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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
---------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file Number ___022316_____
PENN-AMERICA GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2731409
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
420 S. York Road, Hatboro, PA 19040
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 443-3600
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common stock, par value, per share New York
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 23, 2000, the aggregate market value of the outstanding Common Stock
held by non-affiliates of the Registrant was approximately $39,948,076. As of
March 23, 2000, there were 7,719,161 shares of the Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's annual report to stockholders for the fiscal
year-ended December 31, 1999 are incorporated by reference in Parts I, II and IV
of this report.
Part III - Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 2000 Annual Meeting of Shareholders, to be filed not later
than 120 days after the close of the Registrant's fiscal year.
PENN-AMERICA GROUP, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1999
Page
PART I
ITEM 1. BUSINESS........................................................... 3
ITEM 2. PROPERTIES.........................................................17
ITEM 3. LEGAL PROCEEDINGS..................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS...................................................17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS....................................18
ITEM 6. SELECTED FINANCIAL DATA............................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.........................................................18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.........................................................19
ITEM 11. EXECUTIVE COMPENSATION.............................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..............................................19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K...........................................20
Page 2
PART I
ITEM 1. BUSINESS
General
Penn-America Group, Inc. (PNG) is a specialty property and casualty
insurance holding company (collectively referred to as the "Company") which,
through its subsidiaries, Penn-America Insurance Company and Penn-Star Insurance
Company markets and underwrites commercial property, general liability, business
automobile, and multi-peril insurance for small businesses located primarily in
small towns and suburban and rural areas. During 1999, the Company announced the
run-off of its entire book of personal non-standard automobile. This line of
business was previously written in seven states. The Company provides commercial
property and casualty insurance on both an excess and surplus lines basis and an
admitted basis. The Company markets its products through about 50 high-quality
general agents, who in turn produce business through over 25,000 retail
insurance brokers located throughout the United States. The Company focuses on
serving the insurance needs of small or non-standard markets which are generally
characterized by small to average policy premiums and serviced by retail
insurance brokers with limited access to larger, standard lines insurers. The
Company believes that these markets are generally under-served by larger,
standard lines insurers who often limit their underwriting to policies above a
certain minimum premium size or to certain risk classes and who operate in
large-scale markets in which they can achieve economies of scale. The Company
believes that its distribution network enables it to effectively access these
numerous small markets at a relatively low fixed cost through the marketing,
underwriting and administrative support of its general agents, as well as the
localized market knowledge and expertise of its general agents and their retail
insurance brokers.
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1992 to 1999, commercial gross written
premiums cumulative average growth rate was 20.7%, which grew from $22.6 million
to $84.5 million during that time period. The Company's distribution strategy is
to maintain strong relationships with fewer and higher quality general agents
than its competitors. The Company carefully selects a limited number of agents
in each state based on the agent's experience and reputation and strives to
preserve each agent's franchise value within their market territory. The Company
seeks to grow with these general agents and develop strong, longstanding
relationships by providing a high level of service and support. From 1992 to
1999, the Company achieved 273.9% cumulative growth in gross written premiums
with a 31.6% increase in the number of general agents from 38 to 50. The Company
maintains low fixed costs by underwriting the substantial majority of its
policies on a binding authority basis. The Company closely monitors the quality
of business it underwrites by maintaining close relationships with a small
number of general agents. The Company provides its general agents with a
comprehensive, regularly updated underwriting manual which clearly outlines the
Company's pricing and underwriting guidelines. The Company does not write high
risk policies (e.g., medical malpractice, environmental and aviation liability).
The Company generally reviews new and renewal commercial policies on a
continuous basis to ensure that its underwriting guidelines are being followed.
In addition to standard commissions, the Company provides strong incentives to
its general agents to produce profitable business through a contingent
commission structure which is substantially tied to underwriting profitability.
The contingent commissions are paid through the issuance of shares of PNG common
stock, options and cash.
Historically, the Company has underwritten the majority of its commercial
lines business on an excess and surplus lines basis. In recent years, the
Company has underwritten a greater proportion of its commercial lines business
on an admitted basis as it has identified profitable admitted markets which
remain under-served by larger standard insurers. The Company expects to continue
to expand its commercial lines business by offering additional products and
packages which enhance its current property and liability coverages, by
identifying profitable programs and books of business and by selectively adding
Page 3
high quality general agents. Examples of such additional products and programs
include a commercial automobile product and specialty programs.
The Company's commercial insureds consist primarily of small, "Main Street"
businesses, including restaurants, taverns, mercantiles and artisan contractors,
located principally in small towns and suburban and rural areas. In addition,
the Company has developed customized products and coverages for other small
commercial insureds such as daycare facilities, fitness centers and special
events. The Company believes it has benefited from a general migration of small
businesses out of urban centers and into suburban and rural areas. Industry
consolidation, corporate downsizing and the increased use of communications
technology and personal computers, among other factors, have contributed to the
high growth in the number of small businesses in these areas.
The run-off of the non-standard personal automobile business represented
approximately 12% of the Company's gross written premiums in 1999 as compared to
25% and 34% of gross written premium in 1998 and 1997. In 2000, non-standard
personal automobile premium is not expected to represent more than approximately
2% of the Company's gross written premiums.
Penn-America Insurance Company was formed in 1975 by Irvin Saltzman, who
began working in the insurance industry in 1947 when he founded a general
agency. Jon S. Saltzman, Irvin Saltzman's son, is President and Chief Executive
Officer of the Company and has been employed by the Company since 1986. The
Company completed an initial public offering ("IPO") on October 28, 1993, at a
price to the public of $6.00 per share, which was then followed by a secondary
offering in July of 1997 where approximately 3 million shares were sold by the
Company. Currently, the Saltzman family, substantially through their ownership
of Penn Independent Corporation (Penn-Independent), owns approximately 38.3% of
the Company's Common Stock.
Financial Information About Business Segments
The Company has two reported segments: commercial and personal lines, of
which personal lines is comprised solely of non-standard personal automobile
coverages which has been in run-off since March 1999. These segments are managed
separately because they have different customers and require different pricing
and expense structures. The Company does not allocate assets between segments
because assets are reviewed in total by management for decision-making purposes.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Company's 1999 Annual
Report which is incorporated by reference under Item 8. The Company evaluates
segment profit based on profit or loss from operating activities. Segment profit
or loss from operations is pre-tax and does not include unallocated expenses,
but does include investment income attributable to insurance transactions.
Segment profit or loss, therefore, excludes federal income taxes,
unallocated expenses and investment income attributable to equity as opposed to
investment income attributable to insurance transactions. In 1999, no one
customer accounted for more than 10% of the Company's revenue. In 1998 and 1997,
the Company derived approximately 18.4% and 21.3% of its revenues from one
agent.
Page 4
Lines of Business
The following table sets forth an analysis of gross earned premium by
specific product lines during the periods indicated:
Years ended
------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------- --------- ----------- ------------ ----------- ----------
(dollars in thousands)
Commercial lines:
Commercial multi-peril $43,851 46.7% $39,113 40.3% $35,687 35.9%
Liability 24,961 26.6 24,863 25.6 23,486 23.6
Property 5,498 5.9 5,398 5.6 5,502 5.6
Business automobile 5,580 5.9 958 1.0 170 0.2
---------- --------- ----------- ------------ ----------- ----------
79,890 85.1 70,332 72.5 64,845 65.3
---------- --------- ----------- ------------ ----------- ----------
Personal lines:
Auto liability 11,400 12.1 22,125 22.8 29,145 29.3
Auto physical damage 2,614 2.8 4,560 4.7 5,395 5.4
---------- --------- ----------- ------------ ----------- ----------
14,014 14.9 26,685 27.5 34,540 34.7
---------- --------- ----------- ------------ ----------- ----------
Total gross earned premium $93,904 100.0% $97,017 100.0% $ 99,385 100.0%
========== ========= =========== ============ =========== ==========
o Commercial General Liability. The Company's commercial general liability
insurance is written on an occurrence policy form (as opposed to a
claims-made policy form) and provides limits generally ranging from $25,000
to $3 million, with the majority of such policies having limits of between
$500,000 and $1 million. The Company's general liability policies generally
pay defense and related expenses in addition to per occurrence and
aggregate policy limits. General liability insureds include restaurants,
bars and taverns, retail operations, garage liability, contractors and
similar classes.
Increased General Liability Limits. The Company also writes the same
general liability risks (often on a package basis) for limits beyond the
standard $1 million per occurrence limit up to $3,000,000 per occurrence
with significant reinsurance support from General Reinsurance Corporation
(Gen Re).
o Commercial Property. The Company's commercial property lines provide limits
usually no higher than $4 million, with almost all of the policies being
written at limits less than $1 million. Properties insured include
restaurants, bars and taverns, retail operations, vacant buildings and
other similar classes.
o Commercial Multi-Peril. The Company also writes the same commercial
property and general liability risks together as a "package" for its
insureds, generally referred to as "commercial multi-peril." The limits on
these policies are the same as if written on a monoline basis. Consistent
with the current industry trend, the Company has been writing more
commercial multi-peril policies over the last several years than individual
property and liability policies. The Company expects this trend to continue
in light of the fact that a substantial number of the Company's commercial
insureds customarily require both liability and property insurance
coverage, together with standard Insurance Services Office ("ISO") forms
which make it easier and more efficient to write such multi-peril policies.
Program Business. The Company writes specialized underwriting and marketing
programs for individual agents based upon specific territorial needs and
opportunities. The individual agent is given exclusive marketing authority
for the program subject to territorial limitations. The Company believes it
can achieve superior underwriting results and expense savings on these
programs.
Page 5
o Business Automobile and Commercial Umbrella. The Company writes both
business automobile and commercial umbrella coverages to enhance its
commercial multi-peril ("package") writings. The types of risks and
insureds targeted are similar to those covered by other policies, such as,
restaurants, bars and taverns, retail operations, artisan contractors and
similar classes. The business automobile insurance (cars and light trucks)
can be written up to $1 million liability limits. Commercial umbrella
insurance can be written for limits up to $5 million with significant
reinsurance support from General Reinsurance Corporation. For commercial
umbrella, Penn-America usually writes the primary $1 million liability
limit. The Company expects that these coverages will further expand package
writings and help increase renewal retention of existing policies. In all
of its commercial product lines, the Company is continuously developing
specialized programs for certain industry segments to meet the needs of
these markets. For example, the Company has developed programs for
independent fitness centers, day-care operations, low-hazard miscellaneous
professional liability coverages and special events. As a group, these
programs are a significant benefit to the Company's marketing efforts,
although individually they do not generate a material amount of the
Company's gross written premiums.
o Non-Standard Personal Automobile. The Company announced in 1999 that it
would run-off its non-standard personal automobile business in the seven
states where it had been written. The company wrote $11.5 million of
personal automobile premium during 1999 principally related to renewal
premium in those states that requires policies to be renewed for a certain
period of time if not placed with another carrier. The Company expects
run-off from non-standard personal automobile written premium in 2000 to be
approximately $2.0 million.
Marketing and Distribution
The Company currently markets its insurance products through a select
number of high quality general agents. The Company believes that it benefits
significantly from a general agency system because it obtains the significant
underwriting and marketing expertise of the general agents who have strong
business experience and relationships in their local territory. In addition, the
general agency system allows the Company to avoid the expense of maintaining
national or regional sales forces. This enables the Company to focus its efforts
on reviewing the underwriting decisions of its agents and evaluating submission
business, rather than devoting greater resources to making routine underwriting
decisions.
The Company actively competes for quality general agents to distribute its
products. The Company selectively appoints general agents and grants authority
on a state-by-state basis so that each general agent only has authority in the
area where they have marketing expertise. Prior to appointing a general agent,
the Company extensively reviews the candidate's financial condition, geographic
diversification of risk, historical loss experience and reputation, as well as
the agent's results and practices with other insurers. An on-site review is made
of the prospective agent's office, including an audit of selected policy files
and confirmation that the agent has sufficient experience to merit authority to
bind the Company only to appropriate risks as specified in the Company's
underwriting manual. The agent is also interviewed at the Company's office in
order to confirm the compatibility between the agent and the Company's
underwriting staff. Such a comprehensive review is necessitated by the Company's
philosophy of establishing an agent relationship only if it has long-term
potential.
Once appointed, the Company provides each general agent with a
comprehensive agency manual which enables the agent to begin writing business
immediately. The manual allows the agent to write coverages effectively and
consistently within the Company's comprehensive underwriting guidelines. The
agents are provided limited binding authority, based primarily on Insurance
Services Office ("ISO") rates and forms, to write a variety of property, general
Page 6
liability, commercial multi-peril and commercial automobile business, provided
that the risks and terms involved in a particular coverage are within the
guidelines set forth in the agency manual. The Company has devoted extensive
research to the development of its detailed agency manual to enable its agents
to select and price risks consistently. The Company's agency manual is regularly
updated to be responsive to changes in the marketplace. The Company devotes
substantial resources to the continuous monitoring and support of its general
agents.
The general agents are compensated on a commission basis. During 1998, the
Company increased by 10%, the commission on commercial business from 20% to 22%.
For personal lines automobile business, the average commission is 26.5%. A
portion of this commission is passed on to the retail insurance broker. In
addition, the general agency contracts between the Company and its general
agents contain profit sharing incentives under the Agents' Profit Sharing and
Performance Award Program, which is designed to reward general agents who meet
the Company's loss ratio and premium volume criteria. Such contingent
commissions and performance awards accounted for 6.8% of the total commissions
incurred by the Company in 1999. The Agents' Profit Sharing and Performance
Award Program was changed in 1999 to provide for a stock option component in
addition to the stock and cash components. The contingent stock award for 1999
will be issued in May 2000. Stock awards for 1998, which were issued in May
1999, amounted to 42,035 shares, accounting for 33.6% of the total contingent
commissions paid for 1998. Additionally, the Company awards $1,000 in the form
of PNG common stock to each new general agent it appoints.
The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:
Years ended December 31,
------------------------------- ------------------------------ -------------------------------
1999 1998 1997
------------------------------- ------------------------------ -------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(in thousands) (in thousands) (in thousands)
Pacific $19,931 20.8% $23,969 25.3% $ 26,126 25.0%
Midwest 18,255 19.0 14,392 15.2 12,198 11.7
South 17,355 18.1 16,346 17.2 16,236 15.5
Southwest 14,331 14.9 16,027 16.6 18,625 17.8
Mid-Atlantic 10,359 10.8 8,998 9.5 9,876 9.4
Mountain/Northwest 9,818 10.2 9,321 9.8 14,119 13.4
New England 5,934 6.2 6,044 6.4 7,514 7.2
-------------- ------------ --------------- ------------ --------------- ------------
$95,983 100.0% $95,097 100% $104,694 100%
============== ============ =============== ============ =============== ============
Underwriting and Pricing
In the commercial property and casualty market, the rates and terms of
coverage provided by property and casualty insurance carriers are frequently
based on ISO rates and forms. ISO makes available to its members advisory,
rating, statistical and actuarial services, policy language and related
services. ISO and its related organizations currently provide such services,
including rates and forms, to more than 1,500 property and casualty insurance
companies in the U.S. One of the important services that ISO provides is an
actuarial-based estimate of the "ideal" rate for risks in each of approximately
1,250 risk classifications. These rates reflect an analysis of the loss and loss
adjustment expenses on claims reported to ISO. ISO statistics, however, include
only claims and policy information reported to ISO, and therefore do not reflect
all of the loss experience for each class. Also, the historical results for a
particular class may not be sufficient to provide actuarially meaningful
results.
Page 7
The Company primarily uses ISO statistics as a benchmark for risk selection
and pricing. Other carriers may or may not rely as heavily on this information,
and several of the larger standard carriers have developed their own actuarial
databases. As a general rule, most standard carriers set rates lower than ISO
rates. However, the Company, because of its strategy of providing insurance to
under-served markets, typically charges 100% or more of prescribed ISO rates.
Generally, the Company provides its general agents with pricing flexibility on a
per-policy basis, with the objective that in the aggregate, the weighted average
premium of all new and renewal commercial policies written by a general agent
are at approximately 110% of ISO rates. According to ISO data, most standard
carriers typically price at 60-80% of ISO rates.
All policies written by the Company are either generated by the general
agents pursuant to their binding authority or on approval by the Company upon
submission by the general agents if the risk falls outside of that authority. In
1999, approximately 97.8% of the commercial policies written by the Company were
on a binding authority basis, generating approximately 96.5% of the Company's
commercial lines gross written premiums. The Company has established strict
commercial underwriting guidelines within the terms of its agency manual which
identify the risks that: (i) are within the binding authority of the general
agents; (ii) must be submitted to the Company and (iii) the Company would not
insure on any basis (prohibited risks).
The agency manual was prepared after extensive research, including input
from the Company's commercial reinsurers, and is regularly updated by the
Company's underwriting staff. The Company's underwriting staff carefully
monitors its general agents and performs on-site reviews and underwriting audits
of its agents on a periodic basis for quality and compliance with Company
guidelines.
With respect to commercial risks written by general agents under binding
authority, the Company generally has 60 days from the effective date to cancel a
policy if the risk insured does not comply with the Company's underwriting
guidelines. In the event an agent exceeds its authority by binding the Company
on a risk when it had no authority to do so, the Company is at risk for that
policy until it receives the policy and effects a cancellation. General agents
must deliver all policies to the Company within 35 days of the date written. The
Company monitors this activity closely through its computer system and
underwriting department.
The commercial risks the Company writes on a submit basis are generally
similar to the binding authority classes, but may have larger coverage limits or
greater complexity. In determining whether to accept such risks, the Company's
underwriting staff will review such factors as the type of risk, the agent's
knowledge and control of the risk, potential underwriting profitability and
historical data regarding any similar risk previously underwritten by the
Company. During this process, the Company will quote a proposed premium
reflecting relevant ISO rates, if available, and adjustments that may be
warranted based on the individual characteristics of the particular risk. The
underwriting staff then assembles a complete underwriting file with respect to
the particular submission and specific approval procedures are employed,
depending on the characteristics and magnitude of the particular risk.
The Company generally reviews all commercial policies as they are received
from general agents for completeness, accuracy, and compliance with the
Company's underwriting guidelines. In addition, the Company conducts a detailed
audit of each of its general agents at least once a year. The audit involves
thoroughly reviewing between 50 and 100 policies to check for completeness,
accuracy, pricing, use of proper exclusions, verification of information, and
compliance with the Company's regulatory filings, as well as the general agent's
use of the Company's overall product lines. The Company provides its general
agent with written feedback based on the results of its audits and monitors its
timely responses to any issues highlighted in such audits.
Page 8
Claims Management and Administration
Commercial Claims:
The Company's approach to commercial claims management is designed to
investigate reported incidents at the earliest juncture, to select, manage and
supervise all legal and adjustment aspects thereof and to provide a high level
of service and support to general agents, retail insurance brokers and insureds
throughout the claims process. The Company's commercial general agents have no
authority to settle commercial claims or otherwise exercise control over the
claims process. All commercial lines claims are supervised and processed
centrally by the Company's claims management staff. Senior management reviews
all claims over $25,000.
Personal Automobile Claims in Run-Off:
All claims for the personal automobile run-off business are handled by the
Company's internal claims unit. Prior to February 1, 2000, if an automobile
claim was in the States of California and Washington, they were handled by
outside third-party claims management companies. An initial reserve is
established using an average reserve which reflects that state's automobile loss
experience. Subsequent to the establishment of the initial reserve, adjustments
are made to the reserve to reflect new information on the claims' ultimate
settlement costs.
For those claims previously handled by the claims management company, a
pre-established settlement authority depending on coverage was in place. The
claims management company established an initial average reserve based on the
specific state's experience. Any changes to the initial average reserve had to
be approved by the Company.
Reserves
The Company is directly liable for loss and loss adjustment expense
payments under the terms of the insurance policies that it writes. In many
cases, several years may lapse between the occurrence of an insured loss, the
reporting of the loss to the Company and the Company's payment of that loss. The
Company reflects its liability for the ultimate payment of all incurred losses
and loss adjustment expenses by establishing loss and loss adjustment expense
reserves for both reported and unreported claims, which are balance sheet
liabilities representing estimates of future amounts needed to pay claims and
related expenses.
When a claim involving a probable loss is reported, the Company establishes
a case reserve for the estimated amount of the Company's ultimate loss and loss
adjustment expense payments. The estimate of the amount of the ultimate loss is
based upon such factors as the type of loss, jurisdiction of the occurrence,
knowledge of the circumstances surrounding the claim, severity of injury or
damage, potential for ultimate exposure and policy provisions relating to the
claim. The loss adjustment expenses include the estimated expenses of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment process.
All newly reported claims received with respect to personal automobile
policies are established with an initial average reserve. The average reserves
for these claims are determined every quarter by dividing all of the closed
claims into the total amount paid during the three-month period. If a claim is
open for more than 90 days, the open case reserve is evaluated and the reserve
is adjusted upward or downward according to the facts of that particular claim.
In addition, management establishes reserves on an aggregate basis to
provide for Incurred But Not Reported Losses ("IBNR"). The Company's independent
actuarial consultant annually reviews the provision for IBNR and the reserves
taken as a whole. The Company does not discount its loss reserves. The estimates
of reserves are subject to the effect of trends in claims severity and frequency
Page 9
and are continually reviewed. As part of this process, the Company reviews
historical data and considers various factors, including known and anticipated
legal developments, changes in social attitudes, inflation and economic
conditions. As experience develops and other data become available, these
estimates are revised, as required, resulting in increases or decreases to
existing reserves. Adjustments are reflected in results of operations in the
period in which they are made and may deviate substantially from prior
estimates.
The following table sets forth a reconciliation of beginning and ending
reserves as shown on the Company's financial statements (on a GAAP basis,
without regard to reinsurance) for unpaid losses and loss adjustment expenses
for the periods indicated:
Years ended December 31,
------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
(in thousands)
Reserves for unpaid losses and loss adjustment expenses,
at beginning of year $88,937 $84,566 $70,728
---------------- ---------------- ----------------
Incurred losses and loss adjustment expenses:
Provision for insured events of the current year 60,911 60,740 61,916
Increase in provision for insured
events of prior years 9,458 1,074 916
---------------- ---------------- ----------------
Total incurred losses and loss adjustment expenses 70,369 61,814 62,832
---------------- ---------------- ----------------
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year 24,504 22,716 21,408
Losses and loss adjustment expenses attributable
to insured events of prior years 41,083 34,727 27,586
---------------- ---------------- ----------------
Total payments 65,587 57,443 48,994
---------------- ---------------- ----------------
Reserves for unpaid losses and loss adjustment expenses,
at end of year $93,719 $88,937 $84,566
================ ================ ================
The Company has experienced adverse development of gross reserves of $9.5
million, $1.1 million and $916,000 in 1999, 1998 and 1997, respectively, for
prior years' insured events. The increase in 1999 prior year incurred losses is
due to loss development in non-standard personal automobile, which the Company
is exiting, and commercial property and liability lines. The increase in 1998
and 1997 prior years' incurred losses is due primarily to loss development in
non-standard personal automobile liability. The establishment of reserves is an
inherently subjective process and, therefore, the historical gross or net
redundancies or deficiencies may not be indicative of the likelihood or amount
of future redundancies or deficiencies.
The following table represents the development of unpaid loss and loss
adjustment expense reserves during the ten years ended December 31, 1998. The
top of the table reflects the ten-year development of the Company's reserves net
of reinsurance. The bottom of the table reconciles 1992 through 1999 ending
reserves to the gross reserves in the Company's consolidated financial
statements. Prior to 1992, the Company developed its reserves on a net of
reinsurance basis and restatement for those prior years is not presented. The
top line of the table shows the estimated reserve for unpaid loss and loss
adjustment expenses at the balance sheet date for each of the indicated years.
These figures represent the estimated amount of unpaid loss and loss adjustment
expenses for claims arising in all prior years that were unpaid at the balance
sheet date, including losses that had been incurred but not yet reported. The
table also shows the re-estimated amount of the previously recorded reserve
based on experience as of the end of each succeeding year. The estimate changes
as more information becomes available about the frequency and severity of
claims.
Page 10
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for unpaid losses $25,391 $25,352 $25,681 $26,110 $26,830 $35,307 $46,512 $55,656 $68,863 $72,435 $75,633
and loss adjustment
Expenses, as stated
(In thousands)
a.Net cumulative paid as of
1 year later $8,655 $6,929 $6,605 $7,381 $6,852 $12,383 $17,208 $23,660 $30,236 36,449
2 years later 13,361 11,610 10,988 11,127 13,127 20,617 29,612 38,819 51,141
3 years later 16,952 14,667 13,325 15,546 18,656 27,266 38,091 50,982
4 years later 19,050 16,341 16,417 19,253 22,254 32,119 44,016
5 years later 20,359 18,363 19,283 21,503 24,303 34,883
6 years later 21,866 20,214 20,872 22,796 25,642
7 years later 23,383 21,470 21,881 23,714
8 years later 24,476 22,084 22,452
9 years later 24,978 22,432
10 years later 25,280
b.Reserves re-estimated
as of end of year
1 year later $25,128 $23,468 $23,228 $24,478 $23,897 $33,601 $45,708 $55.997 $68,946 $80,855
2 years later 24,329 22,658 22,383 21,945 23,489 34,281 47,225 57,913 76,217
3 years later 23,923 22,252 20,471 22,032 24,558 36,453 47,378 63,575
4 years later 23,615 21,465 20,819 22,767 26,335 36,359 50,704
5 years later 23,639 21,469 21,726 23,935 26,380 38,768
6 years later 24,021 21,990 22,550 24,143 27,532
7 years later 24,683 22,609 22,761 24,776
8 years later 25,379 22,609 23,117
9 years later 25,460 23,004
10 years later 25,844
Net cumulative redundancy
(deficiency) ($453) $2,348 $2,564 $1,334 ($702) ($3,461) ($4,192) ($7,919) ($7,354) ($8,419) -----
Gross liability for unpaid
losses and loss
adjustment expenses, as
stated $31,703 $33,314 $44,796 $60,139 $70,728 $84,566 $88,937 $93,719
Reinsurance recoverable 5,593 6,484 9,489 13,627 15,072 15,703 16,502 18,086
Net liability for unpaid
losses and loss
adjustment expenses, as
stated 26,110 26,830 35,307 46,512 55,656 68,863 72,435 75,633
Gross liability re-estimated -
1 year later 30,609 32,796 48,173 63,884 71,644 85,640 98,395
Reinsurance recoverable
re-estimated 6,131 8,899 14,572 18,176 15,647 16,694 17,540
Net liability re-estimated -
1 year later 24,478 23,897 33,601 45,708 55,997 68,946 80,855
Gross liability re-estimated -
2 years later 30,390 36,243 53,009 66,405 74,312 92,832
Reinsurance recoverable
re-estimated 8,445 12,754 18,728 19,180 16,399 16,615
Net liability re-estimated -
2 years later 21,945 23,489 34,281 47,225 57,913 76,217
Gross liability re-estimated -
3 years later 33,992 41,600 56,042 66,891 80,574
Reinsurance recoverable
re-estimated 11,960 17,042 19,589 19,513 16,999
Net liability re-estimated -
3 years later 22,032 24,558 36,453 47,378 63,575
Gross liability re-estimated -
4 years later 38,165 43,824 56,167 68,927
Reinsurance recoverable
re-estimated 15,398 17,489 19,808 18,223
Net liability re-estimated -
4 years later 22,767 26,335 36,359 50,704
Gross liability re-estimate -
5 years later 39,956 44,466 58,272
Reinsurance recoverable
re-estimated 16,021 18,086 19,504
Net liability re-estimated -
5 years later 23,935 26,380 38,768
Gross Liability re-estimate -
6 years later 40,670 45,595
Reinsurance recoverable
re-estimated 16,527 18,063
Net liability re-estimated -
6 years later 24,143 27,532
Gross liability re-estimated -
7 years later 41,679
Reinsurance recoverable
re-estimated 16,903
Net liability re-estimated -
7 years later 24,776
Gross cumulative deficiency ($9,976)($12,281)($13,476) ($8,787) ($9,846) ($8,266) ($9,458)
a. Net cumulative paid "as of" equals the amounts of paid losses and loss
adjustment expenses subsequent to the year in which the original reserves
were established.
b. Reserves re-estimated "as of" equals the amounts of unpaid losses and loss
adjustment expenses which the company would have originally established
based on Amounts were calculated as the sum of the cumulative paid amounts
described in (a.) above plus the amounts of unpaid losses and loss
adjustment expenses reevaluated at the end of each succeeding year-end.
Page 11
The cumulative redundancy or deficiency represents the aggregate change in
the reserve estimates over all prior years. It should be emphasized that the
table presents a run-off of balance sheet reserves rather than accident or
policy year loss development. Therefore, each amount in the table includes the
effects of changes in reserves for all prior years.
The following table sets forth ratios for the Company and the industry
prepared in accordance with statutory accounting practices ("SAP") prescribed or
permitted by state insurance authorities. The statutory combined ratio, which
reflects underwriting results but not investment income, is a traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio is the sum of (i) the ratio of incurred losses and loss adjustment
expenses to net earned premium ("loss ratio"); and (ii) the ratio of expenses
incurred for commissions, premium taxes, administrative and other underwriting
expenses to net written premium ("expense ratio").
Years ended December 31,
---------------------------------------
1999 1998 1997
------------ ----------- ------------
The Company:
SAP Basis
Loss and loss adjustment expense ratio 73.8% 62.3% 63.0%
Expense ratio 34.9 35.0 32.3
------------ ----------- ------------
Combined ratio 108.7% 97.3% 95.3%
============ =========== ============
Years ended December 31,
---------------------------------------
1999 (1) 1998 (2) 1997 (2)
------------ ----------- ------------
Property and casualty insurance industry :
SAP Basis
Loss and loss adjustment expense ratio 88.3% 75.7% 73.4%
Expense ratio 28.1 27.2 26.6
Dividend ratio 1.1 1.4 1.1
------------ ----------- ------------
Combined ratio 107.5% 104.3% 101.1%
============ =========== ============
(1) Source: Industry Estimate for 1999, Viewpoint, P/C Supplement, January 10,
2000 edition, including dividend ratio.
(2) Source: 1998 and 1997, Best Aggregates & Averages - P/C.
Reinsurance
The Company purchases reinsurance through contracts called "treaties" to
reduce its exposure to liability on individual risks, and to protect against
catastrophic losses. Reinsurance involves an insurance company transferring or
"ceding" a portion of its exposure on a risk to another insurer (the
"reinsurer"). The reinsurer assumes the exposure in return for a portion of the
premium. The ceding of liability to a reinsurer does not legally discharge the
primary insurer from its liability for the full amount of the policies on which
it obtains reinsurance. The primary insurer will be required to pay the entire
loss if the reinsurer fails to meet its obligations under the reinsurance
agreement.
In formulating its reinsurance programs, the Company is selective in its
choice of reinsurers and considers numerous factors, the most important of which
are the financial stability of the reinsurer, its history of responding to
claims and its overall reputation. In an effort to minimize its exposure to the
insolvency of its reinsurers, the Company evaluates the acceptability and
reviews the financial condition of each reinsurer annually. The Company's policy
is to use only reinsurers that have an A.M. Best rating of "A (Excellent)" or
better and that have at least $250 million in policyholder surplus.
Page 12
The Company's current treaty reinsurance is with Gen Re, which is rated
"A++ (Superior)" by A.M. Best. Since January 1995, the Company has maintained
net retention limits of $500,000 (including indemnity and/or loss adjustment
expense) for casualty insurance, except during the first six month period of
1999, where the Company raised its casualty net retention to $1 million. As of
July 1, 1999, the casualty retention was returned to its previous casualty
retention limit of $500,000. The Company had an unearned premium transfer
related to this change in retention limits. Net retention limits for property
insurance were $300,000 per risk for 1999 and 1998 and $200,000 per risk for
1997. The combined Company retention for any one loss resulting from a common
occurrence involving both the property and casualty coverage on a single risk is
$500,000. The Company also maintains casualty contingent excess coverage with
General Re, which covers exposures such as punitive damages and other
extra-contractual obligations, losses in excess of policy limits (such as bad
faith and errors and omissions) and liability actions brought by two or more of
the Company's insureds against each other resulting from the same occurrence.
Effective December 1, 1997, reinsurance was added for both commercial
automobile and commercial umbrella risks. Reinsurance is with General Re, and
the Company has maintained for commercial automobile a net retention of $100,000
per occurrence and a net retention of 10% of the first $1,000,000 for commercial
umbrella in 1999 and 1998, respectively. Commercial automobile and umbrella
policy limits are $1,000,000 and $5,000,000, respectively.
For 1999 and 1998, the Company is covered for catastrophe losses by a
consortium of reinsurers including General Re, Lloyds and other "A" rated or
better reinsurers. Under the terms of the agreement, the Company retains the
first $2 million of losses and the consortium reinsures 95.0% of the next $23
million, with the Company retaining 5.0% of each layer (i.e., 1st layer, $3
million, 2nd layer, $5 million, 3rd layer, $15 million) within the $23 million.
For 2000, the Company is covered for catastrophe losses with a retention of $1
million by a consortium of "A" rated or better reinsurers, such as Gerling
Global Reinsurance, American Reinsurance, Sedgewick Reinsurance, Willis Faber
North America and Herbert Clough, who underwrite 95% to 100% of the layers in
excess of $1 million up to $24 million.
The Company may write individual risks with limits greater than the treaty
limits on a per-policy basis by using facultative reinsurance. The facultative
reinsurers must also meet Penn-America's reinsurer guidelines.
The following table reflects the amount of premiums written and ceded under
reinsurance treaties:
Years ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Gross written premiums $95,983 $95,097 $104,694
Ceded written premiums $ 8,947 $ 7,268 $ 8,133
Investments
The Company's investment policy seeks to maximize investment income consistent
with the overriding objective of maintaining liquidity and minimizing risk.
Approximately 97.8% of the Company's fixed income securities as of December 31,
1999 were rated "A" or better by Standard & Poor's or an equivalent rating by
Moody's. As of December 31, 1999, the Company's fixed maturity investments had
an average duration of approximately 4.5 years. Publicly traded equity
securities, the majority of which consisted of preferred stocks, represented
16.8% of the Company's investment portfolio as of December 31, 1999.
Page 13
As of December 31, 1999, the Company's investment portfolio contained $17.6
million of mortgage- and asset-backed securities at their carrying value. All of
these securities are "AAA" rated securities issued by government and
government-related agencies, are publicly traded, and have market values
obtained from an external pricing service. Changes in estimated cash flows due
to changes in prepayment assumptions from the original purchase assumptions are
revised based on current interest rates and the economic environment. Although
the Company is permitted to invest in other derivative financial instruments,
real estate mortgages and real estate, the Company does not participate in these
markets and does not have any such investments in its investment portfolio.
The Company's investment portfolio is under the direction of the Board of
Directors of Penn-America acting through its Investment Committee (consisting of
selected members of the Company's Board). The Investment Committee establishes
and monitors the Company's investment policies, which are intended to maximize
after-tax income while maintaining a high level of quality and liquidity in its
portfolio for insurance operations. All investment transactions must receive
approval from the Chairman of the Investment Committee prior to their initiation
by the Company's outside investment advisors.
The Investment Committee retained New England Asset Management ("NEAM"), a
subsidiary of Gen Re, to manage its fixed income portfolio and Carl Domino
Associates, L.P. ("CDA"), a registered investment advisor, to recommend
purchases and sales for the equity portfolio and Madison Monroe, Inc., an
investment advisor, who manages a small segment of the fixed income portfolio
representing less than 10%.
The following table shows the classifications of the Company's investments at
December 31, 1999:
Amount
reflected
Fair on balance Percent of
value sheet total
------------- ---------------- --------------
(In thousands)
Fixed maturities:
Available for sale:
U.S. Treasury securities and obligations of
U.S. government agencies $ 9,381 $ 9,381 6.1%
Corporate securities 31,844 31,844 20.6
Mortgage-backed securities 9,401 9,401 6.1
Other structured securities 8,207 8,207 5.3
Municipal 28,214 28,214 18.3
Public Utilities 24,372 24,372 15.8
------------- ---------------- -------------
Total 111,419 111,419 72.2
------------- ---------------- -------------
Held to maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 7,669 7,791 5.1
Corporate securities 7,298 7,360 4.8
Municipal 150 150 .1
Public utilities 986 993 .6
------------- ---------------- --------------
Total 16,103 16,294 10.6
------------- ---------------- --------------
Total fixed maturity securities 127,522 127,713 82.8
------------- ---------------- --------------
Equity securities:
Common stock 7,585 7,585 4.8
Preferred stock 18,435 18,435 12.0
------------- ---------------- -------------
Total equity investments 26,020 26,020 16.8
------------- ---------------- -------------
Short-term investments 449 449 0.4
------------- ---------------- -------------
Total investments $153,991 $154,182 100.0%
============= ================ =============
Page 14
The following table sets forth the composition of the Company's portfolio
of fixed maturity investments by rating at December 31, 1999:
Amortized Percentage Cumulative
Cost of portfolio percentage
---------------------------------------------
(in thousands)
Ratings (1)
- -----------------------------------------------
AAA (including U.S. government obligations) $64,928 49.1% 49.1%
AA 24,638 18.7 67.8
A 39,667 30.0 97.8
BBB 2,036 1.5 99.3
BB 1,000 0.7 100.0
---------------------------------------------
Total $132,269 100.0% 100.0%
=============================================
(1) Ratings are assigned primarily by Standard & Poor's with the remaining
ratings assigned by Moody's and converted to the equivalent Standard &
Poor's ratings.
The following table sets forth the net investment income results of the
Company for each of the years in the periods indicated:
1999 1998 1997
---- ---- ----
(in thousands)
Interest on fixed maturities $7,629 $8,921 $ 7,506
Dividends on equity securities 1,492 1,528 1,123
Interest on short-term
Other 4 2 42
--------------------------------------------
Total investment income 9,912 11,183 9,523
Investment expense (375) (420) (305)
--------------------------------------------
Net investment income $ 9,537 $10,763 $ 9,218
============================================
Competition
The property and casualty insurance industry is highly competitive and
includes several thousand insurers, ranging from large companies offering a wide
variety of products worldwide to smaller, specialized companies in a single
state or region and offering in some cases only a single product. The Company
competes with a significant number of these insurers in attracting quality
general agents and in selling insurance products. Many of the Company's existing
or potential competitors are larger, have considerably greater financial and
other resources, have greater experience in the insurance industry and offer a
broader line of insurance products than the Company. In commercial lines, the
Company competes with excess and surplus lines and specialty admitted insurers
including Scottsdale Insurance Company (part of Nationwide Mutual Insurance
Company), Essex Insurance Company (Markel Corporation), Nautilus Insurance
Company (W.R. Berkley Corporation), and Western World Insurance Company. The
Company also competes with new forms of insurance organizations (such as risk
retention groups) and alternative self-insurance mechanisms. The Company
believes that in order to be successful in its market, it must be aware of
pricing cycles, must be able to minimize the impact of such cycles through tight
expense control and superior customer service and must continually identify
profitable opportunities. Other competitive factors include ratings by A.M.
Best, pricing and admitted versus excess and surplus lines status in a given
state.
Page 15
Regulation
General. The Company is subject to regulation under the insurance statutes
and regulations, including insurance holding company statutes, of the various
states in which it does business. These statutes are generally designed to
protect the interests of insurance policyholders, as opposed to the interests of
stockholders, and they relate to such matters as the standards of solvency which
must be met and maintained; the licensing of insurers and their agents; the
nature and limitations of investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates; periodic examination
of the affairs of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums and losses; and
requirements regarding numerous other matters. All insurance companies must file
annual statements with certain state regulatory agencies and are subject to
regular and special financial examinations by those agencies. The last
regulatory financial examination of Penn-America Insurance Company was completed
by the Pennsylvania Insurance Department in 1999, covering the five-year period
ended December 31, 1998, and for Penn-Star Insurance Company, covering a two
year period ended December 31, 1998, since its initial licensing in 1997.
Since 1993, Penn-America Insurance Company has maintained an "A
(Excellent)" rating from A.M. Best Company, Inc. ("A.M. Best"), which rating was
reaffirmed by A.M. Best in January 2000, and included Penn-Star as a pooled
rating. A.M. Best's ratings are based upon factors of concern to policyholders,
including financial condition and solvency, and are not directed to the
protection of investors.
As of December 31, 1999, Penn-America Insurance Company and Penn-Star
Insurance Company combined are licensed as an admitted insurer in 35 states and
are approved non-admitted (excess and surplus lines) insurers in the other 15
states and the District of Columbia. All insurance is written through licensed
agents and brokers. In states in which the Company operates on a non-admitted
basis, general agents and their retail insurance brokers generally are required
to certify that a certain number of licensed admitted insurers will not write a
particular risk prior to placing that risk with the Company.
Insurance Holding Company Laws. Pennsylvania, the Companies' state of
domicile, has laws governing insurers and insurance holding companies. The
Pennsylvania statutes generally require insurers and insurance holding companies
to register and file reports concerning their capital structure, ownership,
financial condition and general business operations. Under the statutes, a
person must generally obtain the Pennsylvania Insurance Department's approval to
acquire, directly or indirectly, 10% or more of the outstanding voting
securities of the Company or any of its insurance company subsidiaries. The
insurance department's determination of whether to approve any such acquisition
is based on a variety of factors, including an evaluation of the acquirer's
financial condition, the competence of its management and whether competition
would be reduced. All transactions within a holding company's group affecting an
insurer must be fair and reasonable, and the insurer's policyholders' surplus
following any such transaction must be both reasonable in relation to its
outstanding liabilities and adequate for its needs. Notice to applicable
regulators is required prior to the consummation of certain transactions
affecting insurance subsidiaries of the holding company group.
Dividend Restrictions. As an insurance holding company, the Company is
primarily dependent on dividends and other permitted payments from Penn-America
to provide cash for the payment of any cash dividends to its stockholders. The
payment of dividends to the Company by Penn-America and to Penn-America by
Penn-Star are subject to state regulations, primarily the insurance laws of
Pennsylvania. Generally, these laws provide that, unless prior approval is
obtained, dividends of a property and casualty insurance company in any
consecutive 12-month period shall not exceed the greater of 100% of its
statutory net income for the most recent calendar year or 10% of its statutory
policyholders' surplus as of the preceding year end. The maximum annual
dividends payable by Penn-America without prior approval in 2000 is
approximately $6,950,000. In 1999, Penn-America
Page 16
paid dividends of $14.5 million, of which $12.5 million were extraordinary
dividends requiring prior approval from the state of domicile's Insurance
Department. Insurance regulators have broad powers to prevent reduction of
statutory surplus to inadequate levels, and there is no assurance that dividends
of the maximum amounts calculated under any applicable formula would be
permitted.
The Board of Directors has authorized the repurchase of up to 2.5 million
shares. As of December 31, 1999, 1,927,575 shares have been repurchased at an
average cost of $10.10 per share for a total cost of $19.5 million.
Insurance Guaranty Funds. Under insolvency or guarantee laws in states in
which Penn-America is licensed as an admitted insurer (and in New Jersey),
organizations have been established (often referred to as guaranty funds) with
the authority to assess admitted insurers up to prescribed limits for the claims
of policyholders insured by insolvent, admitted insurance companies. Surplus
lines insurance companies are generally not subject to such assessments except
in New Jersey, and their policyholders aren't eligible to file claims against
the guaranty funds.
Additional Legislation or Regulations. New regulations and legislation are
proposed from time to time to limit damage awards, to bring the industry under
regulation by the federal government, to control premiums, policy terminations
and other policy terms, and to impose new taxes and assessments. Difficulties
with insurance availability and affordability have increased legislative
activity at both the federal and state levels. Some state legislatures and
regulatory agencies have enacted measures, particularly in personal lines, to
limit midterm cancellations by insurers and require advance notice of renewal
intentions. In addition, Congress is investigating possible avenues for federal
regulation of the insurance industry.
Employees
The Company has approximately 109 employees. The Company is not a party to
any collective bargaining agreements and believes that its employee relations
are good.
ITEM 2. PROPERTIES
The Company leases approximately 23,000 square feet in an office building
located in Hatboro, Pennsylvania. The office building also houses Penn
Independent and certain of its subsidiaries. The Company leases the space from
Mr. Irvin Saltzman, Chairman of the Board of Directors of the Company, pursuant
to a lease agreement which expires on June 30, 2000, and provides for an annual
rental payment of approximately $281,112, which amount is considered by the
Company to be at fair market value. The parties have agreed to renew this lease
for an additional five (5) year term. The parties are currently negotiating the
terms of this new lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to routine legal proceedings in the normal course of
operating its insurance business. The Company is not involved in any legal
proceedings which reasonably could be expected to have a material adverse effect
on the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1999 to a vote of
holders of the Company's Common Stock.
Page 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The "Market for Common Stock and Related Security Holder Matters" section
on pages 1 and 7 of the Company's Annual Report to stockholders for the year
ended December 31, 1999, which is included as Exhibit (13) to this Form 10-K
Report, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Data" section on page 8 of the
Company's Annual Report to stockholders for the year ended December 31, 1999,
which is included as Exhibit (13) to this Form 10-K Report, is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Results of Operations and
Financial Condition" section on pages 9 to 15 of the Company's Annual Report to
stockholders for the year ended December 31, 1999, which is included as Exhibit
(13) to this Form 10-K Report, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements on pages 16 to 28 of the Company's
Annual Report to stockholders for the year ended December 31, 1999, which is
included as Exhibit (13) to this Form 10-K Report, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Director's information will be in the Company's definitive Proxy
Statement with respect to the Company's 2000 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Executive Officers of the Registrant as of March 12, 2000 are as follows:
Irvin Saltzman 77 Chairman of the Board of Directors of PNG
and Penn-America
Jon S. Saltzman 42 President and Chief Executive Officer of
PNG and Penn-America, and Director
Rosemary R. Ferrero, CPA 44 Vice President - Finance, and Treasurer of
PNG, Vice President and Chief Financial
Officer of Penn-America
Garland P. Pezzuolo 35 Secretary and General Counsel of PNG and
Penn-America
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 2000 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 2000 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 2000 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Page 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a.) The following consolidated financial statements, financial statement
schedules and exhibits are filed as part of this report:
1. Consolidated Financial Statements
Page*
Consolidated Balance Sheets at December 31, 1999 and 1998 16
Consolidated Statements of Earnings for the years
ended December 31, 1999, 1998, and 1997 17
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 18
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998, and 1997 19
Notes to Consolidated Financial Statements 20-27
Independent Auditors' Report 28
The following consolidated financial statement schedules for the years 1999,
1998 and 1997 are submitted herewith:
2. Financial Statement Schedules. Page
Schedule I. Summary of Investments - Other Than
Investments in Related Parties 26
Schedule III. Condensed Financial Information of
Parent Company 27-29
Schedule V. Supplementary Insurance Information 30
Schedule VI. Reinsurance 31
Schedule X. Supplemental Insurance Information
Concerning Property and Casualty 32
Independent Auditors' Consents and Reports on Schedules
(filed as Exhibit 23)
Independent Auditors' Report for the year 1999
Prior Independent Auditors' Report for the
years 1998 and 1997
All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes
thereto.
3. Exhibit Index: 21-25
- --------
* Refers to the respective page of Penn-America Group's 1999 Annual Report to
Stockholders attached as Exhibit (13). The Consolidated Financial Statements and
Independent Auditors' Report on pages 16 to 28 are incorporated herein by
reference. With the exception of the portions of such Annual Report specifically
incorporated by reference in this Item and Items 5, 6, 7 and 8, such Annual
Report shall not be deemed filed as part of this Form 10-K or otherwise subject
to the liabilities of Section 18 of the Securities and Exchange Act of 1934.
Page 20
Exhibit Index
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference
to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance
Company ("Penn-America") and Carnegie General Agency,
incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) and filed with the Securities and Exchange
Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998,
filed with the Registrant's report on Form 10-K for
the period ended December 13, 1997, which has been
filed with the Securities and Exchange Commission.
10.2(b) Notice of Termination of Carnegie Agreement, dated
April 30, 1999.
10.3 1993 Casualty Excess of Loss Reinsurance Agreement
with National Reinsurance Corporation, incorporated
by reference to Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) and
filed with the Securities and Exchange Commission on
August 2, 1993.
10.3(i) Endorsement Nos. 4 through 6 (Termination
Endorsement) to Casualty Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation,
filed with the Securities and Exchange Commission
with Registrant's Report on Form 10-K for the period
ended December 31, 1995.
10.4 1993 Underlying Homeowners and Dwelling Fire Property
Per Risk Excess of Loss Reinsurance (Run-off
Business) Agreement with National Reinsurance
Corporation, incorporated by reference to Exhibit
10.4 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) and filed with the Securities
and Exchange Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial)
Reinsurance Agreement with Employers Reinsurance
Corporation, incorporated by reference to Exhibit
10.5 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) and filed with the Securities
and Exchange Commission on August 2, 1993.
Page 21
Exhibit No. Description
10.5(i) Endorsement No. 3 to Property Per Risk of Excess Loss
(Commercial) Reinsurance Agreement with Employers
Reinsurance Corporation, filed with the Securities
and Exchange Commission with Registrant's Report on
Form 10-K for the period ending December 31, 1994.
10.6 1993 Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation,
incorporated by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) and filed with the Securities and Exchange
Commission on August 2, 1993.
10.6(i) Endorsement No. 6 to Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance
Corporation, filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1994,
which has been filed with the Securities and Exchange
Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe
Excess Reinsurance Agreement with Employers
Reinsurance Corporation effective January 1, 1995,
filed with the Registrant's Report on Form 10-K for
the period ending December 31, 1994, which has been
filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993 between Penn
Independent Corporation ("Penn Independent") and the
Registrant regarding the reimbursement of certain
employment costs, incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) and
filed with the Securities and Exchange Commission on
August 26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20,
1993, Agreement between Penn Independent and
Registrant regarding the sharing of certain operating
costs, filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995, which has
been filed with the Securities and Exchange
Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996,
to August 20, 1993 Agreement between Penn Independent
and Registrant regarding the sharing of certain
operating costs, filed with Registrant's Report on
Form 10-K for the period ended December 31, 1996,
which has been filed with the SEC.
10.7(iii) Amendment dated March 1, 1997 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs,
filed with Registrant's Report on Form 10-K for the
period ended December 31, 1997, which has been filed
with the Securities and Exchange Commission.
10.7(iv) Amendment dated January 1, 1999 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs,
filed with the Registrant's Report on Form 10-K for
the period ended December 31, 1998, which has been
filed with the Securities and Exchange Commission.
Page 22
Exhibit No. Description
10.7(v) Amendment dated January 1, 2000 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs.
10.9 Restated Investment Advisory Agreement effective July
1, 1990 between Penn America and Carl Domino
Associates, L.P., incorporated by reference to
Exhibit 10.9 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) and filed with
the Securities and Exchange Commission on August 2,
1993.
10.9(i) Amended Investment Advisory Agreement effective
September 1, 1997 between and among Penn-America, its
subsidiary, Penn-Star and Carl Domino Associates,
L.P., filed with the Registrant's Report on Form 10-K
for the period ending December 31, 1997, which was
filed with the SEC.
10.9(ii) Agreement dated April 15, 1997 between and among
General Re, New England Asset Management, Inc.,
Penn-America, and its subsidiary, Penn-Star filed
with the Registrant's Report on Form 10-K for the
period ending December 31, 1997, which was filed with
the SEC.
10.9(iii) Investment Advisory Agreement effective February 19,
1999 between Penn-America Insurance Company and
Madison Monroe, Inc.
10.10 1993 Stock Incentive Plan, incorporated by reference
to Exhibit 10.10 to Amendment No. 4 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) and filed with the Securities and Exchange
Commission on September 29, 1993.
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan,
as amended and restated April 4, 1994, incorporated
by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8 (No. 33-82728) and
filed with the Securities and Exchange Commission on
August 11, 1994.
10.10(ii) Employee Bonus Plan, January 1, 2000
10.11 Lease effective June 30, 1995 between Registrant and
Irvin Saltzman, filed with Registrant's Report on
Form 10-K for the period ended December 31, 1995,
which has been filed with the Securities and Exchange
Commission.
10.12 Demand Promissory Note dated January 12, 1993 from
Penn Independent Financial Services, Inc. to
Penn-America, incorporated by reference to Exhibit
10.12 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) and filed with the Securities
and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the
Registrant to Penn Independent, filed with
Registrant's Report on Form 10-K for the period ended
December 31, 1995, which has been filed with the
Securities and Exchange Commission.
Page 23
Exhibit No. Description
10.13(i) Amendment No.1 dated November 30, 1995 to Demand
Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America,
filed with the Registrant's Report on Form 10-K for
the period ended December 31, 1996, which has been
filed with the Securities and Exchange Commission.
10.14 1995 Multiple Line Excess of Loss (Casualty and
Property) Reinsurance Agreement with National
Reinsurance Corporation, filed with Registrant's
Report on Form 10-K for the period ended December 31,
1995, which has been filed with the Securities and
Exchange Commission.
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss
Reinsurance Agreement with National Reinsurance
Corporation, effective as of January 1, 1995, filed
with Registrant's Report on Form 10-K for the period
ended December 31, 1995, which has been filed with
the Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss
Reinsurance Agreement with National Reinsurance
Corporation, effective as of January 1, 1995, filed
with Registrant's Report on Form 10-K for the period
ended December 31, 1995, which has been filed with
the Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with
General Re Corporation effective May 1, 1996, filed
with the Registrant's Report on Form 10-K for the
period ended December 31, 1996, which has been filed
with the Securities and Exchange Commission.
10.15 1995 Property Catastrophe Excess of Loss Reinsurance
Agreement with the subscribing Reinsurers, filed with
the Registrant's Report on Form 10-K for the period
ending December 31, 1994, which has been filed with
the Securities and Exchange Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance
Agreement with the subscribing Reinsurers, filed with
the Registrant's Report on Form 10-K for the period
ended December 31, 1996 which has been filed with the
Securities and Exchange Commission.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive
Compensation Plan, incorporated as Part I to
Registrant's Registration Statement on Form S-8 (No.
333-00050) and filed with the Securities and Exchange
Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and
Profit Sharing Plan, incorporated as Exhibit 4 to
Registrant's Registration Statement on Form S-3 (No.
333-00046) and filed with the Securities and Exchange
Commission on January 4, 1996.
10.17(i) Penn-America Insurance Company's Agency Award and
Profit Sharing Plan, attached as Exhibit 4 to
Registrant's Registration Statement on Form S-3 (No.
333-49055) and filed with the Securities and Exchange
Commission on March 31, 1998.
Page 24
Exhibit No. Description
10.17(ii) Amended General Agency Profit Sharing Addendum to
Agency Award & Profit Sharing Plan.
10.18 Stipulation of Termination of Property and Liability
Reinsurance Agreement with National Reinsurance
Corporation effective May 1, 1996, filed with the
Registrant's Report on Form 10-K for the period ended
December 31, 1996, which has been filed with the
Securities and Exchange Commission.
11 Statement re: computation of per share earnings,
incorporated by reference to Note 2 to the
Consolidated Financial Statements.
13 1999 Annual Report to Shareholders, incorporated by
reference under Item 8.
21 As of December 31, 1999, the Registrant's only
subsidiary is Penn-America Insurance Company, a
Pennsylvania Corporation.
23 Independent Auditors' Consents and Reports on
Schedules
28.1 Loan and Security Agreement, Term Note and Stock
Pledge Agreement dated December 20, 1995 between
Registrant and PNC Bank (successor to Midlantic Bank,
N.A), filed with the Registrant's Report on Form 10-K
for the period ending December 31, 1995, which has
been filed with the Securities and Exchange
Commission.
28.2 Credit Agreement among Registrant, Certain Lenders
and First Union National Bank dated September 28,
1998, filed with the Securities and Exchange
Commission, filed with the Registrant's Report on
Form 10-K for the period ended December 31, 1998,
which has been filed with the Securities and Exchange
Commission.
28.3 First Amendment to Credit Agreement, dated May 12,
1999, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
28.4 Second Amendment to Credit Agreement, dated August
26, 1999, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
28.5 Third Amendment to Credit Agreement, dated March 15,
2000, among registrant certain lenders and First
Union National Bank, dated September 28, 1998.
30.0 Reinsurance Pooling Agreement between Penn-America
Insurance Company and Penn- Star Insurance Company
dated July 1, 1998, filed with the Securities and
Exchange Commission.
b) Reports on Form 8-K - None were filed during the last quarter of 1999
Page 25
PENN-AMERICA GROUP, INC.
Schedule I - Summary of Investments - Other than Investments in Related Parties
(in thousands)
December 31, 1999
-------------------------------------------------------------------
Amortized Amount shown on
Cost Fair Value Balance Sheet
------------------ ----------------- ---------------------
Fixed maturities:
Available for sale
U.S. treasury securities and obligations of
U.S. government agencies $ 10,666 $ 9,381 $ 9,381
Corporate securities 33,005 31,844 31,844
Mortgage-backed securities 9,630 9,401 9,401
Other structured securities 8,230 8,207 8,207
Municipal 29,222 28,214 28,214
Public Utilities 25,222 24,372 24,572
------------------ ----------------- -----------------
Total available for sale 115,975 111,419 111,419
------------------ ----------------- -----------------
Held to maturity
U.S. treasury securities and obligations of
U.S. government agencies 7,791 7,669 7,791
Corporate securities 7,360 7,298 7,360
Municipal 150 150 150
Public Utilities 993 986 993
------------------ ----------------- -----------------
Total held to maturity 16,294 16,103 16,294
------------------ ----------------- -----------------
Total fixed maturities 132,269 127,522 127,713
------------------ ----------------- -----------------
Equity securities:
Common stock 7,484 7,585 7,585
Preferred stock 20,530 18,435 18,435
------------------ ----------------- -----------------
Total equity investments 28,014 26,020 26,020
------------------ ----------------- -----------------
Short term investments: 449 449 449
------------------ ----------------- -----------------
Total investments $160,732 $153,991 $154,182
================== ================= =================
Page 26
PENN-AMERICA GROUP, INC.
Schedule III--Condensed Financial Information of Parent Company
Condensed Balance Sheets
(in thousands except share data)
December 31,
-------------------------------------
1999 1998
---------------- ----------------
ASSETS
Cash $ 55 $ 316
Short-term investments 449 997
Investment in subsidiary, equity method 79,680 98,355
Other assets 499 962
---------------- ----------------
Total assets $ 80,683 $100,630
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 65 $ ---
---------------- ----------------
Total liabilities 65 ---
---------------- ----------------
Stockholders' equity:
Preferred stock, $ .01 par value; authorized 2,000,000 shares;
none issued
Common stock, $.01 par value; authorized 20,000,000 in 1999 and 1998;
issued 1999, 9,990,436 and 1998, 9,938,179 shares; outstanding 1999,
8,062,861 and 1998, 9,395,854 100 99
Additional paid-in capital 69,591 69,035
Other comprehensive (loss) income, net ( 4,324) 2,714
Treasury stock, 1999, 1,927,575 and 1998, 542,325, shares at cost (19,474) (5,643)
Retained earnings 35,050 34,779
---------------- ---------------
80,943 100,984
Unearned compensation from restricted stock awards ( 325) ( 354)
---------------- ---------------
Total stockholders' equity 80,618 100,630
---------------- ----------------
Total liabilities and stockholders' equity $ 80,683 $100,630
================ ================
Page 27
PENN-AMERICA GROUP, INC.
Schedule III--Condensed Financial Information of Parent Company
Condensed Statements of Earnings
(in thousands except per share data)
Years ended December 31,
--------------------------------------------------
1999 1998 1997
------------- ------------- --------------
Dividend income $ 14,500 $ 7,950 $ 1,555
Other 56 65 122
Operating expenses ( 1,306) (1,532) (1,636)
Income tax benefit 425 499 539
------------- ------------- --------------
Income before equity in undistributed
net income of subsidiary 13,675 6,982 580
Equity in undistributed net earnings (loss)
of subsidiary (11,637) 1,899 9,065
------------- ------------- --------------
Net earnings $ 2,038 $8,881 $ 9,645
============= ============= ==============
Net earnings per share
Basic $0.24 $0.91 $ 1.19
Diluted $0.24 $0.90 $ 1.17
Weighted average number of shares used in calculating
per share data
Basic 8,592 9,766 8,126
Diluted 8,658 9,873 8,228
Cash dividends per share $0.2075 $0.20 $ 0.16
============= ============= ==============
Page 28
PENN-AMERICA GROUP, INC.
Schedule III - Condensed Financial Information of Parent Company
Condensed Statements of Cash Flows
(in thousands)
Years ended
December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net earnings $ 2,038 $8,881 $ 9,645
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed (net earnings) losses of subsidiary 11,637 (1,899) (9,065)
Increase (decrease) in :
Accounts payable and accrued expenses 65 (196) (22)
Other, net 328 (519) (200)
Amortization 256 309 221
-------------- ------------ --------------
Net cash provided by operating activities 14,324 6,576 579
-------------- ------------ --------------
Cash flows from investing activities:
Change in short-term investments 548 (997) ---
------------- ------------ --------------
Net cash (used) provided by investing activities 548 (997) ---
------------- ------------ --------------
Cash flows from financing activities:
Repayment of notes payable --- --- (9,000)
Issuance of common stock (net of expenses) 465 815 45,897
Purchase of treasury stock (13,831) (5,643) ---
Equity contributions to subsidiary --- --- (35,000)
Dividends paid ( 1,767) (1,951) (1,329)
------------- ------------ --------------
Net cash (used) provided by financing activities (15,133) (6,779) 568
------------- ------------ --------------
Increase (decrease) in cash ( 261) (1,200) 1,147
Cash, beginning of period 316 1,516 369
------------- ------------ --------------
Cash, end of period $ 55 $ 316 $ 1,516
============= ============ ==============
Page 29
PENN-AMERICA GROUP, INC.
Schedule V - Supplementary Insurance Information
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
Liability Amortization
for Unpaid of
Deferred Losses and Losses Deferred
Policy Loss Net and Loss Policy Other Net
Acquisition Adjustment Unearned Earned Investment Adjustment Acquisition Underwriting Premiums
Costs Expenses Premiums Premiums Income Expenses Costs Expenses Written
----- -------- -------- -------- ------ -------- ----- -------- -------
1999
Commercial $ 8,914 $ 82,192 $ 35,188 $ 71,731 $ 4,347 $ 49,744 $ 20,269 $ 1,596 $ 75,574
Personal 392 11,527 1,144 13,946 735 13,443 4,533 - 11,462
Unallocated - - - - 4,455 - - 4,443 -
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
Total $ 9,306 $ 93,719 $ 36,332 $ 85,677 $ 9,537 $ 63,187 $ 24,802 $ 6,039 $ 87,036
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
1998
Commercial $ 7,553 $ 69,845 $ 30,625 $ 62,949 $ 4,119 $ 37,121 $ 17,112 $ 1,575 $ 64,283
Personal 1,175 19,092 3,628 26,544 943 18,612 8,340 207 23,546
Unallocated - - - - 5,701 - - 4,607 -
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
Total $ 8,728 $ 88,937 $ 34,253 $ 89,493 $ 10,763 $ 55,733 $ 25,452 $ 6,389 $ 87,829
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
1997
Commercial $ 6,449 $ 69,022 $ 29,546 $ 57,189 $ 4,214 $ 32,723 $ 14,327 $ 1,495 $ 60,768
Personal 2,114 15,544 6,627 34,460 774 25,005 10,657 347 35,793
Unallocated - - - - 4,230 - - 3,998 -
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
Total $ 8,563 $ 84,566 $ 36,173 $ 91,649 $ 9,218 $ 57,728 $ 24,984 $ 5,840 $ 96,561
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
Page 30
PENN-AMERICA GROUP, INC.
Schedule VI - Reinsurance
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
Ceded to Assumed Net Premium Percentage
Other from Other Written of Assumed to
Direct Companies Companies Net
--------------- -------------- ------------ ------------- ---------------
1999
Premiums
Property and
liability insurance $ 94,967 $ 8,947 $1,016 $87,036 1.2%
--------------- -------------- ------------ ------------- ---------------
Total
premiums $ 94,967 $ 8,947 $1,016 $87,036 1.2%
=============== ============== ============ ============= ===============
1998
Premiums
Property and $ 94,831 $7,268 $ 266 $87,829 0.3%
liability insurance
--------------- -------------- ------------ ------------- ---------------
Total
premiums $ 94,831 $7,268 $ 266 $87,829 0.3%
=============== ============== ============ ============= ===============
1997
Premiums
Property and
liability insurance $104,694 $8,133 --- $96,561 ---
--------------- -------------- ------------ ------------- ---------------
Total
premiums $104,694 $8,133 --- $96,561 ---
=============== ============== ============ ============= ===============
Page 31
PENN-AMERICA GROUP, INC.
Schedule X - Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
Loss and Loss
Liability Adjustment Expenses
for Unpaid Discount (Benefits) Incurred
Losses and If Any, Related to Paid Losses
Loss Deducted ----------------------------- and Loss
Adjustment From Current Prior Adjustment
Expenses Reserves Year Year Expenses
--------------- -------------- ------------ -------------- -------------------
Years Ended
December 31, 1999 $93,719 $54,768 $8,419 $59,989
December 31, 1998 $88,937 $55,647 $ 86 $52,161
December 31, 1997 $84,566 $57,387 $ 341 $44,521
Page 32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Penn-America Group, Inc.
We have audited the accompanying consolidated balance sheet of Penn-America
Group, Inc. (the Company) as of December 31, 1999, and the related consolidated
statement of income, changes in capital and surplus and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Penn-America
Group, Inc. at December 31, 1999, and the consolidated results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 20, 2000
Independent Auditors' Report
The Board of Directors and Stockholders
Penn-America Group, Inc.:
We have audited the accompanying consolidated balance sheet of Penn-America
Group, Inc. and subsidiaries as of December 31, 1998 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Penn-America Group,
Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
January 22, 1999
Philadelphia, Pennsylvania
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: March 24, 2000 By: /s/ Jon S. Saltzman
-------------------
Jon S. Saltzman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
/s/ Irvin Saltzman Chairman of the Board of Directors March 24, 2000
- -------------------------- and Director
Irvin Saltzman
/s/ Jon S. Saltzman President, Chief Executive Officer and March 24, 2000
- -------------------------- Director (Principal Executive Officer)
Jon S. Saltzman
/s/ Robert A. Lear Director March 24, 2000
- --------------------------
Robert A. Lear
/s/ Rosemary R. Ferrero Vice President-Finance, and Treasurer March 24, 2000
- -------------------------- (Principal Financial and Accounting Officer)
Rosemary R. Ferrero
/s/ Garland P. Pezzuolo Secretary and General Counsel March 24, 2000
- --------------------------
Garland P. Pezzuolo
/s/ Paul Simon Director March 24, 2000
- --------------------------
Paul Simon
/s/ Charles Ellman Director March 24, 2000
- --------------------------
Charles Ellman
/s/ M. Moshe Porat Director March 24, 2000
- --------------------------
M. Moshe Porat
/s/ Jami Saltzman-Levy Director March 24, 2000
- --------------------------
Jami Saltzman-Levy
Exhibit Index
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference
to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance
Company ("Penn-America") and Carnegie General Agency,
incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) and filed with the Securities and Exchange
Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998,
filed with the Registrant's report on Form 10-K for
the period ended December 13, 1997, which has been
filed with the Securities and Exchange Commission.
10.2(b) Notice of Termination of Carnegie Agreement, dated
April 30, 1999.
10.3 1993 Casualty Excess of Loss Reinsurance Agreement
with National Reinsurance Corporation, incorporated
by reference to Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) and
filed with the Securities and Exchange Commission on
August 2, 1993.
10.3(i) Endorsement Nos. 4 through 6 (Termination
Endorsement) to Casualty Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation,
filed with the Securities and Exchange Commission
with Registrant's Report on Form 10-K for the period
ended December 31, 1995.
10.4 1993 Underlying Homeowners and Dwelling Fire Property
Per Risk Excess of Loss Reinsurance (Run-off
Business) Agreement with National Reinsurance
Corporation, incorporated by reference to Exhibit
10.4 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) and filed with the Securities
and Exchange Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial)
Reinsurance Agreement with Employers Reinsurance
Corporation, incorporated by reference to Exhibit
10.5 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) and filed with the Securities
and Exchange Commission on August 2, 1993.
Exhibit No. Description
10.5(i) Endorsement No. 3 to Property Per Risk of Excess Loss
(Commercial) Reinsurance Agreement with Employers
Reinsurance Corporation, filed with the Securities
and Exchange Commission with Registrant's Report on
Form 10-K for the period ending December 31, 1994.
10.6 1993 Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation,
incorporated by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) and filed with the Securities and Exchange
Commission on August 2, 1993.
10.6(i) Endorsement No. 6 to Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance
Corporation, filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1994,
which has been filed with the Securities and Exchange
Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe
Excess Reinsurance Agreement with Employers
Reinsurance Corporation effective January 1, 1995,
filed with the Registrant's Report on Form 10-K for
the period ending December 31, 1994, which has been
filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993 between Penn
Independent Corporation ("Penn Independent") and the
Registrant regarding the reimbursement of certain
employment costs, incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) and
filed with the Securities and Exchange Commission on
August 26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20,
1993, Agreement between Penn Independent and
Registrant regarding the sharing of certain operating
costs, filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995, which has
been filed with the Securities and Exchange
Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996,
to August 20, 1993 Agreement between Penn Independent
and Registrant regarding the sharing of certain
operating costs, filed with Registrant's Report on
Form 10-K for the period ended December 31, 1996,
which has been filed with the SEC.
10.7(iii) Amendment dated March 1, 1997 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs,
filed with Registrant's Report on Form 10-K for the
period ended December 31, 1997, which has been filed
with the Securities and Exchange Commission.
10.7(iv) Amendment dated January 1, 1999 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs,
filed with the Registrant's Report on Form 10-K for
the period ended December 31, 1998, which has been
filed with the Securities and Exchange Commission.
Exhibit No. Description
Exhibit No. Description
10.7(v) Amendment dated January 1, 2000 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs.
10.9 Restated Investment Advisory Agreement effective July
1, 1990 between Penn America and Carl Domino
Associates, L.P., incorporated by reference to
Exhibit 10.9 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) and filed with
the Securities and Exchange Commission on August 2,
1993.
10.9(i) Amended Investment Advisory Agreement effective
September 1, 1997 between and among Penn-America, its
subsidiary, Penn-Star and Carl Domino Associates,
L.P., filed with the Registrant's Report on Form 10-K
for the period ending December 31, 1997, which was
filed with the SEC.
10.9(ii) Agreement dated April 15, 1997 between and among
General Re, New England Asset Management, Inc.,
Penn-America, and its subsidiary, Penn-Star filed
with the Registrant's Report on Form 10-K for the
period ending December 31, 1997, which was filed with
the SEC.
10.9(iii) Investment Advisory Agreement effective February 19,
1999 between Penn-America Insurance Company and
Madison Monroe, Inc.
10.10 1993 Stock Incentive Plan, incorporated by reference
to Exhibit 10.10 to Amendment No. 4 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) and filed with the Securities and Exchange
Commission on September 29, 1993.
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan,
as amended and restated April 4, 1994, incorporated
by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8 (No. 33-82728) and
filed with the Securities and Exchange Commission on
August 11, 1994.
10.10(ii) Employee Bonus Plan, January 1, 2000.
10.11 Lease effective June 30, 1995 between Registrant and
Irvin Saltzman, filed with Registrant's Report on
Form 10-K for the period ended December 31, 1995,
which has been filed with the Securities and Exchange
Commission.
10.12 Demand Promissory Note dated January 12, 1993 from
Penn Independent Financial Services, Inc. to
Penn-America, incorporated by reference to Exhibit
10.12 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) and filed with the Securities
and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the
Registrant to Penn Independent, filed with
Registrant's Report on Form 10-K for the period ended
December 31, 1995, which has been filed with the
Securities and Exchange Commission.
Exhibit No. Description
10.13(i) Amendment No.1 dated November 30, 1995 to Demand
Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America,
filed with the Registrant's Report on Form 10-K for
the period ended December 31, 1996, which has been
filed with the Securities and Exchange Commission.
10.14 1995 Multiple Line Excess of Loss (Casualty and
Property) Reinsurance Agreement with National
Reinsurance Corporation, filed with Registrant's
Report on Form 10-K for the period ended December 31,
1995, which has been filed with the Securities and
Exchange Commission.
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss
Reinsurance Agreement with National Reinsurance
Corporation, effective as of January 1, 1995, filed
with Registrant's Report on Form 10-K for the period
ended December 31, 1995, which has been filed with
the Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss
Reinsurance Agreement with National Reinsurance
Corporation, effective as of January 1, 1995, filed
with Registrant's Report on Form 10-K for the period
ended December 31, 1995, which has been filed with
the Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with
General Re Corporation effective May 1, 1996, filed
with the Registrant's Report on Form 10-K for the
period ended December 31, 1996, which has been filed
with the Securities and Exchange Commission.
10.15 1995 Property Catastrophe Excess of Loss Reinsurance
Agreement with the subscribing Reinsurers, filed with
the Registrant's Report on Form 10-K for the period
ending December 31, 1994, which has been filed with
the Securities and Exchange Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance
Agreement with the subscribing Reinsurers, filed with
the Registrant's Report on Form 10-K for the period
ended December 31, 1996 which has been filed with the
Securities and Exchange Commission.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive
Compensation Plan, incorporated as Part I to
Registrant's Registration Statement on Form S-8 (No.
333-00050) and filed with the Securities and Exchange
Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and
Profit Sharing Plan, incorporated as Exhibit 4 to
Registrant's Registration Statement on Form S-3 (No.
333-00046) and filed with the Securities and Exchange
Commission on January 4, 1996.
10.17(i) Penn-America Insurance Company's Agency Award and
Profit Sharing Plan, attached as Exhibit 4 to
Registrant's Registration Statement on Form S-3 (No.
333-49055) and filed with the Securities and Exchange
Commission on March 31, 1998.
Exhibit No. Description
10.17(ii) Amended General Agency Profit Sharing Addendum to
Agency Award and Profit Sharing Plan.
10.18 Stipulation of Termination of Property and Liability
Reinsurance Agreement with National Reinsurance
Corporation effective May 1, 1996, filed with the
Registrant's Report on Form 10-K for the period ended
December 31, 1996, which has been filed with the
Securities and Exchange Commission.
11 Statement re: computation of per share earnings,
incorporated by reference to Note 2 to the
Consolidated Financial Statements.
13 1999 Annual Report to Shareholders, incorporated by
reference under Item 8.
21 As of December 31, 1999, the Registrant's only
subsidiary is Penn-America Insurance Company, a
Pennsylvania Corporation.
23 Independent Auditors' Consents and Reports on
Schedules
28.1 Loan and Security Agreement, Term Note and Stock
Pledge Agreement dated December 20, 1995 between
Registrant and PNC Bank (successor to Midlantic Bank,
N.A), filed with the Registrant's Report on Form 10-K
for the period ending December 31, 1995, which has
been filed with the Securities and Exchange
Commission.
28.2 Credit Agreement among Registrant, Certain Lenders
and First Union National Bank dated September 28,
1998, filed with the Securities and Exchange
Commission, filed with the Registrant's Report on
Form 10-K for the period ended December 31, 1998,
which has been filed with the Securities and Exchange
Commission.
28.3 First Amendment to Credit Agreement, dated May 12,
199, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
28.4 Second Amendment to Credit Agreement, dated August
26, 1999, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
28.5 Third Amendment to Credit Agreement, dated March 15,
2000, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
30.0 Reinsurance Pooling Agreement between Penn-America
Insurance Company and Penn- Star Insurance Company
dated July 1, 1998, filed with the Securities and
Exchange Commission.
b) Reports on Form 8-K - None were filed during the last quarter of 1999