##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 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
incorporation or organization)
    
    31-1718622
(I.R.S. Employer Identification No.)465 Cleveland Avenue
Westerville, Ohio
(Address of principal executive offices)
    
    43082
(Zip Code)
 (614) 895-2000
 
  þ o
  o þ




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PROCENTURY CORPORATION
 QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended June 30, 2005
 INDEX
 PagePART I: FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Condensed Statements of Operations  For the three and six months ended June 30,
2005 and 2004
    
    
    3Consolidated Condensed Balance Sheets   June 30, 2005 and December 31, 2004
    
    
    4Consolidated Condensed Statements of Shareholders Equity and Comprehensive Income  For the six
months ended June 30, 2005 and 2004
    
    
    5Consolidated Condensed Statements of Cash Flows  For the six months ended June 30, 2005 and 2004
    
    
    6Notes to Consolidated Condensed Financial Statements   June 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
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31EX-31.1EX-31.2EX-32.1EX-32.2
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PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Premiums earned
    
    $
    43,025
    
    
    
    35,819
    
    
    
    84,545
    
    
    
    67,877Net investment income
    
    
    3,495
    
    
    
    2,410
    
    
    
    6,654
    
    
    
    4,375Net realized investment (losses) gains
    
    
    (94
    )
    
    
    21
    
    
    
    (153
    )
    
    
    144Total revenues
    
    
    46,426
    
    
    
    38,250
    
    
    
    91,046
    
    
    
    72,396Losses and loss expenses
    
    
    26,587
    
    
    
    20,986
    
    
    
    52,314
    
    
    
    39,888Amortization of deferred policy acquisition costs
    
    
    10,335
    
    
    
    8,643
    
    
    
    20,555
    
    
    
    15,493Other operating expenses
    
    
    3,474
    
    
    
    3,272
    
    
    
    6,539
    
    
    
    6,850Severance expense
    
    
    
    
    
    
    
    
    
    
    793
    
    
    
    250Interest expense
    
    
    459
    
    
    
    345
    
    
    
    876
    
    
    
    760Interest expense on the redemption of Class B Shares
    
    
    
    
    
    
    518
    
    
    
    
    
    
    
    518Total expenses
    
    
    40,855
    
    
    
    33,764
    
    
    
    81,077
    
    
    
    63,759Income before income tax
    
    
    5,571
    
    
    
    4,486
    
    
    
    9,969
    
    
    
    8,637Income tax expense
    
    
    1,572
    
    
    
    1,500
    
    
    
    2,891
    
    
    
    2,763Net income
    
    $
    3,999
    
    
    
    2,986
    
    
    
    7,078
    
    
    
    5,874Basic net income per share
    
    $
    0.31
    
    
    
    0.27
    
    
    
    0.54
    
    
    
    0.73Diluted net income per share
    
    $
    0.30
    
    
    
    0.26
    
    
    
    0.54
    
    
    
    0.72Weighted average of shares outstanding  basic
    
    
    13,052,650
    
    
    
    11,222,340
    
    
    
    13,049,570
    
    
    
    8,062,828Weighted average of shares outstanding  diluted
    
    
    13,121,314
    
    
    
    11,328,595
    
    
    
    13,127,469
    
    
    
    8,115,125Cash dividend per share
    
    $
    0.02
    
    
    
    
    
    
    
    0.04
    
    
    
    
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 June 30, 2005
    
    December 31, 2004AssetsInvestments:Fixed maturities:Available-for-sale, at fair value (amortized cost 2005, $276,706; 2004,
$262,470)
    
    $
    278,411
    
    
    
    263,401Held-to-maturity, at amortized cost (fair value 2005, $1,147; 2004, $1,156)
    
    
    1,135
    
    
    
    1,142Equities (available-for-sale):Equity securities, at fair value (cost 2005, $25,769; 2004, $17,944)
    
    
    25,817
    
    
    
    18,228Bond mutual funds, at fair value (cost 2005, $18,598; 2004, $18,943)
    
    
    18,308
    
    
    
    18,921Short-term investments, at amortized cost
    
    
    5,056
    
    
    
    4,026Total investments
    
    
    328,727
    
    
    
    305,718Cash
    
    
    12,042
    
    
    
    6,681Premiums in course of collection, net
    
    
    16,618
    
    
    
    11,747Deferred policy acquisition costs
    
    
    18,919
    
    
    
    17,411Prepaid reinsurance premiums
    
    
    9,894
    
    
    
    9,382Reinsurance recoverable on paid losses, net
    
    
    2,137
    
    
    
    3,897Reinsurance recoverable on unpaid losses, net
    
    
    38,380
    
    
    
    29,485Deferred federal income tax asset
    
    
    6,389
    
    
    
    5,442Other assets
    
    
    6,730
    
    
    
    5,164Total assets
    
    $
    439,836
    
    
    
    394,927Liabilities and Shareholders EquityLoss and loss expense reserves
    
    $
    183,312
    
    
    
    153,236Unearned premiums
    
    
    88,745
    
    
    
    82,135Long term debt
    
    
    25,000
    
    
    
    25,000Accrued expenses and other liabilities
    
    
    5,770
    
    
    
    6,703Reinsurance balances payable
    
    
    2,614
    
    
    
    2,348Collateral held
    
    
    11,622
    
    
    
    7,008Federal income taxes payable
    
    
    348
    
    
    
    3,260Total liabilities
    
    
    317,411
    
    
    
    279,690Shareholders equity:Capital stock, without par value
    
    
    
    
    
    
    Additional paid-in capital
    
    
    100,166
    
    
    
    100,103Retained earnings
    
    
    22,277
    
    
    
    15,727Unearned share compensation
    
    
    (1,011
    )
    
    
    (1,413
    )Accumulated other comprehensive income, net of taxes
    
    
    993
    
    
    
    820Total shareholders equity
    
    
    122,425
    
    
    
    115,237Total liabilities and shareholders equity
    
    $
    439,836
    
    
    
    394,927
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 For
the Six Months Ended 
June 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
    
    
    63
    
    
    
    1,063End of period
    
    
    100,166
    
    
    
    99,562Retained earnings:Beginning of period
    
    
    15,727
    
    
    
    8,297Net income
    
    
    7,078
    
    
    
    5,874Dividend of subsidiary available for sale
    
    
    
    
    
    
    (7,024
    )Dividends
    
    
    (528
    )
    
    
    End of period
    
    
    22,277
    
    
    
    7,147Unearned share compensation:Beginning of period
    
    
    (1,413
    )
    
    
    (1,063
    )Vesting of restricted shares
    
    
    402
    
    
    
    End of period
    
    
    (1,011
    )
    
    
    (1,063
    )Accumulated other comprehensive income, net of taxesBeginning of period
    
    
    820
    
    
    
    1,234Unrealized holding (losses) gains arising during period, net of reclassification adjustment
    
    
    173
    
    
    
    (3,512
    )Dividend of subsidiary available for sale
    
    
    
    
    
    
    (564
    )End of period
    
    
    993
    
    
    
    (2,842
    )Total shareholders equity
    
    $
    122,425
    
    
    
    102,804Comprehensive IncomeNet income
    
    $
    7,078
    
    
    
    5,874Other comprehensive income:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during the period:Gross
    
    
    118
    
    
    
    (5,233
    )Related federal income tax (expense) benefit
    
    
    (44
    )
    
    
    1,815Net unrealized gains (losses)
    
    
    74
    
    
    
    (3,418
    )Reclassification adjustment for gains (losses) included in net income:Gross
    
    
    (153
    )
    
    
    144Related federal income tax benefit (expense)
    
    
    54
    
    
    
    (50
    )Net reclassification adjustment
    
    
    (99
    )
    
    
    94Other comprehensive income (loss)
    
    
    173
    
    
    
    (3,512
    )Total comprehensive income
    
    $
    7,251
    
    
    
    2,362
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 For the Six Months Ended June 30,2005
    
    2004Cash flows provided by operating activities:Net income
    
    $
    7,078
    
    
    
    5,874Adjustments:Net realized investment losses (gains)
    
    
    153
    
    
    
    (144
    )Deferred federal income tax benefit
    
    
    (1,188
    )
    
    
    (3,070
    )Restricted share compensation
    
    
    465
    
    
    
    Changes in assets and liabilities:Premiums in course of collection, net
    
    
    (4,871
    )
    
    
    (1,374
    )Deferred policy acquisition costs
    
    
    (1,508
    )
    
    
    (3,902
    )Prepaid reinsurance premiums
    
    
    (512
    )
    
    
    (1,935
    )Reinsurance recoverable on paid and unpaid losses, net
    
    
    (7,135
    )
    
    
    (7,292
    )Federal income taxes payable
    
    
    (2,912
    )
    
    
    3,334Losses and loss expense reserves
    
    
    30,076
    
    
    
    24,160Unearned premiums
    
    
    6,610
    
    
    
    13,623Reinsurance balances payable
    
    
    266
    
    
    
    (1,946
    )Collateral held
    
    
    4,614
    
    
    
    (1,533
    )Receivable from subsidiary available for sale
    
    
    
    
    
    
    26,885Other, net
    
    
    (934
    )
    
    
    (3,496
    )Net cash provided by operating activities
    
    
    30,202
    
    
    
    49,184Cash flows used in investing activities:Purchases of equity securities
    
    
    (46,712
    )
    
    
    (44,952
    )Purchases of fixed maturity securities available-for-sale
    
    
    (62,864
    )
    
    
    (131,314
    )Proceeds from sales of equity securities
    
    
    39,141
    
    
    
    27,217Proceeds from sales and maturities of fixed maturities available-for-sale
    
    
    48,154
    
    
    
    22,504Proceeds from maturities of fixed maturities held-to-maturity
    
    
    
    
    
    
    325Acquisition, net of cash acquired
    
    
    (1,002
    )
    
    
    Net proceeds from sale of short-term investments
    
    
    (1,030
    )
    
    
    13,288Net cash used in investing activities
    
    
    (24,313
    )
    
    
    (112,932
    )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 paid to shareholders
    
    
    (528
    )
    
    
    Draw on line
of credit
    
    
    2,300
    
    
    
    Principal
payment on line of credit
    
    
    (2,300
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (528
    )
    
    
    62,500Increase (decrease) in cash and cash equivalents
    
    
    5,361
    
    
    
    (1,248
    )Cash and equivalents at beginning of year
    
    
    6,681
    
    
    
    5,814Cash and equivalents at end of year
    
    $
    12,042
    
    
    
    4,566Supplemental disclosure of cash flow information:Interest paid
    
    $
    872
    
    
    
    900Federal income taxes paid
    
    $
    6,991
    
    
    
    2,300
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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
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##### Table of Contents




    
    The Company amended its articles of incorporation to eliminate the authority to
issue Class B and Class C common shares.
 On June 1, 2005, Century acquired 100% of the outstanding shares of the Firemans Fund of Texas
(FFTX) for $5.8 million (including direct costs of $100,000). FFTX has statutory surplus of
$5.4 million on the date of acquisition. FFTX is a Texas domiciled property and casualty
company licensed in Texas, Oklahoma and California. The acquisition is part of the Companys
long-term plan to develop business that requires admitted status, as well as its continued
focus on growing its excess and surplus lines business. The total purchase price of the
acquisition was allocated to the assets and the liabilities acquired based upon the respective
fair values as of the date of acquisition. Intangible assets included in the purchase were
valued at $375,000. The excess of the fair value of the net identifiable assets acquired over
the purchase price was $175,000. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, the amortization of
goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived
intangible assets remain on the balance sheet and are tested for impairment on an annual basis,
or when there is reason to suspect that their values may have been
diminished or impaired. Effective August 18, 2005, the Texas
Department of Insurance approved the name change from FFTX to Pro
Century Insurance Company.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, the determination of federal income taxes, 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.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 the
Companys share option and restricted common share plans utilizing the intrinsic value
method. The Company also follows the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation,for the Companys share option grants, 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 and earnings per share
information, which is calculated assuming the Company has accounted for its stock option plans
under the fair value method described in SFAS No. 123 and SFAS No. 148.If the Company recorded compensation expense for its share option 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,2005
    
    2004
    
    2005
    
    2004(dollars in thousands, except per share data)Net income (loss):As reported
    
    $
    3,999
    
    
    
    2,986
    
    
    
    7,078
    
    
    
    5,874Add: Share-based employee
compensation expense included in
reported net income, net of related
tax effects
    
    
    84
    
    
    
    
    
    
    
    302
    
    
    
    Less: Additional share-based employee
compensation expense determined under
fair value-based method for all
awards, net of related tax effects
    
    
    (150
    )
    
    
    (48
    )
    
    
    (502
    )
    
    
    (48
    )
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For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June,2005
    
    2004
    
    2005
    
    2004(dollars in thousands, except per share data)Pro Forma
    
    $
    3,933
    
    
    
    2,938
    
    
    
    6,878
    
    
    
    5,826Basic income (loss) per common share:As reported
    
    $
    0.31
    
    
    
    0.27
    
    
    
    0.54
    
    
    
    0.73Pro Forma
    
    $
    0.30
    
    
    
    0.26
    
    
    
    0.53
    
    
    
    0.72Diluted income (loss) per common share:As reported
    
    $
    0.30
    
    
    
    0.26
    
    
    
    0.54
    
    
    
    0.72Pro Forma
    
    $
    0.30
    
    
    
    0.26
    
    
    
    0.52
    
    
    
    0.72
 No share option or restricted common share-based compensation expense is included in reported
net income (loss) for the three and six months ended June 30, 2004.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 Six MonthsEnded June 30, 2005Risk free interest rate
    
    
    3.97
    %Dividend yield
    
    
    0.76
    %Volatility factor
    
    
    23.14
    %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.
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For the Three Months Ended June 30, 2005(Dollars in thousands, except per share data)Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic Net Income Per ShareNet income
    
    $
    3,999
    
    
    
    13,052,650
    
    
    $
    0.31Effect of Dilutive SecuritiesRestricted common shares and
share options
    
    
    
    
    
    
    68,664
    
    
    
    (0.01
    )Diluted EPSNet income
    
    $
    3,999
    
    
    
    13,121,314
    
    
    $
    0.30
 For the Three Months Ended June 30, 2004(Dollars in thousands, except per share data)Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic Net Income Per ShareNet income
    
    $
    2,986
    
    
    
    11,222,340
    
    
    $
    0.27Effect of Dilutive SecuritiesRestricted common shares and
share options
    
    
    
    
    
    
    106,255
    
    
    
    (0.01
    )Diluted EPSNet income
    
    $
    2,986
    
    
    
    11,328,595
    
    
    $
    0.26
 For the Six Months Ended June 30, 2005(Dollars in thousands, except per share data)Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic Net Income Per ShareNet income
    
    $
    7,078
    
    
    
    13,049,570
    
    
    $
    0.54Effect of Dilutive SecuritiesRestricted common shares and
share options
    
    
    
    
    
    
    77,899
    
    
    
    Diluted EPSNet income
    
    $
    7,078
    
    
    
    13,127,469
    
    
    $
    0.54
 For the Six Months Ended June 30, 2004(Dollars in thousands, except per share data)Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic Net Income Per ShareNet income
    
    $
    5,874
    
    
    
    8,062,828
    
    
    $
    0.73Effect of Dilutive SecuritiesRestricted common shares and
share options
    
    
    
    
    
    
    52,297
    
    
    
    (0.01
    )Diluted EPSNet income
    
    $
    5,874
    
    
    
    8,115,125
    
    
    $
    0.72
 10




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##### Table of Contents



(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:
 June 30, 2005(dollars in thousands)Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    faircost
    
    gains
    
    losses
    
    valueU.S. Treasury securities
    
    $
    89
    
    
    
    17
    
    
    
    
    
    
    
    106Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,046
    
    
    
    
    
    
    
    (5
    )
    
    
    1,041Total
    
    $
    1,135
    
    
    
    17
    
    
    
    (5
    )
    
    
    1,147
 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
  June 30, 2005(dollars in thousands)Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    faircost
    
    gains
    
    losses
    
    valueFixed maturities:U.S. Treasury securities
    
    $
    3,652
    
    
    
    12
    
    
    
    (19
    )
    
    
    3,645Agencies not backed by the full faith and
credit of
the U.S. Government
    
    
    14,619
    
    
    
    128
    
    
    
    (47
    )
    
    
    14,700Obligations of states and political subdivisions
    
    
    121,126
    
    
    
    1,686
    
    
    
    (145
    )
    
    
    122,667Corporate securities
    
    
    39,035
    
    
    
    141
    
    
    
    (321
    )
    
    
    38,855Mortgage-backed securities
    
    
    38,578
    
    
    
    206
    
    
    
    (111
    )
    
    
    38,673Collateralized mortgage obligations
    
    
    29,348
    
    
    
    60
    
    
    
    (145
    )
    
    
    29,263Asset-backed securities
    
    
    30,348
    
    
    
    421
    
    
    
    (161
    )
    
    
    30,608Total fixed maturities
    
    
    276,706
    
    
    
    2,654
    
    
    
    (949
    )
    
    
    278,411Equities:Equity securities
    
    
    25,769
    
    
    
    377
    
    
    
    (329
    )
    
    
    25,817Bond mutual funds
    
    
    18,598
    
    
    
    
    
    
    
    (290
    )
    
    
    18,308Total equities
    
    
    44,367
    
    
    
    377
    
    
    
    (619
    )
    
    
    44,125Total
    
    $
    321,073
    
    
    
    3,031
    
    
    
    (1,568
    )
    
    
    322,536
 11




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##### Table of Contents



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 $35,000 were included in the investment
losses for the three and six months ended June 30, 2005. No other-than-temporary declines were
recognized in 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:
 June 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
    
    $
    
    
    
    
    
    
    
    
    1,041
    
    
    
    (5
    )
    
    
    1,041
    
    
    
    (5
    )Total
    
    $
    
    
    
    
    
    
    
    
    1,041
    
    
    
    (5
    )
    
    
    1,041
    
    
    
    (5
    )
 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:
 12




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##### Table of Contents



June 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
    
    $
    455
    
    
    
    
    
    
    
    1,548
    
    
    
    (19
    )
    
    
    2,003
    
    
    
    (19
    )Agencies not backed by the full faith
and credit of the U.S. Government
    
    
    1,292
    
    
    
    (3
    )
    
    
    5,313
    
    
    
    (44
    )
    
    
    6,605
    
    
    
    (47
    )Obligations of states and political
subdivisions
    
    
    7,380
    
    
    
    (18
    )
    
    
    15,423
    
    
    
    (127
    )
    
    
    22,803
    
    
    
    (145
    )Corporate securities
    
    
    2,880
    
    
    
    (19
    )
    
    
    23,514
    
    
    
    (302
    )
    
    
    26,394
    
    
    
    (321
    )Mortgage-backed securities
    
    
    3,748
    
    
    
    (9
    )
    
    
    15,832
    
    
    
    (102
    )
    
    
    19,580
    
    
    
    (111
    )Collateralized mortgage obligations
    
    
    9,719
    
    
    
    (60
    )
    
    
    10,092
    
    
    
    (85
    )
    
    
    19,811
    
    
    
    (145
    )Asset-backed securities
    
    
    3,136
    
    
    
    (31
    )
    
    
    8,778
    
    
    
    (130
    )
    
    
    11,914
    
    
    
    (161
    )Total fixed maturities
    
    
    28,610
    
    
    
    (140
    )
    
    
    80,500
    
    
    
    (809
    )
    
    
    109,110
    
    
    
    (949
    )Equities:Equity securities
    
    
    7,308
    
    
    
    (154
    )
    
    
    5,190
    
    
    
    (175
    )
    
    
    12,498
    
    
    
    (329
    )Bond mutual funds
    
    
    7,110
    
    
    
    (203
    )
    
    
    11,117
    
    
    
    (87
    )
    
    
    18,227
    
    
    
    (290
    )Total equities
    
    
    14,418
    
    
    
    (357
    )
    
    
    16,307
    
    
    
    (262
    )
    
    
    30,725
    
    
    
    (619
    )Total
    
    $
    43,028
    
    
    
    (497
    )
    
    
    96,807
    
    
    
    (1,071
    )
    
    
    139,835
    
    
    
    (1,568
    )
 At June 30, 2005, the Company had one hundred nine fixed income securities fourteen equity
securities that have been in an unrealized loss position for one year or longer. One hundred
four of the fixed income securities are investment grade, of which one hundred three of these
securities are rated A1/A or better (including sixty-six securities which are rated AAA). The
five remaining non-investment grade fixed income securities are rated BB- or better and have a
fair value equal to 99.1% of their book value as of June 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 June 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 eleven 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 fourteen equity
securities have an aggregate fair
market value of equal to 98.4% of their book value as of June 30, 2005. All one hundred nine
of the fixed income securities are current on interest and principal and all fourteen 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 $26.6 million for the quarter ended June 30, 2005,
compared to $21.0 million for the quarter ended June 30, 2004. In the second quarter of 2005,
the Company recorded $24.9 million of incurred losses and loss expenses attributable to the
2005 accident year and $1.7 million attributable to events of prior years. 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.Net loss and loss expenses incurred were $52.3 million for the six months ended June 30, 2005,
compared to $39.9 million for the six months ended June 30, 2004. For the six months ended June
30, 2005, the Company recorded $48.7 million of incurred losses and loss expenses attributable
to the 2005 accident year and $3.6 million attributable to events of prior years. 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.
 13




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##### Table of Contents



The prior year increases for the quarter and six months ended June 30, 2005 resulted
principally from construction defect claims within the other liability line of the property and
casualty segment. During the first and second quarter of 2005, the Company established
reserves for several contribution action settlements that are anticipated to be paid within the
year. This development was slightly offset by favorable claim count development, while claim
severities continued to be within the Companys expectation. Prior year development for
construction defect claims was $1.7 million and $3.1 million for the three and six months ended
June 30, 2005, respectively.The prior year increases related to construction defect claims was partially offset by positive
development in the Companys property line and supplemented by additional development in the
casualty line. In the first quarter of 2005, the Company reported $355,000 of development in
the property line. In the second quarter of 2005, the Company reported $891,000 of positive
development in the property line that resulted from unexpected decreases in incurred losses.
In addition, in the second quarter of 2005, the Company incurred $770,000 of prior year
development related to the other than construction defect other liability line as a result of
actual incurred losses exceeding expectations. All other lines performed as expected in the
second quarter of 2005.During the first six 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. Prior year development for construction defect claims was
$1.2 million and $2.6 million for the three and six months ended June 30, 2004, respectively.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




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##### Table of Contents



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 Six MonthsEnded June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Premiums written:Direct
    
    $
    54,635
    
    
    
    48,713
    
    
    
    101,953
    
    
    
    91,578Assumed
    
    
    638
    
    
    
    223
    
    
    
    952
    
    
    
    194Ceded
    
    
    (6,916
    )
    
    
    (6,014
    )
    
    
    (12,262
    )
    
    
    (12,206
    )Net premiums written
    
    $
    48,357
    
    
    
    42,922
    
    
    
    90,643
    
    
    
    79,566Premiums earned:Direct
    
    $
    48,919
    
    
    
    40,986
    
    
    
    95,882
    
    
    
    77,909Assumed
    
    
    198
    
    
    
    230
    
    
    
    413
    
    
    
    240Ceded
    
    
    (6,092
    )
    
    
    (5,397
    )
    
    
    (11,750
    )
    
    
    (10,272
    )Net premiums earned
    
    $
    43,025
    
    
    
    35,819
    
    
    
    84,545
    
    
    
    67,877Losses and loss expenses incurred:Direct
    
    $
    31,777
    
    
    
    26,484
    
    
    
    63,671
    
    
    
    51,189Assumed
    
    
    (142
    )
    
    
    523
    
    
    
    (412
    )
    
    
    932Ceded
    
    
    (5,048
    )
    
    
    (6,021
    )
    
    
    (10,945
    )
    
    
    (12,233
    )Net losses and loss expenses incurred
    
    $
    26,587
    
    
    
    20,986
    
    
    
    52,314
    
    
    
    39,888
 (6)
    
    Deferred Policy Acquisition CostsThe following table reflects the amounts of policy acquisition costs deferred and amortized:
 Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Balance at beginning of period
    
    $
    17,506
    
    
    
    14,317
    
    
    
    17,411
    
    
    
    11,714Policy acquisition costs deferred
    
    
    11,748
    
    
    
    9,942
    
    
    
    22,063
    
    
    
    19,395Amortization of deferred policy acquisition costs
    
    
    (10,335
    )
    
    
    (8,643
    )
    
    
    (20,555
    )
    
    
    (15,493
    )Balance at end of period
    
    $
    18,919
    
    
    
    15,616
    
    
    
    18,919
    
    
    
    15,616
 Amortization of deferred policy acquisition costs for the six months ended June 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 six months ended June 30, 2005 and 2004, has been computed
based on our estimated annual effective tax rate of 29.0% and 32.0%, respectively, which differ
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 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




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##### Table of Contents



(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 June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)
    
    (Dollars in thousands)Segment revenue:P/ C
    
    $
    42,927
    
    
    
    35,824
    
    
    
    84,440
    
    
    
    67,877Investing
    
    
    3,401
    
    
    
    2,431
    
    
    
    6,501
    
    
    
    4,519Other (including exited lines)
    
    
    98
    
    
    
    (5
    )
    
    
    105
    
    
    
    Segment revenue
    
    $
    46,426
    
    
    
    38,250
    
    
    
    91,046
    
    
    
    72,396Segment profit (loss):P/ C
    
    $
    2,275
    
    
    
    2,888
    
    
    
    5,213
    
    
    
    5,574Investing
    
    
    3,401
    
    
    
    2,431
    
    
    
    6,501
    
    
    
    4,519Other (including exited lines)
    
    
    481
    
    
    
    (372
    )
    
    
    (80
    )
    
    
    (1,115
    )Segment profit
    
    $
    6,157
    
    
    
    4,947
    
    
    
    11,634
    
    
    
    8,978Segment assets:Investing
    
    $
    328,727
    
    
    
    272,569
    
    
    
    328,727
    
    
    
    272,569Assets not allocated
    
    
    111,109
    
    
    
    101,800
    
    
    
    111,109
    
    
    
    101,800Total consolidated assets
    
    $
    439,836
    
    
    
    374,369
    
    
    
    439,836
    
    
    
    374,369
 The following summary reconciles significant segment items to the Companys interim unaudited
consolidated condensed financial statements:
 16




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Income before income taxes:Segment profit
    
    $
    6,157
    
    
    
    4,947
    
    
    
    11,634
    
    
    
    8,978Unallocated amounts:Corporate expenses
    
    
    (127
    )
    
    
    402
    
    
    
    (789
    )
    
    
    937Interest expense
    
    
    (459
    )
    
    
    (345
    )
    
    
    (876
    )
    
    
    (760
    )Interest expense on redemption of Class B shares
    
    
    
    
    
    
    (518
    )
    
    
    
    
    
    
    (518
    )Income before income tax
    
    $
    5,571
    
    
    
    4,486
    
    
    
    9,969
    
    
    
    8,637
 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, 2005P/ C
    
    $
    13,930
    
    
    
    28,997
    
    
    
    
    
    
    
    42,927Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    98Earned premiums
    
    $
    13,930
    
    
    
    28,997
    
    
    
    98
    
    
    
    43,025Three Months Ended June 30, 2004P/ C
    
    $
    14,039
    
    
    
    21,785
    
    
    
    
    
    
    
    35,824Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Earned premiums
    
    $
    14,039
    
    
    
    21,785
    
    
    
    (5
    )
    
    
    35,819Six Months Ended June 30, 2005P/ C
    
    $
    28,346
    
    
    
    56,094
    
    
    
    
    
    
    
    84,440Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    105Earned premiums
    
    $
    28,346
    
    
    
    56,094
    
    
    
    105
    
    
    
    84,545Six Months Ended June 30, 2004P/ C
    
    $
    27,294
    
    
    
    40,583
    
    
    
    
    
    
    
    67,877Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earned premiums
    
    $
    27,294
    
    
    
    40,583
    
    
    
    
    
    
    
    67,877
 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.(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 is not in compliance with the debt covenants in
its line of credit. As such, the Company does not have the ability to
draw on the line of credit until a waiver is received from the bank.
The Company does not have any borrowings outstanding under the line of
credit at June 30, 2005.(12)
    
    Subsequent EventOn August 17, 2005, the Board of Directors declared a
dividend of $0.02 per common share to be paid on September 21,
2005 to shareholders of record as of August 31, 2005.
 17




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##### Table of Contents



Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
  
    
    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.
  18




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##### Table of Contents



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




---



##### Table of Contents



Reinsurance Recoverables.
 Impairment of Investments.
  Deferred Policy Acquisition Costs.
 Federal Income Taxes
  20




---



##### Table of Contents



Results of Operations
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)
    
    (Dollars in thousands)Selected Financial Data:Gross written premiums
    
    $
    55,273
    
    
    
    48,936
    
    
    
    102,905
    
    
    
    91,772Premiums earned
    
    
    43,025
    
    
    
    35,819
    
    
    
    84,545
    
    
    
    67,877Net investment income
    
    
    3,495
    
    
    
    2,410
    
    
    
    6,654
    
    
    
    4,375Net realized investment (losses) gains
    
    
    (94
    )
    
    
    21
    
    
    
    (153
    )
    
    
    144Total revenues
    
    
    46,426
    
    
    
    38,250
    
    
    
    91,046
    
    
    
    72,396Total expenses
    
    
    40,855
    
    
    
    33,764
    
    
    
    81,077
    
    
    
    63,759Net income
    
    
    3,999
    
    
    
    2,986
    
    
    
    7,078
    
    
    
    5,874Key Financial Ratios:Loss and loss expense ratio
    
    
    61.8
    %
    
    
    58.6
    %
    
    
    61.9
    %
    
    
    58.8
    %Expense ratio
    
    
    32.1
    %
    
    
    33.3
    %
    
    
    33.0
    %
    
    
    33.3
    %Combined ratio
    
    
    93.9
    %
    
    
    91.9
    %
    
    
    94.9
    %
    
    
    92.1
    %
 Overview of Operating Results
    Revenues
 Premiums
  21




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##### Table of Contents




    
    property/casualty; and
    
    other (including exited lines).
   Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Gross written premiums:Property/casualty
    
    $
    54,564
    
    
    
    48,936
    
    
    
    102,139
    
    
    
    91,772Other (including exited lines)
    
    
    709
    
    
    
    
    
    
    
    766
    
    
    
    Total gross written premiums
    
    
    55,273
    
    
    
    48,936
    
    
    
    102,905
    
    
    
    91,772Ceded written premiums
    
    
    6,916
    
    
    
    6,014
    
    
    
    12,262
    
    
    
    12,206Net written premiums
    
    $
    48,357
    
    
    
    42,922
    
    
    
    90,643
    
    
    
    79,566Premiums earned
    
    $
    43,025
    
    
    
    35,819
    
    
    
    84,545
    
    
    
    67,877Net written premiums to gross
written premiums
    
    
    87.5
    %
    
    
    87.7
    %
    
    
    88.1
    %
    
    
    86.7
    %Premiums earned to net
written premiums
    
    
    89.0
    %
    
    
    83.5
    %
    
    
    93.3
    %
    
    
    85.3
    %Net writings ratio (1)
    
    
    1.6
    
    
    
    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. Gross Written Premiums
  22




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##### Table of Contents



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




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##### Table of Contents



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.
      June 30, 2005
    
    December 31, 2004(Dollars in thousands)Property/casualty:Casualty
    
    $
    122,152
    
    
    
    102,430Property
    
    
    18,470
    
    
    
    16,115Other (including exited lines):Commercial auto
    
    
    1,436
    
    
    
    1,780Workers compensation
    
    
    2,865
    
    
    
    3,426Other
    
    
    9
    
    
    
    0Net reserves for losses and loss expenses
    
    
    144,932
    
    
    
    123,751Plus reinsurance recoverables on unpaid losses at end
of period
    
    
    38,380
    
    
    
    29,485Gross reserves for losses and loss expenses
    
    $
    183,312
    
    
    
    153,236
 24




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##### Table of Contents



25




---



##### Table of Contents



Operating Expenses
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Amortization of deferred policy acquisition costs
(ADAC)
    
    $
    10,335
    
    
    
    8,643
    
    
    
    20,555
    
    
    
    15,493Other operating expenses
    
    
    3,474
    
    
    
    3,272
    
    
    
    6,539
    
    
    
    6,850ADAC and other operating expenses
    
    
    13,809
    
    
    
    11,915
    
    
    
    27,094
    
    
    
    22,343Severance expense
    
    
    
    
    
    
    
    
    
    
    793
    
    
    
    250Interest expense
    
    
    459
    
    
    
    345
    
    
    
    876
    
    
    
    760Interest expense on the redemption of the Class B shares
    
    
    
    
    
    
    518
    
    
    
    
    
    
    
    518Total operating expenses
    
    $
    14,268
    
    
    
    12,778
    
    
    
    28,763
    
    
    
    23,871Expense ratio:ADAC
    
    
    24.0
    %
    
    
    24.1
    %
    
    
    24.3
    %
    
    
    22.8
    %Other operating expenses
    
    
    8.1
    %
    
    
    9.1
    %
    
    
    7.7
    %
    
    
    10.1
    %Severence
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.9
    %
    
    
    0.4
    %Total expense ratio (1)
    
    
    32.1
    %
    
    
    33.3
    %
    
    
    33.0
    %
    
    
    33.3
    %
 
 (1)
    
    Interest expense is not included in the calculation of the expense ratio.     Income Taxes
  26




---



##### Table of Contents



Liquidity and Capital Resources
        Line of Credit.
 27




---



##### Table of Contents



Investment Portfolio
   Accounting Standards
  
 Item 3. Quantitative And Qualitative Disclosures About Market Risk
  28




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##### Table of Contents



Item 4. Controls And Procedures
     
 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
   29




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##### Table of Contents



For
    
    Against/WithheldMichael J. Endres
    
    
    12,654,295
    
    
    
    120,635Alan R. Weiler
    
    
    12,684,475
    
    
    
    90,455
 
 Item 5. Other Information
  
 Item 6. Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation of ProCentury
(Incorporated by reference from the Companys Quarterly Report on
Form 10-Q for the period ended March 31, 2004, filed with the
Securities and Exchange Commission SEC on September 4, 2004.)3.2
    
    Amended and Restated Code of Regulations of ProCentury (Incorporated
by reference from the Companys Quarterly Report on Form 10-Q for the
period ended March 31, 2004, filed with the SEC on September 4,
2004.)31.1
    
    Certification of Principal Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act31.2
    
    Certification of Principal Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act32.1
    
    Certification of Principal Executive Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)32.2
    
    Certification of Principal Financial Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
 
 (1)
    
    These certifications are not deemed to be filed for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section. These certifications will not be deemed
to be incorporated by reference into any filing under the Securities Act or the Exchange Act,
except to the extent that the registrant specifically incorporates them by reference. 30




---



##### Table of Contents



SIGNATURE
  PROCENTURY CORPORATIONDate: September 1, 2005
    By:

/s/
Charles D. Hamm, Jr.Charles D. Hamm, Jr.Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 31




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##### Table of Contents



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