PROCENTURY CORPORATION S-4
As filed with the Securities and Exchange Commission on
June 25, 2007
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
PROCENTURY
CORPORATION
(Exact name of Registrant as
specified in its charter)
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Ohio
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6331
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33-0480482
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(State or other jurisdiction
of incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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465 Cleveland Ave.
Westerville, Ohio 43082
(614) 895-2000
(Address, including zip code,
and telephone number,
including area code, of each registrants principal
executive offices)
Edward F. Feighan
President and Chief Executive Officer
ProCentury Corporation
465 Cleveland Ave.
Westerville, Ohio 43082
(614) 895-2000
(Name, address, including zip
code, and telephone number,
including area code, of agent for service)
Copies to:
John M. Gherlein, Esq.
Baker & Hostetler LLP
3200 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114
(216) 621-0200
Approximate date of commencement of proposed sale to the
public: From time to time after this Registration
Statement is declared effective.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check
the following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering
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Aggregate
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Registration
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Securities to be Registered
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Registered
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Price per Shares(2)
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Offering Price
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Fee
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Common Shares, without par value(1)
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3,000,000
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$16.90
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$50,700,000
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$1,557.00
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(1)
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The securities that may be offered
pursuant to this registration statement include, pursuant to
Rule 416 of the Securities Act of 1933, as amended, such
additional number of common shares that may become issuable as a
result of any stock split, stock dividend or similar event.
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(2)
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Calculated solely for the purpose
of this offering under Rule 457(h) of the Securities Act of
1933, as amended, on the basis of the high and low selling
prices per share of the common shares as reported on the NASDAQ
Global Market on June 21, 2007.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any jurisdiction where the offer or
sale is not permitted.
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SUBJECT TO COMPLETION. DATED
JUNE 25, 2007.
PROSPECTUS
3,000,000 Shares
Corporation
COMMON
SHARES
We may use this prospectus to offer and sell up to 3,000,000 of
our common shares at various times in connection with future
business combinations involving our company or its subsidiaries.
The common shares covered by this prospectus may be issued in
connection with mergers, consolidations, recapitalizations or
similar plans of acquisition, purchases of some or all of the
assets of a business or exchanges for the outstanding
securities, obligations or other interests of a business.
We expect that the specific terms of each business combination
in which the common shares will be issued will be negotiated
with the owners or other controlling persons of the businesses
involved. Generally, the common shares covered by the prospectus
that are issued in a business combination will be valued at a
price based on their market value at the time the business
combination is agreed upon or at the time they are delivered
pursuant to the combination, at a price based on average market
prices for periods ending at or near these times or on such
other basis as the parties may agree.
We do not expect that underwriting discounts or commissions will
be paid in connection with the issuances of the common shares
under this prospectus. However, brokers commissions or
finders fees may be paid at various times in connection
with specific business combinations. Any person receiving these
fees may be deemed an underwriter within the meaning of the
Securities Act of 1933, as amended, or the Securities Act, and
any profit on the resale of the common shares purchased by them
may be deemed to be underwriting discounts or commissions under
the Securities Act.
Our common shares are quoted on the NASDAQ Global Market under
the symbol PROS. The last reported sale price of the
common shares on the NASDAQ Global Market on June 22, 2007
was $16.64 per share.
Investing in our common shares involves risks. Before making
an investment in our company, you should consider carefully the
Risk Factors beginning on page 3.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus
is ,
2007.
We have not authorized any dealer, salesman or other person
to give any information or to make any representation other than
those contained or incorporated by reference in this prospectus
and any accompanying supplement to this prospectus. You must not
rely upon any information or representation not contained or
incorporated by reference in this prospectus or any accompanying
prospectus supplement. This prospectus and any accompanying
supplement to this prospectus do not constitute an offer to sell
or the solicitation of an offer to buy any securities other than
the registered securities to which they relate, nor do this
prospectus and any accompanying supplement to this prospectus
constitute an offer to sell or the solicitation of an offer to
buy securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such
jurisdiction. The information contained in this prospectus and
any supplement to this prospectus is accurate as of the dates on
their covers. When we deliver this prospectus or a supplement or
make a sale pursuant to this prospectus or a supplement, we are
not implying that the information is current as of the date of
the delivery or sale.
This prospectus incorporates important business and financial
information about us that is not included with this document. To
receive a free copy of any of the documents incorporated by
reference in this prospectus (other than exhibits, unless they
are specifically incorporated by reference in any such
documents), call or write ProCentury Corporation, 465 Cleveland
Avenue, Westerville, Ohio 43082, Attention: Jeffrey Racz,
Investor Relations, telephone number
(614) 895-2000.
In order to obtain timely delivery of such information, you must
request the information no later than five business days before
the date you must make your investment decision.
When used in this prospectus, the terms ProCentury,
we, our and us refer to
ProCentury Corporation and its consolidated subsidiaries, unless
otherwise specified.
TABLE OF
CONTENTS
PROSPECTUS
SUMMARY
We may use this prospectus to offer and sell up to 3,000,000 of
our common shares at various times in connection with future
business combinations involving our company or its subsidiaries.
The common shares covered by this prospectus may be issued in
connection with mergers, consolidations, recapitalizations or
similar plans of acquisition, purchases of some or all of the
assets of a business or exchanges for the outstanding
securities, obligations or other interests of a business.
We expect that the specific terms of each business combination
in which the common shares will be issued will be negotiated
with the owners or other controlling persons of the businesses
involved. Generally, the common shares covered by the prospectus
that are issued in a business combination will be valued at a
price based on their market value at the time the business
combination is agreed upon or at the time they are delivered
pursuant to the combination, at a price based on average market
prices for periods ending at or near these times or on such
other basis as the parties may agree.
The common shares we offer and sell pursuant to this prospectus
and applicable prospectus supplement or post-effective amendment
in these transactions may be reoffered pursuant to this
prospectus by the holders thereof from time to time in
transactions on the NASDAQ Global Market, in negotiated
transactions, in block trades, through the writing of options on
securities, or any combination of these methods of sale, at
fixed prices that may be changed, at market prices prevailing at
the time of sale, at prices relating to the prevailing prices or
at negotiated prices. These selling holders may sell their
common shares to or through broker-dealers, and the
broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling holders
or the purchasers of shares for whom the broker-dealer may act
as agent or to whom they may sell as principal or both.
We will bear all expenses in connection with the registration of
the common shares being resold by selling holders, other than
selling discounts and commissions and fees and expenses of the
selling holders. The terms for the issuance of common shares may
include provisions for the indemnification of the selling
holders for specified civil liabilities, including liabilities
under the Securities Act. We do not expect that underwriting
discounts or commissions will be paid in connection with the
issuances of the common shares under this prospectus. However,
brokers commissions or finders fees may be paid at
various times in connection with specific business combinations.
Any person receiving these fees may be deemed an underwriter
within the meaning of the Securities Act and any profit on the
resale of the common shares purchased by them may be deemed to
be underwriting discounts or commissions under the Securities
Act.
The common shares to be issued in connection with an acquisition
made pursuant to this prospectus will be registered under the
Securities Act and will be freely transferable under the
Securities Act, except for common shares issued to any person
who is deemed to be an affiliate of the company
being acquired. Persons who may be deemed to be affiliates
include individuals or entities that control, are controlled by,
or are under common control with the company being acquired and
may include some of its officers and directors as well as its
principal shareholders. Pursuant to Rule 145(c) under the
Securities Act, the affiliates of the company being acquired may
not sell their common shares issued pursuant to this prospectus
except under:
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an effective registration statement under the Securities Act
covering the resale of those shares;
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an exemption under paragraph (d) of Rule 145 under the
Securities Act; or
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any other exemption under the Securities Act that may be relied
upon in the opinion of legal counsel reasonably acceptable to
common shares.
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ProCenturys registration statement on
Form S-4,
of which this prospectus forms a part, does not cover the resale
of common shares to be received by affiliates of companies being
acquired pursuant to this prospectus.
ABOUT
PROCENTURY
ProCentury Corporation is a specialty property and casualty
insurance holding company, writing specialty insurance products
for small and mid-sized businesses through Century Surety
Company, or Century, and ProCentury Insurance Company, or PIC,
our operating insurance subsidiaries, which are rated
A- by the
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A.M. Best Company, or A.M. Best. We primarily write
general liability, commercial property, commercial multi-peril,
commercial auto and marine insurance in the excess and surplus
lines market through a select group of general agents. The
excess and surplus lines market provides an alternative market
for customers with hard-to-place risks that insurance companies
licensed by the state in which the insurance policy is sold,
also referred to as standard insurers or admitted insurers,
typically do not cover. Our strategy is to generate an
underwriting profit by being selective in the classes of
business and the coverages we write and providing superior
service to our agents.
As a niche company, we offer specialty insurance
products designed to meet specific insurance needs of targeted
insured markets. These targeted insured markets are often not
served or are underserved by standard companies and, as a
specialty insurer, we seek to compete more on the basis of
service and availability of coverage than price. We focus on
serving the insurance needs of small and mid-sized businesses,
including apartment buildings, hospitality businesses, garages,
non-franchised auto dealers, condominium associations, retail
and wholesale stores, artisan contractors, marinas, daycare
facilities, fitness centers and special event providers. The
insurance needs of these targeted insured markets are serviced
by retail insurance brokers who maintain relationships with the
general agents with whom we do business. The development of
these specialty insurance products is accomplished through our
own experience or knowledge or through proposals brought to us
by an agent with special expertise in a specific class of
business. We underwrite all of our applicants for insurance
coverages on an individual basis. For each class we insure, we
employ a number of customized endorsements, rating tools and
decreased limits to align our product offerings with the risk
profile of the class and the specific insured being underwritten.
Our principal executive offices are located at 465 Cleveland
Avenue, Westerville, Ohio 43082, and the telephone number at
that address is
(614) 895-2000.
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RISK
FACTORS
Investing in our common shares involves a high degree of
risk. Before you invest in our common shares, you should
carefully consider the following risks and cautionary
statements. If any of the events described in the following
risks actually occur, our business, financial condition or
results of operations may suffer. As a result, the trading price
of our common shares could decline, and you could lose all or a
substantial portion of your investment.
Risks
Related to our Business and Industry
Our
business is cyclical in nature and our industry is currently
experiencing softening market conditions which may affect our
financial performance, our ability to grow and the price of our
common shares.
Historically, the financial performance of the property and
casualty insurance industry has tended to fluctuate in cyclical
patterns. Although an individual insurance companys
financial performance is dependent on its own specific business
characteristics, the profitability of most property and casualty
insurance companies tends to follow this cyclical market
pattern. This cyclicality is due in large part to the actions of
industry participants, such as inadequate pricing and
increasingly broad policy terms, general economic factors, such
as low interest rates, the impact of terrorist attacks and
severe weather, none of which is within our control. These
cyclical patterns cause our revenues and net income to
fluctuate, which may cause the price of our common shares to be
volatile.
During the past five years, many admitted insurers returned to
more risk-based underwriting disciplines in the standard market,
resulting in higher premium rates, less flexible terms and, in
some cases, an unavailability of adequate insurance coverage in
the standard market in some classes. We, along with other excess
and surplus lines insurers, benefited from this increase in
rates and volume. During the past year, however, the excess and
surplus lines industry began to experience softer market
conditions primarily attributed to intensified competition for
admitted and surplus lines insurers, resulting in slight rate
decreases. Because these market conditions are due in large part
to the actions of our competitors and general economic factors,
we cannot predict the timing or duration of these conditions.
This increase in competition is expected to continue through
2007.
Our
success depends on our ability to appropriately price the risks
we underwrite.
Our financial condition depends on our ability to underwrite and
set premium rates accurately for a wide variety of risks. Rate
adequacy is necessary to generate sufficient premiums to pay
losses, loss expenses and underwriting expenses and to earn a
profit. In order to price our products accurately, we must
collect and properly analyze a substantial amount of data,
develop, test and apply appropriate rating formulas, closely
monitor and timely recognize changes in trends and project both
severity and frequency of losses with reasonable accuracy. Our
ability to undertake these efforts successfully and price our
products accurately is subject to a number of risks and
uncertainties, some of which are outside our control, including:
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the availability of sufficient reliable data and our ability to
properly analyze available data;
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the uncertainties that inherently characterize estimates and
assumptions;
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our selection and application of appropriate rating and pricing
techniques; and
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changes in legal standards, claim settlement practices, medical
care expenses and restoration costs.
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Consequently, we could under-price risks, which would negatively
affect our profit margins, or we could over-price risks, which
could reduce our sales volume and competitiveness. In either
event, our profitability could be materially and adversely
affected.
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.
We are liable for loss and loss expenses under the terms of the
insurance policies we write. In many cases, several years may
elapse between the occurrence of an insured loss, the reporting
of the loss to us and our payment of the loss. We establish loss
and loss expense reserves for our estimate of the ultimate
payment of all loss and loss
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expenses incurred. If any of our reserves prove to be
inadequate, we will be required to increase reserves resulting
in a reduction in our net income in the period in which the
inadequacy is identified. Future loss experience substantially
in excess of established reserves could also cause our future
earnings, liquidity and financial rating to decline. These
reserves are based on historical data and estimates of future
events and by their nature are imprecise. Our ultimate loss and
loss expenses may vary from established reserves.
Furthermore, several factors may have a substantial impact on
our future loss experience. These factors may include:
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inflation in the size of claims;
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claims development patterns;
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legislative and judicial activity;
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social and economic patterns; and
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litigation and regulatory trends.
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Additionally, we have established loss and loss expense reserves
for certain lines of business we have exited, but circumstances
could develop that would make these reserves insufficient. As of
March 31, 2007, unpaid loss and loss expense reserves (net
of reserves ceded to our reinsurers) were $222.7 million,
consisting of case loss and loss expense reserves of
$71.7 million and incurred but not reported loss and loss
expense reserves of $151.0 million.
We have re-estimated our loss and loss expense reserves
attributable to insured events in prior years. These
re-estimations resulted in a (decrease) increase in reserves of
$(991,000), $(1.1) million, $5.4 million and
$11.1 million for the three months ended March 31,
2007 and the years ended December 31, 2006, 2005 and 2004,
respectively.
Severe
weather conditions and other catastrophes may result in an
increase in the number and amount of claims experienced by our
insureds.
Most of our property business is exposed to the risk of severe
weather conditions and other catastrophes. Catastrophes can be
caused by various events, including natural events such as
severe hurricanes, winter weather, tornadoes, windstorms,
earthquakes, hailstorms, severe thunderstorms and fires, and
other events such as explosions, terrorist attacks and riots.
The incidence and severity of catastrophes and severe weather
conditions are inherently unpredictable. Severe weather
conditions and catastrophes can cause losses in all of our
property lines and generally result in an increase in the number
of claims incurred as well as the amount of compensation sought
by claimants because every geographic location in which we
provide insurance policies is subject to the risk of severe
weather conditions. In 2005, we recorded $5.4 million of
after tax losses related to the hurricane season. In the first
three months of 2007, throughout 2006 and prior to
December 31, 2004, we have not been materially impacted by
catastrophic events. We use a model that is commonly used
throughout the industry to help us ensure that we are purchasing
sufficient catastrophe reinsurance limits. Currently, we
purchase catastrophe reinsurance to cover a potential
catastrophe that is modeled to only occur once every
500 years. There can be no assurance that this modeled
information will accurately predict catastrophic losses. It is
possible that a catastrophic event or multiple catastrophic
events could cause our loss and loss expense reserves to
increase and our liquidity and financial condition to decline.
A
decline in our financial rating assigned by A.M. Best may
result in a reduction of new or renewal business.
A.M. Best, an insurance rating agency, assigns ratings that
generally are based on an insurance companys ability to
pay policyholder obligations. The A.M. Best ratings
criteria focus on capital adequacy, loss and loss expense
reserve adequacy and operating performance. A reduction in our
performance in these criteria could result in a downgrade of an
insurance companys rating. Our insurance subsidiaries
received an A- (excellent) pooled annual rating in
2006 from A.M. Best. A downgrade of our rating below
A- (excellent) could cause our current and future
general agents, retail brokers and insureds to choose other,
more highly rated competitors which would have an adverse impact
on our financial results.
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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.
We compete with a large number of other companies in our
selected lines of business. We face competition from specialty
insurance companies, underwriting agencies and intermediaries,
as well as from diversified financial services companies that
are significantly larger than we are and that have significantly
greater financial, marketing, management and other resources
than we do. Some of these competitors also have significantly
greater experience and market recognition than we do.
In its Annual Review of the Excess & Surplus Lines
Industry, published in September 2006, A.M. Best stated
that large insurance carriers continue to dominate the excess
and surplus lines market, with the top 25 insurance groups
commanding an 82.5% share of the market. While we believe
opportunities are available in this market, the leading
insurance carriers have a firm stronghold. We are not one of the
50 largest insurance carriers in the excess and surplus lines
market. Competition in this market is generally based on many
factors, including:
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the perceived market strength of the insurer in a particular
line;
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pricing and other terms and conditions;
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service;
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speed of claims payment;
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the reputation and experience of the insurer; and
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ratings assigned by independent ratings organizations, such as
A.M. Best.
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We compete primarily on the basis of service.
We may incur increased costs in competing for underwriting
revenues. If we are unable to compete effectively in the markets
in which we operate or to expand our operations into new
markets, our underwriting revenues and net income may decline.
A number of new, proposed or potential legislative and industry
developments could further increase competition in our industry.
These developments include:
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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;
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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;
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programs in which state-sponsored entities provide property
insurance in catastrophe prone areas; and
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changing practices caused by the Internet, which may lead to
greater competition in the insurance business.
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New competition from these developments could cause the supply
and/or
demand for insurance or reinsurance to change, which could
affect our ability to price our products at attractive rates and
thereby affect our underwriting results. Ultimately, this
competition could affect our ability to attract business at
premium rates that are likely to generate underwriting profits.
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.
We distribute our products through a select group of general
agents. Approximately 43.6% of our gross written premiums for
the year ended December 31, 2006 were distributed through
five general agents. In 2006, our largest agency group, with
locations in six states, accounted for $51.8 million
(18.3%) of our total gross written premiums. A loss of all or
substantially all the business produced by one or more of these
general agents could have a negative impact on our revenues. Our
concentration with agents has not significantly changed since
December 31, 2006.
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We may
not be successful in developing our new specialty lines or new
classes of insureds through our program unit that could cause us
to experience losses.
Since 2003, we have entered into several new specialty lines of
business and more than 10 new offerings through our program
unit, including commercial auto physical damage, garage
liability and ocean marine. We continue to look for appropriate
opportunities to diversify our business portfolio by offering
new lines of insurance in which we believe we have sufficient
underwriting and claim expertise. However, because of our
limited history in these new lines, there is limited financial
information available to help us evaluate whether we will be
able to successfully develop these new lines or the likely
ultimate losses and expenses associated with these new lines.
Due to our limited history in these lines, we may have less
experience managing their development and growth than some of
our competitors. Additionally, there is a risk that the lines of
business into which we expand will not perform at the levels we
anticipate.
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.
Our results of operations depend, in part, on the performance of
our investments. Interest rates are highly sensitive to many
factors, including governmental monetary policies and domestic
and international economic and political conditions.
Fluctuations in interest rates affect our returns on and the
fair value of our fixed-maturity securities and equity
securities. Unrealized gains and losses on fixed-maturity
securities and equity securities are recognized in accumulated
other comprehensive income, net of taxes and increase or
decrease our shareholders equity. Interest rates in the
United States are currently low relative to historical levels.
Our fixed-maturity securities and equity securities are
currently in an unrealized loss position, and an increase in
interest rates would further reduce the fair value of our
investments in fixed-maturity securities and equity securities.
In addition, defaults by third parties who fail to pay or
perform obligations could reduce our investment income and
realized investment gains and could result in investment losses
in our portfolio.
We had fixed-maturity and equity investments with a fair value
of $404.5 million as of March 31, 2007 that are
subject to:
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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;
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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
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interest rate risk, which is the risk that our investments may
decrease in value due to changes in interest rates.
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Our fixed-maturity investment portfolio had a fair value of
$360.5 million as of March 31, 2007 and includes
mortgage-backed and other asset-backed securities. As of
March 31, 2007, mortgage-backed securities, asset-backed
securities and collateralized mortgage obligations totaled
$165.1 million and constituted 38.2% of our cash and
investment portfolio. As with other fixed-maturity investments,
the fair value of these securities fluctuates depending on
market and other general economic conditions and the interest
rate environment. Changes in interest rates can expose us to
prepayment risks on these investments. In periods of declining
interest rates, mortgage prepayments generally increase and
mortgage-backed securities and other asset-backed securities are
paid more quickly, requiring us to reinvest the proceeds at the
then prevailing market rates.
Our equity portfolio totaled $44.0 million as of
March 31, 2007. This total includes $29.5 million of
investments in preferred and common securities of individual
companies, which are subject to economic loss from the decline
in preferred and common share prices. As a result, the value of
these investments will be determined by the specific financial
prospects of these individual companies, as well as the equity
markets in general. The remaining $14.5 million of our
equity portfolio is invested in bond mutual funds.
Since the end of 2002, the U.S. financial markets have
experienced a moderate rise in the value of the broader equity
markets and a high degree of volatility in interest rates, which
affect the value of our fixed-maturity securities
6
and equity securities. Our fixed-maturity securities, equity
securities, preferred shares and bond mutual funds have a fair
value of $402.0 million, which represents 89.5% of our
total cash and investment portfolio, these securities are
subject to changes in fair value based on fluctuations in
interest rates. As of March 31, 2007, a 200 basis
point decline in interest rates would result in a
$32.3 million, or 8.0% increase in fair value of our
portfolio and a 200 basis point increase would result in a
$34.9 million, or 8.7%, decrease in fair value of our
portfolio. As of March 31, 2007, our investment portfolio
had a net unrealized investment loss, after the effect of income
taxes of $3.8 million. However, these unrealized losses may
not persist in the current economic environment or may not be
realized and the ultimate loss may be greater.
Our
investment performance may suffer as a result of adverse capital
market developments or other factors, which may affect our
financial results and ability to conduct business.
We invest the premiums we receive from policyholders until it is
needed to pay policyholder claims or other expenses. Our
investment portfolio is managed by two outside independent
investment managers and one related party investment manager,
all of which operate under investment guidelines approved by our
investment committee. Although we seek to maintain sufficient
liquidity from operations, investing and financing activities to
meet our anticipated insurance obligations and operating and
capital expenditure needs, our investments are subject to a
variety of risks, including risks relating to general economic
conditions, market volatility, interest rate fluctuations,
liquidity risk and credit and default risk. In particular, the
volatility of our claims may force us to liquidate securities,
which may cause us to incur capital losses. If we do not
structure our investment portfolio so that it is appropriately
matched with our insurance liabilities, we may be forced to
liquidate investments prior to maturity at a significant loss to
cover such liabilities. Investment losses could significantly
decrease our asset base and statutory surplus, thereby affecting
our ability to conduct business.
If we
are not able to renew our existing reinsurance or obtain new
reinsurance, either our net exposure would increase or we would
have to reduce the level of our underwriting
commitment.
In 2007 we purchased property excess of loss reinsurance to
limit our loss from a single occurrence on any one coverage part
from any one policy to $500,000. For example, if we have a
property policy that has a $600,000 loss, we will be liable for
$500,000 of the loss and the reinsurer will be liable for
$100,000 of the loss. For our casualty business, we retain the
first $500,000 of a loss and share on a quota share basis 50% of
the loss amount that exceeds $500,000 up to $1.0 million.
For example, if we have a casualty policy that has a $600,000
loss, we will be liable for $550,000 of the loss and the
reinsurer will be liable for $50,000 of the loss. We maintained
the same reinsurance structure during 2006.
Further, we purchase catastrophe reinsurance to limit losses
arising from any single occurrence, regardless of how many
policyholders are involved or the extent of their loss, to
$4.0 million. We purchase casualty clash coverage for the
loss amount above $1.0 million for any single occurrence,
regardless of the number of policyholders involved. However, we
may choose in the future to re-evaluate the use of reinsurance
to increase or decrease the amount of liability we cede to
reinsurers, depending upon the cost and availability of
reinsurance.
Market conditions beyond our control determine the availability
and cost of the reinsurance protection that we purchase. The
reinsurance market has changed dramatically over the past few
years as a result of inadequate pricing, poor underwriting and
the significant losses incurred in conjunction with the
terrorist attacks on September 11, 2001 and the 2004 and
2005 hurricane storm seasons. As a result, reinsurers have
exited some lines of business, reduced available capacity and
implemented provisions in their contracts designed to reduce
their exposure to loss. In addition, the historical results of
reinsurance programs and the availability of capital also affect
the availability of reinsurance. The reinsurance market improved
throughout 2006 due to a moderate hurricane season. Our
reinsurance facilities generally are subject to annual renewal.
If we are unable to renew our expiring facilities or to obtain
new reinsurance facilities, either our net exposures would
increase, which could increase our exposure to loss, or, if we
were unwilling to bear an increase in net exposures, we would
have to reduce the level of our underwriting commitments,
especially catastrophe exposed risks, which would reduce our
revenues. To the extent that we are forced to pay more for
reinsurance or retain more liability than we do currently, we
may need to reduce the volume of insurance we write. Due to the
underwriting profile of our business, we have not been
significantly
7
impacted by the changes in the reinsurance market described
above either in claims or reinsurance terms and pricing.
Our
reinsurers may not pay claims made by us on losses in a timely
fashion or may not pay some or all of these claims, in each case
causing our costs to increase and our revenues to
decline.
We purchase reinsurance by transferring part of the risk we have
assumed (known as ceding) to a reinsurance company in exchange
for part of the premium we receive in connection with the risk.
Although reinsurance makes the reinsurer liable to us to the
extent the risk is transferred or ceded to the reinsurer, it
does not relieve us (the reinsured) of our liability to our
policyholders. Accordingly, we bear credit risk with respect to
our reinsurers. That is, our reinsurers may not pay claims made
by us on a timely basis, or they may not pay some or all of
these claims. Either of these events would increase our costs.
As of March 31, 2007, we had $42.2 million of amounts
recoverable from our reinsurers that we would be obligated to
pay if our reinsurers failed to pay. We have recorded a
provision for uncollectible amounts of $4.1 million at
March 31, 2007 and December 31, 2006, which relates to
balances due from reinsurers that are in dispute.
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.
General. Our insurance subsidiaries are
subject to regulations, administered primarily by Ohio and
Texas, our domiciliary states, and to a lesser degree, the other
states in which we are licensed or admitted to sell insurance.
Most insurance regulations are designed to protect the interests
of insurance policyholders, as opposed to the interests of
shareholders. These regulations are generally administered by a
department of insurance in each state and relate to, among other
things, excess and surplus lines of business authorizations,
capital and surplus requirements, rate and form approvals,
investment parameter restrictions, underwriting limitations,
affiliate transactions, dividend limitations, changes in control
and a variety of other financial and non-financial components of
our business. Significant changes in these laws and regulations
could limit our discretion or make it more expensive to conduct
our business. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require
the filing of annual and other reports relating to financial
condition, holding company issues and other matters. These
regulatory requirements may adversely affect or inhibit our
ability to achieve some or all of our business objectives.
Required Licensing. Regulatory authorities
have broad discretion to deny or revoke licenses for various
reasons, including the violation of regulations. In some
instances, where there is uncertainty as to applicability, we
follow practices based on our interpretations of regulations or
practices that we believe generally to be followed by the
industry. These practices may ultimately be different from the
interpretations of regulatory authorities. If we do not have the
requisite licenses and approvals or do not comply with
applicable regulatory requirements, insurance regulatory
authorities could preclude or temporarily suspend us from
carrying on some or all of our activities or otherwise penalize
us. This could adversely affect our ability to operate our
business. Further, changes in the level of regulation of the
insurance industry or changes in laws or regulations themselves
or interpretations by regulatory authorities could adversely
affect our ability to operate our business.
Risk-Based Capital. The National Association
of Insurance Commissioners has adopted a system to test the
adequacy of statutory capital, known as risk-based
capital. This system establishes the minimum amount of
risk-based capital necessary for a company to support its
overall business operations. It identifies property and casualty
insurers that may be inadequately capitalized by evaluating
certain inherent risks of each insurers assets and
liabilities and its mix of net written premiums. Insurers
falling below a calculated threshold may be subject to varying
degrees of regulatory action, including supervision,
rehabilitation or liquidation. Failure to maintain our
risk-based capital at the required levels could cause our
insurance subsidiary to lose its regulatory authority to conduct
its business. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources
from our Annual Report on
Form 10-K
for the year ended December 31, 2006 for a discussion of
our risk-based capital as of December 31, 2006.
8
IRIS Ratios. The Insurance Regulatory
Information System, or IRIS, is part of a collection of
analytical tools designed to provide state insurance regulators
with an integrated approach to screening and analyzing the
financial condition of insurance companies. IRIS has two phases
of screening: statistical and analytical. In the statistical
phase, the National Association of Insurance Commissioners
database generates financial ratios based on financial
information obtained from insurance companies annual
statutory statements. The analytical phase is a review of the
annual statements, financial ratios and other automated solvency
tools. A ratio result falling outside the usual range of IRIS
ratios is viewed as part of the regulatory early monitoring
system. As of December 31, 2006, Century had no IRIS ratios
outside the usual range and PIC had three IRIS ratios outside
the usual range, as described in our Annual Report on
Form 10-K
for the year ended December 31, 2006 under
Business Regulatory Environment
IRIS Ratios, which could result in possible regulatory
attention.
We are
subject to judicial decisions affecting insurance and tort law,
which may adversely affect our ability to achieve our business
objectives.
State courts may render decisions impacting our liability for
losses under insurance and tort law. This case law, as well as
any legislation enacted in response, can impact the claim
severity and frequency assumptions underlying our reserves.
Accordingly, our ultimate liability may exceed our estimates due
to this variable, among others.
As a
holding company, we are dependent on the results of operations
of our insurance subsidiaries and the regulatory and contractual
capacity of our subsidiaries to pay dividends to us. Some states
limit the aggregate amount of dividends our subsidiaries may pay
to us in any twelve-month period, thereby limiting our funds to
pay expenses and dividends.
We are an insurance holding company and our principal asset is
the shares we hold in Century. Dividends and other payments from
this company are our primary source of funds to pay expenses and
dividends to our shareholders. The payment of dividends by
Century to us is limited by statute. In general, these
restrictions limit the aggregate amount of dividends or other
distributions that Century may declare or pay within any
twelve-month period without advance regulatory approval.
Generally, this limitation is the greater of statutory net
income for the preceding calendar year or 10% of the statutory
surplus at the end of the preceding calendar year. In addition,
insurance regulators have broad powers to prevent reduction of
statutory surplus to inadequate levels and could refuse to
permit the payment of dividends of the maximum amounts
calculated under any applicable formula. As a result, we may not
be able to receive dividends from our subsidiary at times and in
amounts necessary to meet our debt service obligations or to pay
dividends to our shareholders or corporate expenses. The amount
of dividends that can be paid to us from Century in 2007 without
regulatory approval is $18.4 million.
Although
we have paid cash dividends in the past, we may not pay cash
dividends in the future.
The declaration and payment of dividends is subject to the
discretion of our board of directors and will depend on our
financial condition, results of operations, cash requirements,
future prospects, regulatory and contractual restrictions on the
payment of dividends by our subsidiaries and other factors
deemed relevant by our board of directors. There is no
requirement that we must, and we cannot assure you that we will,
declare and pay any dividends in the future. Our board of
directors may determine to retain such capital for general
corporate or other purposes.
If we
lose key personnel or are unable to recruit qualified personnel,
our ability to implement our business strategies could be
delayed or hindered.
Our future success will depend, in large part, upon the efforts
of our executive officers and other key personnel. We rely
substantially upon the services of Edward F. Feighan, our
Chairman of the Board, President and Chief Executive Officer,
Erin E. West, our Vice President, Chief Financial Officer and
Treasurer and Christopher J. Timm, our Executive Vice President
and Director. Messrs. Feighan and Timm and Ms. West
each have an employment agreement with us. The loss of any of
these officers or other key personnel could cause our ability to
implement our business strategies to be delayed or hindered. We
do not have key person insurance on the lives of any of our key
management personnel, except one officer. As we continue to
grow, we will need to recruit and retain additional qualified
personnel, but we may not be able to do so. As we have grown, we
have generally been successful in filling
9
key positions, but our ability to continue to recruit and retain
such personnel will depend upon a number of factors, such as our
results of operations, prospects and the level of competition
then prevailing in the market for qualified personnel.
Managing
technology initiatives and meeting new data security
requirements present significant challenges for
us.
While technological developments can streamline many business
processes and ultimately reduce the cost of operations,
technology initiatives can present short-term cost and
implementation risks. In addition, projections of expenses,
implementation schedules and utility of results may be
inaccurate and can escalate over time. We rely on these systems
to process new and renewal business, provide customer service,
make claims payments and facilitate collections and
cancellations, as well as to perform actuarial and other
analytical functions necessary for pricing and product
development.
Data security is subject to increasing regulation. We face
rising costs and competing time constraints in meeting
compliance requirements of new and proposed regulations. The
expanding volume and sophistication of computer viruses, hackers
and other external hazards may increase the vulnerability of our
data systems to security breaches. These increased risks and
expanding regulatory requirement expose us to potential data
loss and damages and significant increases in compliance and
litigation costs.
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.
As of March 31, 2007, we underwrote 64.0% of our property
and casualty premiums on a limited binding authority basis.
Binding authority business represents risks that may be quoted
and bound by our general agents prior to our underwriting
review. If a general agent exceeds this authority by binding us
to a risk that does not comply with our underwriting guidelines,
we are at risk for claims under that policy that occur during
the period from its issue date until we receive the policy and
cancel it.
To cancel a policy for exceeding underwriting authority, we must
receive and cancel the policy within statutorily prescribed time
limits that are dependent on the jurisdiction but are typically
60 days. Our general agents are required by contract to
have bound policies issued and a copy sent to our office within
30 days of the effective date of coverage. Our policy
review generally takes two to four weeks, depending on the time
of year. Upon review of a policy, we issue instructions to cure
any material errors we discover. If cancellation of the policy
is the only cure, we order the cancellation of the policy at
that time pursuant to state law. As a result, we may be bound by
a policy that does not comply with our underwriting guidelines,
and until we can effect a cancellation, we may incur loss and
loss expenses related to that policy.
Our
reliance on our agents subjects us to credit risk.
Our agents collect premiums from policyholders and forward them
to us. In certain jurisdictions, when the insured pays premiums
for these policies to agents for payment over to us, the
premiums might be considered to have been paid under applicable
insurance laws and regulations, and the insured will no longer
be liable to us for these amounts, whether or not we actually
receive the premiums from the agent. Consequently, we assume a
degree of credit risk associated with our agents. Although
agents failures to remit premiums to us have not caused a
material adverse impact on us to date, there have been instances
where agents collected premiums and did not remit it to us and
we were nonetheless required under applicable law to provide the
coverage set forth in the policy despite the absence of premium.
Because the possibility of these events is dependent in large
part upon the financial condition of our agents, which is not
publicly available, we are not able to quantify the exposure
presented by this risk. If we are unable to collect premiums
from our agents in the future, our financial condition and
results of operations could be materially and adversely affected.
10
We are
exposed to risks relating to evaluations of controls required by
Section 404 of the Sarbanes-Oxley Act of 2002.
We continue to evaluate our internal controls systems to allow
management to report on, and our independent registered public
accounting firm to audit, our internal controls over financial
reporting and to perform the system and process evaluation and
testing (and any necessary remediation) required to comply with
the management certification and auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of
2002. In the course of this evaluation, we may identify control
deficiencies of varying degrees of severity under applicable
Securities and Exchange Commission (the SEC) and
Public Company Accounting Oversight Board rules and regulations
that remain unremediated. As a public company, we are required
to report, among other things, control deficiencies that
constitute a material weakness or changes in
internal controls that, or are reasonably likely to, materially
affect internal controls over financial reporting. A
material weakness is a significant deficiency, or
combination of significant deficiencies that results in more
than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. If we cease to comply with the requirements of
Section 404 manner, we might be subject to sanctions or
investigation by regulatory authorities such as the SEC or
NASDAQ. Additionally, failure to comply with Section 404 or
the report by us of a material weakness may cause investors to
lose confidence in our financial statements and our stock price
may be adversely affected. If we fail to remedy any material
weakness, our financial statements may be inaccurate, we may
face restricted access to the capital markets, and your share
price may be adversely affected.
Risks
Related to this Offering
We may
not be able to successfully complete and integrate strategic
acquisitions which may adversely impact our
growth.
As part of our present strategy, we continue to evaluate
possible acquisition transactions and the
start-up of
complementary business ventures on an ongoing basis, and at any
given time, we may be engaged in discussions with respect to
possible acquisitions and new ventures. We cannot assure you
that we will be able to identify suitable acquisition
transactions or insurance ventures, that such transactions will
be financed and completed on acceptable terms or that our future
acquisitions or ventures will be successful. The process of
integrating companies involves a number of special risks,
including the possibility that management may be distracted from
regular business concerns by the need to integrate operations,
unforeseen difficulties in integrating operations and systems,
problems concerning assimilating and retaining the employees of
the acquired company, challenges in retaining customers and
potential adverse short-term effects on operating results. In
addition, we may incur debt to finance future acquisitions and
we may issue securities in connection with future acquisitions
which may dilute the holdings of our current and future
shareholders. If we are unable to successfully complete and
integrate strategic acquisitions in a timely manner, our growth
strategy could be adversely affected. Furthermore, our current
acquisition strategy may include the evaluation of potential
acquisitions of privately-held companies. Because privately-held
companies are generally not subject to Section 404 of the
Sarbanes-Oxley Act of 2002, such companies may not have adequate
internal control procedures, which may, during our integration
with any such company, have an adverse affect on our internal
controls.
Applicable
insurance laws and certain provisions in our articles of
incorporation make it difficult to effect a change of control,
and a large shareholder may have significant influence over
potential change of control transactions.
Under applicable Ohio insurance laws and regulations, no person
may acquire control of ProCentury unless that person has filed a
statement containing specified information with the Ohio
Department of Insurance and obtains advance approval for the
acquisition. Under applicable laws and regulations, any person
acquiring, directly or indirectly (by revocable proxy or
otherwise), 10% or more of the voting shares of any other person
is presumed to have acquired control of such person, and a
person who beneficially acquires 10% or more of our common
shares without obtaining advance approval would be in violation
of Ohio insurance law and would be subject to injunctive action
requiring disposition or seizure of the shares and prohibiting
the voting of such shares, as well as other action as determined
by the Director of the Ohio Department of Insurance.
11
In addition, the Texas Department of Insurance requires a filing
and approval of the commissioner in connection with certain
acquisitions and change of control transactions. Many state
insurance laws also require prior notification to the state
insurance department of a change of control of a non-domiciliary
insurance company licensed to transact insurance in that state.
While these pre-notification statutes do not authorize the state
insurance departments to disapprove the change of control, they
authorize regulatory action (including a possible revocation of
our authority to do business) in the affected state if
particular conditions exist such as undue market concentration.
Any future transactions that would constitute a change of
control of us may require prior notification in the states that
have pre-acquisition notification laws.
Certain provisions of our articles of incorporation and Ohio law
make it more difficult to effect the acquisition of control of
ProCentury by means of a tender offer, open market purchase, a
proxy fight or otherwise. The provisions in our articles of
incorporation that make it difficult to effect a change of
control include the authority of our board of directors to issue
series of preferred shares with such voting rights and other
powers as the board of directors may determine and the
requirement of the affirmative vote of the holders of not less
than 75% of the votes entitled to be cast by all holders of all
of our outstanding shares for certain transactions that could
effect a change of control. Also, our code of regulations
contains notice requirements relating to nominations to the
board of directors and to the raising of business matters at
shareholders meetings.
Volatility
of our common share price could adversely affect
shareholders.
The market price of our common shares could fluctuate
significantly as a result of:
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quarterly variations in our operating results;
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seasonality of our business cycle;
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interest rate changes;
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changes in the markets expectations about our operating
results;
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our operating results failing to meet the expectation of
securities analysts or investors in a particular period;
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changes in financial estimates and recommendations by securities
analysts concerning our company or the insurance industry in
general;
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operating and stock price performance of other companies that
investors deem comparable to us;
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news reports relating to trends in our markets;
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changes in laws and regulations affecting our business;
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material announcements by us or our competitors;
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sales of substantial amounts of common shares by our directors,
executive officers or significant shareholders or the perception
that such sales could occur; and
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general economic and political conditions such as recessions and
acts of war or terrorism.
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FORWARD-LOOKING
STATEMENTS
This prospectus includes and incorporates by reference forward
looking statements, and we intend such forward-looking
statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. Forward looking statements, which
generally include words such as anticipates,
expects, believes, intends,
estimates and similar expressions and include those
statements regarding our expectations, hopes, beliefs,
intentions, goals or strategies regarding the future and are
based on certain underlying assumptions by us. Such assumptions
are, in turn, based on information available and internal
estimates and analyses of general economic conditions,
competitive factors, conditions specific to the property and
casualty insurance industry, claims development and the impact
thereof on our loss reserves, the adequacy of our reinsurance
programs, developments in the securities market and the impact
on our investment portfolio, regulatory changes and conditions,
and other factors. Actual results could differ materially from
those in
12
our forward looking statements These forward-looking statements
include, but are not limited to those described under Risk
Factors. We assume no obligation to update any such
statements except as required by law. You should review the
various risks, uncertainties and other factors described under
the caption Risk Factors in this prospectus, in our
Annual Reports on
Form 10-K
and from time to time in our other SEC filings.
DESCRIPTION
OF CAPITAL SHARES
Our amended and restated articles of incorporation authorize us
to issue up to 20 million common shares, without par value,
and one million preferred shares, without par value. As of June
1, 2007, we had 13,358,867 common shares outstanding. In
addition, as of June 1, 2007, we have reserved 852,996 common
shares for issuance under our equity-based award plans. Our
common shares are listed on the NASDAQ Global Market under the
symbol PROS. National City Bank, Cleveland, Ohio, is
the transfer agent and registrar of the common shares.
The following description of our capital shares sets forth
certain of their general terms and provisions. The following
description of our capital shares is in all respects subject to
and qualified by reference to the applicable provisions of our
amended and restated articles of incorporation and our code of
regulations.
Common
Shares
Pursuant to our amended and restated articles of incorporation,
holders of our common shares are entitled to one vote for each
share held on all matters submitted to a vote of shareholders
and do not have cumulative voting rights. Accordingly, a holder
of a majority of the outstanding common shares entitled to vote
in any election of directors may elect all of the directors
standing for election. Subject to the rights of holders of our
preferred shares, if any, holders of our common shares are
entitled to receive ratably dividends, if any, as may be
declared by our board of directors. Upon the liquidation,
dissolution or winding up of our affairs, holders of our common
shares are entitled to receive ratably our net assets available
for distribution after the payment of our debts and other
liabilities, subject to prior and superior rights of any
preferred shares. Holders of our common shares have no
preemptive, subscription, redemption or conversion rights. The
outstanding common shares are, and the shares offered by this
prospectus when issued and paid for will be, fully paid and
nonassessable.
Preferred
Shares
Under our articles of incorporation, our board of directors is
authorized, subject to limitations prescribed by law, without
further shareholder approval, from time to time to issue up to
an aggregate of one million preferred shares in one or more
series and to fix or alter the designations, rights, preferences
and any qualifications, limitations or restrictions of the
shares of each of these series. The issuance of preferred shares
may have the effect of delaying, deferring or preventing a
change of control.
Certain
Anti-Takeover Provisions of Ohio and Other State Laws
Ohio
Anti-Takeover Law
Certain provisions of Ohio law may have the effect of
discouraging or rendering more difficult an unsolicited
acquisition of a corporation or its capital shares to the extent
the corporation is subject to those provisions. We have opted
out of Chapter 1704 of the Ohio Revised Code, relating to
transactions involving interested shareholders. We remain
subject to the provisions described below.
Under Section 1701.831 of the Code, the acquisition of
shares entitling the holder to exercise certain levels of voting
power of an issuing public corporation (one-fifth or more,
one-third or more, or a majority) can be made only with the
prior authorization of (i) the holders of at least a
majority of the total voting power and (ii) the holders of
at least a majority of the total voting power held by
shareholders other than the proposed acquirer, officers of the
corporation elected or appointed by the directors, and directors
of the corporation who are also employees of the corporation and
excluding certain shares that are transferred after the
announcement of the proposed acquisition and prior to the vote
with respect to the proposed acquisition.
13
Section 1701.59 of the Ohio Revised Code provides, with
certain limited exceptions, that a director shall be held liable
in damages for any action he takes or fails to take as a
director only if it is proved by clear and convincing evidence
that his action or failure to act involved an act or omission
undertaken with deliberate intent to cause injury to the
corporation or with reckless disregard for its best interest. In
addition, Section 1701.59 of the Ohio Revised Code provides
that a director of an Ohio corporation, in determining what he
or she reasonably believes to be in the best interests of the
corporation, shall consider the interests of the
corporations shareholders and may consider, in his or her
discretion, any of the following: (i) the interests of the
corporations employees, suppliers, creditors and
customers; (ii) the economy of the State of Ohio and the
nation; (iii) community and societal considerations; and
(iv) the long-term as well as short-term interests of the
corporation and its shareholders, including the possibility that
these interests may be best served by the continued independence
of the corporation.
Section 1707.041 of the Ohio Revised Code regulates certain
control bids for corporations in Ohio with fifty or
more shareholders that have significant Ohio contacts and
permits the Ohio Division of Securities to suspend a control bid
if certain information is not provided to offerees.
Section 1707.043 of the Ohio Revised Code provides an Ohio
corporation, or in certain circumstances the shareholders of an
Ohio corporation, the right to recover profits realized under
certain circumstances by persons who dispose of securities of a
corporation within 18 months of proposing to acquire such
corporation.
Insurance
Holding Company Regulations on Change of Control
We are regulated as an insurance holding company and are subject
to state laws that restrict the ability of any person to obtain
control of an insurance holding company without prior regulatory
approval. Without this approval or an exemption, no person may
acquire any voting security of an insurance holding company that
controls an insurance subsidiary or merge with the holding
company. Control is generally defined as the direct or indirect
power to direct or indirect power to direct or cause the
direction of the management and policies of a person and is
usually presumed to exist if a person directly or indirectly
owns or controls 10% or more of the voting securities of another
person.
Certain
Anti-Takeover Provisions of our Articles of Incorporation and
Code of Regulations
Classified
Board of Directors; Removal of Directors; Filling of
Vacancies
Our board of directors is divided into three classes of three
directors each. The shareholders elect one class of directors
each year for a term of three years. The classified board makes
it more difficult and time consuming for a shareholder group to
fully use its voting power to gain control of the board of
directors without the consent of the incumbent directors.
Our articles of incorporation and code of regulations provide
that a director, or the entire Board of Directors, may be
removed from office only for cause by the affirmative vote of
the holders of record of outstanding shares representing at
least 75% of the votes entitled to be cast by the holders of all
then outstanding common shares, voting together as a single
class. This supermajority voting provision makes it more
difficult for shareholders to remove directors.
Pursuant to our code of regulations, any vacancy in the Board of
Directors caused by any removal by the shareholders at a special
meeting may be filled by the shareholders at the same meeting.
In addition, our articles of incorporation provide that
vacancies on the Board created by causes other than removal,
including a vacancy created by an increase in the number of
directors, may be filled by the affirmative vote of a majority
of the remaining directors then in office. A person appointed to
fill a vacancy on the Board of Directors will serve until the
expiration of his or her term.
Advance
Notice Provisions
Our code of regulations establishes an advance notice procedure
for shareholders to nominate directors or bring other business
before a meeting. Unless nominated by the board of directors, no
nomination of any candidate for election to the board of
directors by a shareholder is eligible for consideration unless
a written statement setting forth the candidates name and
qualifications is delivered to the board of directors by a
shareholder entitled to vote.
14
In the case of an annual meeting, the statement must be
submitted at least 90 days prior to the anniversary date of
the last annual meeting; in the case of a special meeting, the
statement must be delivered at least 90 days prior to the
date of a special meeting at which an election is to occur.
Unless proposed by a majority of the directors, no business is
eligible for consideration at an annual or special meeting of
shareholders unless a written statement setting forth the
business and its purpose is delivered to the board of directors
by a shareholder entitled to vote at least 90 days prior to
the special meeting at which the business is to be considered
or, in the case of an annual meeting, at least 90 days
prior to the anniversary date of the last annual meeting. These
provisions may make it more difficult for shareholders to make
nominations for directors or bring matters before a meeting of
shareholders.
Supermajority
Vote for Major Transactions
Pursuant to our articles of incorporation, the following
actions, with certain exceptions, require the affirmative vote
of the holders of not less than 75% of the votes entitled to be
cast by all holders of all our then outstanding shares (provided
that such affirmative vote must include the affirmative vote of
the holders of our outstanding shares entitled to cast a
majority of the votes entitled to be cast by the holders of all
our then outstanding shares not beneficially owned by a
substantial shareholder):
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any merger or consolidation of us or our subsidiaries with or
into a substantial shareholder, which is the beneficial owner,
as defined by
Rule 13d-3
of the Securities Exchange Act of 1934, of more than 15% of our
outstanding shares entitled to vote (subject to certain
conditions regarding time of ownership);
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any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of ten percent or more of our assets or our
subsidiaries to or with any substantial shareholder;
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the issuance or transfer by us or our subsidiaries of any equity
securities to a substantial shareholder in exchange for cash,
securities or property with a fair market value in excess of
five percent of our book value;
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the adoption of any plan or proposal for our liquidation or
dissolution while there is a substantial shareholder; or
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any reclassification of our securities or recapitalization, or
any reorganization, merger or consolidation of us with any of
our subsidiaries.
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These supermajority voting provisions may make it more difficult
for us to engage in certain transactions that our board of
directors deems advisable and beneficial to us.
Our articles of incorporation require an amendment that amends
any provision of the articles of incorporation requiring the
vote of a supermajority of shareholders entitled to vote be
approved by the affirmative vote of at least 75% of the
outstanding shares entitled to vote. All other provisions of our
articles of incorporation may be amended by the affirmative vote
of at least a majority of the outstanding shares entitled to
vote. Our articles of incorporation require an amendment that
amends our code of regulations be approved by the affirmative
vote of at least 75% of the outstanding shares entitled to vote;
provided, that if the amendment has been approved by
three-fourths of the board of directors, the amendment need only
be approved by at least a majority of the outstanding shares
entitled to vote.
Blank
Check Preferred Shares
Our articles of incorporation authorize our board of directors,
without shareholder approval, to issue preferred shares with
voting and conversion rights that could adversely affect the
voting power of the holders of our common shares. This right of
issuance could be used as a method of preventing a party from
gaining control of us.
WHERE YOU
CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any
document we file with the SEC at the SECs Public Reference
Room at 100 F Street, N.E., Washington, D.C.
20549. You may obtain information about the operation of the
SECs Public Reference Room by
15
calling the SEC at
1-800-SEC-0330.
The SEC also maintains a web site that contains reports, proxy
and information statements, and other information regarding
registrants that file electronically with the SEC
(http://www.sec.gov).
We have filed a registration statement of which this prospectus
is a part and related exhibits with the SEC under the Securities
Act. This prospectus, filed as part of the registration
statement, does not contain all of the information set forth in
the registration statement and its exhibits and schedules,
portions of which have been omitted as permitted by the rules
and regulations of the SEC. For further information about us and
our common shares, we refer you to the registration statement
and its exhibits and schedules. Statements in this prospectus
about the contents of any contract, agreement or other document
are not necessarily complete and, in each instance, we refer you
to the copy of such contract, agreement or document filed as an
exhibit to the registration statement, with each such statement
being qualified in all respects by reference to the document to
which it refers. You may inspect the registration statement and
exhibits without charge at the SECs Public Reference Room
or at the SECs web site listed above, and you may obtain
copies from the SEC at prescribed rates.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference the
information contained in documents we file with the SEC, which
means that we can disclose important information to you by
referring to those documents. The information incorporated by
reference is an important part of this prospectus. Any statement
contained in a document which is incorporated by reference in
this prospectus is automatically updated and superseded if
information contained in this prospectus, or information that we
later file with the SEC, modifies or replaces that information.
We incorporate by reference the following documents we filed,
excluding any information contained therein or attached as
exhibits thereto which has been furnished but not filed, with
the SEC:
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Annual Report on
Form 10-K
for the year ended December 31, 2006;
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Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007;
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Current Report on
Form 8-K
filed on March 26, 2007; and
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The description of our common shares contained in our
Registration Statement on
Form 8-A
dated March 19, 2004 and all amendments or reports filed
with the SEC for purposes of updating such description.
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Any documents we file pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this prospectus
and prior to the termination of the offering of the securities
to which this prospectus relates will automatically be deemed to
be incorporated by reference in this prospectus and a part of
this prospectus from the date of filing such documents.
To receive a free copy of any of the documents incorporated by
reference in this prospectus (other than exhibits, unless they
are specifically incorporated by reference in any such
documents), call or write ProCentury Corporation, 465 Cleveland
Avenue, Westerville, Ohio 43082, Attention: Jeffrey Racz,
Investor Relations, telephone number
(614) 895-2000.
These documents can also be found on our web site at
http://www.procentury.com
as soon as reasonably practicable after we file such information
with the SEC. Information contained on our web site is not
incorporated by reference into and does not form any part of
this prospectus.
EXPERTS
The consolidated financial statements and financial statement
schedules of ProCentury Corporation and subsidiaries as of
December 31, 2006 and 2005, and for each of the years in
the three-year period ended December 31, 2006, and
managements assessment of the effectiveness of internal
control over financial reporting as of December 31, 2006
have been incorporated by reference herein in reliance upon the
reports of KPMG LLP, independent registered public accounting
firm, incorporated by reference herein, and upon the authority
of said firm as experts in accounting and auditing. The audit
report covering the December 31, 2006 financial statements
refers to the Companys adoption of the Statement of
Financial Accounting Standards No. 123(R), Share-Based
Payment, effective January 1, 2006.
16
VALIDITY
OF THE SECURITIES
The validity of the shares being offered hereby will be passed
upon for us by Baker & Hostetler LLP.
17
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
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Item 20.
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Indemnification
of Directors and Officers.
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The Ohio Revised Code authorizes Ohio corporations to indemnify
officers and directors against liability if the officer or
director acted in good faith and in a manner reasonably believed
by the officer or director to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal
actions, if the officer or director had no reason to believe his
action was unlawful. In the case of an action by or on behalf of
a corporation, indemnification may not be made (1) if the
person seeking indemnification is adjudged liable for negligence
or misconduct, unless the court in which such action was brought
determines such person is fairly and reasonably entitled to
indemnification, or (2) if the liability asserted against
such person concerns certain unlawful distributions. The
indemnification provisions of the Ohio Revised Code require
indemnification if a director or officer has been successful on
the merits or otherwise in defense of any action, suit or
proceeding that he was a party to by reason of the fact that he
is or was a director or officer of the corporation. The
indemnification authorized under Ohio law is not exclusive and
is in addition to any other rights granted to officers and
directors under the articles of incorporation or code of
regulations of the corporation or any agreement between the
officers and directors and the corporation. A corporation may
maintain insurance or furnish similar protection on behalf of
any officer or director against any liability asserted against
him and incurred by him in his capacity, or arising out of his
status, as an officer or director, whether or not the
corporation would have the power to indemnify him against such
liability under the Ohio Revised Code.
The Registrants code of regulations provides for
indemnification of directors and officers of the Registrant to
the fullest extent not prohibited by applicable law against any
costs and expenses actually and reasonably incurred by or
imposed upon a director or officer in connection with any
action, suit, investigation or proceeding, whether civil,
criminal, administrative or otherwise, with respect to which the
director or officer is named or otherwise becomes or is
threatened to be made a party by reason of being or at any time
having been a director or officer of the company, or by reason
of being or at any time having been, while such a director or
officer, an employee or other agent of the company or, at the
direction or request of the company, a director, trustee,
officer, administrator, manager, employee, member, advisor or
other agent of or fiduciary for any other corporation,
partnership, trust, venture or other entity or enterprise
including any employee benefit plan.
The Registrant maintains a directors and officers
insurance policy which insures its directors and officers from
claims arising out of an alleged wrongful act by such persons in
their respective capacities as directors and officers of the
Registrant, subject to certain exceptions.
The Registrant has entered into indemnification agreements with
its directors which provide for indemnification to the fullest
extent permitted under Ohio law.
II-1
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Exhibit
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No.
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Exhibit Description
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4
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.1
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Amended and Restated Articles of
Incorporation of ProCentury Corporation (incorporated herein by
reference to ProCentury Corporations Quarterly Report on
Form 10-Q
for the period ended March 31, 2004 (File
No. 000-50641))
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4
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.2
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Amended and Restated Code of
Regulations of ProCentury Corporation (incorporated herein by
reference to ProCentury Corporations Quarterly Report on
Form 10-Q
for the period ended March 31, 2004 (File
No. 000-50641))
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4
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.3
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Specimen Certificate for common
shares, without par value, of ProCentury Corporation
(incorporated herein by reference to ProCentury
Corporations Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
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.4
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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
Corporations Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
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.5
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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
Corporations Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
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.6
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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
Corporations Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
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.7
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Indenture, dated as of
May 16, 2003, by and between ProFinance Holdings
Corporation and U.S. Bank National Association (incorporated
herein by reference to ProCentury Corporations
Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
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.8
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Amended and Restated Declaration
of Trust, dated as of May 16, 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 Corporations
Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
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.9
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Guarantee Agreement, dated as of
May 16, 2003, by and between ProFinance Holdings
Corporation and U.S. Bank National Association (incorporated
herein by reference to ProCentury Corporations
Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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5
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Opinion of Baker &
Hostetler LLP regarding legality
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23
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.1
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Consent of KPMG LLP
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23
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.2
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Consent of Baker &
Hostetler LLP (included in Exhibit 5)
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24
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Power of Attorney (included on the
signature page hereto)
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(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no
II-2
more than a 20 percent change in the maximum aggregate
offering price set forth in the Calculation of
Registration Fee table in the effective Registration
Statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (a)(1)(i), (a)(1)(ii)
and (a)(1)(iii) of this section do not apply if the information
required to be included in a post-effective amendment by those
paragraphs is contained in reports filed with or furnished to
the Commission by the registrant pursuant to section 13 or
section 15(d) of the Exchange Act that are incorporated by
reference in the registration statement, or is contained in a
form of prospectus filed pursuant to Rule 424(b) that is
part of the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability of the
registrant under the Securities Act to any purchaser in the
initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned Registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned Registrant to the purchaser.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act,
each filing of the registrants annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act,
(and, where applicable, each filing of an employee benefit
plans annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in this
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as
follows: that prior to any public reoffering of the securities
registered hereunder through the use of a prospectus which is a
part of this registration statement, by any person or party who
is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the
applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(d) The registrant undertakes that every prospectus:
(i) that is filed pursuant to the immediately preceding
paragraph or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment
is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration
II-3
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act, and is
therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by a registrant of expenses incurred or paid by a director,
officer or controlling person of such registrant in the
successful defense of any action suit or proceeding) is asserted
by such director, officer or controlling person in connection
with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13
of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the
request.
(g) The undersigned registrant hereby undertakes to supply
by means of a post-effective amendment all information
concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Westerville, State of Ohio, on
June 25, 2007.
PROCENTURY CORPORATION
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By:
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/s/ Edward
F. Feighan
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Edward F. Feighan
Chairman, Chief Executive Officer and President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Erin E. West and Nicholas
L. Alexander, or either of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, including
post-effective amendments, and to file same, with all exhibits
thereto, and other documents in connection therewith, with the
SEC, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and
confirming all that the attorneys-in-fact and agents or any of
them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
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Signature
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Title
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Date
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/s/ Edward
F. Feighan
Edward
F. Feighan
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Chairman of the Board of
Directors, President and Chief Executive Officer (Principal
Executive Officer)
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June 25, 2007
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/s/ Erin
E. West
Erin
E. West
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Chief Financial Officer and
Treasurer
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June 25, 2007
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/s/ Michael
J. Endres
Michael
J. Endres
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Director
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June 25, 2007
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/s/ Robert
F. Fix
Robert
F. Fix
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Director
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June 25, 2007
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/s/ Jeffrey
A. Maffet
Jeffrey
A. Maffet
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Director
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June 25, 2007
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/s/ Press
C. Southworth III
Press
C. Southworth III
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Director
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June 25, 2007
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/s/ Christopher
J. Timm
Christopher
J. Timm
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Director
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June 25, 2007
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/s/ Alan
R. Weiler
Alan
R. Weiler
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Director
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June 25, 2007
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/s/ Robert
J. Woodward, Jr.
Robert
J. Woodward, Jr.
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Director
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June 25, 2007
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II-5
EXHIBIT INDEX
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Exhibit
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No.
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Exhibit Description
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4
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.1
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Amended and Restated Articles of
Incorporation of ProCentury Corporation (incorporated herein by
reference to ProCentury Corporations Quarterly Report on
Form 10-Q
for the period ended March 31, 2004 (File
No. 000-50641))
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4
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.2
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Amended and Restated Code of
Regulations of ProCentury Corporation (incorporated herein by
reference to ProCentury Corporations Quarterly Report on
Form 10-Q
for the period ended March 31, 2004 (File
No. 000-50641))
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4
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.3
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Specimen Certificate for common
shares, without par value, of ProCentury Corporation
(incorporated herein by reference to ProCentury
Corporations Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
|
.4
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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
Corporations Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
|
.5
|
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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
Corporations Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
|
.6
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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
Corporations Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
|
.7
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Indenture, dated as of
May 16, 2003, by and between ProFinance Holdings
Corporation and U.S. Bank National Association (incorporated
herein by reference to ProCentury Corporations
Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
|
.8
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Amended and Restated Declaration
of Trust, dated as of May 16, 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 Corporations
Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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4
|
.9
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Guarantee Agreement, dated as of
May 16, 2003, by and between ProFinance Holdings
Corporation and U.S. Bank National Association (incorporated
herein by reference to ProCentury Corporations
Registration Statement on
Form S-1
(File
No. 333-111294),
as amended)
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5
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Opinion of Baker &
Hostetler LLP regarding legality
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23
|
.1
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Consent of KPMG LLP
|
|
23
|
.2
|
|
Consent of Baker &
Hostetler LLP (included in Exhibit 5)
|
|
24
|
|
|
Power of Attorney (included on the
signature page hereto)
|
II-6