##### 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, 2006
 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 Avenue
    
    43082Westerville, Ohio
    
    (Zip Code)(Address of principal executive offices)
 (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 March 31, 2006
 INDEX
  
 PagePART I: FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Condensed Statements of Operations  For the three months ended March 31, 2006
and 2005
    
    
    3Consolidated Condensed Balance Sheets  March 31, 2006 and December 31, 2005
    
    
    4Consolidated
Condensed Statements of Shareholders Equity and Comprehensive
Income (Loss) 
For the three months ended March 31, 2006 and 2005
    
    
    5Consolidated Condensed Statements of Cash Flows  For the three months ended March 31, 2006
and 2005
    
    
    6Notes to Consolidated Condensed Financial Statements  March 31, 2006
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    30EX-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 March 31,2006
    
    
    2005Premiums earned
    
    $
    49,002
    
    
    
    41,520Net investment income
    
    
    4,426
    
    
    
    3,159Net realized investment gains (losses)
    
    
    21
    
    
    
    (59
    )Total revenues
    
    
    53,449
    
    
    
    44,620Losses and loss expenses
    
    
    30,439
    
    
    
    25,727Amortization of deferred policy acquisition costs
    
    
    12,066
    
    
    
    10,220Other operating expenses
    
    
    3,923
    
    
    
    3,065Severance expense
    
    
    
    
    
    
    793Interest expense
    
    
    543
    
    
    
    417Total expenses
    
    
    46,971
    
    
    
    40,222Income before income tax expense
    
    
    6,478
    
    
    
    4,398Income tax expense
    
    
    1,878
    
    
    
    1,319Net income
    
    $
    4,600
    
    
    
    3,079Basic net income per share
    
    $
    0.35
    
    
    
    0.24Diluted net income per share
    
    $
    0.35
    
    
    
    0.23Weighted average of shares outstanding  basic
    
    
    13,100,705
    
    
    
    13,046,339Weighted average of shares outstanding  diluted
    
    
    13,200,571
    
    
    
    13,129,546
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 March 31,
    
    
    December 31,2006
    
    
    2005AssetsInvestmentsFixed maturities:Available-for-sale, at fair value
(amortized cost 2006, $325,642; 2005, $306,237)
    
    $
    318,836
    
    
    
    302,632Held-to-maturity, at amortized cost
(fair value 2006, $1,101; 2005, $1,118)
    
    
    1,125
    
    
    
    1,128Equities (available-for-sale):Equity securities, at fair value (cost 2006, $28,657; 2005, $27,521)
    
    
    28,401
    
    
    
    26,941Bond mutual funds, at fair value (cost 2006, $15,732; 2005, $18,516)
    
    
    15,221
    
    
    
    17,852Short-term investments, at amortized cost
    
    
    12,499
    
    
    
    12,229Total investments
    
    
    376,082
    
    
    
    360,782Cash and equivalents
    
    
    6,189
    
    
    
    5,628Premiums in course of collection, net
    
    
    13,098
    
    
    
    14,849Deferred policy acquisition costs
    
    
    21,418
    
    
    
    20,649Prepaid reinsurance premiums
    
    
    10,691
    
    
    
    10,989Reinsurance recoverable on paid losses, net
    
    
    7,703
    
    
    
    6,422Reinsurance recoverable on unpaid losses, net
    
    
    39,179
    
    
    
    37,448Deferred federal income tax asset
    
    
    10,687
    
    
    
    9,151Other assets
    
    
    8,292
    
    
    
    8,227Total assets
    
    $
    493,339
    
    
    
    474,145Liabilities and Shareholders EquityLoss and loss expense reserves
    
    $
    223,780
    
    
    
    211,647Unearned premiums
    
    
    96,763
    
    
    
    95,631Long term debt
    
    
    25,000
    
    
    
    25,000Accrued expenses and other liabilities
    
    
    7,223
    
    
    
    6,893Reinsurance balances payable
    
    
    3,724
    
    
    
    2,572Collateral held
    
    
    10,513
    
    
    
    11,014Income taxes payable
    
    
    2,365
    
    
    
    185Total liabilities
    
    
    369,368
    
    
    
    352,942Shareholders equity:Common stock, without par value:Common shares  Issued and outstanding 13,211,019 shares at
March 31, 2006
and December 31, 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    99,841
    
    
    
    100,202Retained earnings
    
    
    29,050
    
    
    
    24,846Unearned compensation
    
    
    
    
    
    
    (695
    )Accumulated other comprehensive loss, net of taxes
    
    
    (4,920
    )
    
    
    (3,150
    )Total shareholders equity
    
    
    123,971
    
    
    
    121,203Total liabilities and shareholders equity
    
    $
    493,339
    
    
    
    474,145
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 Three Months Ended March 31,2006
    
    
    2005Shareholders EquityCapital stock:Beginning of period
    
    $
    
    
    
    
    Stock issued
    
    
    
    
    
    
    End of period
    
    
    
    
    
    
    Additional paid-in capital:Beginning of period
    
    
    100,202
    
    
    
    100,103Impact of adoption of SFAS 123R
    
    
    (695
    )
    
    
    Shares issued under share
compensation plans
    
    
    302
    
    
    
    36Tax benefit on share compensation
plans
    
    
    32
    
    
    
    End of period
    
    
    99,841
    
    
    
    100,139Retained earnings:Beginning of period
    
    
    24,846
    
    
    
    15,727Net income
    
    
    4,600
    
    
    
    3,079Dividend declared (2006, $0.03/share
and 2005, $0.02/share)
    
    
    (396
    )
    
    
    (265
    )End of period
    
    
    29,050
    
    
    
    18,541Unearned share compensation:Beginning of period
    
    
    (695
    )
    
    
    (1,413
    )Impact of adoption of SFAS 123R
    
    
    695
    
    
    
    322End of period
    
    
    
    
    
    
    (1,091
    )Accumulated other comprehensive loss,
net of taxes:Beginning of period
    
    
    (3,150
    )
    
    
    820Unrealized holding losses arising
during the period,
net of reclassification adjustment
    
    
    (1,770
    )
    
    
    (3,135
    )End of period
    
    
    (4,920
    )
    
    
    (2,315
    )Total shareholders equity
    
    $
    123,971
    
    
    
    115,274Comprehensive Income (Loss)Net income
    
    $
    4,600
    
    
    
    3,079Other comprehensive loss:Unrealized losses on securities:Unrealized holding losses arising
during the period:Gross
    
    
    (2,703
    )
    
    
    (4,881
    )Related federal income tax
benefit
    
    
    947
    
    
    
    1,708Net unrealized losses
    
    
    (1,756
    )
    
    
    (3,173
    )Reclassification adjustment for gains
(losses) included in net incomeGross
    
    
    21
    
    
    
    (59
    )Related federal income tax
(expense) benefit
    
    
    (7
    )
    
    
    21Net reclassification
adjustment
    
    
    14
    
    
    
    (38
    )Other comprehensive
loss
    
    
    (1,770
    )
    
    
    (3,135
    )Total comprehensive
income (loss)
    
    $
    2,830
    
    
    
    (56
    )
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
 
 Three Months Ended March 31,2006
    
    
    2005Cash flows provided by operating activities:Net income
    
    $
    4,600
    
    
    
    3,079Adjustments:Net realized investment (gains) losses
    
    
    (21
    )
    
    
    59Deferred federal income tax benefit
    
    
    (583
    )
    
    
    (572
    )Share-based compensation expense
    
    
    302
    
    
    
    358Changes in assets and liabilities:Premiums in course of collection, net
    
    
    1,751
    
    
    
    (3,610
    )Deferred policy acquisition costs
    
    
    (769
    )
    
    
    (95
    )Prepaid reinsurance premiums
    
    
    298
    
    
    
    312Reinsurance recoverable on paid and unpaid losses, net
    
    
    (3,012
    )
    
    
    (2,393
    )Income taxes payable
    
    
    2,180
    
    
    
    (1,390
    )Losses and loss expense reserves
    
    
    12,133
    
    
    
    12,500Unearned premiums
    
    
    1,132
    
    
    
    454Other, net
    
    
    807
    
    
    
    3,009Net cash provided by operating activities
    
    
    18,818
    
    
    
    11,711Cash flows used in investing activities:Purchases of equity securities
    
    
    (3,178
    )
    
    
    (31,159
    )Purchases of fixed maturity securities available-for-sale
    
    
    (29,175
    )
    
    
    (35,034
    )Proceeds from sales of equity securities
    
    
    4,627
    
    
    
    18,935Proceeds from sales and maturities of fixed maturities available-for-sale
    
    
    9,481
    
    
    
    31,673Change in receivable/payable for securities
    
    
    622
    
    
    
    2,043Net proceeds from sale of short-term investments
    
    
    (270
    )
    
    
    (1,017
    )Net cash used in investing activities
    
    
    (17,893
    )
    
    
    (14,559
    )Cash flows used in financing activities:Dividend paid to shareholders
    
    
    (396
    )
    
    
    (265
    )Tax benefit on share compensation plans
    
    
    32
    
    
    
    Net cash used in financing activities
    
    
    (364
    )
    
    
    (265
    )Decrease in cash and equivalents
    
    
    561
    
    
    
    (3,113
    )Cash and equivalents at beginning of year
    
    
    5,628
    
    
    
    6,681Cash and equivalents at end of period
    
    $
    6,189
    
    
    
    3,568Supplemental disclosure of cash flow information:Interest paid
    
    $
    548
    
    
    
    417Federal income taxes paid
    
    $
    250
    
    
    
    3,281
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PROCENTURY CORPORATION AND SUBSIDIARIES
 
    (1)
    
    Basis of PresentationThe accompanying interim unaudited consolidated condensed financial statements and notes
include the accounts of ProCentury Corporation, (the Company or ProCentury) and its wholly
owned insurance subsidiary, Century Surety Company (Century). The interim unaudited
consolidated condensed financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP) for interim financial information and with
the instructions to Article 10 of Regulation S-X. Accordingly, the interim unaudited
consolidated condensed financial statements do not include all of the information and notes
required by GAAP for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation of results for the interim periods
have been included. These interim unaudited consolidated condensed financial statements and
related notes should be read in conjunction with the consolidated financial statements and
related notes in the Companys audited consolidated financial statements, included in the
Companys annual report on Form 10-K for the year ended December 31, 2005. 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
and liabilities and disclosure of contingent assets and liabilities as of the date of the
interim unaudited consolidated condensed financial statements, and the reported amounts of
revenue and expenses for the reporting period. Actual results could differ significantly from
those estimates.Material estimates that are particularly susceptible to significant change in the near-term
relate to the determination of loss and loss expense reserves, the recoverability of deferred
policy acquisition costs, the determination of federal income taxes, the net realizable value
of reinsurance recoverables and the determination of other-than-temporary declines in the fair
value of investments. Although considerable variability is inherent in these estimates,
management believes that the amounts provided are 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.Share Option AccountingEffective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123(R), Share-Based Payment(SFAS No. 123R), using the modified prospective
application transition method. SFAS No. 123R revises SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123). The Company previously followed the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), the
Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation (an interpretation of APB Opinion No. 25), and other
related accounting interpretations for the Companys share option and restricted common share
plans utilizing the intrinsic value method. The Company also followed the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation,for the Companys share
option grants, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure; an amendment of FASB Statement No. 123.Under the modified prospective method, all unvested employee share options and restricted stock
are being expensed over the remaining vesting period based on the fair value at the date the
options were granted. In addition, SFAS No. 123R requires us to estimate forfeitures in
calculating the expense relating to stock-based compensation as opposed to recognizing these
forfeitures and the corresponding reduction in expense as they occur. In addition, SFAS No.
123R requires the Company to reflect the tax savings resulting from tax deductions in excess of
compensation expense reflected in its financial statements as a cash inflow from financing
activities in its statement of cash flows rather than as an operating cash flow as in prior
periods.If the Company recorded compensation expense for it share grants based on the intrinsic value
method as previously required by APB Opinion No. 25, the Companys following financial
information for the three months ended March 31, 2006 would have been adjusted to the pro forma
amounts as indicated in the following table:
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Three Months Ended March31, 2006(In thousands, except per sharedata)As reported
    
    ProFormaIncome before income tax
    
    $
    6,478
    
    
    
    6,518Net income
    
    
    4,600
    
    
    
    4,626Net cash provided by operating activities
    
    
    18,818
    
    
    
    18,786Net cash used in financing activities
    
    
    (364
    )
    
    
    (396
    )Basic net income per share
    
    $
    0.35
    
    
    
    0.35Diluted net income per share
    
    $
    0.35
    
    
    
    0.35
 If the Company recorded compensation expense for its share option grants based on the
fair value method as previously required by SFAS No. 123, the Companys net income and
earnings per share for the three months ended March 31, 2005 would have been adjusted to the
pro forma amounts as indicated in the following table:
 ThreeMonthsEnded March31,2005(In thousands,except pershare data)Net income:As reported
    
    $
    3,079Add: Share-based employee compensation expense included
in reported net income, net of related tax effects
    
    
    232Less: Additional share-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects
    
    
    (592
    )Pro forma
    
    $
    2,719Basic income per common share:As reported
    
    $
    0.24Pro forma
    
    $
    0.21Diluted income per common share:As reported
    
    $
    0.23Pro forma
    
    $
    0.21
 The fair values of the share options are estimated on the dates of grant using the
Black-Scholes option pricing model with the following weighted average assumptions:
 Three Months EndedMarch 31, 2005Risk free interest rate
    
    
    3.69
    %Dividend yield
    
    
    0.76
    %Volatility factor
    
    
    0.231Weighted average expected option life
    
    
    6.1
    Years
 (2)
    
    Income per Common Share
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Basic 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.
 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
 Three Months Ended March 31, 2005(In thousands, except per share data)Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic Net Income Per ShareNet income
    
    $
    3,079
    
    
    
    13,046,339
    
    
    $
    0.24Effect of Dilutive SecuritiesRestricted common shares and share options
    
    
    
    
    
    
    83,207
    
    
    
    0.01Diluted EPSNet income
    
    $
    3,079
    
    
    
    13,129,546
    
    
    $
    0.23
 (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, 2006(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    89
    
    
    
    9
    
    
    
    
    
    
    
    97Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,036
    
    
    
    
    
    
    
    (32
    )
    
    
    1,004Total
    
    $
    1,125
    
    
    
    9
    
    
    
    (32
    )
    
    
    1,101
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##### Table of Contents



December 31, 2005(In thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueU.S. Treasury securities
    
    $
    89
    
    
    
    13
    
    
    
    
    
    
    
    102Agencies not backed by the full faith and credit of
the U.S. Government
    
    
    1,039
    
    
    
    
    
    
    
    (23
    )
    
    
    1,016Total
    
    $
    1,128
    
    
    
    13
    
    
    
    (23
    )
    
    
    1,118
 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:
 March 31, 2006(In thousands)Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturities:U.S. Treasury securities
    
    $
    3,673
    
    
    
    
    
    
    
    (80
    )
    
    
    3,593Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    14,532
    
    
    
    
    
    
    
    (450
    )
    
    
    14,082Obligations of states and political subdivisions
    
    
    153,876
    
    
    
    100
    
    
    
    (2,490
    )
    
    
    151,486Corporate securities
    
    
    35,642
    
    
    
    32
    
    
    
    (1,115
    )
    
    
    34,559Mortgage-backed securities
    
    
    39,439
    
    
    
    26
    
    
    
    (1,420
    )
    
    
    38,045Collateralized mortgage obligations
    
    
    34,203
    
    
    
    55
    
    
    
    (944
    )
    
    
    33,314Asset-backed securities
    
    
    44,277
    
    
    
    269
    
    
    
    (789
    )
    
    
    43,757Total fixed maturities
    
    
    325,642
    
    
    
    482
    
    
    
    (7,288
    )
    
    
    318,836Equities:Equity securities
    
    
    28,657
    
    
    
    353
    
    
    
    (609
    )
    
    
    28,401Bond mutual funds
    
    
    15,732
    
    
    
    30
    
    
    
    (541
    )
    
    
    15,221Total equities
    
    
    44,389
    
    
    
    383
    
    
    
    (1,150
    )
    
    
    43,622Total
    
    $
    370,031
    
    
    
    865
    
    
    
    (8,438
    )
    
    
    362,458
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December 31, 2005(In thousands)Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturities:U.S. Treasury securities
    
    $
    3,688
    
    
    
    1
    
    
    
    (53
    )
    
    
    3,636Agencies not backed by the full faith and
credit of the U.S. Government
    
    
    14,526
    
    
    
    
    
    
    
    (230
    )
    
    
    14,296Obligations of states and political subdivisions
    
    
    142,932
    
    
    
    387
    
    
    
    (1,037
    )
    
    
    142,282Corporate securities
    
    
    36,689
    
    
    
    40
    
    
    
    (876
    )
    
    
    35,853Mortgage-backed securities
    
    
    40,910
    
    
    
    31
    
    
    
    (880
    )
    
    
    40,061Collateralized mortgage obligations
    
    
    27,943
    
    
    
    15
    
    
    
    (606
    )
    
    
    27,352Asset-backed securities
    
    
    39,549
    
    
    
    238
    
    
    
    (635
    )
    
    
    39,152Total fixed maturities
    
    
    306,237
    
    
    
    712
    
    
    
    (4,317
    )
    
    
    302,632Equities:Equity securities
    
    
    27,521
    
    
    
    215
    
    
    
    (795
    )
    
    
    26,941Bond mutual funds
    
    
    18,516
    
    
    
    15
    
    
    
    (679
    )
    
    
    17,852Total equities
    
    
    46,037
    
    
    
    230
    
    
    
    (1,474
    )
    
    
    44,793Total
    
    $
    352,274
    
    
    
    942
    
    
    
    (5,791
    )
    
    
    347,425
 Other-than-temporary impairment losses result in a permanent reduction to the cost
basis of the underlying investment and are recorded as a realized loss in the interim unaudited
consolidated condensed statements of operations. No other-than-temporary declines were realized
during the three months ended March 31, 2006 or 2005.The fair values and gross unrealized losses for securities held
by the Company and assessed as temporarily impaired by management,
categorized by the length of time that the individual securities have
been in a continuous unrealized loss position, as of March 31,
2006 and 2005 are as follows:
 March 31, 2006Less 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
    
    $
    
    
    
    
    
    
    
    
    1,004
    
    
    
    (32
    )
    
    
    1,004
    
    
    
    (32
    )Total
    
    $
    
    
    
    
    
    
    
    
    1,004
    
    
    
    (32
    )
    
    
    1,004
    
    
    
    (32
    )
 The estimated fair value, related gross unrealized losses, and the length of time that the
securities have been impaired for available-for-sale securities that are considered temporarily
impaired are as follows:
 11




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##### Table of Contents



March 31, 2006Less 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
    
    $
    2,276
    
    
    
    (37
    )
    
    
    1,317
    
    
    
    (43
    )
    
    
    3,593
    
    
    
    (80
    )Obligations of U.S. government
corporations and agencies
    
    
    8,456
    
    
    
    (225
    )
    
    
    5,626
    
    
    
    (225
    )
    
    
    14,082
    
    
    
    (450
    )Obligations of states and political
subdivisions
    
    
    116,937
    
    
    
    (1,842
    )
    
    
    22,205
    
    
    
    (648
    )
    
    
    139,142
    
    
    
    (2,490
    )Corporate securities
    
    
    11,286
    
    
    
    (307
    )
    
    
    20,089
    
    
    
    (808
    )
    
    
    31,375
    
    
    
    (1,115
    )Mortgage-backed securities
    
    
    21,615
    
    
    
    (754
    )
    
    
    15,927
    
    
    
    (666
    )
    
    
    37,542
    
    
    
    (1,420
    )Collateralized mortgage obligations
    
    
    18,603
    
    
    
    (507
    )
    
    
    12,882
    
    
    
    (437
    )
    
    
    31,485
    
    
    
    (944
    )Asset-backed securities
    
    
    22,097
    
    
    
    (521
    )
    
    
    7,143
    
    
    
    (268
    )
    
    
    29,240
    
    
    
    (789
    )Total
    
    
    201,270
    
    
    
    (4,193
    )
    
    
    85,189
    
    
    
    (3,095
    )
    
    
    286,459
    
    
    
    (7,288
    )Equities:Equity securities
    
    
    12,284
    
    
    
    (331
    )
    
    
    4,286
    
    
    
    (278
    )
    
    
    16,570
    
    
    
    (609
    )Bond mutual funds
    
    
    8,564
    
    
    
    (275
    )
    
    
    6,189
    
    
    
    (266
    )
    
    
    14,753
    
    
    
    (541
    )Total
    
    
    20,848
    
    
    
    (606
    )
    
    
    10,475
    
    
    
    (544
    )
    
    
    31,323
    
    
    
    (1,150
    )Grand Total
    
    $
    222,118
    
    
    
    (4,799
    )
    
    
    95,664
    
    
    
    (3,639
    )
    
    
    317,782
    
    
    
    (8,438
    )
 At March 31, 2006, the Company had 109 fixed income securities and 12 equity securities
that have been in an unrealized loss position for one year or longer. Of the fixed income
securities, 108 are investment grade, of which 104 of these securities are rated A1/A or better
(including 69 securities which are rated AAA). The one remaining non-investment grade fixed
income security is rated BB+ and has a fair value equal to 98.3% of its book value as of March
31, 2006. One of the equity securities that has been in an unrealized loss position for one
year or longer relates to a closed end preferred stock fund which continues to pay its regular
dividend on a monthly basis and also has an underlying net asset value per share that exceeds
its price per share as of March 31, 2006. One of the equity securities relates to an
investment in an open end high quality short duration bond fund, of which the underlying assets
are all rated AAA. Finally, the ten remaining equity securities that have been in an
unrealized loss position for one year or longer relate to preferred share investments in
issuers each of which has shown an improved financial performance during the past twelve
months. In addition, these ten equity securities have an aggregate fair market value equal to
95.4% of their book value as of March 31, 2006. All 109 of the fixed income securities are
current on interest and principal and all 12 of the equity securities continue to pay dividends
at a level consistent with the prior year. Management believes the declines are temporary and
are not indicative of other-than-temporary impairments.(4)
    
    Loss and Loss Expense ReservesLiability for losses and loss expenses represents the Companys best estimate of the ultimate
amounts needed to pay both reported and unreported claims. These estimates are based on
quarterly internal actuarial studies and certified on an annual basis by an independent
actuary. The Company continually reviews these estimates and, based on new developments and
information, the Company includes adjustments of the probable ultimate liability in the
operating results for the periods in which the adjustments are made.Net loss and loss expenses incurred were $30.4 million for the quarter ended March 31, 2006,
compared to $25.7 million for the quarter ended March 31, 2005. In the first quarter of 2006,
the Company recorded $29.7 million of incurred losses and loss expenses attributable to the
2006 accident year and $702,000 attributable to events of prior years. In the first quarter of
2005, the Company recorded $23.8 million of incurred losses and loss expenses attributable to
the 2005 accident year and $1.9 million attributable to events of prior years.The increases for the first quarter of 2006 related to prior years were due to incurred amounts
above our expectations in our casualty business included in our property and casualty segment.
The increases were primarily due to reported incurred amounts above our expectations for the
2004 and 2003 accident year, an increase in our legal reserves related to expected arbitration
with our reinsurers over a disputed claim and an increase in reserves for accident years 1996
and 1997 as a result of higher than anticipated loss, legal and settlement costs. The increase
in casualty reserves was partially offset by favorable development in our 2004 and 2005
property line included in our property and casualty segment.
 12




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##### Table of Contents



The increases for the first quarter of 2005 related to prior year resulted principally from
construction defect claims within the casualty line of business included in our property and
casualty segment. During the first three months of
2005, the Company established reserves for two contribution action settlements that were
anticipated to be paid within the year. This development was slightly offset by favorable
claim count development, while claim severities continued to be within the Companys
expectations. Prior year development for construction defect claims was $1.4 million for the
three months ended March 31, 2005.Management believes the loss and loss expense reserves make a reasonable provision for expected
losses, however, ultimate settlement of this amount could vary significantly from that
recorded.(5)
    
    ReinsuranceIn the ordinary course of business, Century assumes and cedes reinsurance with other insurers
and reinsurers. These arrangements provide greater diversification of business and limit the
maximum net loss potential on large risks. There have been no significant changes in the
Companys reinsurance program. The amounts of ceded loss and loss expense reserves and ceded
unearned premiums would represent a liability of the Company in the event that its reinsurers
would be unable to meet existing obligations under reinsurance agreements.The effects of assumed and ceded reinsurance on premiums written, premiums earned and loss and
loss expenses incurred were as follows:
 For the Three MonthsEnded March 31,2006
    
    
    2005Premiums written:Direct
    
    $
    57,275
    
    
    
    47,318Assumed
    
    
    754
    
    
    
    314Ceded
    
    
    (7,597
    )
    
    
    (5,346
    )Net premiums written
    
    $
    50,432
    
    
    
    42,286Premiums earned:Direct
    
    
    56,085
    
    
    
    46,963Assumed
    
    
    812
    
    
    
    215Ceded
    
    
    (7,895
    )
    
    
    (5,658
    )Net premiums earned
    
    $
    49,002
    
    
    
    41,520Losses and loss expenses incurred:Direct
    
    $
    34,294
    
    
    
    31,894Assumed
    
    
    104
    
    
    
    (270
    )Ceded
    
    
    (3,959
    )
    
    
    (5,897
    )Net losses and loss expenses incurred
    
    $
    30,439
    
    
    
    25,727
 In 1998 and 1999, the Company had its quota share and excess of loss reinsurance
agreements with three reinsurance companies for its the workers compensation line of business.
These agreements were entered into through an intermediary, which was ordered into liquidation
in 2000. Since that time, the Company attempted to collect the losses directly from one of the
reinsurers. On March 22, 2006, the Companys effort to vacate an adverse award received in
arbitration related to this reinsurer proved unsuccessful. As such, the Company is currently
in the process of turning the claims over to the liquidator of the intermediary and increased
the Companys reserve to $1.5 million from $1.3 million in the event the Company is unable to
fully collect the amounts due. As of March 31, 2006, the Company had approximately $2.9
million of recoverables related to these reinsurance agreements, of which $1.1 million related
to the quota share agreements and $1.8 million related to the excess of loss agreements.In addition, in 2005, the Company notified its reinsurers of a claim in the amount of $4.0
million for which coverage is now being disputed by certain reinsurers. The Company has filed
a notice of arbitration against one of its reinsurers on this claim and may file for
arbitration against the others if current negotiations are not successful. On March 31, 2006,
the Company established a $250,000 reserve related to the potential arbitrations.(6)
    
    Deferred Policy Acquisition CostsThe following reflects the amounts of policy acquisition costs deferred and amortized:
 13




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##### Table of Contents



For the Three MonthsEnded March 31,2006
    
    
    2005Balance at beginning of year
    
    $
    20,649
    
    
    
    17,411Policy acquisition costs deferred
    
    
    12,835
    
    
    
    10,315Amortization of deferred policy acquisition costs
    
    
    (12,066
    )
    
    
    (10,220
    )Balance at end of quarter
    
    $
    21,418
    
    
    
    17,506
 (7)
    
    Federal Income TaxesThe income tax provision for the three months ended March 31, 2006 and 2005 has been computed
based on our estimated annual effective tax rate of 29.0% and 30.0%, respectively, which
differs from the federal income tax rate of 35% principally because of tax-exempt investment
income.(8)
    
    Commitments and ContingenciesThe Company is a defendant in various lawsuits in the ordinary course of its business. In the
opinion of management, the effects, if any, of such lawsuits are not expected to be material to
the Companys consolidated financial position or results from operations.(9)
    
    Employee BenefitsDuring 2004, the Company adopted and the shareholders approved a stock option plan that
provided tax-favored incentive stock options (qualified options), non-qualified share options
to employees and qualified 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 and restricted shares that vest based on achieved performance metrics. Any
compensation cost 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).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. In accordance with SFAS No. 123R, compensation expense
is recorded over the service period based on the grant date fair market value of the options.
The fair market value is determined by the Company using the Black-Scholes option pricing
model. Prior to the adoption of SFAS 123R, in accordance with APB No. 25, no compensation was
recorded for the qualified and non-qualified share options as the market value on the grant
dates equaled the exercise price.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 at the current market 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. In accordance with SFAS
123R, compensation cost is measured on the grant date at the grant date market value and
recorded over the service period. Prior to the adoption of SFAS 123R, compensation expense for
performance-based restricted share awards was recognized based on the fair value of the awards
at the end of the period.The Company may grant options for up to 1.2 million shares under the plan. Through December
31, 2005, the Company had granted 287,000 non-qualified options, 95,000 qualified options,
156,000 time-based restricted shares and 55,024 performance-based restricted shares under the
share plan. On January 3, 2006, the Company granted an
additional 112,500 qualified options.
 14




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##### Table of Contents



A summary of the status of the option plan for the three months ended March 31, 2006 and for
the year ended December 31, 2005 are presented in the following table:
 March 31, 2006
    
    
    December 31, 2005Weighted-
    
    
    
    
    
    
    Weighted-Number of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding at beginning of year
    
    
    382,000
    
    
    $
    10.49
    
    
    
    364,000
    
    
    $
    10.50Granted
    
    
    112,500
    
    
    
    10.64
    
    
    
    18,000
    
    
    
    10.30Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    494,500
    
    
    $
    10.52
    
    
    
    382,000
    
    
    $
    10.49Exercisable at end of period
    
    
    253,684
    
    
    $
    10.50
    
    
    
    217,393
    
    
    $
    10.50Weighted-average fair value of
options granted during year
    
    
    
    
    
    $
    3.07
    
    
    
    
    
    
    $
    2.99
 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 in 2006 and 2005:
 Three MonthsEnded
    
    Year EndedMarch 31,
    
    December 312006
    
    2005Risk free interest rate
    
    
    4.06
    %
    
    
    4.03
    %Dividend yield
    
    
    0.95
    %
    
    
    0.76
    %Volatility factor
    
    
    23.1
    %
    
    
    23.14
    %Weighted average expected option life
    
    
    7
    Years
    
    
    7
    Years
 Information on the range of exercise prices for options outstanding as of March 31, 2006,
is as follows:
 Options Outstanding
    
    Options ExcercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    Exercisable
    
    AverageOutstanding
    
    Contract
    
    Exercise
    
    as of
    
    ExercisePrice Range
    
    Options
    
    Life
    
    Price
    
    March 31, 2006
    
    Price$10.20
    
    
    12,000
    
    
    
    9.2
    
    
    $
    10.20
    
    
    
    3,330
    
    
    $
    10.20$10.50
    
    
    370,000
    
    
    
    8.1
    
    
    $
    10.50
    
    
    
    242,714
    
    
    $
    10.50$10.64
    
    
    112,500
    
    
    
    9.8
    
    
    $
    10.64
    
    
    
    7,634
    
    
    $
    10.64
 15




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##### Table of Contents



A summary of all employee time-based restricted share activity during the three months
ended March 31, 2006 and the year ended December 31, 2005 are as follows:
 2006
    
    
    2005Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Grant Price
    
    
    Shares
    
    
    Grant PriceBeginning of year
    
    
    68,033
    
    
    $
    10.22
    
    
    
    137,049
    
    
    $
    10.31Add (deduct):Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    (2,742
    )
    
    
    10.58
    
    
    
    (31,593
    )
    
    
    10.28Cancelled
    
    
    
    
    
    
    
    
    
    
    (37,423
    )
    
    
    10.50End of year
    
    
    65,291
    
    
    $
    10.20
    
    
    
    68,033
    
    
    $
    10.22
 In January 2005 and September 2005, the Company modified two executives time-based
restricted share awards in connection with the termination of their employment to accelerate
the vesting period. As such, the Company accounted for the modifications as cancellations of a
fixed award and a grant of a variable award, which are valued at the fair market value on the
monthly vesting date. During 2005, the Company recorded $231,924 of compensation expense
related to the January modification and $42,617 related to the September modification. During
the first three months of 2006, the Company recorded no compensation expense related the
January modification and $50,722 related to the September modification. All shares related to
the January modification have vested as of December 31, 2005 and 8,170 shares related to the
September modification remain unvested at March 31, 2006.A summary of all employee performance-based restricted share activity during the quarters ended
March 31, 2006 and 2005 are as follows:
 2006
    
    
    2005Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Grant Price
    
    
    Shares
    
    
    Grant PriceBeginning of year
    
    
    37,365
    
    
    $
    10.50
    
    
    
    
    
    
    $
    Add (deduct):Granted
    
    
    
    
    
    
    
    
    
    
    55,024
    
    
    
    10.50Vested
    
    
    (9,341
    )
    
    
    10.50
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    (17,659
    )
    
    
    10.50End of year
    
    
    28,024
    
    
    $
    10.50
    
    
    
    37,365
    
    
    $
    10.50
 Of the performance-based restricted share awards granted in March of 2005, an award
for 17,659 shares was modified in accordance with the agreement entered into in connection with
the termination of an executive officers employment in September 2005. As such, the award
was treated as cancelled on September 30, 2005 due to a modification of the award to accelerate
the vesting of the shares, change the vesting from annual vesting to monthly vesting and remove
the performance based restrictions. As such, the award is treated as a variable award which is
valued at the fair market value on the monthly vesting date. During 2005, the Company
recorded $46,058 compensation expense related to the restricted shares. During the first three
months of 2006, the Company recorded $54,818 compensation expense
related to the restricted shares and 8,829 shares remain unvested at March 31, 2006.(10)
    
    Segment Reporting DisclosuresThe Company operates in the Property and Casualty Lines (P/C) (including general liability,
multi-peril, commercial property and garage liability).The Companys other (including exited lines) include the surety business and the Companys
exited lines, such as workers compensation and commercial auto/trucking. A limited amount of
surety business is written in order to maintain Centurys U.S. Treasury listing.All investment activities are included in the investing operating segment.
 16




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##### Table of Contents



The Company considers many factors, including economic similarity, the nature of the
underwriting units insurance products, production sources, distribution strategies and
regulatory environment in determining how to aggregate operating segments.Segment profit or loss for each of the Companys segments is measured by underwriting profit or
loss. The property and casualty insurance industry commonly defines underwriting profit or loss
as earned premium net of loss and loss expenses and underwriting, acquisition and insurance
expenses. Underwriting profit or loss does not replace operating income or net income computed
in accordance with GAAP as a measure of profitability. Segment profit for the Investing
operating segment is measured by net investment income and net realized gains or losses. The
Company does not allocate assets, including goodwill, to the P/C and Other operating segments
for management reporting purposes. The total investment portfolio and cash are allocated to the
Investing operating segment.Following is a summary of segment disclosures:
 For the Three MonthsEnded March 31,2006
    
    
    2005(In thousands)Segment revenue:P/C
    
    $
    48,343
    
    
    
    41,513Investing
    
    
    4,447
    
    
    
    3,100Other (including exited lines)
    
    
    659
    
    
    
    7Segment revenue
    
    $
    53,449
    
    
    
    44,620Segment profit (loss):P/C
    
    $
    2,288
    
    
    
    2,938Investing
    
    
    4,447
    
    
    
    3,100Other (including exited lines)
    
    
    377
    
    
    
    (561
    )Segment profit
    
    $
    7,113
    
    
    
    5,477Segment assets:Investing
    
    $
    376,082
    
    
    
    318,436Assets not allocated
    
    
    117,257
    
    
    
    90,981Total consolidated assets
    
    $
    493,339
    
    
    
    409,417
 The following summary reconciles significant segment items to the Companys interim
unaudited consolidated condensed financial statements:
 For the Three MonthsEnded March 31,2006
    
    
    2005(In thousands)Income before income taxes:Segment profit
    
    $
    7,113
    
    
    
    5,477Unallocated amounts:Corporate expenses
    
    
    (92
    )
    
    
    (662
    )Interest expense
    
    
    (543
    )
    
    
    (417
    )Income before income taxes
    
    $
    6,478
    
    
    
    4,398
 The following is a summary of segment earned premium by group of products:
 17




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##### Table of Contents



Property
    
    
    Casualty
    
    
    Other
    
    
    Consolidated(In thousands)Three Months Ended March 31, 2006P/C
    
    $
    14,433
    
    
    
    33,910
    
    
    
    
    
    
    
    48,343Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    659
    
    
    
    659Earned premiums
    
    $
    14,433
    
    
    
    33,910
    
    
    
    659
    
    
    
    49,002Three Months Ended March 31, 2005P/C
    
    $
    14,416
    
    
    
    27,097
    
    
    
    
    
    
    
    41,513Other (including exited lines)
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7Earned premiums
    
    $
    14,416
    
    
    
    27,097
    
    
    
    7
    
    
    
    41,520
 The Company does not manage property and casualty products at this level of detail.(11)
    
    Dividend to Common ShareholdersOn March 13, 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 in the accompanying March 31, 2006 interm unaudited consolidated condensed balance
sheet in the caption accrued expenses and other liabilities.
 
 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 may result in a reduction of new
or renewal business;
    
    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 certain 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, we may incur loss and loss
expenses related to those policies;
    
    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 market conditions, all of which impact interest rates;
    
    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;
    
    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;
 18




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##### Table of Contents




    
    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; and
    
    as a holding company, we are dependent on the results of operations of our insurance
subsidiary and the regulatory and contractual capacity of our subsidiary to pay dividends to
us. Some states limit the aggregate amount of dividends our subsidiary may pay to us in any
twelve-month period, thereby limiting our funds to pay expenses and dividends.
  Overview
 ®
  Gross Written Premiums.
 Net Written Premiums.
 Earned Premiums.
 Loss Ratio.
 Expense Ratio.
 19




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##### Table of Contents



Combined Ratio.
 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,
  20




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##### Table of Contents



Deferred Policy Acquisition Costs.
 Federal
Income Taxes.
  Results of Operations
  For the Three MonthsEnded March 31,2006
    
    
    2005(In thousands)Selected Financial Data:Gross written premiums
    
    $
    58,029
    
    
    
    47,632Premiums earned
    
    
    49,002
    
    
    
    41,520Net investment income
    
    
    4,426
    
    
    
    3,159Net realized investment gains (losses)
    
    
    21
    
    
    
    (59
    )Total revenues
    
    
    53,449
    
    
    
    44,620Total expenses
    
    
    46,971
    
    
    
    40,222Net income
    
    
    4,600
    
    
    
    3,079Key Financial Ratios:Loss and loss expense ratio
    
    
    62.1
    %
    
    
    62.0
    %Expense ratio
    
    
    32.6
    %
    
    
    33.9
    %Combined ratio
    
    
    94.7
    %
    
    
    95.9
    %
 Overview of Operating Results
   21




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Revenues
 Premiums
     
    
    property/casualty; and
    
    other (including exited lines).
   22




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##### Table of Contents



For the Three MonthsEnded March 31,2006
    
    
    2005(In thousands)Gross written premiumsProperty/casualty
    
    $
    57,090
    
    
    
    47,575Other (including exited lines)
    
    
    939
    
    
    
    57Total gross written premiums
    
    
    58,029
    
    
    
    47,632Ceded written premiums
    
    
    7,597
    
    
    
    5,346Net written premiums
    
    $
    50,432
    
    
    
    42,286Net premiums earned
    
    $
    49,002
    
    
    
    41,520Net written premiums to gross written premiums
    
    
    86.9
    %
    
    
    88.8
    %Net premiums earned to net written premiums
    
    
    97.2
    %
    
    
    98.2
    %Net writings ratio (1)
    
    
    1.6
    
    
    
    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. Gross Written Premiums
  Net Written Premiums and Premiums Earned
   Net Investment Income
   Realized Gains (Losses) on Securities
  23




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##### Table of Contents



Expenses
 Losses and Loss Expenses
  
    
    the number of exposures covered in the current year;
    
    trends in claim frequency and claim severity;
    
    changes in the cost of adjusting claims;
    
    changes in the legal environment relating to coverage interpretation, theories of
liability and jury determinations; and
    
    the re-estimation of prior years reserves in the current year.
      24




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##### Table of Contents



March 31
    
    
    December 312006
    
    
    2005(In thousands)Property/casualty:Casualty
    
    $
    155,071
    
    
    
    142,451Property
    
    
    25,547
    
    
    
    27,972Other (including exited lines):Commercial auto
    
    
    1,065
    
    
    
    936Workers compensation
    
    
    2,636
    
    
    
    2,657Other
    
    
    282
    
    
    
    183Net reserves for losses and loss expenses
    
    
    184,601
    
    
    
    174,199Plus reinsurance recoverables on unpaid
losses at end of period
    
    
    39,179
    
    
    
    37,448Gross reserves for losses and loss expenses
    
    $
    223,780
    
    
    
    211,647
 The increase in net loss and loss expenses during the first quarter of 2006 is primarily
attributable to our continued growth, an increase in the cost to settle claims and the premium
pricing declines experienced throughout 2005 and into 2006.The increases for the first quarter of 2006 related to prior years were due to incurred amounts
above our expectations in our casualty business included in our property and casualty segment.
The increases were primarily due to reported incurred amounts above our expectations for the
2003 accident year, an increase in our legal reserves related to expected arbitration with our
reinsurers over a disputed claim and an increase in reserves for accident years 1996 and 1997
as a result of higher than anticipated legal and settlement costs. The increase in casualty
reserves was offset by favorable development in our 2004 and 2005 property line of the property
and casualty segment.
 Operating Expenses
  For the Three MonthsEnded March 31,2006
    
    
    2005(In thousands)Amortization of deferred policy acquisition costs (ADAC)
    
    $
    12,066
    
    
    
    10,220Other operating expenses
    
    
    3,923
    
    
    
    3,065ADAC and other operating expenses
    
    
    15,989
    
    
    
    13,285Severance expense
    
    
    
    
    
    
    793Interest expense
    
    
    543
    
    
    
    417Total operating expenses
    
    $
    16,532
    
    
    
    14,495Expense ratio:ADAC
    
    
    24.6
    %
    
    
    24.6
    %Other operating expenses
    
    
    8.0
    %
    
    
    7.4
    %Severence
    
    
    
    %
    
    
    1.9
    %Total expense ratio (1)
    
    
    32.6
    %
    
    
    33.9
    %
 
 (1)
    
    Interest expense is not included in the calculation of the expense ratio.  25




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##### Table of Contents



Income Taxes
  Liquidity and Capital Resources
         26




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Investment Portfolio
   Accounting Standards
   
 Item 3. Quantitative And Qualitative Disclosures About Market Risk
   
 Item 4. Controls And Procedures
  27




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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.)
 28




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##### Table of Contents



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. 29




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##### Table of Contents



SIGNATURE
  PROCENTURY CORPORATIONDate May 10, 2006
    
    By:
    
    /s/ Erin E. WestErin E. WestChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
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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. 31