##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 000-50641
(Commission File Number)
 
 PROCENTURY CORPORATION
  
 Ohio
    
    31-1718622(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)465 Cleveland AvenueWesterville, Ohio
    
    43082(Address of principal executive offices)
    
    (Zip Code)
 (614) 895-2000
 
  þ o
  o þ o
  o þ




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##### 



PROCENTURY CORPORATION
 QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended June 30, 2007
 INDEX
 PagePART I: FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Condensed Statements of Operations (unaudited)  For the three and six months ended June 30,
2007 and 2006
    
    
    3Consolidated Condensed Balance Sheets  June 30, 2007 (unaudited) and December 31, 2006
    
    
    4Consolidated Condensed Statements of Shareholders Equity and Comprehensive Income (unaudited)  For the six
months ended June 30, 2007 and 2006
    
    
    5Consolidated Condensed Statements of Cash Flows (unaudited)  For the six months ended June 30, 2007 and 2006
    
    
    6Notes to Consolidated Condensed Financial Statements (unaudited)  June 30, 2007
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37SIGNATURES
    
    
    38EX-31.1EX-31.2EX-32.1EX-32.2
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PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PROCENTURY CORPORATION AND SUBSIDIARIES
 
  
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Premiums earned
    
    $
    56,697
    
    
    
    52,565
    
    
    
    111,085
    
    
    
    101,567Net investment income
    
    
    5,493
    
    
    
    4,689
    
    
    
    10,926
    
    
    
    9,115Net realized investment losses
    
    
    (37
    )
    
    
    (62
    )
    
    
    (238
    )
    
    
    (41
    )Other income
    
    
    97
    
    
    
    118
    
    
    
    220
    
    
    
    252Total revenues
    
    
    62,250
    
    
    
    57,310
    
    
    
    121,993
    
    
    
    110,893Losses and loss expenses
    
    
    33,124
    
    
    
    32,575
    
    
    
    67,001
    
    
    
    63,014Amortization of deferred policy acquisition costs
    
    
    14,689
    
    
    
    12,896
    
    
    
    28,388
    
    
    
    24,962Other operating expenses
    
    
    4,353
    
    
    
    4,193
    
    
    
    8,204
    
    
    
    8,250Interest expense
    
    
    668
    
    
    
    567
    
    
    
    1,354
    
    
    
    1,110Total expenses
    
    
    52,834
    
    
    
    50,231
    
    
    
    104,947
    
    
    
    97,336Income before income tax expense
    
    
    9,416
    
    
    
    7,079
    
    
    
    17,046
    
    
    
    13,557Income tax expense
    
    
    2,948
    
    
    
    2,054
    
    
    
    5,199
    
    
    
    3,932Net income
    
    $
    6,468
    
    
    
    5,025
    
    
    
    11,847
    
    
    
    9,625Basic net income per share
    
    $
    0.49
    
    
    
    0.38
    
    
    
    0.90
    
    
    
    0.73Diluted net income per share
    
    $
    0.48
    
    
    
    0.38
    
    
    
    0.88
    
    
    
    0.73Weighted average of shares outstanding  basic
    
    
    13,232,156
    
    
    
    13,114,535
    
    
    
    13,229,792
    
    
    
    13,107,620Weighted average of shares outstanding  diluted
    
    
    13,419,481
    
    
    
    13,247,528
    
    
    
    13,420,544
    
    
    
    13,224,050
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
   June 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006AssetsInvestmentsFixed maturities:Available-for-sale, at fair value
(amortized cost 2007, $392,944; 2006, $362,066)
    
    $
    380,703
    
    
    
    358,422Held-to-maturity, at amortized cost
(fair value 2007, $1,095; 2006, $1,101)
    
    
    1,107
    
    
    
    1,114Equities (available-for-sale):Equity securities, at fair value (cost 2007, $31,455; 2006, $28,112)
    
    
    30,479
    
    
    
    28,188Bond mutual funds, at fair value (cost 2007, $14,737; 2006, $14,876)
    
    
    14,507
    
    
    
    14,755Short-term investments, at amortized cost
    
    
    18,944
    
    
    
    25,623Total investments
    
    
    445,740
    
    
    
    428,102Cash and equivalents
    
    
    10,709
    
    
    
    7,960Premiums in course of collection, net
    
    
    39,937
    
    
    
    37,428Deferred policy acquisition costs
    
    
    26,782
    
    
    
    26,915Prepaid reinsurance premiums
    
    
    15,038
    
    
    
    14,051Reinsurance recoverable on paid losses, net
    
    
    6,662
    
    
    
    7,524Reinsurance recoverable on unpaid losses, net
    
    
    36,491
    
    
    
    36,104Deferred federal income tax asset
    
    
    15,490
    
    
    
    11,561Other assets
    
    
    11,109
    
    
    
    9,403Total assets
    
    $
    607,958
    
    
    
    579,048Liabilities and Shareholders EquityLoss and loss expense reserves
    
    $
    266,132
    
    
    
    250,672Unearned premiums
    
    
    126,166
    
    
    
    127,620Long term debt
    
    
    25,000
    
    
    
    25,000Line of credit
    
    
    4,650
    
    
    
    4,000Accrued expenses and other liabilities
    
    
    21,227
    
    
    
    9,778Reinsurance balances payable
    
    
    5,715
    
    
    
    7,706Collateral held
    
    
    10,366
    
    
    
    10,370Income taxes payable
    
    
    162
    
    
    
    1,514Total liabilities
    
    
    459,418
    
    
    
    436,660Shareholders equity:Common stock, without par value:Common shares  Issued and outstanding 13,358,867 shares at
June 30, 2007 and 13,248,323 shares issued and
outstanding at December 31, 2006
    
    
    
    
    
    
    Additional paid-in capital
    
    
    102,674
    
    
    
    100,954Retained earnings
    
    
    54,608
    
    
    
    43,830Accumulated other comprehensive loss, net of taxes
    
    
    (8,742
    )
    
    
    (2,396
    )Total shareholders equity
    
    
    148,540
    
    
    
    142,388Total liabilities and shareholders equity
    
    $
    607,958
    
    
    
    579,048
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 Six Months Ended June 30,2007
    
    
    2006Shareholders EquityCapital stock:Beginning of period
    
    $
    
    
    
    
    Stock issued
    
    
    
    
    
    
    End of period
    
    
    
    
    
    
    Additional paid-in capital:Beginning of period
    
    
    100,954
    
    
    
    100,202Impact of adoption of SFAS 123R
    
    
    
    
    
    
    (695
    )Shares issued under share compensation plans
    
    
    704
    
    
    
    613Tax benefit on share compensation plans
    
    
    319
    
    
    
    45Exercise of share options
    
    
    697
    
    
    
    6End of period
    
    
    102,674
    
    
    
    100,171Retained earnings:Beginning of period
    
    
    43,830
    
    
    
    24,846Net income
    
    
    11,847
    
    
    
    9,625Dividend declared (2007, $0.08/share and 2006, $0.065/share)
    
    
    (1,069
    )
    
    
    (860
    )End of period
    
    
    54,608
    
    
    
    33,611Unearned share compensation:Beginning of period
    
    
    
    
    
    
    (695
    )Impact of adoption of SFAS 123R
    
    
    
    
    
    
    695End of period
    
    
    
    
    
    
    Accumulated other comprehensive loss, net of taxes:Beginning of period
    
    
    (2,396
    )
    
    
    (3,150
    )Unrealized holding losses arising during the period,
net of reclassification adjustment
    
    
    (6,346
    )
    
    
    (4,128
    )End of period
    
    
    (8,742
    )
    
    
    (7,278
    )Total shareholders equity
    
    $
    148,540
    
    
    
    126,504Comprehensive IncomeNet income
    
    $
    11,847
    
    
    
    9,625Other comprehensive loss:Unrealized losses on securities:Unrealized holding losses arising during the period:Gross
    
    
    (9,995
    )
    
    
    (6,392
    )Related federal income tax benefit
    
    
    3,494
    
    
    
    2,237Net unrealized losses
    
    
    (6,501
    )
    
    
    (4,155
    )Reclassification adjustment for losses included in net incomeGross
    
    
    (238
    )
    
    
    (41
    )Related federal income tax benefit
    
    
    83
    
    
    
    14Net reclassification adjustment
    
    
    (155
    )
    
    
    (27
    )Other comprehensive loss
    
    
    (6,346
    )
    
    
    (4,128
    )Total comprehensive income
    
    $
    5,501
    
    
    
    5,497
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
  
 Six Months Ended June 30,2007
    
    
    2006Cash flows provided by operating activities:Net income
    
    $
    11,847
    
    
    
    9,625Adjustments:Net realized investment losses
    
    
    238
    
    
    
    41Deferred federal income tax benefit
    
    
    (518
    )
    
    
    (916
    )Share-based compensation expense
    
    
    704
    
    
    
    613Changes in assets and liabilities:Premiums in course of collection, net
    
    
    (2,509
    )
    
    
    (510
    )Deferred policy acquisition costs
    
    
    133
    
    
    
    (2,257
    )Prepaid reinsurance premiums
    
    
    (987
    )
    
    
    707Reinsurance recoverable on paid and unpaid losses, net
    
    
    475
    
    
    
    (5,825
    )Income taxes payable/receivable
    
    
    (1,352
    )
    
    
    (506
    )Losses and loss expense reserves
    
    
    15,460
    
    
    
    23,304Collateral held
    
    
    (4
    )
    
    
    (561
    )Unearned premiums
    
    
    (1,454
    )
    
    
    6,646Other, net
    
    
    (3,043
    )
    
    
    (550
    )Net cash provided by operating activities
    
    
    18,990
    
    
    
    29,811Cash flows used in investing activities:Purchases of equity securities
    
    
    (10,600
    )
    
    
    (6,664
    )Purchases of fixed maturity securities available-for-sale
    
    
    (86,783
    )
    
    
    (47,435
    )Proceeds from sales of equity securities
    
    
    7,628
    
    
    
    8,697Proceeds from sales and maturities of fixed maturities available-for-sale
    
    
    54,908
    
    
    
    17,981Change in short-term investments
    
    
    6,679
    
    
    
    608Change in securities receivable/payable
    
    
    11,330
    
    
    
    620Net cash used in investing activities
    
    
    (16,838
    )
    
    
    (26,193
    )Cash flows provided by (used in) financing activities:Dividend paid to shareholders
    
    
    (1,069
    )
    
    
    (860
    )Tax benefit on share compensation plans
    
    
    319
    
    
    
    Draw on line of credit
    
    
    650
    
    
    
    500Exercise of share options
    
    
    697
    
    
    
    6Net cash provided by (used in) financing activities
    
    
    597
    
    
    
    (354
    )Increase in cash and equivalents
    
    
    2,749
    
    
    
    3,264Cash and equivalents at beginning of period
    
    
    7,960
    
    
    
    5,628Cash and equivalents at end of period
    
    $
    10,709
    
    
    
    8,892Supplemental disclosure of cash flow information:Interest paid
    
    $
    1,624
    
    
    
    1,123Federal income taxes paid
    
    $
    6,750
    
    
    
    5,300
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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 subsidiaries, Century Surety Company (Century) and ProCentury Insurance Company
(PIC). The interim unaudited consolidated condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and the instructions to Article 10 of Regulation S-X. Accordingly, the interim
unaudited consolidated condensed financial statements do not include all of the information and
notes required by GAAP for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation of results for the interim periods have
been included. These interim unaudited consolidated condensed financial statements and related
notes should be read in conjunction with the consolidated financial statements and related notes
in the Companys audited consolidated financial statements, included in the Companys annual
report on Form 10-K for the year ended December 31, 2006. The Companys results of operations
for interim periods are not necessarily indicative of the results to be expected for the entire
year.In preparing the interim unaudited consolidated condensed financial statements, management was
required to make certain estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures at the financial reporting date and
throughout the period being reported upon. Certain of the estimates result from judgments that
can be subjective and complex and consequently actual results may differ from these estimates,
which would be reflected in future periods.Material estimates that are particularly susceptible to significant change in the near-term
relate to the determination of loss and loss expense reserves, the recoverability of deferred
policy acquisition costs, the determination of federal income taxes, the net realizable value of
reinsurance recoverables and the determination of other-than-temporary declines in the fair
value of investments. Although considerable variability is inherent in these estimates,
management believes that the amounts provided are reasonable. These estimates are continually
reviewed and adjusted as necessary. Such adjustments are reflected in current operations.All significant intercompany balances and transactions have been eliminated.(2)
    
    Income per Common ShareBasic income per share (EPS) excludes dilution and is calculated by dividing income available
to common shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the dilution that could occur if securities or other contracts to
issue common shares (common share equivalents) were exercised. When inclusion of common share
equivalents increases the EPS or reduces the loss per share, the effect on earnings is
antidilutive. Under these circumstances, diluted net income or net loss per share is computed
excluding the common share equivalents.Based on the above and pursuant to disclosure requirements contained in SFAS No. 128, Earnings
Per Share, the following information represents a reconciliation of the numerator and
denominator of the basic and diluted EPS computations contained in the Companys interim
unaudited consolidated condensed financial statements:
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Three Months Ended June 30, 2007(In thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    6,468
    
    
    
    13,232,156
    
    
    $
    0.49Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    187,325
    
    
    
    (0.01
    )Diluted EPSNet income
    
    $
    6,468
    
    
    
    13,419,481
    
    
    $
    0.48
 Three Months Ended June 30, 2006(In thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    5,025
    
    
    
    13,114,535
    
    
    $
    0.38Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    132,993
    
    
    
    Diluted EPSNet income
    
    $
    5,025
    
    
    
    13,247,528
    
    
    $
    0.38
 Six Months Ended June 30, 2007(In thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    11,847
    
    
    
    13,229,792
    
    
    $
    0.90Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    190,752
    
    
    
    (0.02
    )Diluted EPSNet income
    
    $
    11,847
    
    
    
    13,420,544
    
    
    $
    0.88
 Six Months Ended June 30, 2006(In thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    9,625
    
    
    
    13,107,620
    
    
    $
    0.73Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    116,430
    
    
    
    Diluted EPSNet income
    
    $
    9,625
    
    
    
    13,224,050
    
    
    $
    0.73
 (3)
    
    InvestmentsThe Company invests primarily in investment-grade fixed maturities. The amortized cost, gross
unrealized gains and losses and estimated fair value of fixed maturities classified as
held-to-maturity were as follows:
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June 30, 2007(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    88
    
    
    
    7
    
    
    
    
    
    
    
    95Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,019
    
    
    
    
    
    
    
    (19
    )
    
    
    1,000Total
    
    $
    1,107
    
    
    
    7
    
    
    
    (19
    )
    
    
    1,095
 December 31, 2006(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    88
    
    
    
    10
    
    
    
    
    
    
    
    98Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,026
    
    
    
    
    
    
    
    (23
    )
    
    
    1,003Total
    
    $
    1,114
    
    
    
    10
    
    
    
    (23
    )
    
    
    1,101
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June 30, 2007(In thousands)Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturities:U.S. Treasury securities
    
    $
    2,128
    
    
    
    
    
    
    
    (47
    )
    
    
    2,081Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    14,555
    
    
    
    
    
    
    
    (380
    )
    
    
    14,175Obligations of states and political subdivisions
    
    
    133,897
    
    
    
    28
    
    
    
    (2,780
    )
    
    
    131,145Corporate securities
    
    
    35,856
    
    
    
    38
    
    
    
    (726
    )
    
    
    35,168Mortgage-backed securities
    
    
    106,437
    
    
    
    63
    
    
    
    (2,936
    )
    
    
    103,564Collateralized mortgage obligations
    
    
    59,098
    
    
    
    38
    
    
    
    (1,225
    )
    
    
    57,911Asset-backed securities
    
    
    40,973
    
    
    
    72
    
    
    
    (4,386
    )
    
    
    36,659Total fixed maturities
    
    
    392,944
    
    
    
    239
    
    
    
    (12,480
    )
    
    
    380,703Equities:Equity securities
    
    
    31,455
    
    
    
    99
    
    
    
    (1,075
    )
    
    
    30,479Bond mutual funds
    
    
    14,737
    
    
    
    12
    
    
    
    (242
    )
    
    
    14,507Total equities
    
    
    46,192
    
    
    
    111
    
    
    
    (1,317
    )
    
    
    44,986Total
    
    $
    439,136
    
    
    
    350
    
    
    
    (13,797
    )
    
    
    425,689
 December 31, 2006(In thousands)Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturities:U.S. Treasury securities
    
    $
    3,636
    
    
    
    
    
    
    
    (49
    )
    
    
    3,587Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    13,793
    
    
    
    
    
    
    
    (258
    )
    
    
    13,535Obligations of states and political subdivisions
    
    
    150,981
    
    
    
    445
    
    
    
    (795
    )
    
    
    150,631Corporate securities
    
    
    35,058
    
    
    
    125
    
    
    
    (730
    )
    
    
    34,453Mortgage-backed securities
    
    
    59,599
    
    
    
    34
    
    
    
    (1,108
    )
    
    
    58,525Collateralized mortgage obligations
    
    
    49,486
    
    
    
    152
    
    
    
    (622
    )
    
    
    49,016Asset-backed securities
    
    
    49,513
    
    
    
    316
    
    
    
    (1,154
    )
    
    
    48,675Total fixed maturities
    
    
    362,066
    
    
    
    1,072
    
    
    
    (4,716
    )
    
    
    358,422Equities:Equity securities
    
    
    28,112
    
    
    
    346
    
    
    
    (270
    )
    
    
    28,188Bond mutual funds
    
    
    14,876
    
    
    
    62
    
    
    
    (183
    )
    
    
    14,755Total equities
    
    
    42,988
    
    
    
    408
    
    
    
    (453
    )
    
    
    42,943Total
    
    $
    405,054
    
    
    
    1,480
    
    
    
    (5,169
    )
    
    
    401,365
   10




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##### Table of Contents



June 30, 2007Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Gross
    
    
    Estimated
    
    
    Gross
    
    
    Estimated
    
    
    Grossfair
    
    
    unrealized
    
    
    fair
    
    
    unrealized
    
    
    fair
    
    
    unrealizedvalue
    
    
    loss
    
    
    value
    
    
    loss
    
    
    value
    
    
    loss(In thousands)Fixed Maturity Securities:U.S. Treasury Securities
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    (19
    )
    
    
    1,000
    
    
    
    (19
    )Total
    
    $
    
    
    
    
    
    
    
    
    1,000
    
    
    
    (19
    )
    
    
    1,000
    
    
    
    (19
    )
  Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In thousands)Fixed maturity securities:U.S. Treasury securities
    
    $
    483
    
    
    
    (9
    )
    
    
    1,598
    
    
    
    (38
    )
    
    
    2,081
    
    
    
    (47
    )Obligations of U.S. government
corporations and agencies
    
    
    7,579
    
    
    
    (185
    )
    
    
    6,596
    
    
    
    (195
    )
    
    
    14,175
    
    
    
    (380
    )Obligations of states and political
subdivisions
    
    
    88,098
    
    
    
    (1,828
    )
    
    
    39,640
    
    
    
    (952
    )
    
    
    127,738
    
    
    
    (2,780
    )Corporate securities
    
    
    4,406
    
    
    
    (54
    )
    
    
    26,428
    
    
    
    (672
    )
    
    
    30,834
    
    
    
    (726
    )Mortgage-backed securities
    
    
    58,280
    
    
    
    (1,562
    )
    
    
    30,484
    
    
    
    (1,374
    )
    
    
    88,764
    
    
    
    (2,936
    )Collateralized mortgage obligations
    
    
    30,952
    
    
    
    (713
    )
    
    
    20,576
    
    
    
    (512
    )
    
    
    51,528
    
    
    
    (1,225
    )Asset-backed securities
    
    
    17,186
    
    
    
    (2,500
    )
    
    
    11,111
    
    
    
    (1,886
    )
    
    
    28,297
    
    
    
    (4,386
    )Total
    
    
    206,984
    
    
    
    (6,851
    )
    
    
    136,433
    
    
    
    (5,629
    )
    
    
    343,417
    
    
    
    (12,480
    )Equities:Equity securities
    
    
    21,392
    
    
    
    (761
    )
    
    
    4,271
    
    
    
    (314
    )
    
    
    25,663
    
    
    
    (1,075
    )Bond mutual funds
    
    
    486
    
    
    
    (15
    )
    
    
    5,131
    
    
    
    (227
    )
    
    
    5,617
    
    
    
    (242
    )Total
    
    
    21,878
    
    
    
    (776
    )
    
    
    9,402
    
    
    
    (541
    )
    
    
    31,280
    
    
    
    (1,317
    )Grand Total
    
    $
    228,862
    
    
    
    (7,627
    )
    
    
    145,835
    
    
    
    (6,170
    )
    
    
    374,697
    
    
    
    (13,797
    )
  11




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##### Table of Contents



(4)
    
    Loss and Loss Expense ReservesLoss and loss expense reserves represent our best estimate of ultimate amounts for losses and
related expenses from claims that have been reported but not paid, and those losses that have
occurred but have not yet been reported to us. Loss reserves do not represent an exact
calculation of liability, but instead represent our estimates, generally utilizing individual
claim estimates and actuarial expertise and estimation techniques at a given accounting date.
The loss reserve estimates are expectations of what ultimate settlement and administration of
claims will cost upon final resolution. These estimates are based on facts and circumstances
then known to us, a review of historical settlement patterns, estimates of trends in claims
frequency and severity,
projections of loss costs, expected interpretations of legal theories of liability, and many
other factors. In establishing reserves, we also take into account estimated recoveries,
reinsurance, salvage and subrogation. The reserves are reviewed regularly by a team of actuaries
we employ.Net loss and loss expenses incurred were $33.1 million for the quarter ended June 30, 2007,
compared to $32.6 million for the quarter ended June 30, 2006. In the second quarter of 2007,
the Company recorded $35.6 million of incurred losses and loss expenses attributable to the 2007
accident year, which was partially offset by favorable development of $2.5 million attributable
to events of prior years. In the second quarter of 2006, the Company recorded $31.7 million of
incurred losses and loss expenses attributable to the 2006 accident year and $886,000
attributable to events of prior years.Net loss and loss expenses incurred were $67.0 million for the six months ended June 30, 2007,
compared to $63.0 million for the six months ended June 30, 2006. In the first six months of
2007, the Company recorded $70.5 million of incurred losses and loss expenses attributable to the
2007 accident year, which were partially offset by favorable development of $3.5 million
attributable to events of prior years, as discussed below. For the six months ended June 30,
2006, the Company recorded $61.4 million of incurred losses and loss expenses attributable to the
2006 accident year and $1.6 million attributable to events of prior years.The favorable development during the three and six months ended June 30, 2007 resulted primarily
from reductions in the ultimate loss ratios for accident years 2005 and 2006 on the claims made
contractor liability business included in our property and casualty segment. The Company reduced
carried reserves related to the 2005 and 2006 casualty business based on the Companys internal
actuarial reserve recommendations. The 2005 and 2006 casualty reserves have performed better
than expected to date, and previously carried reserves exceeded the current indications for each
of the estimation methods applied in the Companys internal actuarial analysis. At the beginning
of 2005, the Company began writing certain contractors liability business on a claims made form,
replacing the occurrence form which had previously been utilized through 2004. The Company wrote
a significant volume of claims made contractor business in both 2005 and 2006, and this business
has continued to perform better than expected. The Company continues to monitor loss emergence
on this book and adjusts assumptions and estimates as needed. The Company continues to write
contractor business on an occurrence form on a limited basis, in certain jurisdictions and for
certain classes of business.In the aggregate, the Company recorded $886,000 and $1.6 million of unfavorable reserve
development related to prior accident years for the three and six months ended June 30, 2006,
respectively. For the six months ended June 30, 2006, within the property line, the Company
experienced favorable non-catastrophe case reserve development producing a reduction in ultimate
loss and loss expenses for the 2004 and 2005 accident years by $4.0 million. The Company also
changed its estimates during the six month period on catastrophe losses by reducing its estimates
on Hurricane Wilma by $1.1 million due to actual incurred losses being lower than original
estimates. This favorable development was offset by an increase of $4.1 million in casualty
reserves during the six month period as a result of a refinement to the internal actuarial
reserving technique concerning the weighting of reserve indications and supplemental information
concerning claims severities. The Companys reserves moved to a higher point on the range of
loss and loss expense reserve estimate, despite the fact that overall, the Companys casualty
book of business performed within the range of expectations for the quarter and six months ended
June 30, 2006. The Company also incurred approximately $1.2 million of adverse development
during the six months ended June 30, 2006 due to an increase in amounts expected to be paid for
legal expenses or settlements of claims in litigation on construction defect claims.
Additionally, the Company recorded approximately $1.4 million of unfavorable development during
the six months ended June 30, 2006 related to estimated costs associated with potential
reinsurance collection issues on two separate casualty claims.Management believes the loss and loss expense reserves make a reasonable provision for expected
losses, however, ultimate settlement of these amounts could vary significantly from the amounts
recorded.
 12




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##### Table of Contents



(5)
    
    ReinsuranceIn the ordinary course of business, Century and PIC assume and cede reinsurance with other
insurers and reinsurers. These arrangements provide greater diversification of business and
limit the maximum net loss potential on large risks. There have been no significant changes in
the Companys reinsurance program, since December 31, 2006. The amounts of ceded loss and loss
expense reserves and ceded unearned premiums would represent a liability of the Company in the
event that its reinsurers would be unable to meet existing obligations under reinsurance
agreements.The effects of assumed and ceded reinsurance on premiums written, premiums earned and loss and
loss expenses incurred were as follows:
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Premiums written:Direct
    
    $
    65,588
    
    
    
    64,488
    
    
    
    123,016
    
    
    
    121,763Assumed
    
    
    2,196
    
    
    
    1,192
    
    
    
    3,223
    
    
    
    1,946Ceded
    
    
    (9,200
    )
    
    
    (7,191
    )
    
    
    (17,595
    )
    
    
    (14,788
    )Net premiums written
    
    $
    58,584
    
    
    
    58,489
    
    
    
    108,644
    
    
    
    108,921Premiums earned:Direct
    
    
    63,091
    
    
    
    59,061
    
    
    
    124,187
    
    
    
    115,146Assumed
    
    
    2,224
    
    
    
    1,105
    
    
    
    3,505
    
    
    
    1,917Ceded
    
    
    (8,618
    )
    
    
    (7,601
    )
    
    
    (16,607
    )
    
    
    (15,496
    )Net premiums earned
    
    $
    56,697
    
    
    
    52,565
    
    
    
    111,085
    
    
    
    101,567Losses and loss expenses incurred:Direct
    
    $
    34,784
    
    
    
    38,566
    
    
    
    71,514
    
    
    
    72,860Assumed
    
    
    638
    
    
    
    253
    
    
    
    761
    
    
    
    357Ceded
    
    
    (2,298
    )
    
    
    (6,244
    )
    
    
    (5,274
    )
    
    
    (10,203
    )Net losses and loss expenses incurred
    
    $
    33,124
    
    
    
    32,575
    
    
    
    67,001
    
    
    
    63,014
 The Companys allowance for uncollectible reinsurance at June 30, 2007 was $4.1 million, which
had not changed since December 31, 2006.Management believes that the reserves for uncollectible reinsurance constitute a reasonable
provision for expected costs and recoveries related to the collection of the recoverables on
these claims, however, actual legal costs and settlements of these claims could vary
significantly from the current estimates recorded.(6)
    
    Deferred Policy Acquisition CostsThe following reflects the amounts of policy acquisition costs deferred and amortized:
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    25,996
    
    
    
    21,418
    
    
    
    26,915
    
    
    
    20,649Policy acquisition costs deferred
    
    
    15,475
    
    
    
    14,384
    
    
    
    28,255
    
    
    
    27,219Amortization of deferred policy acquisition costs
    
    
    (14,689
    )
    
    
    (12,896
    )
    
    
    (28,388
    )
    
    
    (24,962
    )Balance at end of period
    
    $
    26,782
    
    
    
    22,906
    
    
    
    26,782
    
    
    
    22,906
 As of June 30, 2007, the Company expensed $214,000 of unamortized deferred policy
acquisition costs related to the auto physical damage program. This expense was a result of the
fact that the programs loss and loss expense ratio exceeded our expectations causing the program
to fall below the profitability levels required for continued deferral of the additional policy
acquisition costs. There were no such expenses during the three or six months ended June 30,
2006.
 13




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##### Table of Contents



(7)
    
    Federal Income TaxesThe income tax provision for the three and six months ended June 30, 2007 has been computed based
on our estimated annual effective tax rate of 30.5% which differs from the federal income tax
rate of 35% principally because of tax-exempt investment income. The income tax provision for
the three and six months ended June 30, 2006 was 29.0% primarily due to the effect of tax-exempt
investment income.(8)
    
    Commitments and ContingenciesWe are party to lawsuits, arbitrations and other proceedings that arise in the normal course of
our business. Certain of the lawsuits, arbitrations and other proceedings involve claims under
policies that we underwrite as an insurer, the liabilities for which we believe have been
adequately included in our loss and loss adjustment expense reserves. Also, from time to time, we
are party to lawsuits, arbitrations and other proceedings that relate to disputes over
contractual relationships with third parties or that involve alleged errors and omissions on the
part of our insurance subsidiaries. We provide accruals for these items to the extent we deem the
losses probable and reasonably estimable.The outcome of litigation is subject to numerous uncertainties. Although the ultimate outcome of
pending matters cannot be determined at this time, based on present information, we believe the
resolution of these matters will not have a material adverse effect on our financial position,
results of operations or cash flows.(9)
    
    Employee BenefitsDuring 2004, the Company adopted and the shareholders approved a stock option plan that provided
for tax-favored incentive share options (qualified options), non-qualified share options to
employees and board members that do not qualify as tax-favored incentive share options
(non-qualified options), time-based restricted shares that vest solely on service provided,
restricted shares that vest based on achieved performance metrics and non-restricted shares that
are issued in conjunction with the Companys annual bonus plan. The Company accounts for this
plan in accordance with FAS 123R. Any compensation cost recorded in accordance with FAS 123R is
recorded in the same captions as the salary expense of the employee (i.e. the compensation cost
for the Chief Investment Officer is recorded in net investment income). The Company will issue
authorized but unissued shares or treasury shares to satisfy restricted share awards or the
exercise of share options.With respect to qualified options, an employee may be granted an option to purchase shares at the
grant date fair market value, payable as determined by the Companys board of directors. An
optionee must exercise an option within 10 years from the grant date. Full vesting of options
granted occurs at the end of four years.With respect to non-qualified options, an employee or a board member may be granted an option to
purchase shares at the grant date fair market value, payable as determined by the Companys board
of directors. An optionee must exercise an option within 10 years from the grant date. Full
vesting of options granted occurs at the end of three years.For both non-qualified and qualified options, the option exercise price equals the stocks fair
market value on the date of the grant. Compensation expense is measured on the grant date fair
value using a Black Scholes model. The compensation cost is recognized over the respective
service period, which typically matches the vesting period.The time-based restricted shares are granted to key executives and vest in equal installments
upon the lapse of a period of time, typically over four-and five-year periods and include both
monthly and annual vesting periods. Compensation expense for time-based restricted shares is
measured on the grant date fair value and then recognized over the respective service period,
which typically matches the vesting period.The performance-based restricted shares are granted to key executives and vest annually over a
four-year period based on achieved specified performance metrics. Compensation expense for
performance-based restricted share awards is recognized based on the fair value of the awards on
the date of grant.The non-restricted shares are granted to key executives pursuant to the stock option plan in
conjunction with the Companys annual bonus plan and are fully vested on the date of grant.
These shares are granted to the executive when the annual bonus plan calculation exceeds the
employees target bonus. Under the annual bonus plan the portion of the bonus that is less than
or equal to
 14




---



##### Table of Contents



the executives target bonus is paid in cash and any amount greater than the target
bonus is paid in non-restricted shares. Compensation expense for non-restricted shares is
recognized based on the grant date fair value.The Company may grant awards for up to 1.2 million shares under the plan. Through June 30, 2007,
the Company had granted 311,000 non-qualified options, 292,500 qualified options, 156,000
time-based restricted shares, 127,353 performance based restricted shares, and 8,661
non-restricted shares under the share plan.During the second quarter of 2007, the Company granted an additional 12,000 non-qualified options
to its board of directors which vest monthly over a three-year period. During the quarter ended
March 31, 2007, the Company awarded certain employees 85,000 share options which vest monthly
over a four-year period. The weighted average fair value of options granted during the three and
six months ended June 30, 2007 was $6.62 and $6.46, respectively. A summary of the status of the
option plan at June 30, 2007 and changes during the three and six months then ended is presented
in the following table:
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30, 2007
    
    
    June 30, 2007Weighted-
    
    
    
    
    
    
    Weighted-Number of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    524,642
    
    
    $
    12.11
    
    
    
    505,900
    
    
    $
    10.58Changes during the period:Granted
    
    
    12,000
    
    
    
    18.70
    
    
    
    97,000
    
    
    
    19.81Exercised
    
    
    
    
    
    
    
    
    
    
    (66,258
    )
    
    
    10.51Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    536,642
    
    
    $
    12.26
    
    
    
    536,642
    
    
    $
    12.26Exercisable at end of period
    
    
    347,513
    
    
    $
    10.69
    
    
    
    347,513
    
    
    $
    10.69
 The fair market value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions used for
grants issued during the three and six months ended June 30, 2007:
 Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2007
    
    2007Risk-free interest rate
    
    
    4.92
    %
    
    
    4.51
    %Expected dividends
    
    
    0.95
    %
    
    
    0.74
    %Expected volatility
    
    
    28.15
    %
    
    
    25.45
    %Weighted average expected term
    
    6.50
    Years
    
    6.28
    Years
 Information on the range of exercise prices for options outstanding at June 30, 2007, is as
follows:
 15




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##### Table of Contents



Options Outstanding
    
    
    Options ExcercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    AggregateOutstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Intrinsic
    
    
    Exercisable
    
    
    Exercise
    
    
    IntrinsicPrice Range
    
    
    Options
    
    
    Term
    
    
    Price
    
    
    Value
    
    
    Options
    
    
    Price
    
    
    Value$
    10.20
    
    
    
    12,000
    
    
    
    7.9
    
    
    $
    10.20
    
    
    $
    78,720
    
    
    
    8,316
    
    
    $
    10.20
    
    
    $
    54,553$
    10.50
    
    
    
    309,600
    
    
    
    6.8
    
    
    $
    10.50
    
    
    $
    1,938,096
    
    
    
    290,381
    
    
    $
    10.50
    
    
    $
    1,817,787$
    10.64
    
    
    
    106,042
    
    
    
    8.5
    
    
    $
    10.64
    
    
    $
    648,977
    
    
    
    38,848
    
    
    $
    10.64
    
    
    $
    237,747$
    13.04
    
    
    
    12,000
    
    
    
    8.9
    
    
    $
    13.04
    
    
    $
    44,640
    
    
    
    4,326
    
    
    $
    13.04
    
    
    $
    16,093$
    18.70
    
    
    
    12,000
    
    
    
    9.9
    
    
    $
    18.70
    
    
    $
    (23,280
    )
    
    
    336
    
    
    $
    18.70
    
    
    $
    (652
    )$
    19.97
    
    
    
    85,000
    
    
    
    9.7
    
    
    $
    19.97
    
    
    $
    (272,850
    )
    
    
    5,306
    
    
    $
    19.97
    
    
    $
    (17,032
    )$
    2,414,303
    
    
    
    
    
    
    
    
    
    
    $
    2,108,496
  For the Three Months
    
    
    For the Six MonthsEnded June 30, 2007
    
    
    Ended June 30, 2007Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Grant Price
    
    
    Shares
    
    
    Grant PriceOutstanding at beginning of period
    
    
    40,428
    
    
    $
    10.17
    
    
    
    45,156
    
    
    $
    10.19Changes during the period:Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    (4,729
    )
    
    
    10.33
    
    
    
    (9,457
    )
    
    
    10.33Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    35,699
    
    
    $
    10.15
    
    
    
    35,699
    
    
    $
    10.15
  For the Three Months
    
    
    For the Six MonthsEnded June 30, 2007
    
    
    Ended June 30, 2007Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Grant Price
    
    
    Shares
    
    
    Grant PriceOutstanding at beginning of period
    
    
    91,012
    
    
    $
    15.82
    
    
    
    64,728
    
    
    $
    12.76Changes during the period:Granted
    
    
    
    
    
    
    
    
    
    
    35,625
    
    
    
    19.97Vested
    
    
    
    
    
    
    
    
    
    
    (9,341
    )
    
    
    10.50Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    91,012
    
    
    $
    15.82
    
    
    
    91,012
    
    
    $
    15.82
  16




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##### Table of Contents



(10)
    
    Segment Reporting Disclosures
       For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Segment revenue:Property and Casualty
    
    $
    54,659
    
    
    
    51,618
    
    
    
    108,027
    
    
    
    99,961Investing
    
    
    5,456
    
    
    
    4,627
    
    
    
    10,688
    
    
    
    9,074Other (including exited lines)
    
    
    2,038
    
    
    
    947
    
    
    
    3,058
    
    
    
    1,606Segment revenue
    
    $
    62,153
    
    
    
    57,192
    
    
    
    121,773
    
    
    
    110,641Segment profit:Property and Casualty
    
    $
    4,814
    
    
    
    2,726
    
    
    
    7,718
    
    
    
    4,880Investing
    
    
    5,456
    
    
    
    4,627
    
    
    
    10,688
    
    
    
    9,074Other (including exited lines)
    
    
    344
    
    
    
    341
    
    
    
    534
    
    
    
    718Segment profit
    
    $
    10,614
    
    
    
    7,694
    
    
    
    18,940
    
    
    
    14,672Segment assets:Investing
    
    $
    445,740
    
    
    
    380,264
    
    
    
    445,740
    
    
    
    380,264Assets not allocated
    
    
    162,218
    
    
    
    129,451
    
    
    
    162,218
    
    
    
    129,451Total consolidated assets
    
    $
    607,958
    
    
    
    509,715
    
    
    
    607,958
    
    
    
    509,715
  17




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##### Table of Contents



For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Total revenues:Segment revenues
    
    $
    62,153
    
    
    
    57,192
    
    
    
    121,773
    
    
    
    110,641Other
    
    
    97
    
    
    
    118
    
    
    
    220
    
    
    
    252Total consolidated revenues
    
    $
    62,250
    
    
    
    57,310
    
    
    
    121,993
    
    
    
    110,893Income before income tax expense:Segment profit
    
    $
    10,614
    
    
    
    7,694
    
    
    
    18,940
    
    
    
    14,672Unallocated amounts:Other income
    
    
    97
    
    
    
    118
    
    
    
    220
    
    
    
    252Corporate expenses
    
    
    (627
    )
    
    
    (166
    )
    
    
    (760
    )
    
    
    (257
    )Interest expense
    
    
    (668
    )
    
    
    (567
    )
    
    
    (1,354
    )
    
    
    (1,110
    )Income before income tax expense
    
    $
    9,416
    
    
    
    7,079
    
    
    
    17,046
    
    
    
    13,557
 18




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##### Table of Contents



Property
    
    
    Casualty
    
    
    Other
    
    
    Consolidated(In thousands)Three Months Ended June 30, 2007Property and Casualty
    
    $
    19,402
    
    
    
    35,257
    
    
    
    
    
    
    
    54,659Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    2,038
    
    
    
    2,038Earned premiums
    
    $
    19,402
    
    
    
    35,257
    
    
    
    2,038
    
    
    
    56,697Three Months Ended June 30, 2006Property and Casualty
    
    $
    15,039
    
    
    
    36,579
    
    
    
    
    
    
    
    51,618Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    947
    
    
    
    947Earned premiums
    
    $
    15,039
    
    
    
    36,579
    
    
    
    947
    
    
    
    52,565
 Property
    
    
    Casualty
    
    
    Other
    
    
    Consolidated(In thousands)Six Months Ended June 30, 2007Property and Casualty
    
    $
    38,372
    
    
    
    69,655
    
    
    
    
    
    
    
    108,027Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    3,058
    
    
    
    3,058Earned premiums
    
    $
    38,372
    
    
    
    69,655
    
    
    
    3,058
    
    
    
    111,085Six Months Ended June 30, 2006Property and Casualty
    
    $
    29,472
    
    
    
    70,489
    
    
    
    
    
    
    
    99,961Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    1,606
    
    
    
    1,606Earned premiums
    
    $
    29,472
    
    
    
    70,489
    
    
    
    1,606
    
    
    
    101,567
  (11)
    
    Dividends to Common ShareholdersOn March 8, 2007, the Board of Directors declared a dividend of $0.04 per common share that was
paid on April 18, 2007 to shareholders of record as of March 27, 2007. The dividends were
accrued on the March 31, 2007 interim unaudited consolidated condensed balance sheet in the
caption accrued expenses and other liabilities. In addition, on May 17, 2007, the Board of
Directors declared a dividend of $0.04 per common share that was paid on June 6, 2007 to
shareholders of record as of May 24, 2007.On March 12, 2006, the Board of Directors declared a dividend of $0.03 per common share that was
paid on April 17, 2006 to shareholders of record as of March 27, 2006. The dividends were
accrued on the March 31, 2006 interim unaudited consolidated condensed balance sheet in the
caption accrued expenses and other liabilities. In addition, on May 15, 2006, the Board of
Directors declared a dividend of $0.035 per common share that was paid on June 7, 2006 to
shareholders of record as of May 24, 2006.(12)
    
    Line of CreditThe Company has a $10.0 million line of credit with a maturity date of September 30, 2009, and
interest only payments due quarterly based on LIBOR plus 1.2% of the outstanding balance. All of
the outstanding shares of Century are pledged as collateral. The Company did not make any draws
on the line of credit during the second quarter of 2007. During the first six months of 2007,
the Company made draws totaling $650,000 on the line of credit for general corporate purposes.
At June 30, 2007, there was $4.7 million outstanding under the line of credit. Interest expense
for the three and six months ended June 30, 2007 was approximately $93,000 and $169,000,
respectively. The outstanding balance at June 30, 2006 was $500,000 and interest expense for the
six months then ended was $1,800.
 19




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##### Table of Contents



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




---



##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Deferred Policy Acquisition Costs.
 Federal Income Taxes.
  Results of Operations
  For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Selected Financial Data:Gross written premiums
    
    $
    67,784
    
    
    
    65,680
    
    
    
    126,239
    
    
    
    123,709Premiums earned
    
    
    56,697
    
    
    
    52,565
    
    
    
    111,085
    
    
    
    101,567Net investment income
    
    
    5,493
    
    
    
    4,689
    
    
    
    10,926
    
    
    
    9,115Net realized investment losses
    
    
    (37
    )
    
    
    (62
    )
    
    
    (238
    )
    
    
    (41
    )Total revenues
    
    
    62,250
    
    
    
    57,310
    
    
    
    121,993
    
    
    
    110,893Total expenses
    
    
    52,834
    
    
    
    50,231
    
    
    
    104,947
    
    
    
    97,336Net income
    
    
    6,468
    
    
    
    5,025
    
    
    
    11,847
    
    
    
    9,625Key Financial Ratios:Loss and loss expense ratio
    
    
    58.4
    %
    
    
    62.0
    %
    
    
    60.3
    %
    
    
    62.0
    %Expense ratio
    
    
    33.6
    %
    
    
    32.5
    %
    
    
    32.9
    %
    
    
    32.7
    %Combined ratio
    
    
    92.0
    %
    
    
    94.5
    %
    
    
    93.2
    %
    
    
    94.7
    %
 23




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##### Table of Contents



Overview of Operating Results
     Revenues
 Premiums
    24




---



##### Table of Contents




    
    property/casualty; and
    
    other (including exited lines).
   For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Gross written premiumsProperty/casualty
    
    $
    65,596
    
    
    
    64,790
    
    
    
    123,299
    
    
    
    121,880Other (including exited lines)
    
    
    2,188
    
    
    
    890
    
    
    
    2,940
    
    
    
    1,829Total gross written premiums
    
    
    67,784
    
    
    
    65,680
    
    
    
    126,239
    
    
    
    123,709Ceded written premiums
    
    
    9,200
    
    
    
    7,191
    
    
    
    17,595
    
    
    
    14,788Net written premiums
    
    $
    58,584
    
    
    
    58,489
    
    
    
    108,644
    
    
    
    108,921Net premiums earned
    
    $
    56,697
    
    
    
    52,565
    
    
    
    111,085
    
    
    
    101,567Net written premiums to gross written premiums
    
    
    86.4
    %
    
    
    89.1
    %
    
    
    86.1
    %
    
    
    88.0
    %Net premiums earned to net written premiums
    
    
    96.8
    %
    
    
    89.9
    %
    
    
    102.2
    %
    
    
    93.2
    %Net writings ratio (1)
    
    
    1.6
    
    
    
    1.8
    
    
    
    1.5
    
    
    
    1.7
 
 (1)
    
    The ratio of net written premiums to our insurance subsidiaries combined statutory
surplus. Management believes this measure is useful in gauging our exposure to pricing
errors in the current book of business. It may not be comparable to the definition of net
writings ratio used by other companies. Gross Written Premiums
  25




---



##### Table of Contents



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




---



##### Table of Contents



Expenses
 Losses and Loss Expenses
         27




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28




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##### Table of Contents



June 30, 2007
    
    
    
    
    
    
    December 31, 2006Case
    
    
    IBNR
    
    
    Total
    
    
    Case
    
    
    IBNR
    
    
    TotalProperty and Casualty:Casualty
    
    $
    55,288
    
    
    
    145,250
    
    
    
    200,538
    
    
    
    59,801
    
    
    
    128,569
    
    
    
    188,370Property
    
    
    13,961
    
    
    
    11,271
    
    
    
    25,232
    
    
    
    13,506
    
    
    
    8,796
    
    
    
    22,302Other (including exited lines):Commercial auto
    
    
    103
    
    
    
    
    
    
    
    103
    
    
    
    147
    
    
    
    
    
    
    
    147Workers compensation
    
    
    1,067
    
    
    
    2,065
    
    
    
    3,132
    
    
    
    1,164
    
    
    
    2,056
    
    
    
    3,220Surety
    
    
    
    
    
    
    636
    
    
    
    636
    
    
    
    
    
    
    
    529
    
    
    
    529Net reserves for losses and loss expenses
    
    
    70,419
    
    
    
    159,222
    
    
    
    229,641
    
    
    
    74,618
    
    
    
    139,950
    
    
    
    214,568Plus reinsurance recoverables on unpaid
losses at end of period
    
    
    10,883
    
    
    
    25,608
    
    
    
    36,491
    
    
    
    11,723
    
    
    
    24,381
    
    
    
    36,104Gross reserves for losses and loss expenses
    
    $
    81,302
    
    
    
    184,830
    
    
    
    266,132
    
    
    
    86,341
    
    
    
    164,331
    
    
    
    250,672
     29




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##### Table of Contents



Operating Expenses
  For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Amortization of deferred policy acquisition costs (ADAC)
    
    $
    14,689
    
    
    
    12,896
    
    
    
    28,388
    
    
    
    24,962Other operating expenses
    
    
    4,353
    
    
    
    4,193
    
    
    
    8,204
    
    
    
    8,250ADAC and other operating expenses
    
    
    19,042
    
    
    
    17,089
    
    
    
    36,592
    
    
    
    33,212Interest expense
    
    
    668
    
    
    
    567
    
    
    
    1,354
    
    
    
    1,110Total operating expenses
    
    $
    19,710
    
    
    
    17,656
    
    
    
    37,946
    
    
    
    34,322Expense ratio:ADAC
    
    
    25.9
    %
    
    
    24.5
    %
    
    
    25.5
    %
    
    
    24.6
    %Other operating expenses
    
    
    7.7
    %
    
    
    8.0
    %
    
    
    7.4
    %
    
    
    8.1
    %Total expense ratio (1)
    
    
    33.6
    %
    
    
    32.5
    %
    
    
    32.9
    %
    
    
    32.7
    %
 
 (1)
    
    Interest expense is not included in the calculation of the expense ratio.    Income Taxes
  30




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##### Table of Contents



Liquidity and Capital Resources
     Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006.
    Line of Credit.
 31




---



##### Table of Contents



Payments Due by Years2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    Total(In thousands)Long Term Debt:Debt issues to a related
party trust (1) (2)
    
    $
    1,201
    
    
    
    2,402
    
    
    
    2,402
    
    
    
    2,402
    
    
    
    2,402
    
    
    
    77,131
    
    
    
    87,940Loss and loss expense payments (3)
    
    
    56,571
    
    
    
    76,385
    
    
    
    53,126
    
    
    
    33,354
    
    
    
    19,330
    
    
    
    27,366
    
    
    
    266,132Operating leases on facilities
    
    
    565
    
    
    
    1,150
    
    
    
    867
    
    
    
    714
    
    
    
    673
    
    
    
    1,129
    
    
    
    5,098Other operating leases
    
    
    152
    
    
    
    235
    
    
    
    70
    
    
    
    59
    
    
    
    32
    
    
    
    
    
    
    
    548Total contractual obligations
    
    $
    58,489
    
    
    
    80,172
    
    
    
    56,465
    
    
    
    36,529
    
    
    
    22,437
    
    
    
    105,626
    
    
    
    359,718
 
 (1)
    
    Amounts include interest payments associated with these obligations using applicable interest
rates as of June 30, 2007.(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.(3)
    
    The timing for payment of our estimated losses 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
   32




---



##### Table of Contents



Accounting Standards
   
  
  33




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    The election of the following three Class III Directors, each to serve until the 2010
annual meeting of shareholders and until a successor has been duly elected and qualified:
 For
    
    Against/WithheldEdward F. Feighan
    
    
    11,956,602
    
    
    
    356,984Jeffrey A. Maffett
    
    
    11,429,026
    
    
    
    884,560Press C. Southworth III
    
    
    11,998,342
    
    
    
    315,244
 2.
    
    The ratification of the selection of KPMG LLP as the Companys independent registered
public accounting firm for the Companys fiscal year ending December 31, 2007:
 For
    
    Against
    
    Abstain12,299,476
    
    
    
    9,051
    
    
    
    5,058
 
 Item 5. Other Information
  
 Item 6. Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation of ProCentury (Incorporated by reference from the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed with the Securities and Exchange Commission SEC on September 4, 2004.)3.2
    
    Amended and Restated Code of Regulations of ProCentury (Incorporated by reference from the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed with the SEC on September 4, 2004.)31.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act32.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)32.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
 
 (1)
    
    These certifications are not deemed to be filed for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section. These certifications will not be
deemed to be incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically incorporates them by
reference. 37




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##### Table of Contents



SIGNATURE
  PROCENTURY CORPORATIONDate August 3, 2007
    By:
    /s/ Erin E. WestErin E. WestChief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 38




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##### Table of Contents



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