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 March 31, 2008
 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
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



PROCENTURY CORPORATION
 QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2008
   INDEX
 PagePART I: FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Condensed Statements of Operations (unaudited)  For the three months ended
March 31, 2008 and 2007
    
    
    3Consolidated Condensed Balance Sheets  March 31, 2008 (unaudited) and December 31, 2007
    
    
    4Consolidated Condensed Statements of Shareholders Equity and Comprehensive Income
(unaudited)  For the three months ended March 31, 2008 and 2007
    
    
    5Consolidated Condensed Statements of Cash Flows (unaudited)  For the three months ended
March 31, 2008 and 2007
    
    
    6Notes to Consolidated Condensed Financial Statements (unaudited)  March 31, 2008
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 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
    
    
    39
  2




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##### 



PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 Three Months Ended March 31,2008
    
    
    2007Premiums earned
    
    $
    48,345
    
    
    
    54,388Net investment income
    
    
    5,332
    
    
    
    5,433Net realized investment losses
    
    
    (462
    )
    
    
    (201
    )Other income
    
    
    86
    
    
    
    123Total revenues
    
    
    53,301
    
    
    
    59,743Losses and loss expenses
    
    
    27,785
    
    
    
    33,877Amortization of deferred policy acquisition costs
    
    
    14,176
    
    
    
    13,699Other operating expenses
    
    
    3,193
    
    
    
    3,851Interest expense
    
    
    596
    
    
    
    686Total expenses
    
    
    45,750
    
    
    
    52,113Income before income tax expense
    
    
    7,551
    
    
    
    7,630Income tax expense
    
    
    2,327
    
    
    
    2,251Net income
    
    $
    5,224
    
    
    
    5,379Basic net income per share
    
    $
    0.39
    
    
    
    0.41Diluted net income per share
    
    $
    0.39
    
    
    
    0.40Weighted average of shares outstanding  basic
    
    
    13,307,738
    
    
    
    13,227,427Weighted average of shares outstanding  diluted
    
    
    13,446,658
    
    
    
    13,421,607
  3




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##### 



PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 March 31,2008
    
    
    December 31,(Unaudited)
    
    
    2007AssetsInvestmentsFixed maturities:Available-for-sale, at fair value
(amortized cost 2008, $415,938; 2007, $411,015)
    
    $
    408,806
    
    
    
    406,439Held-to-maturity, at amortized cost
(fair value 2008, $1,123; 2007, $1,110)
    
    
    1,096
    
    
    
    1,099Equities (available-for-sale):Equity securities, at fair value (cost 2008, $32,890; 2007, $34,686)
    
    
    28,376
    
    
    
    28,998Bond mutual funds, at fair value (cost 2008, $15,252; 2007, $15,029)
    
    
    13,926
    
    
    
    14,244Short-term investments, at amortized cost
    
    
    27,034
    
    
    
    4,730Total investments
    
    
    479,238
    
    
    
    455,510Cash and equivalents
    
    
    7,357
    
    
    
    11,766Premiums in course of collection, net
    
    
    34,195
    
    
    
    31,805Deferred policy acquisition costs
    
    
    24,033
    
    
    
    24,336Prepaid reinsurance premiums
    
    
    15,765
    
    
    
    14,834Reinsurance recoverable on paid losses, net
    
    
    4,650
    
    
    
    3,914Reinsurance recoverable on unpaid losses, net
    
    
    39,654
    
    
    
    40,863Deferred federal income tax asset
    
    
    15,137
    
    
    
    13,584Receivable for securities
    
    
    34,530
    
    
    
    413Other assets
    
    
    11,184
    
    
    
    10,029Total assets
    
    $
    665,743
    
    
    
    607,054Liabilities and Shareholders EquityLoss and loss expense reserves
    
    $
    280,228
    
    
    
    279,253Unearned premiums
    
    
    112,383
    
    
    
    114,645Long term debt
    
    
    25,000
    
    
    
    25,000Line of credit
    
    
    4,650
    
    
    
    4,650Accrued expenses and other liabilities
    
    
    4,286
    
    
    
    6,386Reinsurance balances payable
    
    
    6,553
    
    
    
    5,193Collateral held
    
    
    9,823
    
    
    
    9,889Payable for securities
    
    
    55,007
    
    
    
    304Income taxes payable
    
    
    2,551
    
    
    
    713Total liabilities
    
    
    500,481
    
    
    
    446,033Shareholders equity:Common stock, without par value:Common shares  Issued and outstanding 13,420,967 shares at
March 31, 2008 and 13,363,867 shares issued and
outstanding at December 31, 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    103,988
    
    
    
    103,283Retained earnings
    
    
    71,135
    
    
    
    66,448Accumulated other comprehensive loss, net of taxes
    
    
    (9,861
    )
    
    
    (8,710
    )Total shareholders equity
    
    
    165,262
    
    
    
    161,021Total liabilities and shareholders equity
    
    $
    665,743
    
    
    
    607,054
  4




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##### 



PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 Three Months Ended March 31,2008
    
    
    2007Shareholders EquityCapital stock:Beginning of period
    
    $
    
    
    
    
    Stock issued
    
    
    
    
    
    
    End of period
    
    
    
    
    
    
    Additional paid-in capital:Beginning of period
    
    
    103,283
    
    
    
    100,954Shares issued under share compensation plans
    
    
    660
    
    
    
    414Tax benefit on share compensation plans
    
    
    45
    
    
    
    305Exercise of share options
    
    
    
    
    
    
    697End of period
    
    
    103,988
    
    
    
    102,370Retained earnings:Beginning of period
    
    
    66,448
    
    
    
    43,830Net income
    
    
    5,224
    
    
    
    5,379Dividend declared (2008, $0.04/share and 2007, $0.04/share)
    
    
    (537
    )
    
    
    (534
    )End of period
    
    
    71,135
    
    
    
    48,675Accumulated other comprehensive loss, net of taxes:Beginning of period
    
    
    (8,710
    )
    
    
    (2,396
    )Unrealized holding losses arising during the period,
net of reclassification adjustment
    
    
    (1,151
    )
    
    
    (1,401
    )End of period
    
    
    (9,861
    )
    
    
    (3,797
    )Total shareholders equity
    
    $
    165,262
    
    
    
    147,248Comprehensive IncomeNet income
    
    $
    5,224
    
    
    
    5,379Other comprehensive loss:Unrealized losses on securities:Unrealized holding losses arising during the period:Gross
    
    
    (2,384
    )
    
    
    (2,357
    )Related federal income tax benefit
    
    
    933
    
    
    
    825Net unrealized losses
    
    
    (1,451
    )
    
    
    (1,532
    )Reclassification adjustment for losses included in net incomeGross
    
    
    (462
    )
    
    
    (201
    )Related federal income tax benefit
    
    
    162
    
    
    
    70Net reclassification adjustment
    
    
    (300
    )
    
    
    (131
    )Other comprehensive loss
    
    
    (1,151
    )
    
    
    (1,401
    )Total comprehensive income
    
    $
    4,073
    
    
    
    3,978
  5




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##### 



PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 Three Months Ended March 31,2008
    
    
    2007Cash flows provided by operating activities:Net income
    
    $
    5,224
    
    
    
    5,379Adjustments:Net realized investment losses
    
    
    462
    
    
    
    201Deferred federal income tax benefit
    
    
    (781
    )
    
    
    (329
    )Share-based compensation expense
    
    
    660
    
    
    
    414Changes in assets and liabilities:Premiums in course of collection, net
    
    
    (2,390
    )
    
    
    1,411Deferred policy acquisition costs
    
    
    303
    
    
    
    919Prepaid reinsurance premiums
    
    
    (931
    )
    
    
    (406
    )Reinsurance recoverable on paid and unpaid losses, net
    
    
    473
    
    
    
    1,395Income taxes payable/receivable
    
    
    1,838
    
    
    
    675Losses and loss expense reserves
    
    
    975
    
    
    
    9,509Collateral held
    
    
    (66
    )
    
    
    221Unearned premiums
    
    
    (2,262
    )
    
    
    (3,922
    )Other, net
    
    
    (1,450
    )
    
    
    (3,843
    )Net cash provided by operating activities
    
    
    2,055
    
    
    
    11,624Cash flows used in investing activities:Purchases of equity securities
    
    
    (1,007
    )
    
    
    (6,385
    )Purchases of fixed maturity securities available-for-sale
    
    
    (235,682
    )
    
    
    (45,415
    )Proceeds from sales of equity securities
    
    
    629
    
    
    
    5,555Proceeds from sales and maturities of fixed maturities available-for-sale
    
    
    231,806
    
    
    
    41,573Change in short-term investments
    
    
    (22,304
    )
    
    
    (9,275
    )Change in securities receivable/payable
    
    
    20,586
    
    
    
    3,009Net cash used in investing activities
    
    
    (5,972
    )
    
    
    (10,938
    )Cash flows (used in) provided by financing activities:Dividend paid to shareholders
    
    
    (537
    )
    
    
    (534
    )Tax benefit on share compensation plans
    
    
    45
    
    
    
    305Draw on line of credit
    
    
    
    
    
    
    650Exercise of share options
    
    
    
    
    
    
    697Net cash (used in) provided by financing activities
    
    
    (492
    )
    
    
    1,118(Decrease) increase in cash and equivalents
    
    
    (4,409
    )
    
    
    1,804Cash and equivalents at beginning of period
    
    
    11,766
    
    
    
    7,960Cash and equivalents at end of period
    
    $
    7,357
    
    
    
    9,764Supplemental disclosure of cash flow information:Interest paid
    
    $
    667
    
    
    
    909Federal income taxes paid
    
    $
    1,225
    
    
    
    1,600
  6




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##### 



PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 (1) Basis of Presentation
     (2) Income per Common Share
  Earnings Per Share"
 7




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##### 



Three Months Ended March 31, 2008(In thousands, except share and per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    5,224
    
    
    
    13,307,738
    
    
    $
    0.39Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    138,920
    
    
    
    Diluted EPSNet income
    
    $
    5,224
    
    
    
    13,446,658
    
    
    $
    0.39
 Three Months Ended March 31, 2007(In thousands, except share and per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    5,379
    
    
    
    13,227,427
    
    
    $
    0.41Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    194,180
    
    
    
    (0.01
    )Diluted EPSNet income
    
    $
    5,379
    
    
    
    13,421,607
    
    
    $
    0.40
 (3) Investments
  March 31, 2008(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    87
    
    
    
    17
    
    
    
    
    
    
    
    104Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,009
    
    
    
    10
    
    
    
    
    
    
    
    1,019Total
    
    $
    1,096
    
    
    
    27
    
    
    
    
    
    
    
    1,123
 December 31, 2007(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    87
    
    
    
    14
    
    
    
    
    
    
    
    101Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,012
    
    
    
    
    
    
    
    (3
    )
    
    
    1,009Total
    
    $
    1,099
    
    
    
    14
    
    
    
    (3
    )
    
    
    1,110
  8




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##### 



March 31, 2008(In thousands)Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturities:U.S. Treasury securities
    
    $
    2,515
    
    
    
    138
    
    
    
    
    
    
    
    2,653Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    4,583
    
    
    
    41
    
    
    
    
    
    
    
    4,624Obligations of states and political subdivisions
    
    
    200,156
    
    
    
    409
    
    
    
    (3,692
    )
    
    
    196,873Corporate securities
    
    
    33,795
    
    
    
    179
    
    
    
    (675
    )
    
    
    33,299Mortgage-backed securities
    
    
    102,971
    
    
    
    160
    
    
    
    (682
    )
    
    
    102,449Collateralized mortgage obligations
    
    
    46,933
    
    
    
    666
    
    
    
    (706
    )
    
    
    46,893Asset-backed securities
    
    
    24,985
    
    
    
    80
    
    
    
    (3,050
    )
    
    
    22,015Total fixed maturities
    
    
    415,938
    
    
    
    1,673
    
    
    
    (8,805
    )
    
    
    408,806Equities:Equity securities
    
    
    32,890
    
    
    
    50
    
    
    
    (4,564
    )
    
    
    28,376Bond mutual funds
    
    
    15,252
    
    
    
    
    
    
    
    (1,326
    )
    
    
    13,926Total equities
    
    
    48,142
    
    
    
    50
    
    
    
    (5,890
    )
    
    
    42,302Total
    
    $
    464,080
    
    
    
    1,723
    
    
    
    (14,695
    )
    
    
    451,108
 December 31, 2007(In thousands)Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturities:U.S. Treasury securities
    
    $
    2,515
    
    
    
    61
    
    
    
    
    
    
    
    2,576Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    5,084
    
    
    
    13
    
    
    
    (8
    )
    
    
    5,089Obligations of states and political subdivisions
    
    
    209,564
    
    
    
    911
    
    
    
    (740
    )
    
    
    209,735Corporate securities
    
    
    34,837
    
    
    
    47
    
    
    
    (518
    )
    
    
    34,366Mortgage-backed securities
    
    
    77,527
    
    
    
    36
    
    
    
    (363
    )
    
    
    77,200Collateralized mortgage obligations
    
    
    49,895
    
    
    
    408
    
    
    
    (632
    )
    
    
    49,671Asset-backed securities
    
    
    31,593
    
    
    
    108
    
    
    
    (3,899
    )
    
    
    27,802Total fixed maturities
    
    
    411,015
    
    
    
    1,584
    
    
    
    (6,160
    )
    
    
    406,439Equities:Equity securities
    
    
    34,686
    
    
    
    75
    
    
    
    (5,763
    )
    
    
    28,998Bond mutual funds
    
    
    15,029
    
    
    
    
    
    
    
    (785
    )
    
    
    14,244Total equities
    
    
    49,715
    
    
    
    75
    
    
    
    (6,548
    )
    
    
    43,242Total
    
    $
    460,730
    
    
    
    1,659
    
    
    
    (12,708
    )
    
    
    449,681
 Recognition of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets"
 9




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##### 



March 31, 2008Less 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
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of U.S. government
corporations and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of states and political
subdivisions
    
    
    130,297
    
    
    
    (3,267
    )
    
    
    13,414
    
    
    
    (425
    )
    
    
    143,711
    
    
    
    (3,692
    )Corporate securities
    
    
    10,392
    
    
    
    (363
    )
    
    
    3,678
    
    
    
    (312
    )
    
    
    14,070
    
    
    
    (675
    )Mortgage-backed securities
    
    
    63,947
    
    
    
    (650
    )
    
    
    3,996
    
    
    
    (32
    )
    
    
    67,943
    
    
    
    (682
    )Collateralized mortgage obligations
    
    
    5,348
    
    
    
    (390
    )
    
    
    9,055
    
    
    
    (316
    )
    
    
    14,403
    
    
    
    (706
    )Asset-backed securities
    
    
    7,288
    
    
    
    (1,042
    )
    
    
    6,237
    
    
    
    (2,008
    )
    
    
    13,525
    
    
    
    (3,050
    )Total
    
    
    217,272
    
    
    
    (5,712
    )
    
    
    36,380
    
    
    
    (3,093
    )
    
    
    253,652
    
    
    
    (8,805
    )Equities:Equity securities
    
    
    21,895
    
    
    
    (4,311
    )
    
    
    1,920
    
    
    
    (253
    )
    
    
    23,815
    
    
    
    (4,564
    )Bond mutual funds
    
    
    8,515
    
    
    
    (1,181
    )
    
    
    5,411
    
    
    
    (145
    )
    
    
    13,926
    
    
    
    (1,326
    )Total
    
    
    30,410
    
    
    
    (5,492
    )
    
    
    7,331
    
    
    
    (398
    )
    
    
    37,741
    
    
    
    (5,890
    )Grand Total
    
    $
    247,682
    
    
    
    (11,204
    )
    
    
    43,711
    
    
    
    (3,491
    )
    
    
    291,393
    
    
    
    (14,695
    )
  (4) Fair Value Measurements
  10




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##### 



 -
  -
  -
 Valuation of Investments
  Fixed Maturities
      11




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##### 



Equities
  Fair Value Hierarchy
  March 31, 2008Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(in thousands)Invested assets:Fixed maturities
    
    $
    408,806
    
    
    
    2,653
    
    
    
    395,922
    
    
    
    10,231Equity securities
    
    
    42,302
    
    
    
    
    
    
    
    42,302
    
    
    
    Total
    
    $
    451,108
    
    
    
    2,653
    
    
    
    438,224
    
    
    
    10,231
  Total(in thousands)Balance at January 1, 2008
    
    $
    11,495Total realized and unrealized gains or (losses):Included in realized investment gains and (losses)
    
    
    (2,268
    )Included in increases or (decreases) in accumulated other
comprehensive income
    
    
    1,580Purchases, issuances and settlements
    
    
    (576
    )Transfers in and/or (out) of Level 3
    
    
    Balance at March 31, 2008
    
    $
    10,231Amount of total gains or (losses) for the period included in earnings attributable
to the fair value of changes in assets still held at the reporting date
    
    $
    (2,808
    )
  (5) Loss and Loss Expense Reserves
  12




---



##### 



(6) Reinsurance
   13




---



##### 



For the Three MonthsEnded March 31,2008
    
    
    2007Premiums written:Direct
    
    $
    52,801
    
    
    
    57,428Assumed
    
    
    1,065
    
    
    
    1,027Ceded
    
    
    (8,713
    )
    
    
    (8,395
    )Net premiums written
    
    $
    45,153
    
    
    
    50,060Premiums earned:Direct
    
    
    55,138
    
    
    
    61,096Assumed
    
    
    990
    
    
    
    1,281Ceded
    
    
    (7,783
    )
    
    
    (7,989
    )Net premiums earned
    
    $
    48,345
    
    
    
    54,388Losses and loss expenses incurred:Direct
    
    $
    28,416
    
    
    
    36,730Assumed
    
    
    629
    
    
    
    123Ceded
    
    
    (1,260
    )
    
    
    (2,976
    )Net losses and loss expenses incurred
    
    $27,785
    
    
    33,877
   (7) Deferred Policy Acquisition Costs
 The following reflects the amounts of policy acquisition costs deferred and amortized:
 For the Three MonthsEnded March 31,2008
    
    
    2007Balance at beginning of year
    
    $
    24,336
    
    
    
    26,915Policy acquisition costs deferred
    
    
    13,873
    
    
    
    12,780Amortization of deferred policy acquisition costs
    
    
    (14,176
    )
    
    
    (13,699
    )Balance at end of quarter
    
    $
    24,033
    
    
    
    25,996
  (8) Federal Income Taxes
   14




---



##### 



(9) Commitments and Contingencies
   (10) Employee Benefits
     15




---



##### 



For the Three Months EndedMarch 31, 2008Weighted-Number of
    
    
    AverageShares
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    532,554
    
    
    $
    12.24Changes during the period:Granted
    
    
    92,500
    
    
    
    15.64Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Outstanding at end of period
    
    
    625,054
    
    
    $
    12.74Exercisable at end of period
    
    
    411,952
    
    
    $
    11.14
  Three MonthsEnded March 31,2008Risk-free interest
rate
    
    
    3.37
    %Expected dividends
    
    
    0.89
    %Expected volatility
    
    
    30.57
    %Weighted average
expected term
    

6.25
Years
 16




---



##### 



Options Outstanding
    
    Options ExcercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    AggregateOutstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Intrinsic
    
    
    Exercisable
    
    
    Exercise
    
    
    IntrinsicPrice
    
    Options
    
    
    Term
    
    
    Price
    
    
    Value
    
    
    Options
    
    
    Price
    
    
    Value$10.20
    
    
    11,386
    
    
    
    7.2
    
    
    $
    10.20
    
    
    $
    88,811
    
    
    
    10,821
    
    
    $
    10.20
    
    
    $
    84,404$10.50
    
    
    309,349
    
    
    
    6.1
    
    
    $
    10.50
    
    
    $
    2,320,118
    
    
    
    307,572
    
    
    $
    10.50
    
    
    $
    2,306,793$10.64
    
    
    106,042
    
    
    
    7.8
    
    
    $
    10.64
    
    
    $
    780,469
    
    
    
    59,014
    
    
    $
    10.64
    
    
    $
    434,343$13.04
    
    
    10,721
    
    
    
    8.2
    
    
    $
    13.04
    
    
    $
    53,176
    
    
    
    6,826
    
    
    $
    13.04
    
    
    $
    33,857$15.64
    
    
    92,500
    
    
    
    9.8
    
    
    $
    15.64
    
    
    
    218,300
    
    
    
    3,646
    
    
    $
    15.64
    
    
    
    8,605$18.70
    
    
    10,056
    
    
    
    9.2
    
    
    $
    18.70
    
    
    
    (7,039
    )
    
    
    2,836
    
    
    $
    18.70
    
    
    
    (1,985
    )$19.97
    
    
    85,000
    
    
    
    8.9
    
    
    $
    19.97
    
    
    
    (167,450
    )
    
    
    21,237
    
    
    $
    19.97
    
    
    
    (41,837
    )$
    3,286,384
    
    
    
    
    
    
    
    
    
    
    $
    2,824,179
  For the Three Months EndedMarch 31, 2008WeightedNumber of
    
    
    AverageShares
    
    
    Grant PriceOutstanding at beginning of period
    
    
    20,294
    
    
    $
    10.10Changes during the period:Granted
    
    
    
    
    
    
    Vested
    
    
    (4,728
    )
    
    
    10.33Cancelled
    
    
    
    
    
    
    Outstanding at end of period
    
    
    15,566
    
    
    $
    10.03
  For the Three Months EndedMarch 31, 2008WeightedNumber of
    
    
    AverageShares
    
    
    Grant PriceOutstanding at beginning of period
    
    
    86,836
    
    
    $
    15.92Changes during the period:Granted
    
    
    39,500
    
    
    
    15.64Vested
    
    
    (28,674
    )
    
    
    14.92Cancelled
    
    
    
    
    
    
    Outstanding at end of period
    
    
    97,662
    
    
    $
    16.10
  17




---



##### 



(11) Segment Reporting Disclosures
       For the Three MonthsEnded March 31,2008
    
    
    2007(In thousands)Segment revenue:Property and Casualty
    
    $
    47,519
    
    
    
    53,368Investing
    
    
    4,870
    
    
    
    5,232Other (including exited lines)
    
    
    826
    
    
    
    1,020Segment revenue
    
    $
    53,215
    
    
    
    59,620Segment profit (loss):Property and Casualty
    
    $
    3,507
    
    
    
    2,904Investing
    
    
    4,870
    
    
    
    5,232Other (including exited lines)
    
    
    (119
    )
    
    
    190Segment profit
    
    $
    8,258
    
    
    
    8,326Segment assets:Investing
    
    $
    479,238
    
    
    
    439,419Assets not allocated
    
    
    186,505
    
    
    
    151,959Total consolidated assets
    
    $
    665,743
    
    
    
    591,378
  18




---



##### 



For the Three MonthsEnded March 31,2008
    
    
    2007(In thousands)Total revenues:Segment revenues
    
    $
    53,215
    
    
    
    59,620Other
    
    
    86
    
    
    
    123Total consolidated revenues
    
    $
    53,301
    
    
    
    59,743Income before income taxes:Segment profit
    
    $
    8,258
    
    
    
    8,326Unallocated amounts:Other income
    
    
    86
    
    
    
    123Corporate expenses
    
    
    (197
    )
    
    
    (133
    )Interest expense
    
    
    (596
    )
    
    
    (686
    )Income
before income taxes
    
    $
    7,551
    
    
    
    7,630
 19




---



##### 



Property
    
    
    Casualty
    
    
    Other
    
    
    Consolidated(In thousands)Three Months Ended March 31, 2008Property and Casualty
    
    $
    15,144
    
    
    
    32,375
    
    
    
    
    
    
    
    47,519Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    826
    
    
    
    826Earned premiums
    
    $
    15,144
    
    
    
    32,375
    
    
    
    826
    
    
    
    48,345Three Months Ended March 31, 2007Property and Casualty
    
    $
    18,970
    
    
    
    34,398
    
    
    
    
    
    
    
    53,368Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    1,020
    
    
    
    1,020Earned premiums
    
    $
    18,970
    
    
    
    34,398
    
    
    
    1,020
    
    
    
    54,388
  (12) Dividends to Common Shareholders
   (13) Line of Credit
  (14) Definitive Agreement
  
 Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
  20




---



##### 




    
    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;
    
    sever 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 may result in a reduction of new
or renewal business;
    
    we may incur increased costs in competing for underwriting revenue. If we are unable to
compete effectively with the large number of companies in the insurance industry for
underwriting revenues, our underwriting revenues and net income may decline;
    
    we distribute our products through a select group of general agents, ten 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, illiquid credit markets, 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, which may adversely affect our ability to
achieve our business objectives. In addition, 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;
    
    we are subject to judicial decisions affecting insurance and tort law, which may
adversely affect our ability to achieve our business objectives;
 21




---



##### 




    
    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 risks for us, which could lead to increased costs or business disruptions;
    
    our 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 risks; 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.
 22




---



##### 



Expense Ratio.
 Combined Ratio.
 Critical Accounting Policies
   Loss and Loss Expense Reserves.
 Reinsurance Recoverables.
 Impairment of Investments.
  23




---



##### 



Valuation of Investments
   Deferred Policy Acquisition Costs.
 Federal Income Taxes.
  24




---



##### 



Results of Operations
  For the Three MonthsEnded March 31,2008
    
    
    2007(In thousands)Selected Financial Data:Gross written premiums
    
    $
    53,866
    
    
    
    58,455Premiums earned
    
    
    48,345
    
    
    
    54,388Net investment income
    
    
    5,332
    
    
    
    5,433Net realized investment losses
    
    
    (462
    )
    
    
    (201
    )Total revenues
    
    
    53,301
    
    
    
    59,743Total expenses
    
    
    45,750
    
    
    
    52,113Net income
    
    
    5,224
    
    
    
    5,379Key Financial Ratios:Loss and loss expense ratio
    
    
    57.5
    %
    
    
    62.3
    %Expense ratio
    
    
    35.9
    %
    
    
    32.3
    %Combined ratio
    
    
    93.4
    %
    
    
    94.6
    %
 25




---



##### 



Overview of Operating Results
        Revenues
 Premiums
   26




---



##### 




    
    property/casualty; and
    
    other (including exited lines).
   For the Three MonthsEnded March 31,2008
    
    
    2007(In thousands)Gross written premiumsProperty/casualty
    
    $
    52,408
    
    
    
    57,703Other (including exited lines)
    
    
    1,458
    
    
    
    752Total gross written premiums
    
    
    53,866
    
    
    
    58,455Ceded written premiums
    
    
    8,713
    
    
    
    8,395Net written premiums
    
    $
    45,153
    
    
    
    50,060Net premiums earned
    
    $
    48,345
    
    
    
    54,388Net written premiums to gross written premiums
    
    
    83.8
    %
    
    
    85.6
    %Net premiums earned to net written premiums
    
    
    107.1
    %
    
    
    108.6
    %Net writings ratio (1)
    
    
    1.1
    
    
    
    1.4
 
 (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. 27




---



##### 



Gross Written Premiums
  Net Written Premiums and Premiums Earned
    Net Investment Income
   Net Realized Investment Losses
   Expenses
 Losses and Loss Expenses
  28




---



##### 



29




---



##### 



March 31, 2008
    
    
    December 31, 2007Case
    
    
    IBNR
    
    
    Total
    
    
    Case
    
    
    IBNR
    
    
    TotalProperty and casualty:Casualty
    
    $
    57,686
    
    
    
    157,828
    
    
    
    215,514
    
    
    
    57,035
    
    
    
    152,790
    
    
    
    209,825Property
    
    
    11,935
    
    
    
    9,397
    
    
    
    21,332
    
    
    
    11,427
    
    
    
    13,564
    
    
    
    24,991Other (including exited lines):Commercial auto
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    97
    
    
    
    4
    
    
    
    101Workers compensation
    
    
    1,390
    
    
    
    1,862
    
    
    
    3,252
    
    
    
    1,428
    
    
    
    1,602
    
    
    
    3,030Surety
    
    
    
    
    
    
    468
    
    
    
    468
    
    
    
    
    
    
    
    443
    
    
    
    443Net reserves for losses and loss expenses
    
    
    71,019
    
    
    
    169,555
    
    
    
    240,574
    
    
    
    69,987
    
    
    
    168,403
    
    
    
    238,390Plus reinsurance recoverables on unpaid
losses at end of period
    
    
    13,285
    
    
    
    26,369
    
    
    
    39,654
    
    
    
    12,865
    
    
    
    27,998
    
    
    
    40,863Gross reserves for losses and loss expenses
    
    $
    84,304
    
    
    
    195,924
    
    
    
    280,228
    
    
    
    82,852
    
    
    
    196,401
    
    
    
    279,253
  30




---



##### 



For the Three Months Ended March 31,2008
    
    
    2007(In thousands)Net incurred losses and loss expenses attributable to
insured events of:Current year
    
    $
    31,735
    
    
    
    34,868Prior years:Property and casualtyCasualty
    
    
    (386
    )
    
    
    (1,216
    )Property
    
    
    (3,671
    )
    
    
    222Other (including exited lines):Commercial automobile
    
    
    (104
    )
    
    
    2Workers compensation
    
    
    292
    
    
    
    98Other
    
    
    (81
    )
    
    
    (97
    )Total prior years
    
    
    (3,950
    )
    
    
    (991
    )Net incurred
    
    $
    27,785
    
    
    
    33,877Net loss and loss expense ratio:Current year
    
    
    65.6
    %
    
    
    64.1
    %Prior years
    
    
    (8.1
    )
    
    
    (1.8
    )Net loss and loss expense ratio:
    
    
    57.5
    %
    
    
    62.3
    %
     31




---



##### 



Operating Expenses
  For the Three MonthsEnded March 31,2008
    
    
    2007(In thousands)Amortization of deferred policy acquisition costs (ADAC)
    
    $
    14,176
    
    
    
    13,699Other operating expenses
    
    
    3,193
    
    
    
    3,851ADAC and other operating expenses
    
    
    17,369
    
    
    
    17,550Interest expense
    
    
    596
    
    
    
    686Total operating expenses
    
    $
    17,965
    
    
    
    18,236Expense ratio:ADAC
    
    
    29.3
    %
    
    
    25.2
    %Other operating expenses
    
    
    6.6
    %
    
    
    7.1
    %Total expense ratio (1)
    
    
    35.9
    %
    
    
    32.3
    %
 
 (1)
    
    Interest expense is not included in the calculation of the expense ratio.    Income Taxes
   32




---



##### 



Liquidity and Capital Resources
       33




---



##### 



Investment Portfolio
   Accounting Standards
 The
Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115
 34




---



##### 



Fair
Value Measurements
  Effective Date of FASB Statement No. 157 Fair
Value Measurements
  Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109.
 Accounting for Certain Hybrid Financial
Instruments
 Accounting by
Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges
of Insurance Contracts
 35




---



##### 



Item 3. Quantitative And Qualitative Disclosures About Market Risk
   
 Item 4. Controls And Procedures
     36




---



##### 



PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 2.1
    
    Agreement and Plan of Merger, dated February 20, 2008, by and among Meadowbrook Insurance
Group, Inc., ProCentury Corporation and MBKPC Corp. (Incorporated by reference from the
Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission
(SEC) on February 21, 2008.)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 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 Act
 37




---



##### 



32.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (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. 38




---



##### 



SIGNATURE
  PROCENTURY CORPORATIONDate May 12, 2008
    By:
    /s/ Erin E. WestErin E. WestChief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 39




---



##### 



EXHIBIT INDEX
 2.1
    
    Agreement and Plan of Merger, dated February 20, 2008, by and among Meadowbrook Insurance
Group, Inc., ProCentury Corporation and MBKPC Corp. (Incorporated by reference from the
Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission
(SEC) on February 21, 2008.)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 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. 40