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þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2004
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from          to

Ohio		31-1718622
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
465 Cleveland Ave. Westerville, Ohio (Address of principal executive offices)		43082 (Zip Code)

Title of Each Class		Name of Each Exchange on Which Registered
Common Shares, without par value		NASDAQ

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				Page
PART I:
Item 1		Business			3
Item 2		Properties			28
Item 3		Legal Proceedings			28
Item 4		Submission of Matters to a Vote of Security Holders			29
PART II:
Item 5		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			29
Item 6		Selected Financial and Operating Data			30
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 7A		Quantitative and Qualitative Disclosures About Market Risk			55
Item 8		Financial Statements and Supplementary Data			56
Item 9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			114
Item 9A		Controls and Procedures			114
PART III:
Item 10		Directors and Executive Officers of the Registrant			114
Item 11		Executive Compensation			115
Item 12		Security Ownership of Certain Beneficial Owners and Management			115
Item 13		Certain Relationships and Related Transactions			115
Item 14		Principal Accountant Fees and Services			116
PART IV:
Item 15		Exhibits and Financial Statement Schedules			116
Exhibit 10.12
Exhibit 10.13
Exhibit 10.14
Exhibit 10.15
Exhibit 10.16
Exhibit 21
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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Item 1.	Business

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	•	our commitment to underwriting profitability;
	•	our re-underwriting of our binding policies;
	•	continued low interest rates;
	•	close monitoring or downgrading of many insurers and reinsurers by rating agencies;
	•	new corporate governance requirements; and
	•	industry focus on rate adequacy and the negative effects of under-priced business on the industry as a whole.

			Gross Written Premiums												Net Written Premiums
			Years Ended December 31,												Years Ended December 31,
			2004				2003				2002				2004				2003				2002
			(In thousands)
Property/casualty:
	Casualty		$	122,996			$	83,713			$	53,780			$	107,576			$	74,930			$	44,731
	Property			67,595				67,187				44,508				58,444				57,080				33,601
Other (including exited lines)				814				(1,192	)			2,254				4				(171	)			30
			$	191,405			$	149,708			$	100,542			$	166,024			$	131,839			$	78,362

	Property/ Casualty

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	Geographic Distribution

			Years Ended December 31,
			2004								2003								2002
			(Dollars in thousands)
Midwest			$	38,458				20.1	%		$	32,285				21.6	%		$	24,298				24.2	%
Southeast				51,841				27.1				42,805				28.6				26,339				26.2
Southwest				34,916				18.2				30,850				20.6				20,842				20.7
West				61,062				31.9				42,458				28.4				26,475				26.3
Northeast				5,128				2.7				2,286				1.5				1,086				1.1
Assumed reinsurance				—				—				(976	)			(0.7	)			1,502				1.5
	Total		$	191,405				100.0	%		$	149,708				100.0	%		$	100,542				100.0	%

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	•	investigate reported incidents as soon as possible;
	•	select, manage and supervise all legal and adjustment aspects of the claim; and
	•	provide a high level of service and support to agents and insureds throughout the claims process.

	•	the type of loss;
	•	the jurisdiction of the occurrence;
	•	our knowledge of the circumstances surrounding the claim;
	•	the severity of injury or damage;
	•	the potential for covered loss; and
	•	policy provisions relating to the claim.

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	•	our experience and the industry’s experience;
	•	historical trends in reserving patterns and loss payments;
	•	the impact of claim inflation;
	•	the pending level of unpaid claims;
	•	the cost of claim settlements;
	•	the line of business mix; and
	•	the environment in which property and casualty insurance companies operate.

	•	performing an actuarial analysis of loss and loss expense reserves on a quarterly basis;
	•	assisting our Underwriting Department in evaluating pricing adequacy;
	•	assisting our Loss Reserve Committee, which includes our Vice President and Chief Actuary, Senior Claims Officer, Chief Financial Officer (Chairman), Chief Operating Officer and the President of Century, in establishing management’s best estimate of loss and loss expense reserves; and
	•	working with our independent external actuary in the year-end loss and loss expense reserves statement of actuarial opinion process.

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						Years Ended December 31,
						2004				2003				2002
						(In thousands)
Loss and loss expense reserves at beginning of year, as reported						$	129,236			$	90,855			$	93,998
Less reinsurance recoverables on unpaid losses at beginning of year							36,739				31,853				45,054
Net loss and loss expense reserves at beginning of year							92,497				59,002				48,944
Provision for loss and loss expense incurred for claims related to:
	Current year						78,015				53,961				28,628
	Prior years:
		Property/casualty:
			Casualty				12,842				22,190				13,516
			Property				(3,244	)			2,254				(22	)
		Other (including exited lines):
			Commercial automobile				789				1,350				263
			Workers compensation				664				1,249				3,017
			Total prior years				11,051				27,043				16,774
				Total incurred			89,066				81,004				45,402
Loss and loss expense payments for claims related to:
	Current year						22,095				15,932				9,503
	Prior years						35,717				31,577				25,841
				Total paid			57,812				47,509				35,344
Net loss and loss expense reserves at end of year							123,751				92,497				59,002
Plus reinsurance recoverables on unpaid losses at end of year							29,485				36,739				31,853
Loss and loss expense reserves at end of year, as reported						$	153,236			$	129,236			$	90,855

	Property/ Casualty

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	Other (Including Exited Lines)

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			1995(1)				1996(1)				1997(1)				1998(1)				1999(1)
			(In thousands)
Net liability for losses and loss expenses			$	25,517			$	30,321			$	39,644			$	42,262			$	46,649
Liability re-estimated as of:
	One year later			26,303				29,871				36,789				44,269				49,382
	Two years later			24,291				27,206				38,022				45,006				52,390
	Three years later			21,918				27,761				38,869				47,237				66,299
	Four years later			21,817				28,380				40,234				58,059				77,477
	Five years later			22,472				29,407				52,448				65,977				84,861
	Six years later			23,065				34,926				59,130				72,691
	Seven years later			26,114				37,827				63,389
	Eight years later			26,664				39,706
	Nine years later			27,244
Net cumulative redundancy (deficiency)				(1,727	)			(9,385	)			(23,745	)			(30,429	)			(38,212	)
Cumulative amount of net liability paid as of:
	One year later			8,693				8,623				12,042				14,221				18,741
	Two years later			13,398				15,562				21,304				25,237				31,444
	Three years later			16,484				19,842				28,707				33,559				45,199
	Four years later			18,601				23,211				33,508				42,754				55,536
	Five years later			20,089				25,824				40,788				49,406				65,559
	Six years later			21,528				29,778				45,935				57,133
	Seven years later			23,955				31,113				51,349
	Eight years later			24,358				34,693
	Nine years later			25,558
Gross liability — end of year				32,565				36,694				45,608				55,844				76,357
Reinsurance recoverable on unpaid losses				7,048				6,373				5,964				13,582				29,708
Net liability — end of year				25,517				30,321				39,644				42,262				46,649
Gross liability re-estimated — latest				33,326				44,055				74,779				81,896				120,946
Reinsurance recoverable on unpaid losses re-estimated — latest				6,082				4,349				11,390				9,205				36,085
Net liability re-estimated — latest				27,244				39,709				63,389				72,691				84,861
Gross cumulative redundancy (deficiency)				(761	)			(7,361	)			(29,171	)			(26,052	)			(44,589	)

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			2000(1)				2001(1)				2002(1)				2003(1)				2004
Net liability for losses and loss expenses			$	44,519			$	48,944			$	59,002			$	92,497			$	123,763
Liability re-estimated as of:
	One year later			50,265				64,818				86,045				103,548
	Two years later			66,745				86,480				101,553
	Three years later			84,178				98,983
	Four years later			94,930
	Five years later
	Six years later
	Seven years later
	Eight years later
	Nine years later
Net cumulative redundancy (deficiency)				(50,015	)			(50,039	)			(42,551	)			(11,051	)
Cumulative amount of net liability paid as of:
	One year later			19,047				24,805				30,585				35,717
	Two years later			37,562				46,413				56,457
	Three years later			54,598				65,472
	Four years later			68,806
	Five years later
	Six years later
	Seven years later
	Eight years later
	Nine years later
Gross liability — end of year				84,974				94,146				91,011				129,558				153,236
Reinsurance recoverable on unpaid losses				40,059				45,202				32,009				37,061				29,485
Net liability — end of year				44,915				48,944				59,002				92,497				123,751
Gross liability re-estimated — latest(2)				135,819				133,026				130,699				124,292
Reinsurance recoverable on unpaid losses re-estimated — latest				40,889				34,043				29,146				20,744
Net liability re-estimated — latest				94,930				98,983				101,553				103,548
Gross cumulative redundancy (deficiency)(2)				(50,845	)			(38,880	)			(39,688	)			5,266

(1)	For calendar years and diagonals between 1995 and 2003, the amounts have been restated to remove the net effects of the discontinued operations (i.e. the net surety business).
(2)	In 2004, we entered in a loss portfolio transfer agreement with Evergreen and Continental whereby we assume all of Evergreen and Continental’s business excluding surety and assumed workers’ compensation. In addition, immediately prior to the IPO, the common shares of Evergreen were distributed as dividends to ProCentury’s existing Class A shareholders. Therefore, for years prior to 2004, gross reserves include gross reserves on all business written by Century, Evergreen and Continental except for the surety business. In addition, due to the above transactions in 2004, the gross liability re-estimated latest and the gross cumulative redundancy (deficiency) includes the effects of eliminating Evergreen and Continental’s gross reserves and the assumption of Evergreen and Continental’s non-surety net reserves. Therefore, while the trend of the gross cumulative redundancy (deficiency) remains, the results may not represent the actual redundancy or deficiency of our gross reserves.

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Line of Business		Company Policy Limit		Reinsurance Coverage/Company Retention
Property		Up to $12.5 million per risk		Up to $12.5 million per risk in excess of $500,000 per risk
Casualty — primary		$1.0 million per occurrence		$500,000 per occurrence in excess of $500,000 per occurrence
Casualty — excess and umbrella		Up to $5.0 million per occurrence in excess of the $1.0 million primary policy		90% of first $1.0 million per occurrence and 100% of up to $4.0 million per occurrence

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						Net Amount
		A.M. Best Rating				Recoverable
		as of December 31,				as of December 31,
Reinsurer		2004				2004
						(In thousands)
Hannover Rückversicherungs-Aktiengesellschaft			A			$	7,864
GE Reinsurance Corporation			A				5,638
General Reinsurance Corporation			A ++				4,922
Ace Property and Casualty Company			A				2,941
Folksamerica Reinsurance Company			A				2,349
PMA Capital Insurance Company(1)			B ++				2,055
SCOR Reinsurance Company(1)			B ++				2,046
Berkley Insurance Company			A				1,586
Republic Western Insurance Company(1)			C				1,393
Swiss Reinsurance America Corporation			A +				1,122

(1)	We are closely monitoring the financial status of PMA Capital Insurance Company, Republic Western Insurance Company and SCOR Reinsurance Company, each of which is continuing to pay claims.

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								Percent of
				Amount				Portfolio
				(Dollars in thousands)
Fixed-maturity:
	U.S. Treasury securities			$	4,261				1.4	%
	Agencies not backed by the full faith and credit of the U.S. Government				17,872				5.7
	Corporate securities				46,149				14.8
	Mortgage-backed securities				33,376				10.7
	Asset-backed securities				18,391				5.9
	Collateralized mortgage obligations				23,777				7.6
	Obligations of states and political subdivisions				120,717				38.6
		Total fixed-maturity			264,543				84.7
Cash and short-term investments					10,707				3.4
Equity securities:
	Bond mutual funds				18,921				6.0
	Preferred shares				15,214				4.9
	Common shares				3,014				1.0
		Total equity securities			37,149				11.9
		Total		$	312,399				100.0	%

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				Our
Ratio		Usual Range		Ratio
Change in net writings		33.0% – (33.0)%			36.0	%
Investment yield		10.0  –   4.5			4.1
Change in policyholders’ surplus		50.0  – (10.0)			76.0
Two-year reserve development to surplus		20.0  –   0.0			67.0

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	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.

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	•	claims inflation;
	•	claims development patterns;
	•	legislative activity;
	•	social and economic patterns; and
	•	litigation and regulatory trends

	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, 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.

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	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 that policy.

	If we lose key personnel or are unable to recruit qualified personnel, our ability to implement our business strategies could be delayed or hindered.

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	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.

	•	credit risk, which is the risk that our investments will decrease in value due to unfavorable changes in the financial prospects or a downgrade in the credit rating of an entity in which we have invested;
	•	equity price risk, which is the risk that we will incur economic loss due to a decline in common or preferred stock or bond mutual fund share prices; and
	•	interest rate risk, which is the risk that our investments may decrease in value due to changes in interest rates.

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	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.

	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.

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	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.

	•	an increase in capital-raising by companies in our lines of business, which could result in new entrants to our markets and an excess of capital in the industry;
	•	the enactment of the Gramm-Leach-Bliley Act of 1999, which could result in increased competition from new entrants to our markets;
	•	the implementation of commercial lines deregulation in several states, which could increase competition from standard carriers for our excess and surplus lines of insurance business;
	•	programs in which state-sponsored entities provide property insurance in catastrophe prone areas or other “alternative markets” types of coverage;
	•	changing practices caused by the Internet, which may lead to greater competition in the insurance business; and
	•	consolidation in the insurance industry, which could lead to lower margins for us.

	•	the perceived market strength of the insurer;
	•	pricing and other terms and conditions;

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	•	services provided;
	•	the speed of claims payment;
	•	the reputation and experience of the insurer; and
	•	ratings assigned by independent rating organizations such as A.M. Best.

	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 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.

Item 2.	Properties

Item 3.	Legal Proceedings

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Item 4.	Submission of Matters to a Vote of the Security Holders

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

		Quarter
		1st				2nd(2)				3rd				4th
High			(1	)		$	10.99			$	10.24			$	12.65
Low			(1	)		$	9.37			$	9.30			$	9.62
Close			(1	)		$	9.73			$	9.91			$	12.40

(1)	The Company’s common shares were privately held prior to April 26, 2004. Therefore, information for 2003 and the first quarter of 2004 is not provided.
(2)	For the period from April 21, 2004 through June 30, 2004.

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Item 6.	Selected Financial and Operating Data

																		Three Months				Nine Months
		Years Ended December 31,																Ended				Ended
																		December 31,				September 30,
		2004				2003(1)				2002(1)				2001(1)				2000(1)(2)				2000(1)(2)
		(Dollars in thousands, except per share data)
Operating Data:
(for the periods ended)
Premiums earned		$	148,702			$	108,294			$	63,290			$	42,524			$	7,744			$	24,021
Net investment income			10,048				6,499				5,075				4,595				1,085				3,237
Net realized investment gains (losses)			50				1,932				2,438				364				—				(5	)
Total revenues			158,800				116,725				71,203				48,058				8,793				32,414
Discontinued operations			1,259				1,548				881				(519	)			(1,237	)			(135	)
Net income (loss)			14,980				314				6,080				1,393				511				(1,131	)
Comprehensive income (loss)			14,566				(405	)			6,693				1,845				1,398				(3,901	)
Basic and diluted net income per share:
Net income (loss) from continuing operations before cumulative effect of change in accounting principle		$	1.29			$	(.25	)		$	.88			$	.38			$	1.40			$	(442.67	)
Discontinued operations			.12				.31				.18				(.10	)			(.99	)			(60.00	)
Cumulative effect of change in accounting principle, net of taxes			—				—				.16				—				—				—
Net income (loss)		$	1.41			$	.06			$	1.22			$	.28			$	.41			$	(502.67	)
Weighted average of shares outstanding — basic			10,623,645				5,000,532				5,000,532				5,000,133				1,250,000				225,000
Weighted average of shares outstanding — diluted			10,653,316				5,000,532				5,000,532				5,000,133				1,250,000				225,000

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																		Three Months				Nine Months
		Years Ended December 31,																Ended				Ended
																		December 31,				September 30,
		2004				2003(1)				2002(1)				2001(1)				2000(1)(2)				2000(1)(2)
		(Dollars in thousands, except per share data)
Insurance Performance Data:
(for the periods ended)
Gross written premiums(3)		$	191,405			$	149,708			$	100,542			$	70,484			$	14,781			$	55,676
Net written premiums(4)			166,024				131,839				78,362				44,990				7,846				22,437
GAAP Underwriting Ratios:
(for the periods ended)
Loss ratio(5)			59.9	%			74.8	%			71.7	%			70.4	%			76.5	%			76.3	%
Expense ratio(6)			31.9				34.2				38.3				42.3				24.3				50.8
Combined ratio(7)			91.8	%			109.0	%			110.0	%			112.7	%			100.8	%			127.1	%
Balance Sheet Data:
(at the end of the period)
Cash and investments		$	312,399			$	171,201			$	130,101			$	77,791			$	66,963			$	66,937
Reinsurance recoverables on paid and unpaid losses, net			33,382				42,042				35,323				48,550				45,377				45,723
Assets available for sale			—				59,018				51,229				49,306				30,287				43,043
Total assets			394,927				332,113				260,758				212,677				180,243				186,126
Loss and loss expense reserves			153,236				129,236				90,855				93,998				84,824				83,995
Liabilities available for sale			—				51,431				36,179				32,793				20,113				33,113
Long term debt			25,000				34,133				9,813				10,000				10,000				—
Trust preferred securities			—				—				14,545				—				—				—
Total shareholders’ equity			115,237				36,397				36,396				29,703				22,858				38,137
Other Data:
Net writings ratio, including discontinued operations(8)			1.4				1.7				1.3				1.4				1.3				1.2
Return on average equity(9)			18.5	%			0.9	%			18.4	%			5.3	%			9.2	%			(3.9	)%

(1)

Immediately prior to the completion of the IPO, the common shares of Evergreen National Indemnity Company (“Evergreen”) and its wholly owned subsidiary, Continental Heritage Insurance Company (“Continental”) were distributed as dividends from Century to ProCentury and then by ProCentury to ProCentury’s existing Class A shareholders. Prior to the dividends, Evergreen was a controlled subsidiary of Century. The operations of Evergreen and Continental consisted of ProCentury’s historical surety and assumed workers’ compensation lines of insurance, which were re-classified (net of minority interest and income taxes) as discontinued operations in the above selected consolidated financial data.

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(2)	Our management-led buyout occurred in October 2000. The summary financial information for the nine months ended September 30, 2000 is prepared based on historical results and does not include any purchase accounting adjustments related to the management-led buyout on October 5, 2000. The purchase accounting adjustments did not have a material impact on the financial information for the three-month period ended December 31, 2000.
(3)	The amount received or to be received for insurance policies written by us during a specific period of time without reduction for acquisition costs, reinsurance costs or other deductions.
(4)	Gross written premiums less the portion of such premiums ceded to (reinsured by) other insurers during a specific period of time.
(5)	The ratio of losses and loss expenses to premiums earned, net of the effects of reinsurance.
(6)	The ratio of amortization of deferred policy acquisition costs and other underwriting expenses to premiums earned, net of the effects of reinsurance.
(7)	The sum of the loss and loss expense ratio, net of the effects of reinsurance.
(8)	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 our current book of business. It may not be comparable to the definition of net writings ratio used by other companies. For periods prior to 2004, this ratio includes discontinued operations, as the insurance subsidiaries’ combined statutory surplus is not allocated by line of business. Therefore, in computing the ratio of net written premiums to our insurance subsidiaries’ combined statutory surplus we do not restate the net written premium for discontinued operations to be consistent with that of the subsidiaries’ combined statutory surplus.
(9)	Return on average equity consists of the ratio of net income (loss) to the average of the beginning of period and end of period total shareholders’ equity. For 2004, return on average equity consists of the ratio of net income (loss) to the average equity, which is based on the average of the beginning of period and the end of each quarters’ total shareholders’ equity.

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Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

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			Years Ended December 31,
			2004				2003				2002
			(Dollars in thousands)
Selected Financial Data:
Gross written premiums			$	191,405			$	149,708			$	100,542
Net premiums earned				148,702				108,294				63,290
Net investment income				10,048				6,499				5,075
Net realized investment gains				50				1,932				2,438
Total revenues				158,800				116,725				71,203
Total expenses				138,496				119,546				70,203
Other transactions:
	Gain (loss) on sale of minority interest in subsidiary, net			—				(503	)			9,659
	Cumulative effect of change in accounting principle, net of taxes			—				—				796
	Discontinued operations			1,259				1,548				881
Net income				14,980				314				6,080
Key Financial Ratios:
Loss and loss expense ratio				59.9	%			74.8	%			71.7	%
Expense ratio				31.9				34.2				38.3
Combined ratio				91.8	%			109.0	%			110.0	%

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	Premiums

	•	property/casualty; and
	•	other (including exited lines).

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			Year Ended December 31,
			2004				2003				2002
			(Dollars in thousands)
Gross written premiums:
	Property/casualty		$	190,591			$	150,900			$	98,288
	Other (including exited lines)			814				(1,192	)			2,254
	Total gross written premiums			191,405				149,708				100,542
Ceded written premiums				25,381				17,869				22,180
Net written premiums			$	166,024			$	131,839			$	78,362
Net premiums earned			$	148,702			$	108,294			$	63,290
Net written premiums to gross written premiums				86.7	%			88.1	%			77.9	%
Net premiums earned to net written premiums				89.6	%			82.1	%			80.8	%
Net writings ratio, including discontinued operations(1)				1.4				1.7				1.3

(1)

The ratio of net written premiums (including discontinued operations) to our insurance subsidiaries’ combined statutory surplus. This ratio is not restated to exclude discontinued operations as the insurance subsidiaries’ combined statutory surplus is not allocated by line of business. Therefore, in computing the ratio of net written premiums to our insurance subsidiaries’ combined statutory surplus we do not restate the net written premium for discontinued operations to be consistent with that of the subsidiaries’ combined statutory surplus. Management believes this measure is useful in gauging our exposure to pricing errors in the current book of business. It may not be comparable to the definition of net writings ratio used by other companies.

	Gross Written Premiums

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	Net Written and Earned Premiums

	Net Investment Income

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	Realized Gains (Losses) on Securities

	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.

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				Years Ended December 31,
				2004				2003				2002
				(Dollars in thousands)
Net incurred losses and loss expenses attributable to insured events of:
Current year				$	78,015			$	53,961			$	28,628
Prior years:
	Property/casualty:
		Casualty			12,842				22,190				13,516
		Property			(3,244	)			2,254				(22	)
	Other (including exited lines):
		Commercial auto			789				1,350				263
		Workers’ compensation			664				1,249				3,017
Net incurred				$	89,066			$	81,004			$	45,402
Net loss and loss expense ratio:
Current year					52.5	%			49.8	%			45.2	%
Prior years					7.4				25.0				26.5
Net loss and loss expense ratio					59.9	%			74.8	%			71.7	%

			Year Ended
			December 31,
			2004
			(In thousands)
Property/casualty:
	Casualty		$	102,430
	Property			16,115
Other (including exited lines):
	Commercial auto			1,780
	Workers’ compensation			3,426
Net reserves for losses and loss expenses				123,751
Plus reinsurance recoverables on unpaid losses at end of period				29,485
Gross reserves for losses and loss expenses			$	153,236

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			Year Ended
			December 31,
			2003
			(In thousands)
Property/casualty:
	Casualty		$	71,328
	Property			13,806
Other (including exited lines):
	Commercial auto			3,519
	Workers’ compensation			3,844
Net reserves for losses and loss expenses				92,497
Plus reinsurance recoverables on unpaid losses at end of period				36,739
Gross reserves for losses and loss expenses			$	129,236

	Property/Casualty

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	•	our experience and the industry’s experience;
	•	historical trends in reserving patterns and loss payments;
	•	the impact of claim inflation;
	•	the pending level of unpaid claims;
	•	the cost of claim settlements;
	•	the line of business mix; and
	•	the environment in which property and casualty insurance companies operate.

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	Other (Including Exited Lines)

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	Operating Expenses

				Years Ended December 31,
				2004				2003				2002
				(Dollars in thousands)
Amortization of deferred policy acquisition costs (“ADAC”)				$	33,872			$	25,237			$	15,429
Other operating expenses					13,542				11,757				8,782
ADAC and other operating expenses					47,414				36,994				24,211
Interest expense on the redemption of Class B shares					518				—				—
Interest expense					1,498				1,548				590
		Total operating expenses		$	49,430			$	38,542			$	24,801
Expense ratio: ADAC					22.8	%			23.3	%			24.4	%
	Other operating expenses				9.1				10.9				13.9
		Total expense ratio(1)			31.9	%			34.2	%			38.3	%

(1)	Interest expense and interest expense on the redemption of Class B shares are not included in the calculation of the expense ratio.

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				Years Ended December 31,
				2004				2003				2002
Federal income tax expense at statutory rate					35.00	%			35.00	%			34.00	%
Increase (decrease) attributable to:
	Nontaxable interest income				(2.82	)			0.07				(0.02	)
	Dividend received deduction net of proration				(.12	)			5.63				—
	Difference between the book and tax basis of Evergreen				—				9.33				25.07
	Other nontaxable income				(.04	)			1.00				—
	Other				.40				(.46	)			(2.10	)
		Total			32.42	%			50.57	%			56.95	%

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	Year ended December 31, 2004 compared to Year ended December 31, 2003

	Year ended December 31, 2003 compared to Year ended December 31, 2002

			Payments Due by Year
			2005				2006				2007				2008				2009				Thereafter				Total
			(In thousands)
Long Term Debt:
	Debt issued to a related party trust(1)(2)		$	1,668			$	1,668			$	1,668			$	1,668			$	1,668			$	63,688			$	72,028
Operating leases on facilities				958				978				998				1,018				734				2,339				7,025
Other operating leases				249				212				212				152				—				—				825
	Total contractual obligations		$	2,875			$	2,858			$	2,878			$	2,838			$	2,402			$	66,027			$	79,878

(1)	Amounts include interest payments associated with these obligations using applicable interest rates as of December 31, 2004.

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(2)	In connection with the adoption of FIN 46R, ProCentury has deconsolidated the trusts established in connection with the issuance of trust preferred securities effective December 31, 2003. As a result, ProCentury reports as a component of long term debt the junior subordinated debentures payable by ProCentury to the trusts. See Note 8(b) to our consolidated financial statements.

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								Percent of
				Amount				Portfolio
				(Dollars in thousands)
Fixed-maturity:
	U.S. Treasury securities			$	4,261				1.4	%
	Obligations of U.S. governmental agencies				17,872				5.7
	Corporate securities				46,149				14.8
	Mortgage-backed securities				33,376				10.7
	Asset-backed securities				18,391				5.9
	Collateralized mortgage obligations				23,777				7.6
	Obligations of states and political subdivisions				120,717				38.6
		Total fixed-maturity			264,543				84.7
Cash and short-term investments					10,707				3.4
Equity securities:
	Bond mutual funds				18,921				6.0
	Preferred shares				15,214				4.9
	Common shares				3,014				1.0
		Total equity securities			37,149				11.9
		Total		$	312,399				100.0	%

“AAA”				69.4	%
“AA”				19.0
“A”				8.6
“BBB”				2.5
Below “BBB”				.5
	Total			100.0	%

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Financial				51.0	%
Consumer, non-cyclical				17.5
Utilities				11.5
Energy				3.5
Industrial				8.6
Consumer, cyclical				3.8
Communications				2.6
Basic materials				1.2
Technology				.3
	Total			100.0	%

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				December 31, 2004
				Less Than 12 Months								12 Months or Longer								Total
				Estimated				Gross				Estimated				Gross				Estimated				Gross
				Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
				Value				Loss				Value				Loss				Value				Loss
Fixed maturity securities:
	U.S. Treasury securities			$	2,068			$	(19	)		$	571			$	(13	)		$	2,639			$	(32	)
	Obligations of U.S. government corporations and agencies				3,339				(29	)			5,876				(55	)			9,215				(84	)
	Obligations of states and political subdivisions				30,763				(346	)			3,441				(53	)			34,204				(399	)
	Corporate securities				20,509				(203	)			7,224				(97	)			27,733				(300	)
	Mortgage-backed securities				6,542				(38	)			1,388				(10	)			7,930				(48	)
	Collateralized mortgage obligations				9,908				(99	)			3,153				(21	)			13,061				(120	)
	Asset-backed securities				3,175				(26	)			6,319				(101	)			9,494				(127	)
		Total			76,304				(760	)			27,972				(350	)			104,276				(1,110	)
Equities:
	Equity securities				4,305				(151	)			760				(23	)			5,065				(174	)
	Bond mutual funds				15,619				(25	)			—				—				15,619				(25	)
		Total			19,924				(176	)			760				(23	)			20,684				(199	)
		Total		$	96,228			$	(936	)		$	28,732			$	(373	)		$	124,960			$	(1,309	)

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										Hypothetical
										Percentage Increase
										(Decrease) in
						Estimated
		Estimated Fair				Change in				Fair				Shareholders’
Hypothetical Change in Interest Rates		Value				Fair Value				Value				Equity
		(Dollars in thousands)
200 basis point increase		$	271,199			$	(27,493	)			(9.2	)%			(23.9	)%
100 basis point increase			284,915				(13,777	)			(4.6	)%			(12.0	)%
No change			298,691				—				—				—
100 basis point decrease			312,083				13,391				4.5	%			11.6	%
200 basis point decrease			324,996				26,304				8.8	%			22.8	%

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Item 7A.	Quantitative and Qualitative Disclosures about Market Risk

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Item 8.	Financial Statements and Supplementary Data

		Page
Financial Statements:
Report of Independent Registered Public Accounting Firm			57
Consolidated Balance Sheets at December 31, 2004 and 2003			58
Consolidated Statements of Operations for the three years ended December 31, 2004			59
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the three years ended December 31, 2004			60
Consolidated Statements of Cash Flows for the three years ended December 31, 2004			61
Notes to Consolidated Financial Statements			62
Financial Statement Schedules:
Schedule I — Summary of Investments — Other than Investments in Related Parties			95
Schedule II — Condensed Financial Information of Parent Company			96
Schedule III — Supplementary Insurance Information			110
Schedule IV — Reinsurance			111
Schedule V — Valuation and Qualifying Accounts			112
Schedule VI — Supplemental Information Concerning Property — Casualty Insurance Operations			113

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					2003				2002
					(Dollars in thousands)
Assets
Investments:
	Fixed maturities:
		Available-for-sale, at fair value (amortized cost 2004, $262,470; 2003, $120,701)			$	263,401				121,270
		Held-to-maturity, at amortized cost (fair value 2004, $1,156; 2003, $1,511)				1,142				1,481
	Equities (available-for-sale):
		Equity securities, at fair value (cost 2004, $17,944; 2003, $16,041)				18,228				16,394
		Bond mutual funds, at fair value (cost 2004, $18,943; 2003, $8,882)				18,921				8,906
	Short-term investments, at amortized cost					4,026				17,336
			Total investments			305,718				165,387
Cash						6,681				5,814
Premiums in course of collection, net						11,747				9,686
Deferred policy acquisition costs						17,411				11,714
Prepaid reinsurance premiums						9,382				6,700
Reinsurance recoverable on paid losses, net						3,897				5,303
Reinsurance recoverable on unpaid losses, net						29,485				36,739
Deferred federal income tax asset						5,442				1,774
Receivable from subsidiary available-for-sale						—				26,687
Assets available-for-sale						—				59,018
Other assets						5,164				3,291
			Total assets		$	394,927				332,113
Liabilities and Shareholders’ Equity
Loss and loss expense reserves					$	153,236				129,236
Unearned premiums						82,135				62,139
Long term debt						25,000				34,133
Accrued expenses and other liabilities						6,703				6,677
Reinsurance balances payable						2,348				4,320
Collateral held						7,008				5,716
Federal income taxes payable						3,260				2,064
Liabilities available-for-sale						—				51,431
			Total liabilities			279,690				295,716
Shareholders’ equity:
	Capital stock, without par value:					—				—
		Class A shares — Issued and outstanding 13,155,995 shares at December 31, 2004 and 4,999,995 shares issued and outstanding at December 31, 2003				—				—
		Class B shares — None authorized at December 31, 2004 and authorized 15,000 shares, issued and outstanding 531.68 shares at December 31, 2003				—				—
		Class C shares — None authorized at December 31, 2004 and authorized 10,000 shares, issued and outstanding 0 shares at December 31, 2003				—				—
	Additional paid-in capital					98,690				26,866
	Retained earnings					15,727				8,297
	Accumulated other comprehensive income, net of minority interest and taxes					820				1,234
			Total shareholders’ equity			115,237				36,397
			Total liabilities and shareholders’ equity		$	394,927				332,113

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				2004				2003				2002
				(Dollars in thousands, except per share data)
Premiums earned				$	148,702				108,294				63,290
Net investment income					10,048				6,499				5,075
Net realized investment gains					50				1,932				2,438
Other					—				—				400
		Total revenues			158,800				116,725				71,203
Losses and loss expenses					89,066				81,004				45,402
Amortization of deferred policy acquisition costs					33,872				25,237				15,429
Other operating expenses					13,542				11,757				8,782
Interest expense on the redemption of Class B shares					518				—				—
Interest expense					1,498				1,548				590
		Total expenses			138,496				119,546				70,203
		Income (loss) before gain (loss) on sale of minority interest in subsidiary, net			20,304				(2,821	)			1,000
Gain (loss) on sale of minority interest in subsidiary, net of transaction fees					—				(503	)			9,659
		Income (loss) before minority interest and income tax			20,304				(3,324	)			10,659
Minority interest					—				(409	)			186
Income tax (benefit) expense					6,583				(1,681	)			6,070
		Net income (loss) before discontinued operations and cumulative effect of change in accounting principle			13,721				(1,234	)			4,403
Discontinued operations, net of tax					1,259				1,548				881
Cumulative effect of change in accounting principle, net of tax					—				—				796
		Net income		$	14,980				314				6,080
Basic net income per share:
	Net income (loss) before discontinued operations and cumulative effect of change in accounting principle			$	1.29				(.25	)			.88
	Discontinued operations, net of tax				.12				.31				.18
	Cumulative effect of change in accounting principle, net of tax				—				—				.16
	Net income			$	1.41				.06				1.22
Diluted net income per share:
	Net income (loss) before discontinued operations and cumulative effect of change in accounting principle			$	1.29				(.25	)			.88
	Discontinued operations, net of tax				.12				.31				.18
	Cumulative effect of change in accounting principle, net of tax				—				—				.16
	Net income			$	1.41				.06				1.22
Weighted average of shares outstanding — basic					10,623,645				5,000,532				5,000,532
Weighted average of shares outstanding — diluted					10,653,316				5,000,532				5,000,532

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						2004				2003				2002
						(Dollars in thousands)
Shareholders’ Equity
Capital stock:
	Beginning of year					$	—				—				—
	Stock issued						—				—				—
	End of year						—				—				—
Additional paid-in capital:
	Beginning of year						26,866				26,460				26,460
	Issuance of common shares						77,931				—				—
	Issuance costs						(1,298	)			—				—
	Redemption of Class B shares						(5,000	)			—				—
	Vesting of restricted shares						191				—				—
	Gain on sale of minority interest in subsidiary, net of tax						—				406				—
	End of year						98,690				26,866				26,460
Retained earnings:
	Beginning of year						8,297				7,983				1,903
	Net income						14,980				314				6,080
	Dividend of subsidiary available for sale						(7,025	)			—				—
	Dividend to shareholders						(525	)			—				—
	End of year						15,727				8,297				7,983
Accumulated other comprehensive income, net of taxes:
	Beginning of year						1,234				1,953				1,339
	Unrealized holding (losses) gains arising during the period, net of reclassification adjustment						144				(562	)			586
	Unrealized holding (losses) gains arising during the period, discontinued operations						—				(157	)			28
	Dividend of subsidiary available for sale						(558	)			—				—
	End of year						820				1,234				1,953
				Total shareholders’ equity		$	115,237				36,397				36,396
Comprehensive Income
Net income						$	14,980				314				6,080
Other comprehensive income:
	Unrealized gains on securities:
		Unrealized holding gains arising during the period:
		Gross					298				1,054				3,278
		Related federal income tax expense					(121	)			(360	)			(1,083	)
			Net unrealized gains				177				694				2,195
	Reclassification adjustment for gains included in net income
		Gross					50				1.932				2,438
		Related federal income tax expense					(18	)			(676	)			(829	)
			Net reclassification adjustment				33				1,256				1,609
				Other comprehensive (loss) income			144				(562	)			586
				Other comprehensive (loss) income, discontinued operations			(558	)			(157	)			28
				Total other comprehensive (loss) income			(414	)			(719	)			614
				Total comprehensive income(loss)		$	14,566				(405	)			6,693

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						2004				2003				2002
						(Dollars in thousands)
Cash flows provided by operating activities:
	Net income					$	14,980				314				6,080
	Adjustments:
		Deferred retroactive reinsurance gain					—				(2,506	)			(1,106	)
		Minority interest					—				(409	)			186
		Net realized investment gains					(50	)			(1,932	)			(2,438	)
		Gain on the sale of minority interest in subsidiary					—				(313	)			(10,109	)
		Deferred federal income tax (benefit) expense					(2,512	)			(3,205	)			3,810
		Federal income tax expense included in additional paid-in capital					—				(1,418	)			—
		Cumulative effect of change in accounting principle					—				—				(796	)
		Discontinued operations					(1,259	)			(1,548	)			(881	)
		Restricted stock compensation					191				—				—
		Changes in assets and liabilities:
			Premiums in course of collection, net				(2,061	)			(10,198	)			1,725
			Deferred policy acquisition costs				(5,697	)			(5,441	)			(2,562	)
			Prepaid reinsurance premiums				(2,682	)			389				(603	)
			Reinsurance recoverable on paid, unpaid losses, and retroactive, net				8,660				7,160				23,748
			Federal income taxes payable				1,196				1,165				977
			Losses and loss expense reserves				24,000				38,381				(3,143	)
			Unearned premiums				19,996				23,164				15,725
			Funds held under retroactive reinsurance contract				—				(11,089	)			(9,289	)
			Receivable from subsidiary available for sale				26,687				(12,034	)			(15,608	)
			Discontinued operations				—				14,032				4,639
			Other, net				(1,011	)			(139	)			16,530
				Net cash provided by operating activities			80,438				34,374				27,424
Cash flows used in investing activities:
	Purchases of equity securities						(60,755	)			(114,454	)			(59,761	)
	Purchase of fixed maturity securities available-for-sale						(193,030	)			(129,094	)			(83,522	)
	Purchase of fixed maturity securities held-to-maturity						—				(1,069	)			—
	Proceeds from sales of equity securities						48,797				111,206				48,751
	Proceeds from sales and maturities of fixed maturities available-for-sale						49,807				93,232				51,822
	Proceeds from maturities of fixed maturities held-to-maturity						325				1,100				975
	Net proceeds from sale (purchases) of short-term investments						13,310				(3,004	)			(1,615	)
	Discontinued operations						—				(9,909	)			(6,283	)
				Net cash used in investing activities			(141,546	)			(51,992	)			(49,633	)
Cash flows provided by financing activities:
	Proceeds from issuance of common stock						77,931				—				—
	Issuance costs						(1,298	)			—				—
	Proceeds from the issuance of Trust Preferred Securities						—				10,000				15,000
	Redemption of Class B shares						(5,000	)			—				—
	Principal payment on long term debt						(9,133	)			(680	)			(187	)
	Dividend paid to shareholders						(525	)			—				—
	Gain on sale of minority interest in subsidiary						—				(625	)			—
	Discontinued operations						—				7,500				10,000
				Net cash provided by financing activities			61,975				16,195				24,813
				Increase (decrease) in cash and cash equivalents			867				(1,423	)			2,604
Cash and equivalents at beginning of year							5,814				7,237				4,633
Cash and equivalents at end of year						$	6,681				5,814				7,237
Supplemental disclosure of cash flow information:
	Interest paid					$	1,632				1,521				550
	Federal income taxes paid					$	7,900				3,540				1,234

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(1)	Basis of Presentation

(a)	Organization

	ProCentury Corporation (formerly known as ProFinance Holdings Corporation) (ProCentury or the Company) was formed on July 17, 2000 by Colonial Banc Corp., Richmond Mutual Bancorporation, Inc., DCB Financial Corp., Ohio Heritage Bancorp Inc., Ohio Valley Banc Corp., Stonehenge Opportunity Fund, LLC, and a group of individual investors including members of management. On July 7, 2003, ProFinance Holdings Corporation’s name was changed to ProCentury Corporation.
	On October 5, 2000, ProCentury acquired Century Surety Company (Century) (and its subsidiaries, Evergreen National Indemnity Company (Evergreen), Continental Heritage Insurance Company (Continental), and CSC Insurance Agency, Inc.) from Century Business Services, Inc. and acquired ProCentury Insurance Agency, Inc. (PIA) (formerly Century Workers’ Compensation Agency, Inc.) from Avalon National Corporation. ProCentury and its subsidiaries are collectively referred to herein as the Company.
	In 2001, ProCentury authorized 5,000 nonvoting $0 par Class B and 10,000 nonvoting $0 par Class C common shares. In September 2001, ProCentury issued 531.68 Class B shares to an unrelated third party for $5.0 million.
	In 2002 and 2003, the Company sold approximately 69.65% of the outstanding shares of Evergreen in a series of transactions, see further information in Note 3. As of December 31, 2003, the Company owned 65.06% of the voting shares of Evergreen and approximately 23.06% of the economic interest in Evergreen.
	On April 26, 2004, the Company issued 8,000,000 common shares in an initial public offering (the “IPO”) and received net proceeds (before expenses) of $77.9 million, based on an initial public offering price of $10.50. The following transactions occurred in connection with the IPO:

	•	Immediately prior to the completion of the IPO, each outstanding Class A common share was converted into 500 common shares. After the conversion, but prior to the completion of the IPO, the Company had 4,999,995 Class A common shares outstanding. The share conversion is reflected for all periods presented;
	•	Immediately prior to the completion of the IPO, the common shares of Evergreen were distributed as dividends from Century to ProCentury and then by ProCentury to ProCentury’s existing Class A shareholders;
	•	The Company issued 8,000,000 Class A common shares and received net proceeds (before expenses) of $77.9 million;
	•	The Company granted 101,200 restricted common shares and 364,000 stock options to certain employees of ProCentury;
	•	The Company repaid $8.7 million of bank indebtedness outstanding at the closing of the IPO;
	•	The Company redeemed all of its outstanding Class B common shares for an aggregate redemption price of $5.0 million and recorded interest expense of $518,000 in connection with the redemption; and

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	•	The Company amended its articles of incorporation to eliminate the authority to issue Class B and Class C common shares.

	In addition, on August 5, 2004 the Company issued 54,800 of additional restricted common shares to certain employees of Pro-Century.
	Century markets and underwrites general liability, commercial property, multi-peril, and limited bonding coverages to commercial and individual customers through independent and affiliated agents throughout the United States. The Company writes business on both an admitted and nonadmitted basis in 48 states and the District of Columbia, on an admitted basis only in six states and on a nonadmitted basis only in 42 states and the District of Columbia. Century competes with other property and casualty insurance companies and is subject to the regulations of certain state and federal agencies and undergoes periodic financial examinations by those regulatory authorities.
	Following is a description of the most significant risks facing the Company and how the Company mitigates those risks:

	•	Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates will occur and create additional loss costs or expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits or new legal theories may create costs for the insurer beyond those recorded in the consolidated financial statements. This risk is reduced by underwriting and loss adjusting practices that identify and minimize the adverse impact of these risks.
	•	Credit Risk is the risk that issuers of securities owned by the Company will default or other parties, including reinsurers that owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy and by maintaining reinsurance and credit and collection policies.
	•	Interest Rate Risk is the risk that interest rates will change and cause a change in the value of an insurer’s investments. The Company mitigates this risk by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer may have to sell assets prior to maturity and recognize a gain or loss.
	•	Ratings Risk is the risk that rating agencies change their outlook or rating of Century. The rating agencies generally utilize proprietary capital adequacy models in the process of establishing ratings for Century. Century is at risk to changes in these models and the impact that changes in the underlying business that it is engaged in can have on such models. To mitigate this risk, Century maintains regular communications with the rating agencies and evaluates the impact of significant transactions on such capital adequacy models and considers the same in the design of transactions to minimize the adverse impact of this risk.
	•	Significant Business Concentrations: As of December 31, 2004, the Company did not have a material concentration of financial instruments in a single investee or geographic location. Also, the Company did not have a concentration of business transactions with a particular distribution source, a market or geographic area in which business is conducted that makes it overly vulnerable to a single event which

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		could cause a severe impact to the Company’s financial position. The Company did, however, have a concentration of business transactions with a particular customer. See Note 12(d).
	•	Reinsurance: The Company has entered into reinsurance contracts to cede a portion of its business. Total amounts recoverable under these reinsurance contracts include ceded reserves, paid and unpaid claims, and certain other amounts, which totaled $40.4 million as of December 31, 2004. The ceding of risk does not discharge the original insurer from its primary obligation to the contract holder. The Company is selective in its choice of reinsurers and considers numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize the Company’s exposure to the insolvency of its reinsurers, the Company evaluates the acceptability and reviews the financial condition of each reinsurer annually. The Company’s policy is to use only those reinsurers that have an A.M. Best rating of “A-” (excellent) or better and that have at least $500 million in policyholders’ surplus, or Lloyds of London syndicates that have an A.M. Best rating of “A-” (excellent) or better. See Note 5.

	(b) Summary of Significant Accounting Policies

	The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).
	Immediately prior to the completion of the IPO, the common shares of Evergreen and its wholly owned subsidiary, Continental were distributed as dividends from Century to ProCentury and then by ProCentury to ProCentury’s existing Class A shareholders. Prior to the dividends, Evergreen was a 30.35% controlled subsidiary of Century. The operations of Evergreen and Continental consisted of ProCentury’s historical surety and assumed workers’ compensation lines of insurance, which were re-classified (net of minority interest and income taxes) as discontinued operations in the accompanying consolidated financial statements and notes for all periods presented.
	In preparing the consolidated financial statements, management is 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 consolidated 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 generally reflected in current operations.

	(c) Consolidation Policy

	The consolidated financial statements include the accounts of ProCentury and its wholly owned subsidiaries.

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	In 2003 and 2002, the Company owned a controlling interest of Evergreen and therefore, consolidated 100% of Evergreen’s assets, liabilities, revenues, and expenses, with reductions on the balance sheets and statements of operations for the minority shareholders’ proportionate interest in Evergreen’s equity and earnings (see Note 3). As of the IPO, Evergreen is no longer a subsidiary of the Company (see Note 1(a)).
	All significant intercompany balances and transactions have been eliminated.

	(d) Investment Securities

	The Company classifies its fixed maturity and equity securities into one of two categories: held-to-maturity or available-for-sale. Held-to-maturity securities are those securities that the Company has the ability and intent to hold the security until maturity. All securities not classified as held-to-maturity are classified as available-for-sale.
	Held-to-maturity fixed maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts to maturity date using the effective interest method. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect and minority interest, on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive income within shareholders’ equity, until realized.
	For mortgage-backed securities, the Company recognizes income using a constant effective yield method based on prepayment assumptions and the estimated economic life of the securities. When estimated prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. Any resulting adjustment is included in net investment income. All other investment income is recorded using the interest-method without anticipating the impact of prepayments.
	Realized gains or losses represent the difference between the book value of securities sold and the proceeds realized upon sale, and are recorded on the trade date. The Company uses the specific identification method to determine the cost of securities sold.
	Under the Company’s accounting policy for equity securities and fixed-maturity securities that can be contractually prepaid or otherwise settled in a way that may limit the Company’s ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the Company has both the ability and intent to hold the investment for a reasonable period until the security’s forecasted recovery and evidence exists indicating that recovery will occur in a reasonable period of time.
	For other fixed-maturity and equity securities, an other-than-temporary impairment charge is taken when the Company does not have the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not limited to, the current fair value as compared to amortized cost or cost, as appropriate, of the security; the amount and length of time a security’s fair value has been below amortized cost or cost; specific credit issues and financial prospects related to the issuer; the Company’s intent to hold or dispose of the security; and current economic conditions.

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	Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.
	Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income is recognized when earned.
	Prior to May 2003, gains or losses resulting from the sale or issuance of a consolidated subsidiary’s stock are included in the consolidated statements of operations. Beginning in May 2003, such gains or losses are excluded from earnings and are reported within shareholders’ equity. See Note 3.

	(e) Premiums in Course of Collection

Premiums in course of collection include amounts due from agents and amounts relating to assumed reinsurance. These balances are stated net of certain commission payable amounts, prepaid agents’ balances, and allowance for uncollectible premiums in course of collection. The Company evaluates the collectibility of premiums in course of collection based on a combination of factors. In circumstances in which the Company is aware of a specific customer’s inability to meet its financial obligations to the Company, a specific allowance for bad debt against amounts due is recorded to reduce the net receivable to the amount believed to be collectible. For all remaining balances, allowances are recognized for bad debts based on the length of time the receivables are past due using the Company’s historical experience of write-offs. The allowance for uncollectible premiums in course of collection was $79,000 and $204,445, at December 31, 2004 and 2003, respectively.

	(f) Loss and Loss Expense Reserves

Loss and loss expense reserves represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known. The Company uses actuarial methodologies to assist in establishing these estimates, including judgments relative to estimates of future claims severity and frequency, length of time to develop to ultimate resolution, judicial theories of liability and other third-party factors that are often beyond our control. Due to the inherent uncertainty associated with the cost of unsettled and unreported claims, the ultimate liability may be different from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current period’s results. The loss and loss expense reserves are not discounted.

	(g) Premium Earned and Unearned

	Insurance premiums are earned in proportion to the insurance coverage provided, which is generally on the daily pro-rata basis and are stated after deduction for reinsurance placed with other insurers and reinsurers. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums.

	(h) Deferred Policy Acquisition Costs

	The Company defers commissions, premium taxes and certain other costs that vary with and are primarily related to the acquisition of insurance contracts. These costs are capitalized and charged to

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expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, anticipated losses and settlement expenses and certain other costs expected to be incurred as the premium is earned. Judgments as to ultimate recoverability of such deferred costs are highly dependent upon estimated future loss costs associated with the written premiums. The amounts that are not considered realizable are charged as an expense through amortization of deferred policy acquisition costs.

	(i) Reinsurance Ceded

	In the ordinary course of business, Century reinsures certain risks, generally on an excess-of-loss basis, with other insurance companies which primarily are rated “A-” or higher by A.M. Best on the date that the agreement is entered into. Such reinsurance arrangements serve to limit the Company’s maximum loss.
	Reinsurance does not discharge the Company from its primary liability to policyholders, and to the extent that a reinsurer is unable to meet its obligations, the Company would be liable.
	Reinsurance recoverables are determined based in part on the terms and conditions of reinsurance contracts. Reinsurance recoverables on paid and unpaid losses, net, are established for the portion of our loss and loss expense reserves that are ceded to reinsurers and are reported separately as assets, net of any valuation allowance. Reinsurance recoverables on paid and unpaid losses are accounted for and reported separately as assets, net of any valuation allowance, while ceded premiums payable are reported separately as liabilities. Reinsurance premiums paid and reinsurance recoveries on claims incurred are deducted from the respective revenue and expense accounts. The estimated valuation allowance on reinsurance recoverables on paid and unpaid losses at December 31, 2004 and 2003 was $1.3 million and $1.4 million, respectively.

	(j) Negative Goodwill

	On October 5, 2000, ProCentury acquired 100% of the outstanding shares of Century and PIA for $30.5 million. The acquisition was accounted for using the purchase method of accounting. The total purchase price of the acquisition was allocated to the assets acquired and liabilities assumed based upon the respective fair values as of the date of acquisition. The excess of the fair value of net identifiable assets acquired over the purchase price, after reducing noncurrent and nontangible assets, was $514,000, which was recorded as negative goodwill. This negative goodwill is a combination of $1.5 million of tax deductible goodwill that was recognized with the purchase of PIA and $2.0 million of unallocated negative goodwill related to the reorganization that occurred on October 5, 2000.
	Negative goodwill is the excess of the fair value of the net assets over the price paid to acquire a company, reduced by accretion and any subsequent valuation adjustments. Negative goodwill is accreted on a straight-line basis over the expected periods to be benefited, which is generally 5 years. The accumulated accretion of goodwill was $128,000 at December 31, 2001.
	In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which addresses financial account-

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ing and reporting standards for goodwill and other intangible assets. Upon adoption, SFAS No. 142 requires that any unaccreted negative goodwill from a business combination for which the acquisition date was before July 1, 2001, be included in income. The Company adopted the provisions of SFAS No. 142 on January 1, 2002 and the remaining negative goodwill of $385,000 and the related tax benefit of $411,000, totaling $796,000, was recorded as income as a cumulative effect of a change in accounting principle in the accompanying 2002 consolidated statement of operations.

	(k) Federal Income Taxes

	Prior to January 1, 2003, ProCentury and its subsidiaries, including Evergreen and Continental, filed a consolidated federal income tax return in accordance with a tax sharing agreement. Each entity within the consolidated group pays its share of federal income taxes primarily based on separate return calculations. ProCentury’s tax sharing agreement with its subsidiaries allowed it to make certain Internal Revenue Code (“Code”) elections in its consolidated federal tax return. In the event such code elections are made, any benefit or liability is the responsibility of ProCentury and is not accrued or paid by the subsidiary.
	The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded in the consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated statements of income.
	The Company utilizes the asset and liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized.
	Beginning on January 1, 2003, Evergreen was no longer eligible to be a member of ProCentury’s consolidated tax group and therefore no longer participated in ProCentury’s tax sharing agreement (see Note 3). However, until April of 2004, Evergreen’s taxes were consolidated in the accompanying financial statements as Evergreen continued to be a consolidated subsidiary. All other consolidated subsidiaries continue to participate in ProCentury’s tax sharing agreement.

	(l) Net Income Per Share

	Basic net income per share 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

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	EPS or reduces the loss per share, the effect on earnings is antidilutive. Under these circumstances, diluted net income per share is computed excluding the common share equivalents.
	On April 21, 2004, the Company’s Class A common shares split on a 500 to 1 basis. Prior periods’ share and per share data has been adjusted to reflect this split. On April 26, 2004, the Company issued 8,000,000 common shares and 101,200 restricted common shares, which are reflected in the Company’s share and per share data for all periods after April 26, 2004. In addition, on August 5, 2004, the Company issued an additional 54,800 restricted common shares which are reflected in the Company’s share and per share data for all periods after August 5, 2004.
	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 consolidated condensed financial statements.

		For the Year Ended December 31, 2004
		(dollars in thousands except per share data)
		Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount
Basic Net Income Per Share
Net income before discontinued operations and cumulative effect of change in accounting principle		$	13,721				10,623,645			$	1.29
Effect of Dilutive Securities
Restricted common shares			—				29,671				.00
Diluted EPS
Net income before discontinued operations and cumulative effect of change in accounting principle		$	13,721				10,653,316			$	1.29

	The Company’s stock option grants are considered anti-dilutive at December 31, 2004 as the average market price was less than the exercise price. Diluted EPS is the same as Basic EPS for the year ended December 31, 2003 and 2002 because the Company had no common share equivalents granted during those periods.

	(m) Comprehensive Income

	Comprehensive income encompasses all changes in shareholders’ equity (except those arising from transactions with shareholders) and includes net income and changes in net unrealized investment gains and losses on fixed maturity investments classified as available-for-sale and equity securities, net of minority interest and taxes.

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	(n) Fair Value Disclosures

	The Company, in estimating its fair value disclosures for financial instruments, uses the following methods and assumptions:

	•	Cash and short-term investments — The carrying amounts reported approximate their fair value.
	•	Investment securities — Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services. Fair values for equity securities, consisting of preferred and common stocks and bond mutual funds, are based on quoted market prices or independent pricing services. Fair value disclosures for investments are included in Note 2.
	•	Other — The carrying amounts reported for premiums in the course of collection, reinsurance recoverables, accrued investment income, and other assets approximate their fair value. The Company’s long term debt, accrued expenses and other liabilities, reinsurance balances payable, and reinsurance payable on paid losses are either short term in nature or based on current market price, which also approximates fair value.

	(o) Share-Based Compensation

The Company follows the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), the Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation (an interpretation of APB Opinion No. 25), and other related accounting interpretations for the Company’s share option and restricted common share plans utilizing the “intrinsic value method.” The Company also follows the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, for the Company’s share option grants, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure; an amendment of FASB Statement No. 123. This disclosure requires pro forma net income (loss) and earnings (loss) per share information, which is calculated assuming the Company has accounted for its stock option plans under the “fair value method” described in SFAS No. 123 and SFAS No. 148.

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	If the Company recorded compensation expense for its share option grants based on the “fair value method,” the Company’s net income (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts as indicated in the following table:

			For the Year Ended
			December 31,
			2004				2003				2002
Net income (loss):
	As reported		$	14,980				314				6,080
	Add: Share-based employee compensation expense included in reported net income, net of related tax effects			124				—				—
	Less: Additional share-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects			(677	)			—				—
	Pro Forma		$	14,427				314				6,080
Basic income loss per common share:
	As reported		$	1.41				.06				1.22
	Pro Forma		$	1.36				.06				1.22
Diluted income loss per common share:
	As reported		$	1.41				.06				1.22
	Pro Forma		$	1.35				.06				1.22

	No share option or restricted common share-based compensation expense is included in reported net income (loss) for any period presented for 2003 or 2002, as the Company had no common share equivalents granted during 2003 or 2002.
	The fair values of the share options and restricted common shares are estimated on the dates of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

		Year Ended
		December 31,
		2004
Risk free interest rate			3.74%
Dividend yield			0.76%
Volatility factor			23.14%
Weighted average expected option life			6.15 Years

	(p) Recently Issued Accounting Standards

	In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS 123 and supersedes APB 25. SFAS 123R requires companies to expense at fair value all costs resulting from share-based payment transactions, except for equity instruments held by employee share ownership plans. SFAS 123R also amended SFAS No. 95,

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Statement of Cash Flows, to require excess tax benefits to be reported as a financing cash inflow rather than as a reduction of taxes paid. SFAS 123R is effective for the Company as of the beginning of the first period that begins after June 15, 2005. As permitted by SFAS 123R, the Company will adopt the Statement effective July 1, 2005 using the modified prospective method. The Company expects to report stock compensation expense of approximately $482,000, net of tax, in the second half of 2005 due to the adoption of SFAS 123R.

	(q) Reclassifications

	Certain 2003 and 2002 amounts have been reclassified in order to conform to the 2004 presentation.

(2)	Investments

	The Company invests primarily in investment-grade fixed maturities. The amortized cost, gross unrealized gains and losses and estimated fair value of fixed maturity securities classified as held-to-maturity were as follows:

			December 31, 2004
							Gross				Gross
			Amortized				unrealized				unrealized				Estimated
			cost				gains				losses				fair value
U.S. Treasury securities			$	89				13				—				102
Agencies not backed by the full faith and credit of the U.S. Government				1,053				1				—				1,054
	Total		$	1,142				14				—				1,156

			December 31, 2003
							Gross				Gross
			Amortized				unrealized				unrealized				Estimated
			cost				gains				losses				fair value
U.S. Treasury securities			$	416				17				—				433
Agencies not backed by the full faith and credit of the U.S. Government				1,065				13				—				1,078
	Total		$	1,481				30				—				1,511

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	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:

				December 31, 2004
								Gross				Gross
				Amortized				unrealized				unrealized				Estimated
				cost				gains				losses				fair value
Fixed maturities:
	U.S. Treasury securities			$	4,169				35				(32	)			4,172
	Agencies not backed by the full faith and credit of the U.S. Government				16,805				98				(84	)			16,819
	Obligations of states and political subdivisions				119,893				1,225				(399	)			120,717
	Corporate securities				46,249				200				(300	)			46,149
	Mortgage-backed securities				33,148				276				(48	)			33,376
	Collateralized mortgage obligations				23,825				72				(120	)			23,777
	Asset-backed securities				18,383				135				(127	)			18,391
		Total fixed maturities			262,470				2,041				(1,110	)			263,401
Equities:
	Equity securities				17,944				458				(174	)			18,228
	Bond mutual funds				18,943				3				(25	)			18,921
		Total equities			36,887				461				(199	)			37,149
		Total		$	299,358				2,501				(1,309	)			300,550

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				December 31, 2003
								Gross				Gross
				Amortized				unrealized				unrealized				Estimated
				cost				gains				losses				fair value
Fixed maturities:
	U.S. Treasury securities			$	4,172				118				(18	)			4,272
	Agencies not backed by the full faith and credit of the U.S. Government				18,128				71				(122	)			18,077
	Obligations of states and political subdivisions				7,909				16				(145	)			7,780
	Corporate Securities				35,671				382				(122	)			35,931
	Mortgage-backed securities				25,011				356				(6	)			25,361
	Collateralized mortgage obligations				8,611				38				(74	)			8,575
	Asset-backed securities				21,199				196				(121	)			21,274
		Total fixed maturities			120,701				1,177				(608	)			121,270
Equities:
	Equity securities				16,041				428				(75	)			16,394
	Bond mutual funds				8,882				24				(-	)			8,906
		Total equities			24,923				452				(75	)			25,300
		Total		$	145,624				1,629				(683	)			146,570

	Under the Company’s accounting policy for equity securities and fixed-maturity securities that can be contractually prepaid or otherwise settled in a way that may limit the Company’s ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the Company has both the ability and intent to hold the investment for a reasonable period until the security’s forecasted recovery and evidence exists indicating that recovery will occur in a reasonable period of time.
	For other fixed-maturity and equity securities, an other-than-temporary impairment charge is taken when the Company does not have the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not limited to, the current fair value as compared to amortized cost or cost, as appropriate, of the security; the amount and length of time a security’s fair value has been below amortized cost or cost; specific credit issues and financial prospects related to the issuer; the Company’s intent to hold or dispose of the security; and current economic conditions.
	Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment. No other-than-temporary declines were realized in the year ended December 31, 2004. For the year ended December 31, 2003 and 2002, one fixed maturity security was written down in the amount of $87,000 and one fixed maturity security was written down in the amount of $38,000, respectively, which were included as a realized loss in the accompanying consolidated condensed statements of operations.

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	The estimated fair value, related gross unrealized loss, and the length of time that the securities have been impaired for available-for-sale securities that are considered temporarily impaired are as follows:

				December 31, 2004
				Less than 12 months								12 months or longer								Total
								Gross				Estimated				Gross				Estimated				Gross
				Estimated				unrealized				fair				unrealized				fair				unrealized
				fair value				loss				value				loss				value				loss
Fixed maturities:
	U.S. Treasury securities			$	2,068				(19	)			571				(13	)			2,639				(32	)
	Agencies not backed by the full faith and credit of the U.S. Government				3,339				(29	)			5,876				(55	)			9,215				(84	)
	Obligations of states and political subdivisions				30,763				(346	)			3,441				(53	)			34,204				(399	)
	Corporate securities				20,509				(203	)			7,224				(97	)			27,733				(300	)
	Mortgage-backed securities				6,542				(38	)			1,388				(10	)			7,930				(48	)
	Collateralized mortgage obligations				9,908				(99	)			3,153				(21	)			13,061				(120	)
	Asset-backed securities				3,175				(26	)			6,319				(101	)			9,494				(127	)
		Total fixed maturities			76,304				(760	)			27,972				(350	)			104,276				(1,110	)
Equities:
	Equity securities				4,305				(151	)			760				(23	)			5,065				(174	)
	Bond mutual funds				15,619				(25	)			—				—				15,619				(25	)
		Total equities			19,924				(176	)			760				(23	)			20,684				(199	)
		Total		$	96,228				(936	)			28,732				(373	)			124,960				(1,309	)

The Company had no held-to-maturity securities with an unrealized loss at December 31, 2004. At December 31, 2004, the Company had 40 fixed maturity and equity securities that have been in an unrealized loss position for one year or longer. Thirty-eight of these securities are investment grade, of which 35 of these securities are rated A1/ A or better (including 23 securities which are rated AAA). The three remaining investment grade securities are rated BBB and have a fair value equal to 99.6% of their book value as of December 31, 2004. The two equity securities are not investment grade and had a fair value equal to 97.0% of their book value as of December 31, 2004. All 40 securities are current on interest and principal. Management believes the declines are temporary and are not indicative of other-than-temporary impairments.

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	Fixed maturities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or to prepay obligations with or without call or prepayment penalties.

			December 31, 2004
			Amortized				Estimated
			cost				fair value
Held-to-maturity:
	Due in one year or less		$	—				—
	Due after one year through five years			1,053				1,053
	Due after five years through ten years			—				—
	Due after ten years			89				103
			$	1,142				1,156
Available-for-sale:
	Due in one year or less		$	2,184				2,203
	Due after one year through five years			54,358				54,205
	Due after five years through ten years			57,070				57,581
	Due after ten years			73,502				73,868
	Mortgage-backed, collateralized obligations and asset-backed			75,356				75,544
			$	262,470				263,401

	The components of net investment income in 2004, 2003 and 2002 were as follows:

		Year ended December 31
		2004				2003				2002
Interest on fixed maturity investments		$	8,781				5,778				4,834
Dividends on equity securities			1,904				1,255				207
Interest on cash and short-term investments			199				121				370
			10,884				7,154				5,411
Less investment expenses			836				655				336
		$	10,048				6,499				5,075

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	All investments in fixed-maturity securities were income producing during 2004, 2003 and 2002. Net realized investment gains, including other-than-temporary impairments, were as follows:

					Year ended December 31
					2004				2003				2002
Realized gains (losses):
	Fixed maturities:
		Gross realized gains			$	289				713				2,552
		Gross realized losses				(240	)			(538	)			(128	)
			Total fixed maturities			49				175				2,424
	Equity securities:
		Gross realized gains				294				1,900				18
		Gross realized losses				(293	)			(143	)			(4	)
			Total equity securities			1				1,757				14
			Net realized investment gains		$	50				1,932				2,438

	For the years ended December 31, 2004, 2003 and 2002, net income tax expense on net realized investment gains were $18,000, $676,000, and $829,000, respectively.
	Proceeds from the sale of fixed maturity securities available-for-sale were $28.0 million, $72.6 million, and $42.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.
	The change in unrealized appreciation on investments recorded in shareholders’ equity and in other comprehensive income is as follows:

			Year ended December 31
			2004				2003				2002
Fixed maturities securities			$	363				(1,112	)			771
Equity securities				(115	)			234				69
	Change in unrealized appreciation on investments before adjustment to taxes			248				(878	)			840
Change in deferred income taxes				103				(316	)			254
	Change in net unrealized appreciation on investments, net of tax		$	144				(562	)			586

	Century held fixed maturity securities with a carrying value of approximately $7.1 million and $4.7 million on deposit with regulatory authorities as required by law at December 31, 2004 and 2003, respectively.
	At December 31, 2004 and 2003, Century maintained a trust fund (consisting of cash and investments) with a combined carrying value of approximately $234,000 and $235,000, respectively. The assets of the trust are recorded as cash and investments and are held as security for unearned premiums and outstanding loss reserves under an assumed reinsurance contract.

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(3)	Sale of Minority Interest of Evergreen

	In 2002 and through March of 2003, ProCentury sold a total of 49.8% of Evergreen (25.0% of the voting shares) in three transactions in order to raise capital to support current operations. The intent at the time of these transactions was to retain a controlling interest in Evergreen. In May of 2003, management of the Company began initial discussions and contemplation concerning adopting a formal plan of reorganization, that would be contingent on the successful completion of an initial public offering (IPO), that included the disposition of the remaining shares of Evergreen (see further discussion below).
	In 2002, Evergreen created two additional classes of nonvoting common shares. The nonvoting Class B shares are $1 par with 25,000 shares authorized of which 18,000 were issued through a stock dividend to Century. The Class B shares have all of the same characteristics as the Class A shares except there are no voting rights. The Class C shares are $1 dollar par with 100 shares authorized. The liquidation preferences for all classes of common stock are as follows:

	(a)	The Class A and B shareholders are entitled to receive (on a pro rata basis) the lesser of the total amount of the liquidation proceeds or $25 million.
	(b)	The Class C shareholders are entitled to receive (on a pro rata basis) the lesser of the amount of liquation proceeds (net of the first distribution as defined in (a) above) or $5 million per Class C share plus 5% per annum simple interest thereon between the date of issuance of such Class C share and the date of the liquidation event.
	(c)	Any liquidation proceeds remaining after the previous distributions are distributed to the Class A and B and C shareholders on a pro rata basis.

	In April 2002, Century sold 599 Class A shares and 4,177 Class B shares of Evergreen for net proceeds of $5.0 million to a nonvoting shareholder of ProCentury. Simultaneously, Evergreen issued to the nonvoting shareholder of ProCentury 1 Class C share for net proceeds of $5.0 million. In December 2002, Century sold 599 Class A shares and 4,177 Class B shares of Evergreen for net proceeds of $5.0 million. Simultaneously, Evergreen issued to the acquirer of the shares 1 Class C share for net proceeds of $5.0 million. These transactions resulted in a pretax gain of $10,109,329, which is included, net of transaction fees of $450,000, in the accompanying 2002 consolidated statement of operations.
	In March 2003, Century sold 299.5 Class A shares and 2,088.5 Class B shares of Evergreen for net proceeds of $2.8 million. Simultaneously, Evergreen issued to the acquirer .5 Class C share for net proceeds of $2.5 million. This transaction resulted in a pretax gain of $312,500, which is included, net of transaction fees of $215,000, in the accompanying 2003 consolidated statement of operations.
	In May of 2003 management of the Company began discussions and contemplation of adopting a formal plan of reorganization which included the disposition of the remaining interests of Evergreen. At this point, the Company determined that the result of all subsequent sales of subsidiary stock would be required to be reflected directly in shareholders’ equity, rather than in the statement of operations. This plan was formalized and approved at the November 2003 board meeting. As part of this plan, in August 2003 Century sold 299.5 Class A shares and 2,088.5 Class B shares for net proceeds of $2.8 million. Simultaneously, Evergreen issued to the acquirer of the shares .5 Class C share for net proceeds of $2.5 million. In addition, in December 2003, Century sold 299.5 Class A shares and 2,088.5 Class B

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	shares for net proceeds of $2.8 million. Simultaneously, Evergreen issued to the acquirer .5 Class C share for net proceeds of $2.5 million. These transactions resulted in a pretax gain of $625,000 ($406,250 after tax gain), which is included as additional paid in capital in the accompanying 2003 consolidated balance sheet. In addition, transaction fees related to these sales of $600,000 are recorded in the 2003 consolidated statement of operations. The remaining interest in Evergreen was distributed as a dividend to existing shareholders in 2004.
	As a result of the aforementioned transactions, effective January 1, 2003, Evergreen is no longer part of the consolidated ProCentury federal income tax return.
	In conjunction with these transactions, Century entered into an agreement with the parties that purchased the shares of Evergreen that guarantees that (a) Evergreen’s loss reserves (including claim reserves, contingent commissions and unrecoverable reinsurance balances) as of the date of the sale of securities are adequate to pay Evergreen’s actual losses incurred prior to that date and (b) that Evergreen’s net unearned premiums for business in force, as reflected in Evergreen’s balance sheet at that date, will not run off at more than a 100% combined ratio. In 2003, the Company made an estimate related to these guarantees, approximately $919,000 of this amount was charged to expense in the accompanying 2003 consolidated statement of operations and $465,000 was contributed to Evergreen in order to restore Evergreen’s statutory surplus to $30.0 million. Effective January 1, 2004, the guarantee was assumed by Evergreen.

(4)	Loss and Loss Expense Reserves

	The rollforward of loss and loss expense reserves are summarized as follows:

					Year ended December 31
					2004				2003				2002
Loss and loss expense reserves at beginning of year, as reported					$	129,236				90,855				93,998
Less reinsurance recoverables on unpaid losses at beginning of year						36,739				31,853				45,054
			Net loss and loss expense reserves at beginning of year			92,497				59,002				48,944
Provision for loss and loss expenses incurred for claims related to:
		Current year				78,015				53,961				28,628
		Prior years				11,051				27,043				16,774
			Total incurred			89,066				81,004				45,402
Losses and loss expense payments for claims related to:
	Current year					22,095				15,932				9,503
	Prior years					35,717				31,577				25,841
			Total paid			57,812				47,509				35,344
Net loss and loss expense reserves at end of year						123,751				92,497				59,002
Plus reinsurance recoverables on unpaid losses at end of year						29,485				36,739				31,853
			Loss and loss expense reserves at end of year, as reported		$	153,236				129,236				90,855

	The Company increased incurred loss and loss expenses attributable to insured events of prior periods by approximately $11.1 million, $27.0 million and $16.8 million in 2004, 2003 and 2002, respectively.

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	A significant portion of these increases resulted principally from construction defect claims in the other liability line, which were new types of claims that were not anticipated when the Company wrote these policies primarily between 1994 and 1998. In 2004, 2003 and 2002, the Company received an unanticipated increased number of construction defect claims predominantly related to insureds that operated as sub-contractors primarily in the state of California. Prior to 2000, most construction defect litigation was targeted at general contractors and housing developers. However, as their policy limits became eroded due to the vast number of litigants, plaintiff attorneys sought additional recoveries from sub-contractors. Consequently, with the increased number of claims reported, combined with higher than expected costs to defend these construction defect claims, the Company increased its estimates. The Company received 986, 1,084 and 921 new construction defect claim counts in 2004, 2003 and 2002, respectively. The increases in incurred losses related to construction defect reserves were approximately $8.3 million, $13.4 million and $10.4 million in 2004, 2003 and 2002, respectively.
	In addition, during 2004, 2003 and 2002, the Company also incurred development above expectations on our non-construction defect casualty reserves that led to reassessments of the initial loss ratio expectations and the claim reporting and settlement patterns. This reestimation resulted in approximately $4.6 million, $8.8 million and $3.1 million in 2004, 2003 and 2002, respectively of additional incurred loss and loss expenses.
	We began writing commercial automobile coverage for vehicles and light trucks in 1997. The initial estimates for 1998 and 1999 were based on a relatively low level of claims reported to the Company. As of December 31, 1999, the Company’s expectations of claim reporting patterns were based on industry experience, since limited company experience was available. In the second quarter of 2000, the Company exited the commercial automobile line of business due to unsatisfactory underwriting results. In 2002, the Company increased the estimates by approximately $263,000. In 2003, the Company received 15 new claim counts and an increase in claims severity that was above expectation which caused an additional $1.4 million increase in estimates related to the commercial automobile line. In 2004, the Company again experienced an increase in severity above expectations that caused an additional $789,000 increase in estimates related to the commercial automobile line.
	We offered workers’ compensation coverage from 1997 through January 2002. In December of 2001, the Company announced that this line of business was being exited due to unsatisfactory underwriting results and the lack of availability of acceptable reinsurance. The Company’s change in reserve estimates for the workers’ compensation line for 2004, 2003, and 2002 was approximately $664,000, $1.2 million and $3.0 million, respectively. These reestimations were due to changes in the selected development patterns on the 2000 to 2002 accident years, as the number of claims, claim severity and the cost to settle the claims were above expectation.
	In addition, in 2004, the Company experienced negative case incurred development on the property line which caused favorable changes to the selected development patterns that resulted in $3.3 million of favorable development.
	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.

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(5)	Reinsurance

	In 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. Excess of loss contracts in effect through December 31, 2004 generally protect against individual property and casualty losses over $500,000. Excess of loss contracts in effect for workers’ compensation losses protect against individual losses over $200,000. Additionally, from January 1, 2001 through June 30, 2001, and from July 1, 2001 through December 31, 2002 the first $200,000 in workers’ compensation losses were 80% and 60% ceded on a quota share basis, respectively. Catastrophe and clash coverage is also maintained. In addition, effective January 1, 2004, Century entered into a loss portfolio transfer and quota share arrangement with Evergreen and Continental whereby Century assumed all of Evergreen and Continental’s property and casualty, workers’ compensation, and commercial automobile lines of business and Evergreen assumed all of Century’s traditional surety lines of business.
	Approximately 75% of the total reinsurance recoverable on paid and unpaid losses at December 31, 2004 was with reinsurance companies which had an A. M. Best rating of A or higher at December 31, 2004.
	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:

				Year ended December 31
				2004				2003				2002
Premiums written:
	Direct			$	191,136				150,616				99,073
	Assumed				269				(908	)			1,469
	Ceded				(25,381	)			(17,869	)			(22,180	)
		Net premiums written		$	166,024				131,839				78,362
Premiums earned:
	Direct			$	171,718				127,114				83,550
	Assumed				497				(551	)			1,286
	Ceded				(23,513	)			(18,269	)			(21,546	)
		Net premiums earned		$	148,702				108,294				63,290
Losses and loss expenses incurred:
	Direct			$	106,492				99,156				45,599
	Assumed				22				990				(2,570	)
	Ceded				(17,448	)			(19,142	)			2,373
		Net losses and loss expenses incurred		$	89,066				81,044				45,402

	During 2001, one of Century’s reinsurers was placed into regulatory rehabilitation due to its financial impairment. In 2002, management estimated its unrecoverable outstanding ceded balances related to

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	this reinsurer and charged to expense $405,000. No amounts related to this reinsurer were charged to expense in 2004 or 2003.
	In 1998 and 1999, the Company had both quota share and excess of loss reinsurance agreements with three reinsurance companies related to the workers’ compensation line of business. As of December 31, 2004, 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. During 2004, the Company lost binding arbitration with one of the reinsurers. This reinsurer was the only reinsurer on the quota share agreements and was a participant on the excess of loss treaties. The arbitration centered around the quota share agreements and did not fully contemplate evidence related to the excess of loss treaties. As such, the Company is pursuing further litigation on the collection of the excess of loss treaties and has fully reserved the collectibles related to the recoverable amounts on the quota share agreements. In addition, the Company has established an additional $200,000 reserve on the amounts recoverable related to the excess of loss treaties. The Company believes that it will ultimately prevail on the collection of the excess of loss recoverable amounts and are beginning to pursue collection related to the other two reinsurers. In 2003, the Company had $1.4 million reserved related to this matter.

(6)	Retroactive Reinsurance

	Effective January 1, 2001, Century entered into a retroactive reinsurance treaty with a nonaffiliated reinsurer covering losses occurring on or before January 1, 2001, and unrecoverable reinsurance. The following activity occurred related to this reinsurance treaty:

				December 31
				2004				2003				2002
Reserves transferred:
	Initial reserves			$	—				20,000				20,000
	Adjustments — prior years				—				(6,120	)			4,400
	Adjustments — current year				—				(13,880	)			(10,520	)
		Reinsurance recoverables on retroactive reinsurance, end of year		$	—				—				13,880
Funds held:
	Consideration for reserves transferred			$	—				20,000				20,000
	Consideration paid in cash to reinsurer				—				(500	)			(500	)
	Interest credited — prior years				—				2,109				878
	Interest credited — current year				—				—				1,231
	Paid losses recovered — prior years				—				(10,520	)			—
	Adjustments — current year				—				(11,089	)			(10,520	)
		Funds held under retroactive reinsurance contract, end of year		$	—				—				11,089

	Century paid initial consideration of $500,000 which was included as an offset to the funds held under retroactive reinsurance contract. Under the terms of the contract the remaining consideration was

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	maintained in a funds held account which accrued interest for the benefit of the reinsurer at a contracted annual rate of 6.0% and 4.5% during 2002 and 2001, respectively.
	The $4.4 million of additional transferred reserves during 2001 resulted in a deferred gain on retroactive reinsurance. The deferred gain is being amortized over the settlement period using the interest method. No additional reserves were transferred in 2002.
	Interest on the funds held balance of $1.2 million and $878,000 was recorded as other operating expenses during 2002 and 2001, respectively. This amount was substantially offset by amortization of the deferred retroactive reinsurance gain of $1.1 million and $788,000 during 2002 and 2001, respectively, which was included in other operating expenses in the accompanying consolidated statements of operations. Paid losses of $10.5 million were reimbursed to Century under this contract in 2002 through a reduction of the funds held balance. No paid losses were reimbursed to Century under this contract in 2001.
	Effective January 1, 2003, the retroactive reinsurance contract was commuted. The commutation resulted in a release of ceded reserves of $13.9 million, which was primarily offset by a release of the funds held account of $11.1 million and the release of the remaining deferred retroactive reinsurance gain of $2.5 million. The net of these transactions resulted in a $285,000 pre-tax loss in 2003, which was recorded as other operating expense in the accompanying 2003 statement of operations.

(7)	Deferred Policy Acquisition Costs

	The following reflects the amounts of policy acquisitions costs deferred and amortized:

			Year ended December 31
			2004				2003				2002
Balance at beginning of year			$	11,714				6,273				3,711
Policy acquisition costs deferred				39,569				30,677				17,991
Amortization of deferred policy acquisition costs				(33,872	)			(25,237	)			(15,429	)
	Balance at end of year		$	17,411				11,714				6,273

Amortization of deferred policy acquisition cost for the year ended December 31, 2004 includes a reduction of amortization expense of $2.5 million relating to the transfer of capitalized acquisition costs from Evergreen and Continental for the property and casualty segment, which was partially offset by $1.9 million of capitalized acquisition costs for the surety business that was transferred from Century to Evergreen and Continental. These transactions occurred in conjunction with the termination of the intercompany pooling agreement and the implementation of the loss portfolio agreements discussed in the Company’s Registration Statement on Form S-1 (file No. 333-111794) in “The Evergreen and Continental Transactions.”

(8)	Long-Term Debt

(a)	Bank Debt

	The Company borrowed $10.0 million from Eaton National Bank & Trust Co., a subsidiary of Colonial Banc Corp., a shareholder of the Company, on October 5, 2000. The initial terms of the note were

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	interest only for the first year at 9.5%, with the first quarterly payment due April 5, 2001. Beginning October 5, 2001, principal and interest payments of $327,889 were due quarterly at a rate adjusted to the prime rate of 5.5%. In April of 2002, the terms of the note were changed from quarterly principal and interest payments to quarterly interest only payments for the April 2002 payment and the next three consecutive quarters.
	Beginning April 5, 2003, principal payments recommenced with principal and interest payments due quarterly with a maturity date of October 5, 2012. From October 5, 2002 to October 4, 2003, interest on the outstanding principal balance accrued at a floating rate of interest equal to the prime rate of interest at any given time. Beginning on October 4, 2003, the rate is adjusted annually to the current prime rate on October 5 until final maturity of the note on October 5, 2012. All of the stock of Century and PIA secure the loan. Accrued interest at December 31, 2003 was $93,358. The loan was paid in full in April 2004 with a portion of the proceeds from the Company’s IPO.

(b)	Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures

	On December 4, 2002, ProFinance Statutory Trust I (the “Trust”), a Connecticut statutory business trust formed by the Company, issued 15,000 floating rate capital securities (“Trust Preferred Securities”) generating gross proceeds of $15.0 million. Net proceeds were approximately $14.5 million, after deducting offering costs of $454,000. In addition, on May 15, 2003, ProFinance Statutory Trust II (the “Trust”), a Connecticut statutory business trust formed by the Company, issued 10,000 floating rate capital securities (“Trust Preferred Securities”) generating gross proceeds of $10.0 million. Net proceeds were approximately $9.7 million, after deducting offering costs of $300,000.
	In December 2003, FASB issued Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities — an interpretation of ARB No. 51 (“FIN 46R”), which required all public companies to apply the provisions of FIN 46 or FIN 46R to special purpose entities created prior to February 1, 2003. Once adopted by an entity, FIN 46R replaces FIN 46. Public companies, including the Company, at a minimum, must apply the unmodified provisions of FIN 46 to entities that were considered “special-purpose entities” in practice and under applicable FASB pronouncements or guidance by the end of the first reporting period ending after December 15, 2003. Companies may apply either FIN 46 or FIN 46R to special-purpose entities at the initial effective date on an entity-by-entity basis. The Company has early adopted FIN 46R in its entirety as of December 31, 2003.
	The Company’s special purpose entities where the Company is the primary beneficiary are the trusts that were established in connection with the issuance of mandatorily redeemable preferred securities. As a result of the adoption of FIN 46R, the Company deconsolidated these trusts as of December 31, 2003 in the accompanying 2003 consolidated balance sheet. This resulted in the Company classifying the trust preferred securities as long term debt and recording an increase of $733,000 in other assets and long term debt, both of which were previously eliminated when consolidating the trusts. In accordance with FIN 46R transition guidance, prior periods, were not restated. There was no other impact to the Company’s consolidated financial statements as a result of the adoption of FIN 46R.
	The Trust Preferred Securities have a 30-year maturity and are redeemable by the Company at par on or after December 15, 2007 and May 15, 2008, respectively. Holders of the Trust Preferred Securities are

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	entitled to receive cumulative cash distributions accruing from the date of issuance and payable quarterly in arrears at a rate of 400 and 410 basis points, respectively, over the three-month London Interbank Offered Rates (“LIBOR”). The maximum distribution rate is 12.5% through December 4, 2007 and May 15, 2008, respectively. Under certain circumstances, the Company has the right to defer distributions and interest on the Trust Preferred Securities for up to five years. The obligations of the Trust are guaranteed by the Company with respect to distributions and payments of the Trust Preferred Securities. These distributions are recorded as interest expense in the accompanying consolidated statements of operations, as the Trust Preferred Securities are considered a debt instrument. Interest paid totaled $1.4 million and $1.1 million in 2004 and 2003, respectively. No interest was paid in 2002.
	Proceeds from the sale of the Trust Preferred Securities were used to purchase the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”). The Debentures, which are the sole asset of the Trust, have the same terms with respect to maturity, payments and distributions as the Trust Preferred Securities. The Company has the right to defer payments of interest on the Debentures for up to five years.
	Of the proceeds from the sale of the Trust Preferred Securities, ProCentury contributed and/or settled outstanding amounts with Century in the amounts of $9.0 million and $14.5 million in 2003 and 2002, respectively.

	(c) Line of Credit

	On September 8, 2004, the Company obtained a $5.0 million line of credit. As of December 31, 2004, no draws have been made. Interest on the note is payable quarterly and is based on a floating rate of LIBOR plus 2.5%. The note matures on September 8, 2006. Under the terms of the line of credit, 100% of the common shares of Century are pledge as collateral.

(9)	Federal Income Taxes

	The components of the income tax (benefit) expense are as follows:

			Year ended December 31
			2004				2003				2002
Federal current tax expense			$	9,095				1,524				2,260
Federal deferred tax (benefit) expense				(2,512	)			(3,205	)			3,810
	Total federal income tax (benefit) expense		$	6,583				(1,681	)			6,070

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	The income tax (benefit) expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% in 2004 and 2003 and 34% in 2002 to income before minority interest and income taxes as a result of the following:

				Years ended December 31,
				2004				2003				2002
Federal income tax expense at statutory rate					35.00	%			35.00	%			34.00	%
Increase (decrease) attributable to:
	Nontaxable interest income				(2.82	)			0.07				(0.02	)
	Dividend received deduction net of proration				(.12	)			5.63				—
	Difference between the book and tax basis of Evergreen				—				9.33				25.07
	Other nontaxable income				(.04	)			1.00				—
	Other				.40				(.46	)			(2.10	)
		Total			32.42	%			50.57	%			56.95	%

	The tax effects of temporary differences that give rise to significant portions of the net deferred federal income tax asset/liability were as follows:

			December 31
			2004				2003
Unearned premiums not deductible			$	5,093			$	3,368
Loss and loss expense reserves discounting				6,621				4,114
Other, net				193				423
	Total gross deferred tax assets			11,907				7,905
Less valuation allowance				—				—
	Net deferred tax assets			11,907				7,905
Deferred policy acquisition costs				(6,094	)			(4,196	)
Difference between the book and tax basis of Evergreen				—				(1,666	)
Unrealized appreciation on investments				(371	)			(269	)
	Total gross deferred tax liabilities			(6,465	)			(6,131	)
	Net deferred federal income tax asset		$	5,442			$	1,774

The Company is required to establish a valuation allowance for any portion of the gross deferred federal income tax asset that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred federal income tax assets through deductions against future earnings and, therefore, no such valuation allowance has been established.

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(10)	Employee Benefits

	During 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 that do not qualify as tax-favored incentive share options (non-qualified options) and restricted shares to employees. The Company accounts for this plan in accordance with APB Opinion No. 25, under which no compensation cost is recognized until the shares vest.
	With respect to qualified options, an officer 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 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.
	The restricted share awards are issued as time-based awards. The time-based awards 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 restricted share awards is recognized over the respective vesting periods. The current year expense is not representative of the effect on net income for future years since each subsequent year will reflect expense for additional vested awards.
	The Company may grant options for up to 1.2 million shares under the plan. Through December 31, 2004, the Company had granted 269,000 non-qualified options, 95,000 qualified options and 156,000 restricted shares under the share plan. For both non-qualified and qualified options, the option exercise price equals the stock’s fair market value on the date of the grant.
	A summary of the status of the option plan at December 31, 2004, and changes during the year then ended are presented in the following table and narrative:

		December 31, 2004
						Weighted-
						Average
		Number of				Exercise
		Shares				Price
Outstanding at beginning of year			—				—
Granted			364,000			$	10.50
Exercised			—				—
Forfeited			—				—
Outstanding at end of year			364,000			$	10.50
Exercisable at end of year			75,611			$	10.50
Weighted-average fair value of options granted during year						$	9.65

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	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 2004:

		Year ended
		December 31,
		2004
Risk free interest rate			3.97%
Dividend yield			0.76%
Volatility factor			23.14%
Weighted average expected option life			7 Years

	Information on the range of exercise prices for options outstanding as of December 31, 2004, is as follows:

Average

Remaining

Average

Average

Outstanding

Contract

Exercise

Exercisable

Exercise

Price Range

Options

Life

Price

Options

Price

$ 10.50

364,000

9.3

$

10.50

75,611

$

10.50

	A summary of all employee restricted share activity during the years ended December 31 follows:

		2004
						Weighted
		Number of				Average
Restricted Shares		Shares				Grant Price
Beginning of year			—			$	—
Add (deduct):
Granted			156,000				10.32
Vested			(18,951	)			10.44
Cancelled			—				—
End of year			137,049			$	10.31

(11)	Transactions with Related Parties

	(a) Evergreen-UNI

Century paid Evergreen-UNI (formerly an affiliate through significant shareholders of ProCentury) commissions for business produced for our surety business through an agency agreement of $12.0 million, and $7.1 million during 2003 and 2002. There were no amounts due to Evergreen-UNI at December 31, 2003. These amounts are included in discontinued operations. Effective with the IPO, Evergreen-UNI is no longer an affiliate of ProCentury.

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	(c) Shareholders of ProCentury

	In 2004, 2003 and 2002, ProCentury paid approximately $484,000, $1.9 million and $2.0 million, respectively in fees relating to various consulting agreements with certain shareholders of ProCentury, including the following significant agreements:

	•	Software Agreements. These agreements were entered into in December 2000, as amended in December 2001 and May 2002. Pursuant to these agreements, the Company’s shareholders assisted us in the marketing of certain computer software that performs website building tasks to their customers and clients. These agreements were terminated as of June 30, 2002. Pursuant to these agreements the Company paid approximately $983,000 in 2002.
	•	Accretive Agreements. These agreements were entered into as of July 1, 2002. Pursuant to these agreements, the Company’s shareholders assisted the Company in developing financial products and services to be offered to and through the community banks. These agreements terminated on December 31, 2003. Pursuant to these agreements the Company paid approximately $241,000, $966,000 and $244,000 in 2004, 2003 and 2002, respectively.
	•	Stonehenge Monitoring Agreement. This agreement was entered into as of July 1, 2002. In connection with its investment in the Company, the Company has paid Stonehenge Opportunity Fund, LLC a monitoring fee for the time and effort it expended in monitoring its investment in the Company, which included reviewing and evaluating the financial statements, attending meetings with management and board of directors and consulting with the Company with respect to business and prospects. This agreement was terminated on December 31, 2003. Pursuant to this agreement the Company paid approximately $85,000, $342,000 and $87,000 in 2004, 2003 and 2002, respectively.
	•	Full Circle Consulting Arrangement. This agreement was effective from October 5, 2000 until December 31, 2003. Pursuant to this agreement, the Company paid Full Circle Holdings, LTD fees for managing the investment in the Company made by its members. Pursuant to this agreement the Company paid approximately $158,000, 625,000 and $620,000 in 2004, 2003 and 2002, respectively.

	Approximately $483,000 was accrued at December 31, 2003 related to these agreements. No amounts were accrued at December 31, 2004.
	In addition, in 2003, the Company paid a total of $1.3 million of finders fees to two shareholders of ProCentury related to the sale of the minority interest in Evergreen.

(12)	Commitments, Contingencies and Concentration

	(a) Continental Heritage Insurance Company

In 2001, Century entered into an option agreement with Williams and Parish. Subject to the terms of the option agreement, Williams and Parish had a right to acquire 100% of the issued and outstanding common shares of Continental at the statutory book value on the date exercised. The option expired December 31, 2003. The option was not exercised, expired on December 31, 2003, and the liability of $450,000 was released as a reduction to other operating expenses in the accompanying 2003 consolidated statement of operations.

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	For the years ended December 31, 2003 and 2002, the Company recorded insurance premiums (net of commissions) of $1,256,301 and $1,767,193, respectively, related to the bail bond program that is produced by Williams and Parish. With the dividend disposition of Evergreen, Williams and Parrish are no longer a related party to ProCentury.

(b)	Leases

	Century is a party to various lease agreements with unrelated parties, primarily related to the lease of office space. The minimum future rental payments under these operating leases at December 31, 2004 were as follows:

2005			$	1,207
2006				1,190
2007				1,210
2008				1,170
2009				734
Thereafter				2,339
	Total		$	7,850

	Rental expense for the years ended December 31, 2004, 2003 and 2002 was $1.2 million, $934,000, and $852,000, respectively.

	(c) Lawsuits

	The Company is named from time to time as defendants in various legal actions that are incidental to our business and arise out of or are related to claims made in connection with our insurance policies, claims handling, premium finance agreements and other contracts and employment related disputes. The plaintiffs in some of these lawsuits have alleged bad faith or extracontractual damages and some have claimed punitive damages. The Company believes that the resolution of these legal actions will not have a material adverse effect on the Company’s financial position or results of operations.
	In addition, state and federal regulators have commenced investigations or other proceedings relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales by producers on behalf of either the issuer or the purchaser. Related investigations and proceedings may be commenced in the future. The Company has not been formally contacted by regulatory agencies and state attorneys general for information relating to these investigations into compensation and bidding arrangements, anti-competitive activities and unsuitable sales practices. These proceedings are expected to continue in the future, and could result in legal precedents and new industry-wide legislation, rules and regulations that could significantly affect the financial services industry.

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	(d) Concentration of Revenues

Five of the Company’s 84 agents contributed, on a combined basis, approximately 44.3% of the Company’s 2004 consolidated direct and assumed premiums written. One of the Company’s agents individual contributed an amount greater than 10% of the Company’s direct and assumed premiums written and combined represented approximately 20.2% of the Company’s 2004 consolidated direct and assumed premiums written. There was no concentration of revenue with respect to geographic area as of December 31, 2004.

(13)	Dividends from Subsidiaries and Statutory Information

	Century is regulated by its state of domicile, Ohio, and the states in which it does business. Such regulations, among other things, limit the payment of dividends without prior regulatory approval. ProCentury is dependent on dividends from Century for operating expenses and interest and principal on long term debt and the Debentures. The maximum dividend that may be paid without prior approval of the Director of Insurance is limited to the extent that all dividends in the past 12 months do not exceed the greater of the statutory income of the preceding calendar year or 10% of total statutory surplus as of the prior December 31. As a result, the maximum dividend Century may pay to ProCentury in 2005 without prior approval is approximately $13.8 million. Dividends paid to ProCentury from Century were $9.1 million (of which $6.0 million were ordinary dividends and $3.1 million were extraordinary dividends), $3.0 million and $1.8 million in 2004, 2003 and 2002, respectively.
	The Company does not expect such regulatory requirements to impair its ability to pay operating expenses and interest and principal during 2005.
	ProCentury contributed $55.0 million, $9.0 million, and $10.9 million in 2004, 2003 and 2002, respectively, to Century.
	The National Association of Insurance Commissioners (NAIC) has developed property and casualty risked based capital (RBC) standards that relate an insurer’s reported statutory surplus to the risks inherent in overall operations. The RBC formula uses the statutory annual statement to calculate the minimum indicated capital level required to support asset and underwriting risk. The NAIC calls for various levels of regulatory action based on the magnitude of an indicated RBC capital deficiency, if any. Century regularly monitors capital requirements along with the NAIC’s RBC developments. Century has determined that its capital levels are in excess of the minimum capital requirements for all RBC action levels as of December 31, 2004.
	Century maintains its accounts in conformity with accounting practices prescribed or permitted by the Ohio Department of Insurance that vary in certain respects from GAAP. In converting from statutory to GAAP, typical adjustments include deferral of policy acquisition costs, the inclusion of statutory nonadmitted assets, and the inclusion of net unrealized holdings gains or losses in shareholders’ equity relating to fixed maturity securities. The statutory capital and surplus of Century as of December 31, 2004 and 2003 was approximately $115.8 million and $59.7 million, respectively. The statutory net (loss) income of Century for the years ended December 31, 2004, 2003 and 2002, was approximately $13.8 million, $(2.4) million and $3.9 million, respectively.

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(14)	Segment Reporting Disclosures

	The Company primarily operates in the Property and Casualty Lines (P/C) (including general liability, multi-peril, and commercial property).
	The Company’s Other (including exited lines) include the surety business and the Company’s exited lines such as workers’ compensation and commercial auto. 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.
	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 operating 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 to the P/C and Other (including exited lines) operating segments for management reporting purposes. The total investment portfolio and cash are allocated to the Investment operating segment.
	Following is a summary of segment disclosures:

				Year Ended December 31
				2004				2003				2002
Segment revenue:
	P/C			$	148,708				108,319				60,626
	Investing				10,098				8,431				7,513
	Other (including exited lines)				(6	)			(25	)			2,664
		Segment revenue		$	158,800				116,725				70,803
Segment profit (loss):
	P/C			$	11,873				(5,018	)			(253	)
	Investing				10,098				8,431				7,513
	Other (including exited lines)				(1,580	)			(3,336	)			(2,723	)
		Segment profit		$	20,391				77				4,537
Segment assets:
	Investing			$	312,399				171,201				130,100
	Assets not allocated				82,528				160,912				130,658
		Total consolidated assets		$	394,927				332,113				260,758

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	The following summary reconciles significant segment items to the Company’s consolidated financial statements:

					Year Ended December 31
					2004				2003				2002
Total revenues:
	Segment revenues				$	158,800				116,725				70,803
	Other					—				—				400
			Total consolidated revenues		$	158,800				116,725				71,203
Income before minority interest and income taxes:
Segment profit					$	20,391				77				4,537
Unallocated amounts:
	Corporate expenses					893				(1,350	)			(2,947	)
	Gain (loss) on sale of minority interest in subsidiary, net					—				(503	)			9,659
	Interest expense on the redemption of Class B shares					(518	)			—				—
	Interest expense					(1,498	)			(1,548	)			(590	)
		Income (loss) before minority interest and income taxes			$	20,304				(3,324	)			10,659

	The following is a summary of segment earned premium by group of products:

				Property				Casualty				Other				Consolidated
Year ended December 31, 2004:
	P/C			$	56,901				91,807				—				148,708
	Other (including exited lines)				—				—				(6	)			(6	)
		Earned premiums		$	56,901				91,807				(6	)			148,702
Year ended December 31, 2003:
	P/C			$	46,433				61,886				—				108,319
	Other (including exited lines)				—				—				(25	)			(25	)
		Earned premiums		$	46,433				61,886				(25	)			108,294
Year ended December 31, 2002:
	P/C			$	23,774				36,852				—				60,626
	Other (including exited lines)				—				—				2,664				2,664
		Earned premiums		$	23,774				36,852				2,664				63,290

	The Company does not manage property and casualty products at this level of detail.

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(15)	Unaudited Interim Financial Information

	Selected quarterly financial information is as follows:

					First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Year-to-Date
2004
	Net premiums earned				$	32,059				35,819				39,543				41,281				148,702
	Net investment income					1,965				2,410				2,719				2,954				10,048
	Net realized investment gains (losses)					123				21				(22	)			(72	)			50
		Income before minority interest and income tax				4,150				4,486				5,459				6,209				20,304
			Net income			2,887				2,986				3,712				5,395				14,980
	Basic earnings per share(1)				$	0.58				0.27				0.28				0.41				1.41
	Diluted earnings per share(1)					0.58				0.26				0.28				0.41				1.41

(1)	Since the weighted-average shares for the quarters are calculated independently of the weighted-average shares for the year, quarterly income per share may not total to annual income per share.

	The quarterly information for 2003 is not provided as the Company was privately held in 2003.

(16)	Subsequent Event

The Company entered into a Separation Agreement with Mr. John A. Marazza, Executive Vice President and Chief Operating Officer, effective January 28, 2005, setting forth the terms of his departure from the Company and providing for the payment to Mr. Marazza of the benefits to which he was entitled pursuant to his employment agreement with the Company. Such benefits consist of the payment of Mr. Marazza’s salary through April 2006, performance bonuses for 2004 and 2005, health insurance and related benefits through February 2006, continued payment of the value of whole life insurance premiums (which Mr. Marazza elected to receive in cash in lieu of insurance pursuant to the Employment Agreement) through February 2006 and full vesting of Mr. Marazza’s restricted shares and options to purchase common shares, which options will remain exercisable until the tenth anniversary of the date of grant. Mr. Marazza agreed to provide consulting services to the Company and its subsidiaries for no additional consideration for a period of ninety days following his departure. The Separation Agreement also provides for termination of the employment agreement, except for the ongoing obligations on Mr. Marazza concerning confidentiality, non-solicitation and non-competition contained therein. The total expense that will be incurred in 2005 is $744,000.

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					December 31, 2004
													Amount
													Shown on
													Balance
					Cost				Fair Value				Sheet
					(Dollars in thousands)
Fixed maturities:
Available-for-sale
United States government					$	4,169				4,172				4,172
Agencies not backed by the full faith and credit of the U.S. Government						16,805				16,819				16,819
States, municipals and political subdivisions						119,893				120,717				120,717
All other corporate bonds						121,604				121,693				121,693
			Total available-for-sale			262,470				263,401				263,401
Held-to-maturity
United States Government and government agencies and authorities						1,142				1,156				1,142
		Total held-to-maturity				1,142				1,156				1,142
			Total fixed-maturities			263,612				264,556				264,543
Equity securities:
Common stocks
	Banks, trust and insurance companies					1,483				1,574				1,574
	Industrial, miscellaneous and all other					20,402				20,361				20,361
Nonredeemable preferred stocks						15,002				15,214				15,214
			Total equity securities			36,887				37,149				37,149
Short-term investments						4,026				XXXX				4,026
			Total investments		$	304,525				XXXX				305,718

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						December 31,
						2004				2003
						(Dollars in thousands)
Assets
	Investments:
		Equities (available-for-sale):
			Bond mutual funds (amortized cost 2004, $6,549; 2003, $1)			$	6,549				1
				Total investments			6,549				1
	Cash						10				28
	Investment in consolidated subsidiaries, equity method						135,057				72,244
	Receivable from consolidated subsidiaries						1,303				702
	Other assets						733				1,112
				Total assets		$	143,652				74,087
Liabilities and shareholders’ equity
Liabilities:
	Long term debt					$	25,000				34,124
	Trust preferred securities, net						—				—
	Accrued expenses and other liabilities						161				860
	Deferred federal income tax liability						264				748
	Federal income taxes payable						2,990				1,958
				Total liabilities			28,415				37,690
Shareholders’ equity:							115,237				36,397
				Total liabilities and shareholders’ equity		$	143,652				74,087

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				Year Ended				Year Ended				Year Ended
				December 31,				December 31,				December 31,
				2004				2003				2002
				(Dollars in thousands)
Net investment income				$	113				—				—
Net realized loss					(32	)			—				—
Cash dividends on common stock of consolidated subsidiaries					9,088				3,000				1,825
	Total revenue				9,169				3,000				1,825
Other operating expenses					694				1,381				3,127
Interest expense of Class B shares					518				—				—
Interest expense					1,498				1,548				590
	Total expenses				2,710				2,929				3,717
		Income (loss) before transaction fees on the sale of minority interest in subsidiary			6,459				71				(1,892	)
Transaction fees on the sale of minority interest in subsidiary					—				(815	)			(450	)
		Gain (loss) before equity in undistributed earnings of consolidated subsidiaries and income taxes			6,459				(744	)			(2,342	)
Equity in undistributed earnings of consolidated subsidiaries					7,671				1,319				10,861
Income tax (benefit) expense					(850	)			262				826
		Net income before cumulative effect of change in accounting principle			14,980				314				7,693
Cumulative effect of change in accounting principle, net of taxes					—				—				(1,613	)
		Net income		$	14,980				314				6,080

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							2004				2003				2002
							(Dollars in thousands)
Shareholders’ Equity
Capital stock:
	Beginning of year						$	—				—				—
	Stock issued							—				—				—
	End of year							—				—				—
Additional paid-in capital:
	Beginning of year							26,866				26,460				26,460
	Issuance of common shares							77,931				—				—
	Issuance costs							(1,298	)			—				—
	Redemption of Class B shares							(5,000	)			—				—
	Vesting of restricted shares							191				—				—
	Gain on sale of minority interest in subsidiary, net of tax							—				406				—
	End of year							98,690				26,866				26,460
Retained earnings:
	Beginning of year							8,297				7,983				1,903
	Net income							14,980				314				6,080
	Dividend of subsidiary available for sale							(7,025	)			—				—
	Dividend to shareholders							(525	)			—				—
	End of year							15,727				8,297				7,983
Accumulated other comprehensive income, net of taxes:
	Beginning of year							1,234				1,953				1,339
	Unrealized holding (losses) gains arising during the period, net of reclassification adjustment							144				(562	)			586
	Unrealized holding (losses) gains arising during the period, discontinued operations							—				(157	)			28
	Dividend of subsidiary available for sale							(558	)			—				—
	End of year							820				1,234				1,953
				Total shareholders’ equity			$	115,237				36,397				36,396
Comprehensive Income
Net income							$	14,980				314				6,080
Other comprehensive income:
	Unrealized gains on securities:
		Unrealized holding gains arising during the period:
			Gross					298				1,054				3,278
			Related federal income tax expense					(121	)			(360	)			(1,083	)
				Net unrealized gains				177				694				2,195
		Reclassification adjustment for gains included in net income
			Gross					50				1.932				2,438
			Related federal income tax expense					(18	)			(676	)			(829	)
				Net reclassification adjustment				33				1,256				1,609
					Other comprehensive (loss) income			144				(562	)			586
					Other comprehensive (loss) income, discontinued operations			(558	)			(157	)			32
					Total other comprehensive (loss) income			(414	)			(719	)			614
					Total comprehensive income(loss)		$	14,566				(405	)			6,693

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				Year Ended				Year Ended				Year Ended
				December 31,				December 31,				December 31,
				2004				2003				2002
Cash flows from operating activities:
	Net income			$	14,980				314				6,080
	Adjustments to reconcile net income to net cash provided by operating activities				(15,400	)			(1,261	)			(9,519	)
		Net cash used in operating activities			(420	)			(947	)			(3,439	)
Cash flows from investing activities:
	Purchase of investments				(10,063	)			(10,017	)			(15,841	)
	Sale of investments				3,490				10,637				15,213
	Capital contributions to subsidiaries				(55,000	)			(9,000	)			(10,860	)
		Net cash used in investing activities			(61,573	)			(8,380	)			(11,488	)
Cash flows from financing activities:
	Proceeds from issuance of trust preferred securities				—				10,000				15,000
	Principal payments on long term debt				(9,133	)			(680	)			(187	)
	Proceeds from issuance of common stock				77,931				—				—
	Issuance costs				(1,298	)			—				—
	Redemption of Class B shares				(5,000	)			—				—
	Dividend paid to shareholders				(525	)			—				—
		Net cash provided by financing activities			61,975				9,320				14,813
		Decrease in cash			(18	)			(7	)			(114	)
Cash at beginning of year					28				35				149
Cash at end of year				$	10				28				35

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(1)	Organization and Summary of Significant Accounting Policies

	(a) Organization

	ProCentury Corporation (formerly known as ProFinance Holdings Corporation) (ProCentury or the Company) was formed on July 17, 2000 by Colonial Banc Corp., Richmond Mutual Bancorporation, Inc., DCB Financial Corp., Ohio Heritage Bancorp Inc., Ohio Valley Banc Corp., Stonehenge Opportunity Fund, LLC, and a group of individual investors including members of management. On July 7, 2003, ProFinance Holdings Corporation’s name was changed to ProCentury Corporation.
	On October 5, 2000, ProCentury acquired Century Surety Company (Century) (and its subsidiaries, Evergreen National Indemnity Company (Evergreen), Continental Heritage Insurance Company (Continental), and CSC Insurance Agency, Inc.) from Century Business Services, Inc. and acquired ProCentury Insurance Agency, Inc. (PIA) (formerly Century Workers’ Compensation Agency, Inc.) from Avalon National Corporation. ProCentury and its subsidiaries are collectively referred to herein as the Company.
	In 2001, ProCentury authorized 5,000 nonvoting $0 par Class B and 10,000 nonvoting $0 par Class C common stock shares. In September 2001, ProCentury issued 531.68 Class B shares to an unrelated third party for $5.0 million.
	In 2002 and 2003, the Company sold approximately 69.65% of the outstanding shares of Evergreen in a series of transactions, see further information in note 3. As of December 31, 2003, the Company owned 65.06% of the voting shares of Evergreen and approximately 23.06% of the economic interest in Evergreen.
	On April 26, 2004, the Company issued 8,000,000 common shares in an initial public offering (the “IPO”) and received net proceeds (before expenses) of $77.9 million, based on an initial public offering price of $10.50. The following transactions occurred in connection with the IPO:

	•	Immediately prior to the completion of the IPO, each outstanding Class A common share was converted into 500 common shares. After the conversion, but prior to the completion of the IPO, the Company had 4,999,995 Class A common shares outstanding. The share conversion is reflected for all periods presented.
	•	Immediately prior to the completion of the IPO, the common shares of Evergreen were distributed as dividends from Century to ProCentury and then by ProCentury to ProCentury’s existing Class A shareholders.
	•	The Company issued 8,000,000 Class A common shares and received net proceeds (before expenses) of $77.9 million.
	•	The Company granted 101,200 restricted common shares and 364,000 stock options to certain employees of ProCentury.
	•	The Company repaid $8.7 million of bank indebtedness outstanding at the closing of the IPO.
	•	The Company redeemed all of its outstanding Class B common shares for an aggregate redemption price of $5.0 million and recorded interest expense of $518,000 in connection with the redemption.

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	•	The Company amended its articles of incorporation to eliminate the authority to issue Class B and Class C common shares.

	In addition, on August 5, 2004 the Company issued 54,800 of additional restricted common shares to certain employees of ProCentury.

	(b) Summary of Significant Accounting Policies

	The accompanying condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).
	In preparing the condensed financial statements, management is 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 consolidated 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 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 generally reflected in current operations.

	(c) Change in Accounting Principle

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which addresses financial accounting and reporting standards for goodwill and other intangible assets. Upon adoption, SFAS No. 142 requires that any unaccreted negative goodwill from a business combination for which the acquisition date was before July 1, 2001, be included in income. The Company adopted the provisions of SFAS No. 142 on January 1, 2002 and the remaining negative goodwill of $385,000 and the related tax benefit of $411,000, totaling $796,000, was recorded as income as a cumulative effect of a change in accounting principle in the accompanying 2002 consolidated statement of operations. Included in the consolidated negative goodwill was unallocated positive goodwill of $1.6 million that was recorded by ProCentury in the condensed financial information.

	(d) Federal Income Taxes

	Prior to January 1, 2003, ProCentury and its subsidiaries, including Evergreen and Continental, filed a consolidated federal income tax return in accordance with a tax sharing agreement. Each entity within the consolidated group pays its share of federal income taxes primarily based on separate return calculations. ProCentury’s tax sharing agreement with its subsidiaries allowed it to make certain Internal Revenue Code (“Code”) elections in its consolidated federal tax return. In the event such code elections are made, any benefit or liability is the responsibility of ProCentury and is not accrued or paid by the subsidiary.
	The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of

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	certain items. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded in the consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated statements of income.
	The Company utilizes the asset and liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized.
	Beginning on January 1, 2003, Evergreen was no longer eligible to be a member of ProCentury’s consolidated tax group and therefore no longer participated in ProCentury’s tax sharing agreement (see Note 3). However, until April of 2004, Evergreen’s taxes were consolidated in the accompanying financial statements as Evergreen continued to be a consolidated subsidiary. All other consolidated subsidiaries continue to participate in ProCentury’s tax sharing agreement.

	(e) Comprehensive Income

	Comprehensive income encompasses all changes in shareholders’ equity (except those arising from transactions with shareholders) and includes net income and changes in net unrealized investment gains and losses on fixed maturity investments classified as available-for-sale and equity securities, net of minority interest and taxes.

	(d) Investment Securities

	The Company classifies its equity securities as available-for-sale. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive income within shareholders’ equity, until realized.
	Realized gains or losses represent the difference between the book value of securities sold and the proceeds realized upon sale, and are recorded on the trade date. The Company uses the specific identification method to determine the cost of securities sold.
	Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. The Company regularly reviews the fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. A number of criteria are considered during this process including, but not limited to: the current fair value as compared to amortized cost or cost, as appropriate, of the security; the length of time the security’s fair value has been below amortized cost or cost and specific credit issues related to the issuer and current economic conditions. In general, we focus our attention on those securities whose fair value was less than 80% of their amortized cost or cost, as appropriate, for six or more consecutive months. In evaluating potential impairment, we also consider the

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	current fair value compared to amortized cost or cost, as appropriate, our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to the issuer and current economic conditions. Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying investment. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.. Realized gains or losses, including any provision for other-than-temporary declines in value, are included in the consolidated statements of operations.
	Dividend and interest income is recognized when earned.

	(e) Share-Based Compensation

	The Company follows the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), the Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation (an interpretation of APB Opinion No. 25), and other related accounting interpretations for the Company’s share option and restricted common share plans utilizing the “intrinsic value method.” The Company also follows the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, for the Company’s share option grants, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure; an amendment of FASB Statement No. 123. This disclosure requires pro forma net income (loss) and earnings (loss) per share information, which is calculated assuming the Company has accounted for its stock option plans under the “fair value method” described in SFAS No. 123 and SFAS No. 148.
	If the Company recorded compensation expense for its share option grants based on the “fair value method,” the Company’s net income (loss) would have been adjusted to the pro forma amounts as indicated in the following table:

			For the Year Ended
			December 31,
			2004				2003				2002
Net income (loss):
	As reported		$	14,980				314				6,080
	Add: Share-based employee compensation expense included in reported net income, net of related tax effects			124				—				—
	Less: Additional share-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects			(677	)			—				—
	Pro Forma		$	14,427				314				6,080

	No share option or restricted common share-based compensation expense is included in reported net income (loss) for any period presented for 2003 or 2002, as the Company had no common share equivalents granted during 2003 or 2002.

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	The fair values of the share options and restricted common shares are estimated on the dates of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

		Year Ended
		December 31, 2004
Risk free interest rate			3.74	%
Dividend yield			0.76	%
Volatility factor			23.14	%
Weighted average expected option life			6.15 Years

(2)	Investments

There are no gross unrealized gains or losses on the Company’s bond mutual funds at December 31, 2004 and 2003. Dividends received on equity securities for the year ended December 31, 2004 were $113,000. No dividends were received for the years ended December 31, 2003 or 2002. Realized losses on equity securities for the year ended December 31, 2004 were $32,000 ($21,000 net of tax). No realized gains or losses were realized for the years ended December 31, 2003 or 2002.

(3)	Long-term Debt

	(a) Bank Debt

	The Company borrowed $10,000,000 from Eaton National Bank & Trust Co., a subsidiary of Colonial Banc Corp., a shareholder of the Company, on October 5, 2000. The initial terms of the note were interest only for the first year at 9.5%, with the first quarterly payment due April 5, 2001. Beginning October 5, 2001, principal and interest payments of $327,889 were due quarterly at a rate adjusted to the prime rate of 5.5%. In April of 2002, the terms of the note were changed from quarterly principal and interest payments to quarterly interest only payments for the April 2002 payment and the next three consecutive quarters.
	Beginning April 5, 2003, principal payments recommenced with principal and interest payments due quarterly with a maturity date of October 5, 2012. From October 5, 2002 to October 4, 2003, interest on the outstanding principal balance accrued at a floating rate of interest equal to the prime rate of interest at any given time. Beginning on October 4, 2003, the rate is adjusted annually to the current prime rate on October 5 until final maturity of the note on October 5, 2012. All of the stock of Century and PIA secure the loan. Accrued interest at December 31, 2003 was $93,358. The loan was paid in full in April 2004 with a portion of the proceeds from the Company’s IPO.

(b)	Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures

On December 4, 2002, ProFinance Statutory Trust I (the “Trust”), a Connecticut statutory business trust formed by the Company, issued 15,000 floating rate capital securities (“Trust Preferred Securities”) generating gross proceeds of $15.0 million. Net proceeds were approximately $14.5 million, after deducting offering costs of $454,000. In addition, on May 15, 2003, ProFinance Statutory Trust II (the “Trust”), a Connecticut statutory business trust formed by the Company, issued 10,000 floating rate

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	capital securities (“Trust Preferred Securities”) generating gross proceeds of $10.0 million. Net proceeds were approximately $9.7 million, after deducting offering costs of $300,000.
	In December 2003, FASB issued Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities — an interpretation of ARB No. 51 (“FIN 46R”), which required all public companies to apply the provisions of FIN 46 or FIN 46R to special purpose entities created prior to February 1, 2003. Once adopted by an entity, FIN 46R replaces FIN 46. Public companies, including the Company, at a minimum, must apply the unmodified provisions of FIN 46 to entities that were considered “special-purpose entities” in practice and under applicable FASB pronouncements or guidance by the end of the first reporting period ending after December 15, 2003. Companies may apply either FIN 46 or FIN 46R to special-purpose entities at the initial effective date on an entity-by-entity basis. The Company has early adopted FIN 46R in its entirety as of December 31, 2003.
	The Company’s special purpose entities where the Company is the primary beneficiary are the trusts that were established in connection with the issuance of mandatorily redeemable preferred securities. As a result of the adoption of FIN 46R, the Company has deconsolidated these trusts as of December 31, 2003 in the accompanying 2003 consolidated balance sheet. This resulted in the Company classifying the trust preferred securities as long term debt and recording an increase of $733,000 in other assets and long term debt, both of which were previously eliminated when consolidating the trusts. In accordance with FIN 46R transition guidance, prior periods, were not restated. There was no other impact to the Company’s consolidated financial statements as a result of the adoption of FIN 46R.
	The Trust Preferred Securities have a 30-year maturity and are redeemable by the Company at par on or after December 15, 2007 and May 15, 2008, respectively. Holders of the Trust Preferred Securities are entitled to receive cumulative cash distributions accruing from the date of issuance and payable quarterly in arrears at a rate of 400 and 410 basis points, respectively, over the three-month London Interbank Offered Rates (“LIBOR”). The maximum distribution rate is 12.5% through December 4, 2007 and May 15, 2008, respectively. Under certain circumstances, the Company has the right to defer distributions and interest on the Trust Preferred Securities for up to five years. The obligations of the Trust are guaranteed by the Company with respect to distributions and payments of the Trust Preferred Securities. These distributions are recorded as interest expense in the accompanying consolidated statements of operations, as the Trust Preferred Securities are considered a debt instrument. Interest paid totaled $1.4 million and $1.1 million in 2004 and 2003, respectively. No interest was paid in 2002.
	Proceeds from the sale of the Trust Preferred Securities were used to purchase the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”). The Debentures, which are the sole asset of the Trust, have the same terms with respect to maturity, payments and distributions as the Trust Preferred Securities. The Company has the right to defer payments of interest on the Debentures for up to five years.
	Of the proceeds from the sale of the Trust Preferred Securities, ProCentury contributed and/or settled outstanding amounts with Century in the amounts of $9.0 million and $14.5 million in 2003 and 2002, respectively.

	(c) Line of Credit

	On September 8, 2004, the Company obtained a $5.0 million line of credit. As of December 31, 2004, no draws have been made. Interest on the note is payable quarterly and is based on a floating rate of LIBOR

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	plus 2.5%. The note matures on September 8, 2006. Under the terms of the line of credit, 100% of the common shares of Century are pledge as collateral.

(4)	Transactions with Related Parties

	(a) Shareholders of ProCentury

	In 2004, 2003 and 2002, ProCentury paid approximately $484,000, $1.9 million and $2.0 million, respectively in fees relating to various consulting agreements with certain shareholders of ProCentury, including the following significant agreements:

	•	Software Agreements. These agreements were entered into in December 2000, as amended in December 2001 and May 2002. Pursuant to these agreements, the Company’s shareholders assisted us in the marketing of certain computer software that performs website building tasks to their customers and clients. These agreements were terminated as of June 30, 2002. Pursuant to these agreements the Company paid approximately $983,000 in 2002.
	•	Accretive Agreements. These agreements were entered into as of July 1, 2002. Pursuant to these agreements, the Company’s shareholders assisted the Company in developing financial products and services to be offered to and through the community banks. These agreements terminated on December 31, 2003. Pursuant to these agreements the Company paid approximately $241,000, $966,000 and $244,000 in 2004, 2003 and 2002, respectively.
	•	Stonehenge Monitoring Agreement. This agreement was entered into as of July 1, 2002. In connection with its investment in the Company, the Company has paid Stonehenge Opportunity Fund, LLC a monitoring fee for the time and effort it expended in monitoring its investment in the Company, which included reviewing and evaluating the financial statements, attending meetings with management and board of directors and consulting with the Company with respect to business and prospects. This agreement was terminated on December 31, 2003. Pursuant to this agreement the Company paid approximately $85,000, $342,000 and $87,000 in 2004, 2003 and 2002, respectively.
	•	Full Circle Consulting Arrangement. This agreement was effective from October 5, 2000 until December 31, 2003. Pursuant to this agreement, the Company paid Full Circle Holdings, LTD fees for managing the investment in the Company made by its members. Pursuant to this agreement the Company paid approximately $158,000, 625,000 and $620,000 in 2004, 2003 and 2002, respectively.

	Approximately $483,000 was accrued at December 31, 2003 related to these agreements. No amounts were accrued at December 31, 2004.
	In addition, in 2003, the Company paid a total of $1.3 million of finders fees to two shareholders of ProCentury related to the sale of the minority interest in Evergreen. Approximately $450,000 of this amount was accrued at December 31, 2002.

	(b) Century Surety Company

	Dividends paid to ProCentury from Century were $9.1 million, $3.0 million and $1.8 million in 2004, 2003 and 2002, respectively.
	ProCentury contributed $55.0 million, $9.0 million and $10.9 million in 2004, 2003 and 2002, respectively, to Century.

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(5)	Commitments and Contingencies

	The Company is a defendant in various lawsuits. In the opinion of management, the effects, if any, of such lawsuits are not expected to be material to the Company’s financial position or results from operations.

(6)	Employee Benefits

	During 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 that do not qualify as tax-favored incentive share options (non-qualified options) and restricted shares to employees. The Company accounts for this plan in accordance with APB Opinion No. 25, under which no compensation cost is recognized until the shares vest.
	With respect to qualified options, an officer 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 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.
	The restricted share awards are issued as time-based awards. The time-based awards 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 restricted share awards is recognized over the respective vesting periods. The current year expense is not representative of the effect on net income for future years since each subsequent year will reflect expense for additional vested awards.
	The Company may grant options for up to 1.2 million shares under the plan. Through December 31, 2004, the Company had granted 269,000 non-qualified options, 95,000 qualified options and 156,000 restricted shares under the share plan. For both non-qualified and qualified options, the option exercise price equals the stock’s fair market value on the date of the grant.

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	A summary of the status of the option plan at December 31, 2004, and changes during the year then ended are presented in the following table and narrative:

		December 31, 2004
						Weighted-Average
		Number of Shares				Exercise Price
Outstanding at beginning of year			—				—
Granted			364,000			$	10.50
Exercised			—				—
Forfeited			—				—
Outstanding at end of year			364,000			$	10.50
Exercisable at end of year			75,611			$	10.50
Weighted-average fair value of
options granted during year						$	9.65

	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 2004:

		Year Ended
		December 31, 2004
Risk free interest rate			3.97%
Dividend yield			0.76%
Volatility factor			23.14%
Weighted average expected option life			7 Years

	Information on the range of exercise prices for options outstanding as of December 31, 2004, is as follows:

		Outstanding				Average Remaining				Average				Exercisable				Average
Price Range		Options				Contract Life				Exercise Price				Options				Exercise Price
$10.50			364,000				9.3			$	10.50				75,611			$	10.50

	A summary of all employee restricted share activity during the years ended December 31 follows:

		2004
						Weighted
		Number of				Average
Restricted Shares		Shares				Grant Price
Beginning of year			—			$	—
Add (deduct):
Granted			156,000				10.32
Vested			(18,951	)			10.44
Cancelled			—				—
End of year			137,049			$	10.31

(7)	Subsequent Event

	The Company entered into a Separation Agreement with Mr. John A. Marazza, Executive Vice President and Chief Operating Officer, effective January 28, 2005, setting forth the terms of his

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departure from the Company and providing for the payment to Mr. Marazza of the benefits to which he was entitled pursuant to his employment agreement with the Company. Such benefits consist of the payment of Mr. Marazza’s salary through April 2006, performance bonuses for 2004 and 2005, health insurance and related benefits through February 2006, continued payment of the value of whole life insurance premiums (which Mr. Marazza elected to receive in cash in lieu of insurance pursuant to the Employment Agreement) through February 2006 and full vesting of Mr. Marazza’s restricted shares and options to purchase common shares, which options will remain exercisable until the tenth anniversary of the date of grant. Mr. Marazza agreed to provide consulting services to the Company and its subsidiaries for no additional consideration for a period of ninety days following his departure. The Separation Agreement also provides for termination of the employment agreement, except for the ongoing obligations on Mr. Marazza concerning confidentiality, non-solicitation and non-competition contained therein. The total expense that will be incurred in 2005 is $744,000.

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							Liability for
							Unpaid																				Amortization
			Deferred				Losses and																Losses and				of Deferred
			Policy				Loss												Net				Loss				Policy				Other				Net
			Acquisition				Adjustment				Unearned				Earned				Investment				Adjustment				Acquisition				Underwriting				Premiums
			Costs				Expenses				Premiums				Premiums				Income				Expenses				Costs				Expenses				Written
Year ended
December 31, 2004
P/ C			$	17,411				141,511				81,843				148,708				—				87,463				33,872				15,500				166,020
Investing				—				—				—				—				10,048				—				—				—				—
Other (Including Exited Lines)				—				11,725				292				(6	)			—				1,603				—				(29	)			4
Unallocated				—				—				—				—				—				—				—				(1,929	)			—
	Total		$	17,411				153,236				82,135				148,702				10,048				89,066				33,872				13,542				166,024
Year ended
December 31, 2003
P/ C			$	11,714				97,117				62,126				108,319				—				77,942				24,642				10,753				132,010
Investing				—				—				—				—				6,499				—				—				—				—
Other (Including Exited Lines)				—				32,119				13				(25	)			—				3,062				595				(346	)			(171	)
Unallocated				—				—				—				—				—				—				—				1,350				—
	Total		$	11,714				129,236				62,139				108,294				6,499				81,004				25,237				11,757				131,839
Year ended
December 31, 2002
P/ C			$	6,273				54,446				38,600				60,626				—				39,505				13,920				7,454				78,332
Investing				—				—				—				—				5,075				—				—				—				—
Other (Including Exited Lines)				—				36,409				375				2,664				—				5,897				1,509				(2,019	)			30
Unallocated				—				—				—				—				—				—				—				3,347				—
	Total		$	6,273				90,855				38,975				63,290				5,075				45,402				15,429				8,782				78,362

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										Assumed from								Percentage of
Property and Liability						Ceded to Other				Other				Net Premium				Assumed to
Insurance Premiums		Direct				Companies				Companies				Written				Net
Year ended
December 31, 2004		$	191,136				(25,381	)			269				166,024				0.2	%
Year ended
December 31, 2003		$	150,616				(17,869	)			(908	)			131,839				(0.7	)%
Year ended
December 31, 2002		$	99,073				(22,180	)			1,469				78,362				1.9	%

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						Additions
						Charged/
		Balance at				(credited) to				Charged to
		beginning of				costs and				other				Deductions				Balance at
		period				expenses				accounts				(1)				end of period
Year ended December 31, 2004
Allowance for uncollectible:
Premiums in course of collection		$	204				(118	)			—				7				79
Reinsurance		$	1,382				(97	)			—				—				1,285
Year ended December 31, 2003
Allowance for uncollectible:
Premiums in course of collection		$	898				(126	)			—				567				204
Reinsurance		$	1,382				—				—				—				1,382
Year ended December 31, 2002
Allowance for uncollectible:
Premiums in course of collection		$	1,652				(152	)			—				602				898
Reinsurance		$	482				1,288				—				388				1,382

(1)	Deductions include write-offs of amounts determined to be uncollectible.

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		Liability for				Discount,				Loss and Loss Adjustment
		Unpaid Losses				If Any,				Expenses (Benefits) Incurred								Paid Losses and
		and Loss				Deducted				Related to								Loss
		Adjustment				From				Current				Prior				Adjustment
		Expenses				Reserves				Period				Periods				Expenses
Year ended
December 31, 2004		$	153,236				—				78,015				11,051				57,812
Year ended
December 31, 2003		$	129,236				—				53,961				27,043				47,509
Year ended
December 31, 2002		$	90,855				—				29,528				15,874				35,344

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Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.	Controls and Procedures

Item 10.	Directors and Executive Officers of the Registrant

Name		Age				Position with ProCentury
Edward F. Feighan			57			Chairman of the Board, President, Chief Executive Officer and Director
Charles D. Hamm			50			Chief Financial Officer and Treasurer
Christopher J. Timm			48			Executive Vice President and Director

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Item 11.	Executive Compensation

Item 12.	Security Ownership of Certain Beneficial Owners and Management

Number of

Number of Common

Common Shares

Shares to be Issued

Weighted Average

Remaining

upon Exercise of

Exercise Price of

Available for Future

Plan Category

Outstanding Options

Outstanding Options

Issuance(1)

Equity compensation plans approved by shareholders

364,000

$

10.50

659,108

Equity compensation plans not approved by shareholders

N/A

N/A

N/A

Total

364,000

$

10.50

659,108

(1)	Shares may be issued upon exercise of options or in the form of appreciation rights, performance units, restricted stock or restricted stock units.

Item 13.	Certain Relationships and Related Transactions

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Item 14.	Principal Accountant Fees and Services

Item 15.	Exhibits and Financial Statement Schedules

	Report of independent registered public accounting firm
	Consolidated Balance Sheets at December 31, 2004 and 2003
	Consolidated Statements of Operations for the three years ended December 31, 2004
	Consolidated Statements of Shareholders’ Equity and
	Comprehensive Income for the three years ended December 31, 2004
	Consolidated Statements of Cash Flows for the three years ended December 31, 2004
	Notes to Consolidated Financial Statements

	Schedule I — Summary of Investments — Other than Investments in Related Parties
	Schedule II — Condensed Financial Information of Parent Company
	Schedule III — Supplementary Insurance Information
	Schedule IV — Reinsurance
	Schedule V — Valuation and Qualifying Accounts
	Schedule VI — Supplemental Information Concerning Property — Casualty Insurance Operations

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	PROCENTURY CORPORATION

	By:	/s/ Edward F. Feighan

	Edward F. Feighan,
	Chairman, President and Chief Executive Officer

Signature				Title		Date
/s/ Edward F. Feighan   Edward F. Feighan				Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)		March 23, 2005
/s/ Charles D. Hamm, Jr.   Charles D. Hamm, Jr.				Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)		March 23, 2005
/s/ Michael J. Endres   Michael J. Endres				Director		March 23, 2005
/s/ Robert F. Fix   Robert F. Fix				Director		March 23, 2005
/s/ Jeffrey A. Maffett   Jeffrey A. Maffett				Director		March 23, 2005
/s/ Press C. Southworth III   Press C. Southworth III				Director		March 23, 2005
/s/ Christopher J. Timm   Christopher J. Timm				Director		March 23, 2005
/s/ Alan R. Weiler   Alan R. Weiler				Director		March 23, 2005
/s/ Robert J. Woodward, Jr.   Robert J. Woodward, Jr.				Director		March 23, 2005

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Exhibit
Number				Description
	3	.1		Amended and Restated Articles of Incorporation of ProCentury Corporation (incorporated herein by reference to ProCentury Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2004 (File No. 000-50641))
	3	.2		Amended and Restated Code of Regulations of ProCentury Corporation (incorporated herein by reference to ProCentury Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2004 (File No. 000-50641))
	4	.1		Specimen Certificate for common shares, without par value, of ProCentury Corporation (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	4	.2		Indenture, dated as of December 4, 2002, by and between ProFinance Holdings Corporation and State Street Bank and Trust Company of Connecticut (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	4	.3		Amended and Restated Declaration of Trust, dated as of December 4, 2002, by and among State Street Bank and Trust Company of Connecticut, ProFinance Holdings Corporation and Steven R. Young and John Marazza, as Administrators (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	4	.4		Guarantee Agreement, dated as of December 4, 2002, by and between ProFinance Holdings Corporation and State Street Bank and Trust Company of Connecticut (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	4	.5		Indenture, dated as of May 15, 2003, by and between ProFinance Holdings Corporation and U.S. Bank National Association (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	4	.6		Amended and Restated Declaration of Trust, dated as of May 15, 2003, by and among U.S. Bank National Association, ProFinance Holdings Corporation and Steven R. Young and John Marazza, as Administrators (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	4	.7		Guarantee Agreement, dated as of May 15, 2003, by and between ProFinance Holdings Corporation and U.S. Bank National Association (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.1		Employment Agreement, dated as of December 15, 2003, by and between ProCentury Corporation and Edward F. Feighan (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)
	10	.2		Employment Agreement, dated as of December 15, 2003, by and between ProCentury Corporation and John A. Marazza (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)
	10	.3		Employment Agreement, dated as of December 15, 2003, by and between ProCentury Corporation and Christopher J. Timm (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)
	10	.4		Employment Agreement, dated as of December 15, 2003, by and between ProCentury Corporation and Charles D. Hamm (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)
	10	.6		Separation Agreement by and between ProCentury Corporation and John A. Marazza, dated January 21, 2005 (incorporated herein by reference to ProCentury Corporation’s Current Report on Form 8-K dated January 21, 2005 (File No. 000-50641))(1)
	10	.7		Form of ProCentury Corporation Indemnification Agreement by and between ProCentury Corporation and each member of its Board of Directors (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)

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Exhibit
Number				Description
	10	.8		ProCentury Corporation 2004 Stock Option and Award Plan (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)
	10	.9		ProCentury Corporation Deferred Compensation Plan (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)
	10	.10		ProCentury Corporation Deferred Compensation Plan Rabbi Trust Agreement (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)
	10	.11		ProCentury Corporation Annual Incentive Plan (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)(1)
	10	.12		Form of Restricted Stock Award Agreement for Restricted Stock under the ProCentury Corporation 2004 Stock Option and Award Plan(1)
	10	.13		Form of Stock Option Agreement for Non-Qualified Stock Options under the ProCentury Corporation 2004 Stock Option and Award Plan(1)
	10	.14		Form of Stock Option Award Agreement for Incentive Stock Options under the ProCentury Corporation 2004 Stock Option and Award Plan(1)
	10	.15		Form of Restricted Stock Award Agreement for Restricted Stock for Executive Officers under the ProCentury Corporation 2004 Stock Option and Award Plan(1)
	10	.16		Form of Stock Option Agreement for Non-Qualified Stock Options for Executive Officers under the ProCentury Corporation 2004 Stock Option and Award Plan(1)
	10	.17		Transitional Administrative Agreement, effective as of January 1, 2004, by and among ProCentury Corporation, Evergreen National Indemnity Corporation and Continental Heritage Insurance Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.18		Loss Portfolio Transfer Reinsurance Contract, effective as of January 1, 2004, issued to Century Surety Company by Evergreen National Indemnity Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.19		Loss Portfolio Transfer Reinsurance Contract, effective as of January 1, 2004, issued to Continental Heritage Insurance Company by Century Surety Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.20		Loss Portfolio Transfer Reinsurance Contract, effective as of January 1, 2004, issued to Evergreen National Indemnity Company by Century Surety Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.21		Quota Share Reinsurance Contract, effective as of January 1, 2004, issued to Evergreen National Indemnity Company by Century Surety Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.22		Quota Share Reinsurance Contract, effective as of January 1, 2004, issued to Continental Heritage Insurance Company by Century Surety Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.23		Quota Share Reinsurance Contract, effective as of January 1, 2004, issued to Century Surety Company by Evergreen National Indemnity Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.24		Software License Agreement, effective as of January 1, 2004, by and among Century Surety Company, Evergreen National Indemnity Company and Continental Heritage Insurance Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	10	.25		Software Support and Maintenance Agreement, effective as of January 1, 2004, by and among Century Surety Company, Evergreen National Indemnity Company and Continental Heritage Insurance Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)

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Exhibit
Number				Description
	10	.26		Share Purchase Agreement, effective as of January 1, 2004, by and between Century Surety Company and Evergreen National Indemnity Company (incorporated herein by reference to ProCentury Corporation’s Registration Statement on Form S-1 (File No. 333-111294), as amended)
	21			Subsidiaries of ProCentury Corporation
	23			Consent of KPMG LLP
	31	.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
	31	.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
	32	.1			Certification of Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	(2)
	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	(2)

(1)	Management contracts and compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.
(2)	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.