##### 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 March 31, 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
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##### Table of Contents



PROCENTURY CORPORATION
 QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2007
 INDEX
 PagePART I: FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Condensed Statements of Operations (unaudited)  For the three months ended
March 31, 2007 and 2006
    
    
    3Consolidated Condensed Balance Sheets  March 31, 2007 (unaudited) and December 31, 2006
    
    
    4Consolidated Condensed Statements of Shareholders Equity and Comprehensive Income
(unaudited)  For the three months ended March 31, 2007 and 2006
    
    
    5Consolidated Condensed Statements of Cash Flows (unaudited)  For the three months ended
March 31, 2007 and 2006
    
    
    6Notes to Consolidated Condensed Financial Statements (unaudited)  March 31, 2007
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PROCENTURY CORPORATION AND SUBSIDIARIES
 
    Three Months Ended March 31,2007
    
    
    2006Premiums earned
    
    $
    54,388
    
    
    
    49,002Net investment income
    
    
    5,433
    
    
    
    4,426Net realized investment (losses) gains
    
    
    (201
    )
    
    
    21Other income
    
    
    123
    
    
    
    134Total revenues
    
    
    59,743
    
    
    
    53,583Losses and loss expenses
    
    
    33,877
    
    
    
    30,439Amortization of deferred policy acquisition costs
    
    
    13,699
    
    
    
    12,066Other operating expenses
    
    
    3,851
    
    
    
    4,057Interest expense
    
    
    686
    
    
    
    543Total expenses
    
    
    52,113
    
    
    
    47,105Income before income tax expense
    
    
    7,630
    
    
    
    6,478Income tax expense
    
    
    2,251
    
    
    
    1,878Net income
    
    $
    5,379
    
    
    
    4,600Basic net income per share
    
    $
    0.41
    
    
    
    0.35Diluted net income per share
    
    $
    0.40
    
    
    
    0.35Weighted average of shares outstanding  basic
    
    
    13,227,427
    
    
    
    13,100,705Weighted average of shares outstanding  diluted
    
    
    13,421,607
    
    
    
    13,200,571
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
   March 31,2007
    
    
    December 31,(Unaudited)
    
    
    2006AssetsInvestmentsFixed maturities:Available-for-sale, at fair value (amortized cost 2007, $365,268; 2006, $362,066)
    
    $
    359,401
    
    
    
    358,422Held-to-maturity, at amortized cost (fair value 2007, $1,103; 2006, $1,101)
    
    
    1,110
    
    
    
    1,114Equities (available-for-sale):Equity securities, at fair value (cost 2007, $29,470; 2006, $28,112)
    
    
    29,525
    
    
    
    28,188Bond mutual funds, at fair value (cost 2007, $14,513; 2006, $14,876)
    
    
    14,485
    
    
    
    14,755Short-term investments, at amortized cost
    
    
    34,898
    
    
    
    25,623Total investments
    
    
    439,419
    
    
    
    428,102Cash and equivalents
    
    
    9,764
    
    
    
    7,960Premiums in course of collection, net
    
    
    36,017
    
    
    
    37,428Deferred policy acquisition costs
    
    
    25,996
    
    
    
    26,915Prepaid reinsurance premiums
    
    
    14,457
    
    
    
    14,051Reinsurance recoverable on paid losses, net
    
    
    4,739
    
    
    
    7,524Reinsurance recoverable on unpaid losses, net
    
    
    37,494
    
    
    
    36,104Deferred federal income tax asset
    
    
    12,639
    
    
    
    11,561Other assets
    
    
    10,853
    
    
    
    9,403Total assets
    
    $
    591,378
    
    
    
    579,048Liabilities and Shareholders EquityLoss and loss expense reserves
    
    $
    260,181
    
    
    
    250,672Unearned premiums
    
    
    123,698
    
    
    
    127,620Long term debt
    
    
    25,000
    
    
    
    25,000Line of credit
    
    
    4,650
    
    
    
    4,000Accrued expenses and other liabilities
    
    
    12,301
    
    
    
    9,778Reinsurance balances payable
    
    
    5,520
    
    
    
    7,706Collateral held
    
    
    10,591
    
    
    
    10,370Income taxes payable
    
    
    2,189
    
    
    
    1,514Total liabilities
    
    
    444,130
    
    
    
    436,660Shareholders equity:Common stock, without par value:Common shares  Issued and outstanding 13,358,867 shares at
March 31, 2007 and 13,248,323 shares issued and
outstanding at December 31, 2006
    
    
    
    
    
    
    Additional paid-in capital
    
    
    102,370
    
    
    
    100,954Retained earnings
    
    
    48,675
    
    
    
    43,830Accumulated other comprehensive loss, net of taxes
    
    
    (3,797
    )
    
    
    (2,396
    )Total shareholders equity
    
    
    147,248
    
    
    
    142,388Total liabilities and shareholders equity
    
    $
    591,378
    
    
    
    579,048
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
  
 Three Months Ended March 31,2007
    
    
    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
    
    
    414
    
    
    
    302Tax benefit on share compensation plans
    
    
    305
    
    
    
    32Exercise of share options
    
    
    697
    
    
    
    End of period
    
    
    102,370
    
    
    
    99,841Retained earnings:Beginning of period
    
    
    43,830
    
    
    
    24,846Net income
    
    
    5,379
    
    
    
    4,600Dividend declared (2007, $0.04/share and 2006, $0.03/share)
    
    
    (534
    )
    
    
    (396
    )End of period
    
    
    48,675
    
    
    
    29,050Unearned 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
    
    
    (1,401
    )
    
    
    (1,770
    )End of period
    
    
    (3,797
    )
    
    
    (4,920
    )Total shareholders equity
    
    $
    147,248
    
    
    
    123,971Comprehensive Income (Loss)Net income
    
    $
    5,379
    
    
    
    4,600Other comprehensive loss:Unrealized losses on securities:Unrealized holding losses arising during the period:Gross
    
    
    (2,357
    )
    
    
    (2,703
    )Related federal income tax benefit
    
    
    825
    
    
    
    947Net unrealized losses
    
    
    (1,532
    )
    
    
    (1,756
    )Reclassification adjustment for (losses) gains included in net incomeGross
    
    
    (201
    )
    
    
    21Related federal income tax benefit (expense)
    
    
    70
    
    
    
    (7
    )Net reclassification adjustment
    
    
    (131
    )
    
    
    14Other comprehensive loss
    
    
    (1,401
    )
    
    
    (1,770
    )Total comprehensive income
    
    $
    3,978
    
    
    
    2,830
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
  
 Three Months Ended March 31,2007
    
    
    2006Cash flows provided by operating activities:Net income
    
    $
    5,379
    
    
    
    4,600Adjustments:Net realized investment losses (gains)
    
    
    201
    
    
    
    (21
    )Deferred federal income tax benefit
    
    
    (329
    )
    
    
    (583
    )Share-based compensation expense
    
    
    414
    
    
    
    302Changes in assets and liabilities:Premiums in course of collection, net
    
    
    1,411
    
    
    
    1,751Deferred policy acquisition costs
    
    
    919
    
    
    
    (769
    )Prepaid reinsurance premiums
    
    
    (406
    )
    
    
    298Reinsurance recoverable on paid and unpaid losses, net
    
    
    1,395
    
    
    
    (3,012
    )Income taxes payable/receivable
    
    
    675
    
    
    
    2,180Losses and loss expense reserves
    
    
    9,509
    
    
    
    12,133Collateral held
    
    
    221
    
    
    
    (501
    )Unearned premiums
    
    
    (3,922
    )
    
    
    1,132Other, net
    
    
    (3,843
    )
    
    
    1,308Net cash provided by operating activities
    
    
    11,624
    
    
    
    18,818Cash flows used in investing activities:Purchases of equity securities
    
    
    (6,385
    )
    
    
    (3,178
    )Purchases of fixed maturity securities available-for-sale
    
    
    (45,415
    )
    
    
    (29,175
    )Proceeds from sales of equity securities
    
    
    5,555
    
    
    
    4,627Proceeds from sales and maturities of fixed maturities available-for-sale
    
    
    41,573
    
    
    
    9,481Change in short-term investments
    
    
    (9,275
    )
    
    
    622Change in securities receivable/payable
    
    
    3,009
    
    
    
    (270
    )Net cash used in investing activities
    
    
    (10,938
    )
    
    
    (17,893
    )Cash flows provided by (used in) financing activities:Dividend paid to shareholders
    
    
    (534
    )
    
    
    (396
    )Tax benefit on share compensation plans
    
    
    305
    
    
    
    32Draw on line of credit
    
    
    650
    
    
    
    Exercise of share options
    
    
    697
    
    
    
    Net cash provided by (used in) financing activities
    
    
    1,118
    
    
    
    (364
    )Increase in cash and equivalents
    
    
    1,804
    
    
    
    561Cash and equivalents at beginning of period
    
    
    7,960
    
    
    
    5,628Cash and equivalents at end of period
    
    $
    9,764
    
    
    
    6,189Supplemental disclosure of cash flow information:Interest paid
    
    $
    909
    
    
    
    548Federal income taxes paid
    
    $
    1,600
    
    
    
    250
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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:
 7




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Three Months Ended March 31, 2007(In thousands, except 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
 Three Months Ended March 31, 2006(In thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    4,600
    
    
    
    13,100,705
    
    
    $
    0.35Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    99,866
    
    
    
    Diluted EPSNet income
    
    $
    4,600
    
    
    
    13,200,571
    
    
    $
    0.35
 (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:
 March 31, 2007(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
    
    
    1,022
    
    
    
    
    
    
    
    (17
    )
    
    
    1,005Total
    
    $
    1,110
    
    
    
    10
    
    
    
    (17
    )
    
    
    1,103
 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
 The amortized cost, gross unrealized gains and losses, and estimated fair value of
fixed-maturity and equity securities classified as available-for-sale were as follows:
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March 31, 2007(In thousands)Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    FairAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueFixed maturities:U.S. Treasury securities
    
    $
    3,621
    
    
    
    1
    
    
    
    (34
    )
    
    
    3,588Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    14,549
    
    
    
    2
    
    
    
    (151
    )
    
    
    14,400Obligations of states and political subdivisions
    
    
    134,903
    
    
    
    195
    
    
    
    (829
    )
    
    
    134,269Corporate securities
    
    
    36,195
    
    
    
    137
    
    
    
    (593
    )
    
    
    35,739Mortgage-backed securities
    
    
    72,694
    
    
    
    5
    
    
    
    (956
    )
    
    
    71,743Collateralized mortgage obligations
    
    
    58,126
    
    
    
    220
    
    
    
    (687
    )
    
    
    57,659Asset-backed securities
    
    
    45,180
    
    
    
    262
    
    
    
    (3,439
    )
    
    
    42,003Total fixed maturities
    
    
    365,268
    
    
    
    822
    
    
    
    (6,689
    )
    
    
    359,401Equities:Equity securities
    
    
    29,470
    
    
    
    384
    
    
    
    (329
    )
    
    
    29,525Bond mutual funds
    
    
    14,513
    
    
    
    105
    
    
    
    (133
    )
    
    
    14,485Total equities
    
    
    43,983
    
    
    
    489
    
    
    
    (462
    )
    
    
    44,010Total
    
    $
    409,251
    
    
    
    1,311
    
    
    
    (7,151
    )
    
    
    403,411
 December 31, 2006(In thousands)Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    FairAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    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
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March 31, 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
    
    
    
    
    
    
    
    
    
    
    1,005
    
    
    
    (17
    )
    
    
    1,005
    
    
    
    (17
    )Total
    
    $
    
    
    
    
    
    
    
    
    1,005
    
    
    
    (17
    )
    
    
    1,005
    
    
    
    (17
    )
  March 31, 2007Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
 
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    Estimated
    
    
    GrossFair
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    

Fair Value
    
    

    Loss
    
    

    Value
    
    
    Loss(In thousands)Fixed maturity securities:U.S. Treasury securities
    
    $
    
    
    
    
    
    
    
    
    3,312
    
    
    
    (34
    )
    
    
    3,312
    
    
    
    (34
    )Obligations of U.S. government
corporations and agencies
    
    
    6,733
    
    
    
    (30
    )
    
    
    6,671
    
    
    
    (121
    )
    
    
    13,404
    
    
    
    (151
    )Obligations of states and political
subdivisions
    
    
    51,089
    
    
    
    (258
    )
    
    
    42,557
    
    
    
    (571
    )
    
    
    93,646
    
    
    
    (829
    )Corporate securities
    
    
    1,525
    
    
    
    (16
    )
    
    
    27,466
    
    
    
    (577
    )
    
    
    28,991
    
    
    
    (593
    )Mortgage-backed securities
    
    
    39,059
    
    
    
    (142
    )
    
    
    32,365
    
    
    
    (814
    )
    
    
    71,424
    
    
    
    (956
    )Collateralized mortgage obligations
    
    
    12,007
    
    
    
    (362
    )
    
    
    21,587
    
    
    
    (325
    )
    
    
    33,594
    
    
    
    (687
    )Asset-backed securities
    
    
    14,712
    
    
    
    (2,088
    )
    
    
    11,615
    
    
    
    (1,351
    )
    
    
    26,327
    
    
    
    (3,439
    )Total
    
    
    125,125
    
    
    
    (2,896
    )
    
    
    145,573
    
    
    
    (3,793
    )
    
    
    270,698
    
    
    
    (6,689
    )Equities:Equity securities
    
    
    7,164
    
    
    
    (122
    )
    
    
    4,461
    
    
    
    (207
    )
    
    
    11,625
    
    
    
    (329
    )Bond mutual funds
    
    
    
    
    
    
    
    
    
    
    5,159
    
    
    
    (133
    )
    
    
    5,159
    
    
    
    (133
    )Total
    
    
    7,164
    
    
    
    (122
    )
    
    
    9,620
    
    
    
    (340
    )
    
    
    16,784
    
    
    
    (462
    )Grand Total
    
    $
    132,289
    
    
    
    (3,018
    )
    
    
    155,193
    
    
    
    (4,133
    )
    
    
    287,482
    
    
    
    (7,151
    )
  10




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##### Table of Contents



(4)
    
    Loss and Loss Expense Reserves
      (5)
    
    Reinsurance
  11




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##### Table of Contents



For the Three MonthsEnded March 31,2007
    
    
    2006Premiums written:Direct
    
    $
    57,428
    
    
    
    57,275Assumed
    
    
    1,027
    
    
    
    754Ceded
    
    
    (8,395
    )
    
    
    (7,597
    )Net premiums written
    
    $
    50,060
    
    
    
    50,432Premiums earned:Direct
    
    
    61,096
    
    
    
    56,085Assumed
    
    
    1,281
    
    
    
    812Ceded
    
    
    (7,989
    )
    
    
    (7,895
    )Net premiums earned
    
    $
    54,388
    
    
    
    49,002Losses and loss expenses incurred:Direct
    
    $
    36,730
    
    
    
    34,294Assumed
    
    
    123
    
    
    
    104Ceded
    
    
    (2,976
    )
    
    
    (3,959
    )Net losses and loss expenses incurred
    
    $
    33,877
    
    
    
    30,439
   (6)
    
    Deferred Policy Acquisition Costs
  For the Three MonthsEnded March 31,2007
    
    
    2006Balance at beginning of year
    
    $
    26,915
    
    
    
    20,649Policy acquisition costs deferred
    
    
    12,780
    
    
    
    12,835Amortization of deferred policy acquisition costs
    
    
    (13,699
    )
    
    
    (12,066
    )Balance at end of quarter
    
    $
    25,996
    
    
    
    21,418
  (7)
    
    Federal Income Taxes
  12




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##### Table of Contents



(8)
    
    Commitments and Contingencies
   (9)
    
    Employee Benefits
         13




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##### Table of Contents



March 31, 2007Weighted-Number of
    
    
    AverageShares
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    505,900
    
    
    $
    10.58Changes during the period:Granted
    
    
    85,000
    
    
    
    19.97Exercised
    
    
    (66,258
    )
    
    
    10.51Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Outstanding at end of period
    
    
    524,642
    
    
    $
    12.11Exercisable at end of period
    
    
    322,635
    
    
    $
    10.53
  Three MonthsEnded March 31,2007Risk-free interest rate
    
    
    4.46
    %Expected dividends
    
    
    0.71
    %Expected volatility
    
    
    25.07
    %Weighted average expected term
    
    
    6.25 Years
  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
    
    
    
    8.2
    
    
    $
    10.20
    
    
    
    
    $
    156,000
    
    
    
    7,326
    
    
    $
    10.20
    
    
    $
    95,238$10.50
    
    
    309,600
    
    
    
    7.1
    
    
    $
    10.50
    
    
    
    
    $
    3,931,920
    
    
    
    278,402
    
    
    $
    10.50
    
    
    $
    3,535,705$10.64
    
    
    106,042
    
    
    
    8.8
    
    
    $
    10.64
    
    
    
    
    $
    1,331,888
    
    
    
    38,583
    
    
    $
    10.64
    
    
    $
    484,602$13.04
    
    
    12,000
    
    
    
    9.2
    
    
    $
    13.04
    
    
    
    
    $
    121,920
    
    
    
    3,324
    
    
    $
    13.04
    
    
    $
    33,772$19.97
    
    
    85,000
    
    
    
    9.9
    
    
    $
    19.97
    
    
    
    
    $
    274,550
    
    
    
    
    
    
    $
    19.97
    
    
    
    $
    5,816,278
    
    
    
    
    
    
    
    
    
    
    $
    4,149,318
  14




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##### Table of Contents



WeightedNumber of
    
    
    AverageShares
    
    
    Grant PriceOutstanding at beginning of period
    
    
    45,156
    
    
    $
    10.19Changes during the period:Granted
    
    
    
    
    
    
    Vested
    
    
    (4,728
    )
    
    
    10.33Cancelled
    
    
    
    
    
    
    Outstanding at end of period
    
    
    40,428
    
    
    $
    10.17
  WeightedNumber of
    
    
    AverageShares
    
    
    Grant PriceOutstanding at beginning of period
    
    
    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
  (10) Segment Reporting Disclosures
      15




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##### Table of Contents



For the Three MonthsEnded March 31,2007
    
    
    2006(In thousands)Segment revenue:Property and Casualty
    
    $
    53,368
    
    
    
    48,343Investing
    
    
    5,232
    
    
    
    4,447Other (including exited lines)
    
    
    1,020
    
    
    
    659Segment revenue
    
    $
    59,620
    
    
    
    53,449Segment profit (loss):Property and Casualty
    
    $
    2,904
    
    
    
    2,288Investing
    
    
    5,232
    
    
    
    4,447Other (including exited lines)
    
    
    190
    
    
    
    377Segment profit
    
    $
    8,326
    
    
    
    7,112Segment assets:Investing
    
    $
    439,419
    
    
    
    376,082Assets not allocated
    
    
    151,959
    
    
    
    117,257Total consolidated assets
    
    $
    591,378
    
    
    
    493,339
  For the Three MonthsEnded March 31,2007
    
    
    2006(In thousands)Total revenues:Segment revenues
    
    $
    59,620
    
    
    
    53,449Other
    
    
    123
    
    
    
    134Total consolidated revenues
    
    $
    59,743
    
    
    
    53,583Income before income taxes:Segment profit
    
    $
    8,326
    
    
    
    7,112Unallocated amounts:Other income
    
    
    123
    
    
    
    134Corporate expenses
    
    
    (133
    )
    
    
    (225
    )Interest expense
    
    
    (686
    )
    
    
    (543
    )Income before income taxes
    
    $
    7,630
    
    
    
    6,478
 16




---



##### Table of Contents



Property
    
    
    Casualty
    
    
    Other
    
    
    Consolidated(In thousands)Three 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
    
    
    
    54,388Three Months
Ended March 31,
2006Property and
Casualty
    
    $
    14,433
    
    
    
    33,910
    
    
    
    
    
    
    
    48,343Other
(including exited
lines)
    
    
    
    
    
    
    
    
    
    
    659
    
    
    
    659Earned premiums
    
    $
    14,433
    
    
    
    33,910
    
    
    
    659
    
    
    
    49,002
  (11) Dividends to Common Shareholders
   (12) Line of Credit
  
 Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
  
    
    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;
    
    a decline in our financial rating assigned by A.M. Best & Company may result in a
reduction of new or renewal business;
 17




---



##### Table of Contents




    
    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 these regulations, we may be subject to penalties,
including fines and suspensions, which may adversely affect our financial condition and
results of operations;
    
    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;
    
    we may not be successful in developing our new specialty lines that could cause us to
experience losses;
    
    if we lose key personnel or are unable to recruit qualified personnel, our ability to
implement our business strategies could be delayed or hindered;
    
    our investment results and, therefore, our financial condition may be impacted by
changes in the business, financial condition or operating results of the entities in which
we invest, as well as changes in government monetary policies, general economic conditions
and overall capital market conditions, all of which impact interest rates;
    
    we distribute our products through a select group of general agents, five of whom
account for a significant part of our business, and such relationships could be
discontinued or cease to be profitable;
    
    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;
    
    if we are not able to renew our existing reinsurance or obtain new reinsurance, either
our net exposure would increase or we would have to reduce the level of our underwriting
commitment;
    
    our business is cyclical in nature, which will affect our financial performance and may
affect the price of our common shares;
    
    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;
    
    severe weather conditions and other catastrophes may result in an increase in the
number and amount of claims experienced by our insureds;
    
    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: and
    
    managing technology initiatives and meeting new data security requirements present
significant challenges to us.
  Overview
 ®
  Written and Unearned Premium.
 18




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##### Table of Contents



Form 10-Q
 Loss and Loss Expense Ratio.
 Expense Ratio.
 Combined Ratio.
 Critical Accounting Policies
   Loss and Loss Expense Reserves.
 Reinsurance Recoverables.
 Impairment of Investments.
 19




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##### Table of Contents



Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets,
  Deferred Policy Acquisition Costs.
 Federal Income Taxes.
  Results of Operations
  20




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##### Table of Contents



For the Three MonthsEnded March 31,2007
    
    
    2006(In thousands)Selected Financial Data:Gross written premiums
    
    $
    58,455
    
    
    
    58,029Premiums earned
    
    
    54,388
    
    
    
    49,002Net investment income
    
    
    5,433
    
    
    
    4,426Net realized investment gains (losses)
    
    
    (201
    )
    
    
    21Total revenues
    
    
    59,743
    
    
    
    53,583Total expenses
    
    
    52,113
    
    
    
    47,105Net income
    
    
    5,379
    
    
    
    4,600Key Financial Ratios:Loss and loss expense ratio
    
    
    62.3
    %
    
    
    62.1
    %Expense ratio
    
    
    32.3
    %
    
    
    32.9
    %Combined ratio
    
    
    94.6
    %
    
    
    95.0
    %
 21




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##### Table of Contents



Overview of Operating Results
     Revenues
 Premiums
    22




---



##### Table of Contents




    
    property/casualty; and
    
    other (including exited lines).
   For the Three MonthsEnded March 31,2007
    
    
    2006(In thousands)Gross written premiumsProperty/casualty
    
    $
    57,703
    
    
    
    57,090Other (including exited lines)
    
    
    752
    
    
    
    939Total gross written premiums
    
    
    58,455
    
    
    
    58,029Ceded written premiums
    
    
    8,395
    
    
    
    7,597Net written premiums
    
    $
    50,060
    
    
    
    50,432Net premiums earned
    
    $
    54,388
    
    
    
    49,002Net written premiums to gross written premiums
    
    
    85.6
    %
    
    
    86.9
    %Net premiums earned to net written premiums
    
    
    108.6
    %
    
    
    97.2
    %Net writings ratio (1)
    
    
    1.4
    
    
    
    1.6
 
 (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
  23




---



##### Table of Contents



Net Written Premiums and Premiums Earned
    Net Investment Income
   Net Realized Investment Losses
   Expenses
 Losses and Loss Expenses
  
    
    the number of exposures covered in the current year;
    
    trends in claim frequency and claim severity;
    
    changes in the cost of adjusting claims;
 24




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##### Table of Contents




    
    changes in the legal environment relating to coverage interpretation, theories of liability and jury determinations; and
    
    the re-estimation of prior years reserves in the current year.
       25




---



##### Table of Contents



March 31
    
    
    December 312007
    
    
    2006(In thousands)Property/casualty:Casualty
    
    $
    193,694
    
    
    
    188,370Property
    
    
    25,049
    
    
    
    22,302Other (including exited lines):Commercial auto
    
    
    133
    
    
    
    147Workers compensation
    
    
    3,208
    
    
    
    3,220Surety
    
    
    603
    
    
    
    529Net reserves for losses and loss expenses
    
    
    222,687
    
    
    
    214,568Plus reinsurance recoverables on unpaid
losses at end of period
    
    
    37,494
    
    
    
    36,104Gross reserves for losses and loss expenses
    
    $
    260,181
    
    
    
    250,672
 Operating Expenses
  For the Three MonthsEnded March 31,2007
    
    
    2006(In thousands)Amortization of deferred policy acquisition costs (ADAC)
    
    $
    13,699
    
    
    
    12,066Other operating expenses
    
    
    3,851
    
    
    
    4,057ADAC and other operating expenses
    
    
    17,550
    
    
    
    16,123Interest expense
    
    
    686
    
    
    
    543Total operating expenses
    
    $
    18,236
    
    
    
    16,666Expense ratio:ADAC
    
    
    25.2
    %
    
    
    24.6
    %Other operating expenses
    
    
    7.1
    %
    
    
    8.3
    %Total expense ratio (1)
    
    
    32.3
    %
    
    
    32.9
    %
 
 (1)
    
    Interest expense is not included in the calculation of the expense ratio.  26




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##### Table of Contents



Income Taxes
  Liquidity and Capital Resources
        27




---



##### Table of Contents



Investment Portfolio
   Accounting Standards
   28




---



##### Table of Contents




  
  
 Item 3. Quantitative And Qualitative Disclosures About Market Risk
  29




---



##### Table of Contents



Item 4. Controls And Procedures
     30




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##### Table of Contents



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
 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. 31




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##### Table of Contents



SIGNATURE
  PROCENTURY CORPORATIONDate May 8, 2007
    By:
    /s/ Erin E. WestErin E. WestChief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 32




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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. 33