common ShareBasic income per share (EPS) excludes dilution and is calculated by dividing income available
to common shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the dilution that could occur if securities or other contracts to
issue common shares (common share equivalents) were exercised. When inclusion of common share
equivalents increases the EPS or reduces the loss per share, the effect on earnings is
antidilutive. Under these circumstances, diluted net income or net loss per share is computed
excluding the common share equivalents.Based on the above and pursuant to disclosure requirements contained in SFAS No. 128, Earnings
Per Share, the following information represents a reconciliation of the numerator and
denominator of the basic and diluted EPS computations contained in the Companys interim
unaudited consolidated condensed financial statements.
 9




---



##### 



For the Three Months Ended September 30, 2005(Dollars in thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net (Loss) Per ShareNet (loss)
    
    $
    (1,793
    )
    
    
    13,064,909
    
    
    $
    (0.14
    )Effect of Dilutive SecuritiesRestricted common shares and
share options
    
    
    
    
    
    
    59,578
    
    
    
    Diluted EPSNet (loss)
    
    $
    (1,793
    )
    
    
    13,124,487
    
    
    $
    (0.14
    )
 For the Three Months Ended September 30, 2004(Dollars in thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    3,712
    
    
    
    13,135,450
    
    
    $
    0.28Effect of Dilutive SecuritiesRestricted common shares and
share options
    
    
    
    
    
    
    43,602
    
    
    
    Diluted EPSNet income
    
    $
    3,712
    
    
    
    13,179,052
    
    
    $
    0.28
 For the Nine Months Ended September 30, 2005(Dollars in thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    5,285
    
    
    
    13,054,764
    
    
    $
    0.40Effect of Dilutive SecuritiesRestricted common shares and
share options
    
    
    
    
    
    
    71,868
    
    
    
    Diluted EPSNet income
    
    $
    5,285
    
    
    
    13,126,632
    
    
    $
    0.40
 For the Nine Months Ended September 30, 2004(Dollars in thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    9,585
    
    
    
    9,779,529
    
    
    $
    0.98Effect of Dilutive SecuritiesRestricted common shares and
share options
    
    
    
    
    
    
    23,572
    
    
    
    Diluted EPSNet income
    
    $
    9,585
    
    
    
    9,803,101
    
    
    $
    0.98
 10




---



##### 



(3)
    
    InvestmentsThe Company invests primarily in investment-grade fixed-maturity securities. The amortized
cost, gross unrealized gains and losses and estimated fair value of fixed-maturity securities
classified as held-to-maturity were as follows:
 September 30, 2005(Dollars in thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    89
    
    
    
    14
    
    
    
    
    
    
    
    103Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,043
    
    
    
    
    
    
    
    (19
    )
    
    
    1,024Total
    
    $
    1,132
    
    
    
    14
    
    
    
    (19
    )
    
    
    1,127
 December 31, 2004(Dollars in thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    89
    
    
    
    13
    
    
    
    
    
    
    
    102Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,053
    
    
    
    1
    
    
    
    
    
    
    
    1,054Total
    
    $
    1,142
    
    
    
    14
    
    
    
    
    
    
    
    1,156
 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:
 September 30, 2005(Dollars in thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueFixed maturities:U.S. Treasury securities
    
    $
    3,693
    
    
    
    1
    
    
    
    (45
    )
    
    
    3,649Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    14,325
    
    
    
    13
    
    
    
    (165
    )
    
    
    14,173Obligations of states and political subdivisions
    
    
    134,464
    
    
    
    444
    
    
    
    (819
    )
    
    
    134,089Corporate securities
    
    
    38,207
    
    
    
    50
    
    
    
    (694
    )
    
    
    37,563Mortgage-backed securities
    
    
    43,427
    
    
    
    74
    
    
    
    (580
    )
    
    
    42,921Collateralized mortgage obligations
    
    
    27,831
    
    
    
    5
    
    
    
    (375
    )
    
    
    27,461Asset-backed securities
    
    
    36,497
    
    
    
    253
    
    
    
    (446
    )
    
    
    36,304Total fixed maturities
    
    
    298,444
    
    
    
    840
    
    
    
    (3,124
    )
    
    
    296,160Equities:Equity securities
    
    
    25,987
    
    
    
    255
    
    
    
    (566
    )
    
    
    25,676Bond mutual funds
    
    
    18,261
    
    
    
    24
    
    
    
    (464
    )
    
    
    17,821Total equities
    
    
    44,248
    
    
    
    279
    
    
    
    (1,030
    )
    
    
    43,497Total
    
    $
    342,692
    
    
    
    1,119
    
    
    
    (4,154
    )
    
    
    339,657
 11




---



##### 



December 31, 2004(Dollars in thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueFixed maturities:U.S. Treasury securities
    
    $
    4,169
    
    
    
    35
    
    
    
    (32
    )
    
    
    4,172Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    16,805
    
    
    
    98
    
    
    
    (84
    )
    
    
    16,819Obligations of states and political subdivisions
    
    
    119,893
    
    
    
    1,225
    
    
    
    (399
    )
    
    
    120,717Corporate securities
    
    
    46,249
    
    
    
    200
    
    
    
    (300
    )
    
    
    46,149Mortgage-backed securities
    
    
    33,148
    
    
    
    276
    
    
    
    (48
    )
    
    
    33,376Collateralized mortgage obligations
    
    
    23,825
    
    
    
    72
    
    
    
    (120
    )
    
    
    23,777Asset-backed securities
    
    
    18,383
    
    
    
    135
    
    
    
    (127
    )
    
    
    18,391Total fixed maturities
    
    
    262,470
    
    
    
    2,041
    
    
    
    (1,110
    )
    
    
    263,401Equities:Equity securities
    
    
    17,944
    
    
    
    458
    
    
    
    (174
    )
    
    
    18,228Bond mutual funds
    
    
    18,943
    
    
    
    3
    
    
    
    (25
    )
    
    
    18,921Total equities
    
    
    36,887
    
    
    
    461
    
    
    
    (199
    )
    
    
    37,149Total
    
    $
    299,358
    
    
    
    2,501
    
    
    
    (1,309
    )
    
    
    300,550
 Under the Companys accounting policy for equity securities and fixed-maturity securities
that can be contractually prepaid or otherwise settled in a way that may limit the Companys
ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the
Company has both the ability and intent to hold the investment for a reasonable period until
the securitys forecasted recovery and evidence exists indicating that recovery will occur
within a reasonable period of time.For other fixed-maturity and equity securities, an other-than-temporary impairment charge
is taken when the Company does not have the ability and intent to hold the security until the
forecasted recovery or if it is no longer probable that the Company will recover all amounts
due under the contractual terms of the security. Many criteria are considered during this
process including, but not limited to, the current fair value as compared to amortized cost or
cost, as appropriate, of the security; the amount and length of time a securitys fair value
has been below amortized cost or cost; specific credit issues and financial prospects related
to the issuer; the Companys ability and intent to hold or dispose of the security, and current
economic conditions.Other-than-temporary impairment losses result in a permanent reduction to the cost basis
of the underlying investment. Other-than-temporary losses of $79,000 and $114,000 were included
in the investment losses for the three and nine months ended September 30, 2005, respectively.
No other-than-temporary declines were realized in the nine months ended September 30, 2004.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 as follows:
 September 30, 2005(Dollars in thousands)Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Gross
    
    
    Estimated
    
    
    Gross
    
    
    Estimated
    
    
    Grossfair
    
    
    unrealized
    
    
    fair
    
    
    unrealized
    
    
    fair
    
    
    unrealizedvalue
    
    
    loss
    
    
    value
    
    
    loss
    
    
    value
    
    
    lossAgencies not backed by the full faith
and credit of the U.S. Government
    
    $
    1,024
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    1,024
    
    
    
    (19
    )Total
    
    $
    1,024
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    1,024
    
    
    
    (19
    )
 12




---



##### 



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:
 
 September 30, 2005(Dollars in thousands)Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Gross
    
    
    Estimated
    
    
    Gross
    
    
    Estimated
    
    
    Grossfair
    
    
    unrealized
    
    
    fair
    
    
    unrealized
    
    
    fair
    
    
    unrealizedvalue
    
    
    loss
    
    
    value
    
    
    loss
    
    
    value
    
    
    lossFixed maturities:U.S. Treasury securities
    
    $
    3,381
    
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    3,381
    
    
    
    (45
    )Agencies not backed by the full faith
and credit of the U.S. Government
    
    
    6,071
    
    
    
    (64
    )
    
    
    5,253
    
    
    
    (101
    )
    
    
    11,324
    
    
    
    (165
    )Obligations of states and political
subdivisions
    
    
    66,787
    
    
    
    (471
    )
    
    
    16,667
    
    
    
    (348
    )
    
    
    83,454
    
    
    
    (819
    )Corporate securities
    
    
    24,249
    
    
    
    (448
    )
    
    
    7,594
    
    
    
    (246
    )
    
    
    31,843
    
    
    
    (694
    )Mortgage-backed securities
    
    
    36,124
    
    
    
    (439
    )
    
    
    5,645
    
    
    
    (141
    )
    
    
    41,769
    
    
    
    (580
    )Collateralized mortgage obligations
    
    
    17,152
    
    
    
    (242
    )
    
    
    9,348
    
    
    
    (133
    )
    
    
    26,500
    
    
    
    (375
    )Asset-backed securities
    
    
    15,758
    
    
    
    (240
    )
    
    
    7,954
    
    
    
    (206
    )
    
    
    23,712
    
    
    
    (446
    )Total fixed maturities
    
    
    169,522
    
    
    
    (1,949
    )
    
    
    52,461
    
    
    
    (1,175
    )
    
    
    221,983
    
    
    
    (3,124
    )Equities:Equity securities
    
    
    10,749
    
    
    
    (393
    )
    
    
    2,796
    
    
    
    (173
    )
    
    
    13,545
    
    
    
    (566
    )Bond mutual funds
    
    
    8,298
    
    
    
    (253
    )
    
    
    9,060
    
    
    
    (211
    )
    
    
    17,358
    
    
    
    (464
    )Total equities
    
    
    19,047
    
    
    
    (646
    )
    
    
    11,856
    
    
    
    (384
    )
    
    
    30,903
    
    
    
    (1,030
    )Total
    
    $
    188,569
    
    
    
    (2,595
    )
    
    
    64,317
    
    
    
    (1,559
    )
    
    
    252,886
    
    
    
    (4,154
    )
 At September 30, 2005, the Company had seventy-five fixed income securities and seven
equity securities that have been in an unrealized loss position for one year or longer.
Seventy-three of the fixed income securities are investment grade, of which seventy-one of
these securities are rated A1/A or better (including fifty-three securities which are rated
AAA). The two remaining non-investment grade fixed income securities are rated BB and BB- and
have a fair value equal to 99.9% of their book value as of September 30, 2005. Two of the
equity securities that have been in an unrealized loss position for one year or longer relate
to closed end bond or preferred stock funds, each of which continues to pay its regular
dividend on a monthly basis and also has an underlying net asset value per share that exceeds
its price per share as of September 30, 2005. One of the equity securities relates to an
investment in an open end high quality short duration bond fund, of which the underlying assets
are all rated AAA. Finally, the four remaining equity securities that have been in an
unrealized loss position for one year or longer relate to preferred share investments in
issuers each of which has shown an improved financial performance during 2005. In addition,
these seven equity securities have an aggregate fair market value equal to 96.8% of their book
value as of September 30, 2005. All seventy-five of the fixed income securities are current on
interest and principal and all seven of the equity securities continue to pay dividends at a
level consistent with the prior year. Management believes 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 certified on an annual basis by an independent
actuary. 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 $36.4 million for the quarter ended September 30,
2005, compared to $24.5 million for the quarter ended September 30, 2004. In the third quarter
of 2005, the Company recorded $35.4 million of incurred losses and loss expenses attributable
to the 2005 accident year and $978,000 attributable to events of prior years. In the third
quarter of 2004, the Company recorded $20.6 million of incurred losses and loss expenses
attributable to the 2004 accident year and $3.9 million attributable to events of prior years.Net loss and loss expenses incurred were $88.7 million for the nine months ended September 30,
2005, compared to $64.4 million for the nine months ended September 30, 2004. For the nine
months ended September 30, 2005, the Company recorded $84.1 million of incurred losses and loss
expenses attributable to the 2005 accident year and $4.6 million attributable to events of
prior years. For the nine months ended September 30, 2004, the Company recorded $56.4 million
of incurred losses and loss expenses attributable to the 2004 accident year and $8.0 million
attributable to events of prior years.During the quarter ended September 30, 2005, the Company incurred $8.8 million of incurred net loss
and loss expenses and $18.3 million of gross loss and loss expenses related to Hurricanes Katrina
and Rita. The Company did not incur a significant amount of hurricane losses in 2004.
 13




---



##### 



The prior year increase for the quarter ended September 30, 2005 resulted principally from the
non-construction defect casualty line of business in the property and casualty segment. This
increase resulted from unexpected increases in claims severities that caused reassessments of
the claim reporting and settlement patterns, which resulted in $944,000 of
additional incurred loss and loss expenses. In addition, the most significant components of
the prior year increases for the quarter ended September 30, 2005 included $454,000 of
favorable development in the Companys property line as a result of actual reported losses
below expectations and $363,000 of prior year increases related to construction defect claims
within the other liability line of the property and casualty segment. The development with
construction defect claims primarily resulted in anticipated increase in litigation expenses
related to the contribution actions which were slightly offset by favorable claim count
development. Construction defect claim severities continue to be within the Companys
expectations. The $978,000 prior year increases in the quarter ended September 30, 2005
compares to $3.9 million of prior year increases for the same period in 2004, which primarily
resulted from the construction defect line.The prior year increase for the nine months ended September 30, 2005 included $3.5 million
increases related to construction defect, $2.0 million related to the non-construction defect
casualty line and $463,000 of increases related to the exited commercial auto line from adverse
new claim information on two claims. The increases were offset by
approximately $989,000 of favorable development in the property line of business. The
increases related to construction defect primarily relate to reserves established for several
contribution action settlements that are anticipated to be paid within the year and increased
estimate of litigation reserves related to the contribution actions. The increases related to
the non-construction defect casualty line primarily relate to claim severities exceeding the
Companys expectations resulting in reassessments of the initial loss ratio expectations and
the claim reporting and settlement patterns. The favorable development for property resulted
from actual reported losses below expectations. The prior year increases for the nine months
ended September 30, 2005 of $4.6 million compares to $8.0 million during the same period of
2004.A significant portion of the nine months ended September 30, 2004 prior year increases resulted
principally from construction defect claims in the other liability line in the property and
casualty segment. During the first nine months of 2004, new construction defect claim counts
exceeded expectations. Based on the claim count experience that 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, causing adverse development on prior
accident years during the nine month periods ended September 30, 2004. In addition, in the nine
months ended September 30, 2004, increases in incurred amounts on four claims also increased
the amount of incurred development.Additionally, during the second quarter of 2004, the Company experienced development related to
19 new contractors claims. The 19 new claims were higher than recent experience and the
development on pending claims exceeded the Companys expectations.During the first quarter of 2004, the Company recorded 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).(5)
    
    ReinsuranceIn the ordinary course of business, Century assumes and cedes reinsurance with other insurers
and reinsurers. These arrangements provide greater diversification of business and limit the
maximum net loss potential on large risks. There have been no significant changes in the
Companys reinsurance program. The amounts of ceded loss and loss expense reserves and ceded
unearned premiums would represent a liability of the Company in the event that its reinsurers
would be unable to meet existing obligations under reinsurance agreements.
 14




---



##### 



The effects of assumed and ceded reinsurance on premiums written, premiums earned and loss and
loss expenses incurred were as follows:
 
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Premiums written:Direct
    
    $
    52,491
    
    
    
    49,963
    
    
    
    154,444
    
    
    
    141,939Assumed
    
    
    993
    
    
    
    38
    
    
    
    1,945
    
    
    
    135Ceded
    
    
    (7,703
    )
    
    
    (6,535
    )
    
    
    (19,965
    )
    
    
    (19,042
    )Net premiums written
    
    $
    45,781
    
    
    
    43,466
    
    
    
    136,424
    
    
    
    123,032Premiums earned:Direct
    
    $
    51,575
    
    
    
    45,768
    
    
    
    147,457
    
    
    
    124,235Assumed
    
    
    475
    
    
    
    95
    
    
    
    888
    
    
    
    375Ceded
    
    
    (7,116
    )
    
    
    (6,320
    )
    
    
    (18,866
    )
    
    
    (17,189
    )Net premiums earned
    
    $
    44,934
    
    
    
    39,543
    
    
    
    129,479
    
    
    
    107,421Losses and loss expenses incurred:Direct
    
    $
    50,850
    
    
    
    29,397
    
    
    
    114,521
    
    
    
    76,612Assumed
    
    
    (229
    )
    
    
    575
    
    
    
    (641
    )
    
    
    2,521Ceded
    
    
    (14,211
    )
    
    
    (5,453
    )
    
    
    (25,156
    )
    
    
    (14,727
    )Net losses and loss expenses incurred
    
    $
    36,410
    
    
    
    24,518
    
    
    
    88,724
    
    
    
    64,406
 (6)
    
    Deferred Policy Acquisition CostsThe following table reflects the amounts of policy acquisition costs deferred and amortized:
 Three Months EndedSeptember 30,
    
    
    Nine Months EndedSeptember 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Balance at beginning of period
    
    $
    18,919
    
    
    
    15,616
    
    
    
    17,411
    
    
    
    11,714Policy acquisition costs deferred
    
    
    11,411
    
    
    
    9,989
    
    
    
    33,474
    
    
    
    29,384Amortization of deferred policy acquisition costs
    
    
    (10,941
    )
    
    
    (8,526
    )
    
    
    (31,496
    )
    
    
    (24,019
    )Balance at end of period
    
    $
    19,389
    
    
    
    17,079
    
    
    
    19,389
    
    
    
    17,079
 Amortization of deferred policy acquisition costs for the nine months ended September 30,
2004 included 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 among Century, Evergreen and
Continental, as disclosed in the Companys Form 10-K filing for the year ended December 31,
2004.(7)
    
    Federal Income TaxesThe income tax provision for the nine months ended September 30, 2005 and 2004, has been
computed based on our estimated annual effective tax rate of 25.0% and 32.0%, respectively,
which differ from the federal income tax rate of 35% principally because of tax-exempt
investment income. The income tax provision for the quarter ended September 30, 2005 was
38.6% primarily due to the pretax loss recorded for the quarter and the effect of tax-exempt
investment income. The income tax provision for the quarter ended September 30, 2004 was 32.0%
primarily due to the effect of tax-exempt investment income.(8)
    
    Commitments and ContingenciesThe Company is a defendant in various lawsuits in the ordinary course of its business. 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.
 15




---



##### 



(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 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 September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)
    
    
    (Dollars in thousands)Segment revenue:P/ C
    
    $
    44,625
    
    
    
    39,550
    
    
    
    129,065
    
    
    
    107,427Investing
    
    
    3,800
    
    
    
    2,697
    
    
    
    10,301
    
    
    
    7,216Other (including exited lines)
    
    
    309
    
    
    
    (7
    )
    
    
    414
    
    
    
    (6
    )Segment revenue
    
    $
    48,734
    
    
    
    42,240
    
    
    
    139,780
    
    
    
    114,637Segment (loss) profit:P/ C
    
    $
    (5,602
    )
    
    
    2,895
    
    
    
    (389
    )
    
    
    8,469Investing
    
    
    3,800
    
    
    
    2,697
    
    
    
    10,301
    
    
    
    7,216Other (including exited lines)
    
    
    (100
    )
    
    
    (4
    )
    
    
    (180
    )
    
    
    (1,119
    )Segment (loss) profit
    
    $
    (1,902
    )
    
    
    5,588
    
    
    
    9,732
    
    
    
    14,566Segment assets:Investing
    
    $
    344,988
    
    
    
    290,981
    
    
    
    344,988
    
    
    
    290,981Assets not allocated
    
    
    125,529
    
    
    
    87,958
    
    
    
    125,529
    
    
    
    87,958Total consolidated assets
    
    $
    470,517
    
    
    
    378,939
    
    
    
    470,517
    
    
    
    378,939
 16




---



##### 



The following summary reconciles significant segment items to the Companys interim
unaudited consolidated condensed financial statements:
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)(Loss) income before income taxes:Segment (loss) profit
    
    $
    (1,902
    )
    
    
    5,588
    
    
    
    9,732
    
    
    
    14,566Unallocated amounts:Corporate expenses
    
    
    (536
    )
    
    
    223
    
    
    
    (1,325
    )
    
    
    1,160Interest expense
    
    
    (483
    )
    
    
    (352
    )
    
    
    (1,359
    )
    
    
    (1,113
    )Interest expense on redemption of Class B shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (518
    )(Loss) income before income tax
    
    $
    (2,921
    )
    
    
    5,459
    
    
    
    7,048
    
    
    
    14,095
 The following is a summary of segment earned premium by group of products:
 Property
    
    
    Casualty
    
    
    Other
    
    
    Consolidated(Dollars in thousands)Three Months Ended September 30, 2005P/ C
    
    $
    13,983
    
    
    
    30,642
    
    
    
    
    
    
    
    44,625Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    309
    
    
    
    309Earned premiums
    
    $
    13,983
    
    
    
    30,642
    
    
    
    309
    
    
    
    44,934Three Months Ended September 30, 2004P/ C
    
    $
    14,858
    
    
    
    24,692
    
    
    
    
    
    
    
    39,550Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Earned premiums
    
    $
    14,858
    
    
    
    24,692
    
    
    
    (7
    )
    
    
    39,543Nine Months Ended September 30, 2005P/ C
    
    $
    42,329
    
    
    
    86,736
    
    
    
    
    
    
    
    129,065Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    414
    
    
    
    414Earned premiums
    
    $
    42,329
    
    
    
    86,736
    
    
    
    414
    
    
    
    129,479Nine Months Ended September 30, 2004P/ C
    
    $
    42,152
    
    
    
    65,275
    
    
    
    
    
    
    
    107,427Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Earned premiums
    
    $
    42,152
    
    
    
    65,275
    
    
    
    (6
    )
    
    
    107,421
 The Company does not manage property and casualty products at this level of detail.(10)
    
    Dividend to Common ShareholdersOn March 24, 2005, the Board of Directors declared a dividend of $0.02 per common share that
was paid on April 28, 2005 to shareholders of record as of April 7, 2005. On May 19, 2005, the
Board of Directors declared a dividend of $0.02 per common share that was paid on June 22, 2005
to shareholders of record as of June 1, 2005. On August 17, 2005, the Board of Directors
declared a dividend of $0.02 per common share that was paid on September 21, 2005 to
shareholders of record as of August 31, 2005.(11)
    
    Line of CreditThe Company has a $5.0 million line of credit with a maturity date of September 8, 2006, and
interest only payments due quarterly based on LIBOR plus 2.5% of the outstanding balance. All
of the outstanding shares of Century are pledged as collateral. In April 2005, the Company made
a $2.3 million draw on the line of credit for general corporate purposes. The $2.3 million
draw was paid off on May 17, 2005. Interest paid on the line of credit was $5,000. Due to the
late filing of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2005,
the Company became non-compliant with the debt covenants for the line of credit. On September
7, 2005, the Company received a waiver from the bank and now has the ability to draw on the
line of credit. The Company does not have any borrowings outstanding under the line of credit
at September 30, 2005.
 17




---



##### 



Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
  
    
    our actual incurred losses and loss expenses, including those related to recent hurricanes,
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.
  18




---



##### 



Overview
   Gross Written Premiums.
 Net Written Premiums.
 Loss Ratio.
 Expense Ratio.
 Combined Ratio.
 Critical Accounting Policies
   19




---



##### 



Loss and Loss Expense Reserves.
 Reinsurance Recoverables.
 Impairment of Investments.
  Deferred Policy Acquisition Costs.
 Federal Income Taxes
  20




---



##### 



Results of Operations
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)
    
    
    (Dollars in thousands)Selected Financial Data:Gross written premiums
    
    $
    53,484
    
    
    
    50,001
    
    
    
    156,389
    
    
    
    142,074Premiums earned
    
    
    44,934
    
    
    
    39,543
    
    
    
    129,479
    
    
    
    107,421Net investment income
    
    
    3,866
    
    
    
    2,719
    
    
    
    10,520
    
    
    
    7,094Net realized investment (losses) gains
    
    
    (66
    )
    
    
    (22
    )
    
    
    (219
    )
    
    
    122Total revenues
    
    
    48,734
    
    
    
    42,240
    
    
    
    139,780
    
    
    
    114,637Total expenses
    
    
    51,655
    
    
    
    36,781
    
    
    
    132,732
    
    
    
    100,542Net (loss) income
    
    
    (1,793
    )
    
    
    3,712
    
    
    
    5,285
    
    
    
    9,585Key Financial Ratios:Loss and loss expense ratio
    
    
    81.0
    %
    
    
    62.0
    %
    
    
    68.5
    %
    
    
    60.0
    %Expense ratio
    
    
    32.9
    %
    
    
    30.1
    %
    
    
    32.9
    %
    
    
    32.1
    %Combined ratio
    
    
    113.9
    %
    
    
    92.1
    %
    
    
    101.4
    %
    
    
    92.1
    %
 Overview of Operating Results
    21




---



##### 



Revenues
 Premiums
     
    
    property/casualty; and
    
    other (including exited lines).
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)
    
    
    (Dollars in thousands)Gross written premiums:Property/casualty
    
    $
    52,015
    
    
    
    50,001
    
    
    
    154,154
    
    
    
    142,074Other (including exited lines)
    
    
    1,469
    
    
    
    
    
    
    
    2,235
    
    
    
    Total gross written premiums
    
    
    53,484
    
    
    
    50,001
    
    
    
    156,389
    
    
    
    142,074Ceded written premiums
    
    
    (7,703
    )
    
    
    (6,535
    )
    
    
    (19,965
    )
    
    
    (19,042
    )Net written premiums
    
    $
    45,781
    
    
    
    43,466
    
    
    
    136,424
    
    
    
    123,032Net premiums earned
    
    $
    44,934
    
    
    
    39,543
    
    
    
    129,479
    
    
    
    107,421Net written premiums to gross
written premiums
    
    
    85.6
    %
    
    
    86.9
    %
    
    
    87.2
    %
    
    
    86.6
    %Net premiums earned to net
written premiums
    
    
    98.1
    %
    
    
    91.0
    %
    
    
    94.9
    %
    
    
    87.3
    %Net writings ratio (1)
    
    
    1.5
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.5
 
 (1)
    
    The ratio of net written premiums to our insurance subsidiaries combined statutory
surplus. This ratio is not restated to exclude discontinued operations as the insurance
subsidiaries combined statutory surplus is not allocated by line of business. Therefore, in
computing the ratio of net written premiums to our insurance subsidiaries combined statutory
surplus we do not restate the net written premium for discontinued operations to be consistent
with that of the subsidiaries combined statutory surplus. Management believes this measure
is useful in gauging our exposure to pricing errors in the current book of business. It may
not be comparable to the definition of net writings ratio used by other companies. 22




---



##### 



Gross Written Premiums
  Net Written Premiums and Premiums Earned
   Net Investment Income
    Realized Gains (Losses) on Securities
   23




---



##### 



Expenses
 Losses and Loss Expenses
  
    
    the number of exposures covered in the current year;
    
    trends in claim frequency and claim severity;
    
    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.
      September 30, 2005
    
    
    December 31, 2004(Dollars in thousands)Property/casualty:Casualty
    
    $
    131,693
    
    
    
    102,430Property
    
    
    28,766
    
    
    
    16,115Other (including exited lines):Commercial auto
    
    
    1,082
    
    
    
    1,780Workers compensation
    
    
    2,718
    
    
    
    3,426Other
    
    
    42
    
    
    
    Net reserves for losses and loss expenses
    
    
    164,301
    
    
    
    123,751Plus reinsurance recoverables on unpaid losses at end
of period
    
    
    51,042
    
    
    
    29,485Gross reserves for losses and loss expenses
    
    $
    215,343
    
    
    
    153,236
 24




---



##### 



25




---



##### 



Operating Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Amortization of deferred policy acquisition costs (ADAC)
    
    $
    10,941
    
    
    
    8,526
    
    
    
    31,496
    
    
    
    24,019Other operating expenses
    
    
    3,821
    
    
    
    3,385
    
    
    
    10,360
    
    
    
    10,236ADAC and other operating expenses
    
    
    14,762
    
    
    
    11,911
    
    
    
    41,856
    
    
    
    34,255Severance expense
    
    
    
    
    
    
    
    
    
    
    793
    
    
    
    250Interest expense
    
    
    483
    
    
    
    352
    
    
    
    1,359
    
    
    
    1,113Interest expense on the redemption of the Class B shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518Total operating expenses
    
    $
    15,245
    
    
    
    12,263
    
    
    
    44,008
    
    
    
    36,136Expense ratio:ADAC
    
    
    24.3
    %
    
    
    21.5
    %
    
    
    24.3
    %
    
    
    22.4
    %Other operating expenses
    
    
    8.6
    %
    
    
    8.6
    %
    
    
    8.0
    %
    
    
    9.5
    %Severence
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.6
    %
    
    
    0.2
    %Total expense ratio (1)
    
    
    32.9
    %
    
    
    30.1
    %
    
    
    32.9
    %
    
    
    32.1
    %
 
 (1)
    
    Interest expense is not included in the calculation of the expense ratio.     26




---



##### 



Income Taxes
  Liquidity and Capital Resources
        27




---



##### 



Line of Credit.
  Payments Due by Year2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total(Dollars in thousands)Long Term Debt:Debt issued to a related party trust (1)(2)
    
    $
    515
    
    
    
    2,060
    
    
    
    2,060
    
    
    
    2,060
    
    
    
    2,060
    
    
    
    72,790
    
    
    
    81,545Loss and loss expense payments, net of the
effects of reinsurance (3)
    
    
    16,966
    
    
    
    56,242
    
    
    
    37,376
    
    
    
    24,703
    
    
    
    11,831
    
    
    
    17,183
    
    
    
    164,301Operating lease on facilities
    
    
    239
    
    
    
    978
    
    
    
    998
    
    
    
    1,018
    
    
    
    734
    
    
    
    2,339
    
    
    
    6,306Other operating leases
    
    
    60
    
    
    
    212
    
    
    
    212
    
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    636Total contractual obligations
    
    $
    17,780
    
    
    
    59,492
    
    
    
    40,646
    
    
    
    27,933
    
    
    
    14,625
    
    
    
    92,312
    
    
    
    252,788
 
 (1)
    
    Amounts include interest payments associated with these obligations using applicable
interest rates as of September 30, 2005.(2)
    
    In connection with the adoption of FIN 46R, ProCentury has deconsolidated the trusts
established in connection with the issuance of trust preferred securities effective December
31, 2003. As a result, ProCentury reports as a component of long term debt the junior
subordinated debentures payable by ProCentury to the trusts. See Note 8(b) to our 2004
audited consolidated financial statements included in the Form 10-K.(3)
    
    The timing for payment of our estimated losses, net of the effects of reinsurance is
determined by periods based on our historical claims payment experience. Due to the
uncertainty in estimating the timing of such payments, there is a risk that the amounts paid
in any period can be significantly different than the amounts disclosed above.  Investment Portfolio
   28




---



##### 



Accounting Standards
   Item 3. Quantitative And Qualitative Disclosures About Market Risk
   Item 4. Controls And Procedures
     29




---



##### 



PART II: OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  Item 6. Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation of ProCentury (Incorporated by reference
from the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004,
filed with the Securities and Exchange Commission SEC on September 4, 2004.)3.2
    
    Amended and Restated Code of Regulations of ProCentury (Incorporated by reference from the
Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed with
the SEC on September 4, 2004.)10.1
    
    Consulting Agreement, dated September 20, 2005, between the
ProCentury Corporation and Charles D. Hamm, Jr.31.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act32.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)32.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)
 
  30




---



##### 



SIGNATURE
  PROCENTURY CORPORATIONDate: November 10, 2005
    By:
    /s/ Erin E. WestErin E. WestChief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 31




---



##### 



EXHIBIT INDEX
 3.1
    
    Amended and Restated Articles of Incorporation of ProCentury (Incorporated by reference
from the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004,
filed with the Securities and Exchange Commission (SEC) on September 4, 2004.)3.2
    
    Amended and Restated Code of Regulations of ProCentury (Incorporated by reference from the
Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed with
the SEC on September 4, 2004.)10.1
    
    Consulting Agreement, dated September 20, 2005, between the
ProCentury Corporation and Charles D. Hamm, Jr.31.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act32.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)32.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)