UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from                      to                     .

000-50641
(Commission File Number)

(614) 895-2000
(Registrant’s telephone number, including area code)

YES þ     NO o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES o     NO þ

     As of May 13, 2005, the registrant had 13,211,019 outstanding Common Shares, without par value.

PROCENTURY CORPORATION

QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2005

INDEX

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

PROCENTURY CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data)

See accompanying notes to the unaudited consolidated condensed financial statements.

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PROCENTURY CORPORATION AND SUBSIDIARIES

Consolidated Condensed Balance Sheets
(Unaudited)
(Dollars in thousands, except per share data)

See accompanying notes to the unaudited consolidated condensed financial statements.

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PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)

Consolidated Condensed Statements of Shareholders’ Equity
and Comprehensive Income

(Unaudited)

(Dollars in thousands)

See accompanying notes to the unaudited consolidated condensed financial statements.

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PROCENTURY CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

     See accompanying notes to the unaudited consolidated condensed financial statements.

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PROCENTURY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

March 31, 2005

(Unaudited)

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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

     The following discussion of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated condensed financial statements and the notes to those statements included in this Form 10-Q. Some of the statements in this report, including those set forth in the discussion and analysis below, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are derived from information that we currently have and assumptions that we make and may be identified by words such as “believes,” “anticipates,” “expects,” “plans,” “should,” “estimates” and similar expressions. We cannot assure you that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties we face. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements are described under the heading “Risks Related to Our Business and Industry” in our Annual Report on Form 10-K for the year ended December 31, 2004 and elsewhere in this report, and include, but are not limited to, the following factors:

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     You are cautioned not to place undue reliance on forward-looking statements, which speak only as of their respective dates.

Overview

     ProCentury is a holding company that underwrites selected property and casualty and surety insurance through its subsidiaries collectively known as the Century Insurance Group®. As a “niche” company, we offer specialty insurance products designed to meet specific insurance needs of targeted insured groups. The excess and surplus lines market provides an alternative market for customers with hard-to-place risks and risks that insurance companies licensed by the state in which the insurance policy is sold, which are also referred to as “admitted insurers,” specifically refuse to write. When we underwrite within the excess and surplus lines market, we are selective in the lines of business and types of risks we choose to write. Typically, the development of these specialty insurance products is generated through proposals brought to us by an agent or broker seeking coverage for a specific group of clients.

     We evaluate our insurance operations by monitoring key measures of growth and profitability. We measure our growth by examining gross written premiums. We generally measure our operating results by examining our net income, return on equity and loss, expense and combined ratios. The following provides further explanation of the key measures that we use to evaluate our results:

     Gross Written Premiums. Gross written premiums is the sum of direct written premiums and assumed written premiums. We use gross written premiums, which excludes the impact of premiums ceded to reinsurers, as a measure of the underlying growth of our insurance business from period to period.

     Net Written Premiums. Net written premiums is the sum of direct written premiums and assumed written premiums less ceded written premiums. We use net written premiums, primarily in relation to gross written premiums, to measure the amount of business retained after cessions to reinsurers.

     Loss Ratio. Loss ratio is the ratio (expressed as a percentage) of losses and loss expenses incurred to premiums earned. Loss ratio generally is measured on both a gross (direct and assumed) and net (gross less ceded) basis. We use the gross loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results, which are net of ceded reinsurance, as reflected in our consolidated financial statements

     Expense Ratio. Expense ratio is the ratio (expressed as a percentage) of net operating expenses to premiums earned and measures a company’s operational efficiency in producing, underwriting and administering its insurance business. We reduce our operating expenses by ancillary income (excluding net investment income and realized gains (losses) on securities) to calculate our net operating expenses. Due to our historically high levels of reinsurance, we calculate our expense ratio on both a gross basis (before the effect of ceded reinsurance) and a net basis (after the effect of ceded reinsurance). Although the net basis is meaningful in evaluating our financial results that are net of ceded reinsurance, as reflected in our consolidated financial statements, we believe that the gross expense ratio better reflects the operational efficiency of the underlying business and is a better measure of future trends. Interest expense is not included in the calculation of the expense ratio.

     Combined Ratio. Combined ratio is the sum of the loss ratio and the expense ratio and measures a company’s overall underwriting profit. If the combined ratio is at or above 100, an insurance company cannot be profitable without investment income (and may not be profitable if investment income is insufficient). We use the combined ratio in evaluating our overall underwriting profitability and as a measure for comparing our profitability relative to the profitability of our competitors.

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Critical Accounting Policies

     It is important to understand our accounting policies in order to understand our financial statements. Management considers certain of these policies to be critical to the presentation of our financial results, since they require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the period being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates, which would be reflected in future periods.

     Our most critical accounting policies involve the reporting of loss and loss expense reserves (including losses that have occurred but were not reported to us by the financial reporting date), reinsurance recoverables, the impairment of investments, deferred policy acquisition costs and federal income taxes.

     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. We use actuarial methodologies to assist us 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. See Note 4 to our unaudited consolidated condensed financial statements included in this Form 10-Q.

     Reinsurance Recoverables. 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. Reinsurance recoverables are determined based in part on the terms and conditions of reinsurance contracts which could be subject to interpretations that differ from our own based on judicial theories of liability. In addition, we bear credit risk with respect to our reinsurers which can be significant considering that certain of the reserves remain outstanding for an extended period of time. We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. See Note 5 to our unaudited consolidated condensed financial statements included in this Form 10-Q.

     Impairment of Investments. Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. 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. For additional detail regarding our investment portfolio at March 31, 2005 and December 31, 2004, including disclosures regarding other-than-temporary declines in investment value, see Note 3 to our unaudited consolidated condensed financial statements included in this Form 10-Q.

     Deferred Policy Acquisition Costs. We defer 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 expense in proportion to premium revenue recognized. The method followed in computing deferred policy

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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. See Note 6 to our unaudited consolidated condensed financial statements included in this Form 10-Q.

     Federal Income Taxes 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 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.

     We utilize 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. 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 more likely than not to be realized. See Note 7 to our unaudited consolidated condensed financial statements included in this Form 10-Q.

Results of Operations

     The table below summarizes certain operating results and key measures used in monitoring and evaluating operations. The information is intended to summarize and supplement information contained in interim unaudited consolidated condensed financial statements and to assist the reader in gaining a better understanding of results of operations.

Overview of Operating Results

     Net income increased from $2.9 million for the three months ended March 31, 2004 to $3.1 million for the three months ended March 31, 2005.

     The increase in net income was primarily attributable to an increase in total revenue, which was directly related to an increase in net earned premium and net investment income. The increase in net earned premium resulted

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principally from an increase in the volume of business which was offset by slight rate declines in both the property and casualty lines of business. Net investment income increased in the first quarter of 2005 due to higher invested assets as a result of the proceeds from the Company’s initial public offering that occurred in April of 2004 and the operational cash flows that occurred throughout 2004 and into the first quarter of 2005.

     This increase in total revenue was offset by an increase in total expenses that resulted from an increase in net loss and loss expenses and the $793,000 severance expense with our former Chief Operating Officer. The loss and loss expense ratios for the three months ended March 31, 2005 and 2004 were 62.0% and 59.0%, respectively, which reflects higher current accident year ultimate loss and loss expense ratios driven by the decreasing rate environment throughout 2004 and into 2005. The expense ratios for the three months ended March 31, 2005 and 2004 were 33.9% and 33.3%, respectively. The increase in the expense ratio is directly attributable to the severance expense recorded in the first quarter of 2005 as mentioned above.

Revenues

     Premiums

     Premiums include insurance premiums underwritten by Century (which are referred to as direct premiums) and insurance premiums assumed from other insurers generally in states where Century is not licensed (which are referred to as assumed premiums). We refer to direct and assumed premiums together as gross premiums.

     Written premiums are the total amount of premiums billed to the policyholder less the amount of premiums returned, generally as a result of cancellations, during a given period. Written premiums become premiums earned as the policy ages. Barring premium changes, if an insurance company writes the same mix of business each year, written premiums and premiums earned will be equal, and the unearned premium reserve will remain constant. During periods of growth, the unearned premium reserve will increase, causing premiums earned to be less than written premiums. Conversely, during periods of decline, the unearned premium reserve will decrease, causing premiums earned to be greater than written premiums.

     We have historically relied on quota share, excess of loss, and catastrophe reinsurance primarily to manage our regulatory capital requirements and also to limit our exposure to loss. Generally, we have ceded a significant portion of our premiums to unaffiliated reinsurers in order to maintain a net written premiums to statutory surplus ratio of less than 2-to-1.

     Our underwriting business is currently divided into two primary segments:

     Our property/casualty segment primarily includes general liability, commercial property and multi-peril insurance for small and mid-sized businesses. The other (including exited lines) segment primarily includes our surety business, including landfill and specialty surety that is written in order to maintain Century’s U.S. Treasury listing, workers’ compensation, which was exited in January 2002, and commercial auto, which was exited in May 2000.

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     The following table presents our gross written premiums in our primary segments and provides a summary of gross, ceded and net written premiums and net premiums earned for the periods indicated.

     Gross Written Premiums

     Gross written premiums increased to $47.6 million for the quarter ended March 31, 2005, an increase of 11.2% from $42.8 million for the same period in 2004. This increase was primarily due to an increase in volume of our property/casualty segment which was slightly offset by overall rate declines across our book of business. While our casualty line of business continued to grow with an increase of $5.4 million of gross written premiums, we experienced a decline in our overall casualty growth rate due to rate softening and increased market competition. Although, we expect this rate softening and increased market competition to continue throughout 2005, we believe that there are still opportunities for profitable growth in our casualty lines. Our property lines decreased in the first quarter of 2005 by $737,000. This decrease is a result of softened rates across our property book of business, causing the loss of some of our individually significant property accounts.

     Net Written Premiums and Premiums Earned

     Net written premiums for the three months ended March 31, 2005 were $42.3 million, representing an increase of 15.4% compared to the same period in 2004. Net written premiums represented 88.8% of gross written premiums for the three months ended March 31, 2005. This is higher than the relationship of net written premiums to gross written premiums during the same period in 2004, reflecting an increase in retention for the current year resulting from the decreased use of facultative reinsurance from a lower number of property accounts that have been historically ceded under the facultative treaty.

     Premiums earned, a function of net written premiums, were $41.5 million for the three months ended March 31, 2005, or 98.2% of net written premiums. This is higher than the relationship of premiums earned to net written premiums during the same period in 2004, reflecting the slower growth rate at the end of 2004 and into the first quarter of 2005.

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     Net Investment Income

     Our investment portfolio generally consists of liquid, readily marketable and investment-grade fixed-maturity and equity securities. Net investment income is comprised of interest and dividends earned on these securities, net of related investment expenses.

     Net investment income increased to $3.2 million for the three months ended March 31, 2005, compared to $2.0 million for the same period in 2004. The increase was primarily due to an increase in invested assets, including cash as a result of the proceeds from the IPO and an increase in operation cash flows throughout 2004 and into 2005. Invested assets, including cash, increased by $130.3 million to $318.4 million as of March 31, 2005 from $188.1 million as of March 31, 2004. Pre-tax investment yield for the first three months ended March 31, 2005 was 4.5%, compared to 4.3% for the same period in 2004. In addition, in an effort to increase our tax equivalent yield we increased our allocation to tax-exempt municipals throughout 2004 and into 2005. Based on the increase in our allocation, we increased our tax equivalent yield to 5.1% as of March 31, 2005 from 4.6% as of March 31, 2004.

     Realized Gains (Losses) on Securities

     Realized gains and losses on securities are principally affected by changes in interest rates, the timing of sales of investments and changes in credit quality of the securities held as investments.

     We realized net investment losses of $59,000 and net investment gains of $123,000 on the sale of securities for the three months ended March 31, 2005 and 2004, respectively. No other-than-temporary declines were realized in the first quarter of 2005 or 2004.

Expenses

     Losses and Loss Expenses

     Losses and loss expenses represent our largest expense item and include (1) payments made to settle claims, (2) estimates for future claim payments and changes in those estimates for current and prior periods, and (3) costs associated with settling claims. The items that influence the incurred losses and loss expenses for a given period include, but are not limited to, the following:

     We continue to perform an internal quarterly actuarial analysis and establish or adjust (for prior accident quarters) our best estimate of the ultimate incurred losses and loss expenses to reflect loss development information and trends that have been updated for the most recent quarter’s activity. As of December 31 of each year, we have an independent actuarial analysis performed of the adequacy of our reserves. Our estimate of ultimate loss and loss expenses is evaluated and re-evaluated by accident year and by major coverage grouping. Changes in estimates are reflected in the period the additional information becomes known.

     Our reinsurance program significantly influences our net retained losses. In exchange for premiums ceded to reinsurers under quota share and excess of loss reinsurance agreements, our reinsurers assume a portion of the losses and loss expenses incurred. We remain obligated for amounts ceded in the event that the reinsurers do not meet their obligations under the agreements (due to, for example, disputes with the reinsurer or the reinsurer’s insolvency).

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     Net losses and loss expenses increased to $25.7 million for the three months ended March 31, 2005 from $18.9 million for the same period in 2004. Net losses and loss expense ratios for the three months ended March 31, 2005 and 2004 were 62.0% and 59.0%, respectively.

     Our reserve for losses and loss expenses at March 31, 2005 was $165.7 million (before the effects of reinsurance) and $134.2 million (after the effects of reinsurance), as estimated through our internal actuarial analysis. During the first quarter of 2005, we concluded through our actuarial analysis that the December 31, 2004 reserve for losses and loss expenses of $123.8 million (after the effects of reinsurance) was deficient by $1.9 million primarily on our construction defect and property reserves.

     Our reserve for losses and loss expenses (net of the effects of reinsurance) at March 31, 2005 and December 31, 2004 by line was as follows:

     Based on the first quarter 2005 internal actuarial review, the Company recorded $23.8 million of incurred losses and loss expenses attributable to the 2005 accident year and $1.9 million attributable to events of prior years. The accident year losses and loss expense ratios for the property and casualty segment for accident years 2005, 2004 and 2003 were 57.4%, 52.8% and 45.6%, respectively. In the first quarter of 2004, the Company recorded $16.7 million of incurred losses and loss expenses attributable to the 2004 accident year and $2.2 million attributable to events of prior years.

     The prior year increases for the first quarter of 2005 resulted principally from construction defect claims within the other liability line of the property and casualty segment. During the first three months of 2005, the Company established reserves for two contribution action settlements that are anticipated to be paid within the year. This development was slightly offset by favorable claim count development, while claim severities continued to be within the Company’s expectation. Prior year development for construction defect claims was $1.4 million for the three months ended March 31, 2005.

     At March 31, 2005 the Company had 519 open claims relating to construction defect compared to 566 open claims as of December 31, 2004. During the first quarter of 2005, 175 new claims were reported and 222 existing claims were settled or dismissed. Our net loss and loss expense reserves for construction defect claims at March 31, 2005 were $19.4 million compared to $19.0 million at December 31, 2004.

     During the first quarter of 2004, new construction defect claim counts exceeded expectations. Based on the claim count experience that emerged, the Company’s actuaries revised the factors used in the estimation of ultimate construction defect claim counts. This re-estimation of claim count projection factors produced an increase in the estimated ultimate cost of construction defect claims. The prior year development recognized during the quarter for construction defect was substantially due to adverse claim count experience. The claim severities for the quarter of 2004 were in line with the Company’s recent experience and expectations. Additionally, during the quarter,

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development on pending claims was favorable and the amount of claims closed continued to exceed the amount of new claims reported. As of March 31, 2004 the Company had 572 open claims relating to construction defect compared to 597 open claims as of December 31, 2003. During the first quarter of 2004, 262 new claims were reported and 287 existing claims were settled or dismissed. Our net loss and loss expense reserves for construction defect claims at March 31, 2004 were $17.9 million.

     During the first quarter of 2005, the Company recorded $355,000 of prior year development for property. This primarily resulted from adverse development on two December 2004 fire claims. All other lines performed as expected in the first quarter of 2005.

     During the first quarter of 2004, the Company recorded increases in paid and incurred losses and loss expenses on seven commercial auto liability claims. The net incurred increases on these claims totaled $778,000. The increases were related to one significant, unanticipated new claim ($155,000), reserve increases related to coverage disputes on three claims ($297,000), and unfavorable changes in conditions relating to three other claims ($326,000).

     Our other (exited lines) performed as expected in the first quarter of 2005. For commercial automobile, the Company had 29 open claims at March 31, 2005 compared to 38 open claims at December 31, 2004. During the first quarter of 2005, there were no new claims reported and nine existing claims were settled or dismissed. Our net loss and loss expense reserves for commercial automobile at March 31, 2005 were $1.7 million compared to $1.8 million as of December 31, 2004. In addition, for workers’ compensation, at March 31, 2005, the Company had 235 open claims at March 31, 3005 compared to 257 open claims at December 31, 2004. During the first quarter of 2005, there were three new claims reported and 25 existing claims were settled or dismissed. Our net loss and loss expense reserves for workers compensation at March 31, 2005 were $3.1 million compared to $3.4 million as of December 31, 2004.

     Operating Expenses

     Operating expenses include the costs to acquire a policy (included in amortization of deferred policy acquisition costs), other operating expenses (including corporate expenses) and interest expense. The following table presents our amortization of deferred policy acquisition costs, other operating expenses and related ratios and interest expense for the periods indicated:

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     Operating expenses increased $3.4 million, or 30.6%, to $14.5 million for the three month period ended March 31, 2005 from $11.1 million for the same period in 2004. The increase is primarily attributable to an increase in ADAC, including commission expenses. This increase resulted from an increase in the volume of insurance written. The increase in the ADAC ratio to 24.6% in 2005 from 21.4% in 2004, is directly related to the fact that the 2004 expense 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 segment 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.

     Other operating expenses decreased slightly to $3.1 million for the first quarter 2005 compared to $3.6 million for the first quarter 2004. This decrease is a direct result of the Company’s focus on expense management that occurred throughout 2004 and into 2005.

     The overall expense ratio for the three months ended March 31, 2005 was 33.9%, which is 0.6 percentage points higher than that of the same period in 2004. The increase in the expense ratio for the three month period ended March 31, 2005 is primarily due to the severance agreement with the Company’s former Chief Operating Officer recorded in 2005, the one time ADAC adjustment that lowered overall expenses in 2004, all of which were offset by an increase in operational efficiencies achieved through a focus on expense management as seen in the overall decline in the other operating expense ratio.

     Interest expense remained consistent for the three months ended March 31, 2005 and 2004 at $417,000 and $415,000, respectively.

Income Taxes

     The 2005 income tax provision for the quarter ended March 31, 2005 has been computed based on our estimated annual effective tax rate of 30.0%, which differs from the federal income tax rate of 35% principally because of tax-exempt investment income. The effective tax rate of 30.0% in 2005 is lower than the 32.4% reported in 2004 primarily due to the increase in tax exempt municipal bonds that occurred throughout 2004 and into 2005.

Liquidity and Capital Resources

     ProCentury is a holding company, the principal asset of which is the common shares of Century. Although we have the capacity to generate cash through loans from banks and issuances of equity securities, our primary source of funds to meet our short-term liquidity needs, including the payment of dividends to our shareholders and corporate expenses, is dividends from Century. Century’s principal sources of funds are underwriting operations, investment income and proceeds from sales and maturities of investments. Century’s primary use of funds is to pay claims and operating expenses, to purchase investments and to make dividend payments to us. ProCentury’s future liquidity is dependent on the ability of Century to pay dividends.

     Century is restricted by statute as to the amount of dividends it may pay without the prior approval of regulatory authorities. Century may pay dividends to ProCentury without advance regulatory approval only from unassigned surplus and only to the extent that all dividends in the current twelve months do not exceed the greater of 10% of total statutory surplus as of the end of the prior fiscal year or statutory net income for the prior year. Using these criteria, the available ordinary dividend payable by Century to ProCentury for 2005 is $13.8 million. Century did not pay ProCentury any dividends in the first quarter of 2005. Century paid ordinary dividends of $1.5 million for the three months ended March 31, 2004. Century’s ability to pay future dividends to ProCentury without advance regulatory approval is dependent upon maintaining a positive level of unassigned surplus, which in turn, is dependent upon Century generating net income in excess of dividends to ProCentury.

     Century is required by law to maintain a certain minimum level of surplus on a statutory basis. Surplus is calculated by subtracting total liabilities from total admitted assets. The National Association of Insurance Commissioners (“NAIC”) has a risk-based capital standard designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of each insurer’s assets and liabilities and its mix of net

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written premiums. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. At December 31, 2004, the statutory surplus of Century was in excess of the prescribed risk-based capital requirements that correspond to any level of regulatory action. Century’s statutory surplus at December 31, 2004 was $115.8 million and the regulatory action level was $29.3 million. Century’s statutory surplus at March 31, 2005 was $118.7 million.

     Consolidated net cash provided by operating activities was $11.7 million for the first quarter of 2005, compared to $11.3 million for the same period in 2004. This improvement was primarily attributable to the increase in net written premiums partially offset by an increase in paid losses.

     Consolidated net cash used by investing activities was $14.6 million for the first quarter of 2005, compared to net cash used by investing activities of $10.7 million for the same period in 2004. This increase was primarily attributable to the increased level of purchases of fixed maturity securities.

     Consolidated net cash used in financing activities was $265,000 for the first quarter of 2005, compared to net cash used in financing activities of $234,000 for the same period in 2004. The $265,000 in the first quarter of 2005 related to dividends declared and accrued on March 24, 2005. The dividend was paid on April 28, 2005 to shareholders of record as of April 7, 2005. The $234,000 in the first quarter of 2004 related to principal payments on our long term bank debt that was subsequently paid off in April of 2004.

     Interest on our debt issued to a related party trust is variable and resets quarterly based on a spread over three-month London Interbank Offered Rates (“LIBOR”). As part of our asset/liability matching program, we have short-term investments, investments in bond mutual funds, as well as available cash balances from operations and investment maturities, that are available for reinvestment during periods of rising or falling interest rates.

     Line of Credit. ProCentury has a $5.0 million line of credit. 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. There was no outstanding balance at March 31, 2005; however, in April 2005, the Company made a $2.3 million draw on the line of credit.

     The following table summarizes information about contractual obligations and commercial commitments. The minimum payments under these agreements at March 31, 2005 were as follows:

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     Given our historical cash flow, we believe cash flow from operating activities in 2005 will provide sufficient liquidity for our operations, as well as to satisfy debt service obligations and to pay other operating expenses. Although we anticipate that we will be able to meet our cash requirements, we can give no assurance in this regard.

Investment Portfolio

     Our investment strategy is designed to capitalize on our ability to generate positive cash flow from our underwriting activities. Preservation of capital is our first priority, with a secondary focus on maximizing appropriate risk adjusted return. We seek to maintain sufficient liquidity from operations, investing and financing activities to meet our anticipated insurance obligations and operating and capital expenditure needs. The majority of our fixed-maturity portfolio is rated investment grade to protect investments. Our investment portfolio is managed by two outside independent investment managers that operate under investment guidelines approved by Century’s investment committee. Century’s investment committee meets at least quarterly and reports to Century’s board of directors. In addition, we employ stringent diversification rules and balance our investment credit risk and related underwriting risks to minimize total potential exposure to any one security. In limited circumstances, we will invest in non-investment grade fixed maturity securities that have an appropriate risk adjusted return, subject to satisfactory credit analysis performed by us and our investment managers.

     Our cash and investment portfolio increased to $318.4 million at March 31, 2005 from $312.4 million at December 31, 2004 and is summarized by type of investment in Note 3 to the interim unaudited consolidated condensed financial statements, included in this Form 10-Q filing. The Company’s taxable equivalent yield increased from 4.8% at December 31, 2004 to 5.1% at March 31, 2005. The increase in the taxable equivalent yield during the first quarter of 2005 was a result of the investment of proceeds from maturities and operating cash flows at higher interest rates, which were partially driven by the overall rise in market interest rates. Our fixed maturity securities at March 31, 2005 remained fairly consistent with the balance at December 31, 2004. Equity securities increased from $37.1 million at December 31, 2004 to $48.3 million at March 31, 2005. During the three months ended March 31, 2005, the duration of the fixed income portfolio decreased slightly from 4.5 years at December 31, 2004 to 4.3 years at March 31, 2005. The overall credit quality of the portfolio remained investment grade.

Accounting Standards

In December 2004, the FASB revised Statement No. 123 (SFAS 123R), “Share-Based Payment,” which requires companies to expense the estimated fair value of employee stock options and similar awards, for all options vesting, granted, or modified after the effective date of this revised statement. The accounting provisions of SFAS 123R were to become effective for interim periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (SEC) adopted a final rule amending Rule 4-01(a) of Regulation S-X regarding the compliance date for SFAS 123R. This ruling delays the effective date of SFAS 123R to the first interim or annual reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. As a result, the accounting provisions of SFAS 123R will become effective beginning in 2006 for our financial statements.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

     The Company is exposed to market risk, which is the potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, equity price risk and interest rate risk.

     As of March 31, 2005, there had not been a material change in any of the market risk information disclosed by the Company under Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in its Annual Report on Form 10-K for the year ended December 31, 2004.

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Item 4. Controls And Procedures

     As of the end of the period covered by this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chairman and Chief Executive Officer (“CEO”) and the Executive Vice President and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15 (“Disclosure Controls”).

     The Company’s management, including the CEO and CFO, does not expect that its Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

     Based upon the Company’s controls evaluation, the CEO and CFO have concluded that the Company’s Disclosure Controls provide reasonable assurance that the information required to be disclosed by the Company in its periodic reports is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

     There were no changes in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

     The Company’s subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. The Company does not believe that such litigation, individually or in the aggregate, will have a material effect on its consolidated financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     Not applicable.

Item 3. Defaults Upon Senior Securities

     Not applicable.

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

     Not applicable.

Item 5. Other Information

     Not applicable.

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Item 6. Exhibits

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized.