SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
--------------------------------
OR
( ) 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 0-22316
--------------------
Penn-America Group, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 South York Road, Hatboro, Pennsylvania 19040
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(Address of principal executive offices, including zip code)
(215) 443-3600
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(Registrant's telephone number, including area code)
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 other 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 ____ .
At November 11, 2002, 11,579,598 shares of the registrant's common stock, $.01
par value, were outstanding.
Page 1
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Index
Page Number
Explanatory Note 3
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2002 (unaudited) and
December 31, 2001(restated) 4
Consolidated Unaudited Statements of Operations - For the three
and nine months ended September 30, 2002 and 2001 5
Consolidated Unaudited Statement of Stockholders' Equity -
For the nine months ended September 30, 2002 6
Consolidated Unaudited Statements of Cash Flows -
For the nine months ended September 30, 2002 and 2001 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
Item 4. Controls and Procedures 24
Part II - Other Information 25
Page 2
Penn-America Group, Inc. and SubsidiarIES
Explanatory Note
Penn-America Group, Inc. ("PAGI" or the "Company") has recently
resolved various accounting and disclosure comments from the Securities and
Exchange Commission ("SEC") in conjunction with the Company's registration
statement filing relating to the issuance of additional shares of common stock.
One of the comments addressed the timing of recording other-than-temporary
("OTT") declines in the market value of certain equity securities. The Company
agreed to amend its accounting policy and record OTT write-downs on these
securities for the periods ending December 31, 2001, 2000 and 1999. This
restatement affects net income for each of these periods but has no effect on
total stockholders' equity since the unrealized loss on these securities was
already recorded in Accumulated Other Income (Loss) in the Consolidated Balance
Sheets and Statements of Stockholders' Equity. The Company has restated its
financial statements for the affected periods and has filed such restatements on
Form 10-K/A for the year ended December 31, 2001. For further information, see
Note 1 to Notes to the Unaudited Consolidated Financial Statements.
Page 3
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
September 30, December 31,
2002 2001
----------------- -----------------
ASSETS (Unaudited) (Restated)
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost 2002, $166,938; 2001, $130,976) $ 176,108 $ 135,253
Held to maturity, at amortized cost (fair value 2002, $2,034; 2001, $15,317) 1,965 15,084
Equity securities, at fair value (cost 2002, $22,177; 2001, $24,720) 23,378 25,149
----------------- -----------------
Total investments 201,451 175,486
Cash 27,649 13,129
Accrued investment income 2,117 2,199
Premiums receivable 14,239 12,285
Reinsurance recoverable 27,031 25,804
Prepaid reinsurance premiums 8,778 4,241
Deferred policy acquisition costs 13,240 9,083
Capital lease, affiliate 1,601 1,666
Deferred income taxes 2,439 3,790
Income tax recoverable -- 66
Other assets 333 366
----------------- -----------------
Total assets $ 298,878 $ 248,115
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 131,759 $ 119,598
Unearned premiums 66,223 41,034
Accounts payable and accrued expenses 7,148 3,800
Capitalized lease obligation, affiliate 1,464 1,570
Income tax payable 395 --
Other liabilities 1,823 1,722
----------------- -----------------
Total liabilities 208,812 167,724
----------------- -----------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares;
None issued -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
issued 2002 and 2001, 15,335,223 and 15,228,351 shares, respectively;
outstanding 2002 and 2001, 11,585,223 and 11,478,351 shares, respectively 153 152
Additional paid-in capital 71,523 70,735
Accumulated other comprehensive income 6,845 3,106
Retained earnings 36,545 31,320
Treasury stock, 3,750,000 shares at cost (24,161) (24,161)
Officers' stock loans (629) (629)
Unearned compensation from restricted stock awards (210) (132)
----------------- -----------------
Total stockholders' equity 90,066 80,391
----------------- -----------------
Total liabilities and stockholders' equity $ 298,878 $ 248,115
================= =================
Page 4
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the three and nine months ended September 30, 2002 and 2001
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues
Premiums earned $ 30,705 $ 20,946 $ 80,922 $ 66,194
Net investment income 3,038 2,851 8,796
8,516
Net realized investment gain (loss) 1,172 40 (173) (192)
------------ ------------ ------------ ------------
Total revenues 34,915 23,837 89,545 74,518
------------ ------------ ------------ ------------
Losses and expenses
Losses and loss adjustment expenses 20,799 14,553 53,449 46,740
Amortization of deferred policy acquisition costs 7,527 4,957 20,277 17,188
Other underwriting expenses 2,209 2,028 6,032 5,246
Corporate expenses 118 141 462 492
Interest expense 35 40 105 120
------------ ------------ ------------ ------------
Total losses and expenses 30,688 21,719 80,325 69,786
------------ ------------ ------------ ------------
Income before income tax 4,227 2,118 9,220 4,732
Income tax expense 1,330 567 2,655 1,220
------------ ------------ ------------ ------------
Net income $ 2,897 $ 1,551 $ 6,565 $ 3,512
============ ============ ============ ============
Net income per share
Basic $ 0.25 $ 0.14 $ 0.57 $ 0.31
Diluted $ 0.25 $ 0.13 $ 0.56 $ 0.31
Weighted average shares outstanding
Basic 11,585,043 11,437,697 11,565,749 11,404,539
Diluted 11,775,916 11,532,284 11,765,175 11,489,607
Cash dividends per share $ 0.03875 $ 0.035 $ 0.11583 $ 0.105
Page 5
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the nine months ended September 30, 2002
(In thousands, except per share data)
Accumulated
Additional Other
Common Paid-In Comprehensive Retained Treasury
Stock Capital Income Earnings Stock
------------ ---------- ------------------- ---------- -----------
Balance at December 31, 2001 (Restated) $152 $ 70,735 $ 3,106 $ 31,320 $ (24,161)
Net income -- -- -- 6,565 --
Other comprehensive income:
net unrealized gain on investments,
net of tax and reclassification -- -- 3,739 -- --
adjustment
Comprehensive income
Issuance of common stock 1 788 -- -- --
Unearned compensation from
restricted stock awards issued -- -- -- -- --
Amortization of compensation expense from
restricted stock awards issued -- -- -- -- --
Cash dividends paid ($0.11583 per share) -- -- -- (1,340) --
-----------------------------------------------------------------------------------
Balance at September 30, 2002 $153 $ 71,523 $ 6,845 $ 36,545 $ (24,161)
===================================================================================
Unearned
Compensation
From
Officers' Restricted Total
Stock Stock Stockholders'
Loans Awards Equity
---------- --------------- ------------------
Balance at December 31, 2001 (Restated) $ (629) $ (132) $ 80,391
Net income -- -- 6,565
Other comprehensive income:
net unrealized gain on investments,
net of tax and reclassification adjustment -- -- 3,739
------------------
Comprehensive income 10,304
------------------
Issuance of common stock -- -- 789
Unearned compensation from
restricted stock awards issued -- (155) (155)
Amortization of compensation expense from
restricted stock awards issued -- 77 77
Cash dividends paid ($0.11583 per share) -- -- (1,340)
-------------------------------------------------------
Balance at September 30, 2002 $ (629) $ (210) $ 90,066
=======================================================
Page 6
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 2002 and 2001
(In thousands)
Nine months ended September 30,
--------------------------------------
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net income $ 6,565 $ 3,512
Adjustments to reconcile net income to net cash provided by
operating activities:
Net (accretion)/amortization and depreciation expense (100) 48
Net realized investment loss 173 192
Deferred income tax (575) (402)
Net increase (decrease) in premiums receivable, prepaid reinsurance
premiums and unearned premiums 18,698 (5,095)
Net increase in unpaid losses and loss adjustment expenses
and reinsurance recoverable 10,934 2,120
Accrued investment income 82 210
Deferred policy acquisition costs (4,157) 1,415
Income tax recoverable/payable 461 1,622
Other assets (29) 20
Accounts payable and accrued expenses 3,348 172
Other liabilities 590 (1,011)
--------------- ---------------
Net cash provided by operating activities 35,990 2,803
--------------- ---------------
Cash flows from investing activities:
Purchases of equity securities (1,500) (3,062)
Purchases of fixed maturities available for sale (69,372) (25,625)
Proceeds from sales of equity securities 1,494 2,020
Proceeds from sales and maturities of fixed maturities available for sale 35,924 19,242
Proceeds from maturities and calls of fixed maturities held to maturity 13,130 2,000
--------------- ---------------
Net cash used by investing activities (20,324) (5,425)
--------------- ---------------
Cash flows from financing activities:
Issuance of common stock 300 410
Officers' stock loans -- (109)
Principal payments on capital lease obligations, affiliate (106) (93)
Dividends paid (1,340) (1,198)
--------------- ---------------
Net cash used by financing activities (1,146) (990)
--------------- ---------------
Decrease in cash 14,520 (3,612)
Cash, beginning of period 13,129 11,425
--------------- ---------------
Cash, end of period $27,649 $ 7,813
=============== ===============
Page 7
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Organization and Basis of Presentation
Penn-America Group, Inc. ("PAGI") is an insurance holding company.
Approximately 40% of the outstanding common stock of PAGI was owned by Penn
Independent Corporation ("Penn Independent") at September 30, 2002. The
accompanying financial statements include the accounts of PAGI and its wholly
owned subsidiary, Penn-America Insurance Company ("Penn-America") and its wholly
owned subsidiary, Penn-Star Insurance Company ("Penn-Star"), (collectively the
"Company").
The Company markets and underwrites general liability, commercial
property and multi-peril insurance for small businesses located primarily in
small towns and suburban and rural areas. The Company can write business in all
fifty states and the District of Columbia on both an admitted and non-admitted
basis.
The accompanying interim condensed unaudited consolidated financial
statements and notes have been prepared in accordance with accounting principles
generally accepted in the United States ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of results for the interim periods have been
included. All significant intercompany accounts and transactions have been
eliminated in consolidation. It is suggested that these interim condensed
unaudited consolidated financial statements and related notes be read in
conjunction with the financial statements and related notes in the Company's
Form 10-K/A for the year ended December 31, 2001. The Company's results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire year.
In conjunction with the Company's registration statement filing
relating to the issuance of additional shares of common stock, the Company has
resolved various accounting and disclosure comments from the Securities and
Exchange Commission ("SEC"). One of the comments addressed related to the timing
of the recording of other than temporary ("OTT") declines in the market value of
certain equity securities. The Company agreed to amend its accounting policy and
record OTT write-downs on these securities for the periods ending December 31,
2001, 2000 and 1999. This restatement affects net income for each of these
periods but has no effect on aggregate stockholders' equity since the unrealized
loss on these securities was already recorded in Accumulated Other Income (Loss)
in the Consolidated Balance Sheets and Statements of Stockholders' Equity. This
restatement resulted in an increase to accumulated other comprehensive income of
$2,014,000 and decrease to retained earnings of the same amount as of December
31, 2001.
The table below shows a comparison of previously reported and restated
total revenues, net income and net income per share (basic and diluted) for the
periods affected.
For the years ended,
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(in thousands except per December 31, 2001 December 31, 2000 December 31, 1999
-------------------------------- -------------------------------- ------------------------------
share data) As Reported As Restated As Reported As Restated As Reported As Restated
--------------- ------------- -------------- -------------- ------------- -------------
Total revenues $99,718 $99,095 $100,572 $99,095 $96,055 $95,104
Net income (loss) 5,351 4,940 (3,856) (4,831) 2,038 1,410
Net income (loss) per
share
Basic 0.47 0.43 (0.33) (0.42) 0.16 0.11
Diluted 0.47 0.43 (0.33) (0.42) 0.16 0.11
Page 8
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
The restatement had no effect on net income for the three and nine
months ended September 30, 2001. The effect of this restatement is reflected in
the Consolidated Balance Sheets and Consolidated Statement of Stockholders'
Equity for balances at December 31, 2001.
Note 2 - Reinsurance
Premiums earned are presented net of amounts ceded to reinsurers of
$5.1 million and $2.8 million for the three months ended September 30, 2002 and
2001, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $3.2 million and $1.1 million for the three
months ended September 30, 2002 and 2001, respectively.
Premiums earned are net of amounts ceded to reinsurers of $12.3 million
and $8.8 million for the nine months ended September 30, 2002 and 2001,
respectively. Losses and loss adjustment expenses are net of amounts ceded to
reinsurers of $6.0 million and $4.5 million for the nine months ended September
30, 2002 and 2001, respectively.
Note 3 - Comprehensive Income
Accumulated other comprehensive income consists solely of unrealized
gains or losses on investment securities net of applicable income tax expense or
benefit and reclassification adjustments. Comprehensive income was $5.2 million
for the three months ended September 30, 2002 compared with $3.6 million for the
three months ended September 30, 2001. Comprehensive income was $10.3 million
and $6.0 million for the nine months ended September 30, 2002 and 2001,
respectively.
Note 4 - Income Per Share
Income per share for the three and nine months ended September 30, 2002
and 2001 is computed by dividing net income by the basic and diluted weighted
average number of common shares outstanding during the respective periods. The
following table is a reconciliation of the numerators and denominators of the
basic and diluted income per share computations:
Page 9
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
(in thousands, except per share data) Three months ended September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Basic per share computation:
Net income $ 2,897 $ 1,551 $ 6,565 $ 3,512
Weighted average common shares (1) 11,585,043 11,437,697 11,565,749 11,404,539
----------- ----------- ----------- -----------
Basic net income per share (1) $ 0.25 $ 0.14 $ 0.57 $ 0.31
=========== =========== =========== ===========
Diluted per share computation:
Net income $ 2,897 $ 1,551 $ 6,565 $ 3,512
Weighted average common shares (1) 11,585,043 11,437,697 11,565,749 11,404,539
Additional shares outstanding after the assumed
assumed exercise of stock options by
applying the treasury stock method (1) 190,873 94,587 199,426 85,068
----------- ----------- ----------- -----------
Total shares (1) 11,775,916 11,532,284 11,765,175 11,489,607
=========== =========== =========== ===========
Diluted net income per share (1) $ 0.25 $ 0.13 $ 0.56 $ 0.31
=========== =========== =========== ===========
(1) Adjusted to reflect a three-for-two stock split effected on May 9, 2002.
Note 5 - Retroactive Adjustment for Stock Split
The common stock issued and outstanding and treasury stock at December
31, 2001 have been restated to reflect the three-for-two stock split announced
on April 11, 2002 and distributed on May 9, 2002. Accordingly, the balance sheet
values for common stock and additional paid-in capital have been adjusted for
the effect of the stock split. This adjustment resulted in a $51,000 increase in
common stock and a $51,000 decrease in additional paid-in capital. The following
table illustrates share information on a pre stock split and a post stock split
basis as of December 31, 2001:
Pre Stock Split Post Stock Split
Basis Basis
------------------------ --------------------------
Common stock issued 10,152,234 15,228,351
Common stock outstanding 7,652,234 11,478,351
Treasury stock 2,500,000 3,750,000
Page 10
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 6- Segment Information
The Company had two reportable segments: non-standard personal
automobile and commercial lines. These segments were managed separately because
they had different customers, pricing and expense structures. The Company exited
the non-standard personal automobile business in 1999 and announced that it
would run-off its remaining portfolio of such business. The Company will
continue to report on this segment separately until the amounts relating to the
non-standard personal automobile business become immaterial to the financial
statements presented. 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 more
fully described in the summary of significant accounting policies in Note 1 of
the Company's 2001 Form 10-K/A. The Company evaluates segment results based on
profit or loss from operating activities. Segment profits or losses from
operations are pre-tax and do not include unallocated expenses but do include
investment income attributable to insurance transactions. Segment profit or loss
therefore excludes federal income taxes, unallocated expenses and investment
income attributable to equity.
The following is a summary of the Company's segment revenues, expenses and
profit:
(in thousands) Three months ended September 30, 2002
Commercial Personal
Automobile Total
-------------------------------------------------------------
Premiums earned $ 30,705 $ -- $ 30,705
Net investment income and net realized investment loss
loss from insurance operations 2,227 -- 2,227
-------------------------------------------------------------
Total segment revenues 32,932 -- 32,932
-------------------------------------------------------------
Segment losses and loss adjustment expenses 20,799 -- 20,799
Segment expenses 8,225 -- 8,225
-------------------------------------------------------------
Total segment expenses 29,024 -- 29,024
-------------------------------------------------------------
Segment income $ 3,908 $ -- $ 3,908
-------------------------------------------------------------
Plus unallocated items:
Net investment income from equity 1,983
Unallocated expenses (1,664)
Income tax expense
(1,330)
--------------
Net income $ 2,897
==============
Page 11
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
(in thousands) Three months ended September 30, 2001
Personal
Commercial Automobile Total
-------------------------------------------------------------
Premiums earned $ 20,946 $ -- $20,946
Net investment income and net realized investment
loss from insurance operations 1,926 85 2,011
-------------------------------------------------------------
Total segment revenues 22,872 85 22,957
-------------------------------------------------------------
Segment losses and loss adjustment expenses 14,553 -- 14,553
Segment expenses 5,731 5 5,736
-------------------------------------------------------------
Total segment expenses 20,284 5 20,289
-------------------------------------------------------------
Segment income $ 2,588 $ 80 $ 2,668
-------------------------------------------------------------
Plus unallocated items:
Net investment income from equity 880
Unallocated expenses (1,430)
Income tax expense (567)
---------------
Net income $ 1,551
===============
Total segment revenue of $32,932,000 and $22,957,000 plus unallocated net
investment income from equity of $1,983,000 and $880,000 equals total Company
revenues of $34,915,000 and $23,837,000 for the three months ended September 30,
2002 and 2001, respectively.
The following is a summary of the Company's segment revenues, expenses and
profit:
(in thousands) Nine months ended September 30, 2002
Commercial Personal Automobile Total
-----------------------------------------------------------------
Premiums earned $80,922 $ -- $ 80,922
Net investment income and net realized investment
loss from insurance operations 4,666 -- 4,666
-----------------------------------------------------------------
Total segment revenues 85,588 -- 85,588
-----------------------------------------------------------------
Segment losses and loss adjustment expenses 53,449 -- 53,449
Segment expenses 22,459 -- 22,459
-----------------------------------------------------------------
Total segment expenses 75,908 -- 75,908
-----------------------------------------------------------------
Segment income $ 9,680 $ -- $ 9,680
-----------------------------------------------------------------
Plus unallocated items:
Net investment income from equity 3,957
Unallocated expenses (4,417)
Income tax expense (2,655)
---------------
Net income $ 6,565
===============
Page 12
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
(in thousands) Nine months ended September 30, 2001
Personal
Commercial Automobile Total
-----------------------------------------------------------------
Premiums earned $66,172 $ 22 $ 66,194
Net investment income and net realized investment
loss from insurance operations 5,360 240 5,600
-----------------------------------------------------------------
Total segment revenues 71,532 262 71,794
-----------------------------------------------------------------
Segment losses and loss adjustment expenses 48,233 (1,493) 46,740
Segment expenses 18,880 15 18,895
-----------------------------------------------------------------
Total segment expenses 67,113 (1,478) 65,635
-----------------------------------------------------------------
Segment income $ 4,419 $ 1,740 $ 6,159
-----------------------------------------------------------------
Plus unallocated items:
Net investment income from equity 2,724
Unallocated expenses (4,151)
Income tax expense (1,220)
----------------
Net income $ 3,512
================
Total segment revenue of $85,588,000 and $71,794,000 plus unallocated net
investment income from equity of $3,957,000 and $2,724,000 equals total Company
revenues of $89,545,000 and $74,518,000 for the nine months ended September 30,
2002 and 2001, respectively.
Note 7- Capital Offerings
On June 27, 2002, PAGI filed a registration statement with the
Securities and Exchange Commission relating to a proposed offering of 4,000,000
shares of its common stock. Until the registration statement is effective, these
securities may not be sold nor may offers to buy be accepted.
On October 27, 2002, the Company signed a non-binding letter of intent
to issue approximately $15 million of trust preferred securities by a business
trust subsidiary to be established by the Company.
The intended use of the net proceeds of these offerings are to support
the Company's operations, including contributing capital to the insurance
subsidiaries and capitalizing new insurance subsidiaries to support the growth
in business, and for working capital and other general corporate expenses.
Page 13
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended September 30, 2002 and 2001
Premiums earned were $30.7 million for the three months ended September
30, 2002 compared to $20.9 million for the three months ended September 30,
2001. The Company previously announced that it was exiting both commercial
automobile and non-standard personal automobile lines of business. Premiums
earned for these exited lines of business decreased to $13,000 for the three
months ended September 30, 2002 compared to $812,000 for the three months ended
September 30, 2001. The Company's core commercial lines premiums earned
(excluding exited lines of business) increased $10.6 million, or 52.4%,
attributable to the increase in net written premiums for the three months ended
September 30, 2002 as compared to the same period of 2001.
Gross written premiums increased 82.9% for the three months ended
September 30, 2002 to $43.1 million compared to $23.6 million for the three
months ended September 30, 2001. This increase was attributable to rate
increases, strong growth in new business and higher average exposures per
policy.
Ceded written premiums, the portion of gross written premiums reinsured
by other unaffiliated insurers, increased to $6.6 million for the three months
ended September 30, 2002 compared to $2.5 million for the three months ended
September 30, 2001. The increase in ceded written premiums was primarily due to
growth in gross written premiums, and approximately a 50% increase in
reinsurance rates on the Company's multiple-line excess of loss reinsurance
treaty.
Net written premiums which are gross written premiums less ceded
written premiums, increased 73.3% for the three months ended September 30, 2002
to $36.5 million compared to $21.1 million for the three months ended September
30, 2001. The increase in net written premiums was consistent with the increase
in gross written premiums, but was partially offset by higher reinsurance costs.
Net investment income increased to $3.0 million for the three months
ended September 30, 2002 compared to $2.9 million for the same period last year,
primarily due to growth in average invested assets, which was partially offset
by a lower average investment yield on the Company's fixed-income investments
and lower interest rates on the Company's overnight cash balances.
Net realized investment gain was $1.2 million for the three months
ended September 30, 2002 compared to $40,000 from the three months ended
September 30, 2001. The net realized gain for the three months ended September
30, 2002 consists of $2.3 million in net realized gain recognized on the sale of
certain of the Company's fixed-income investments, partially offset by a $1.1
million other-than-temporary impairment write-down on certain of the Company's
common stocks.
Losses and loss adjustment expenses increased 42.9% to $20.8 million
for the three months ended September 30, 2002 from $14.6 million for the three
months ended September 30, 2001. The loss ratio for the three months ended
September 30, 2002 was 67.7 compared to 69.5 for the three months ended
September 30, 2001. The loss ratio is calculated by dividing losses and loss
adjustment expenses by premiums earned. The improvement in the loss ratio was
primarily attributable to rate increases implemented in 2001 and 2002 and
exiting of the commercial automobile line of business, partially offset by an
increase in the severity of property claims.
Page 14
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Amortization of deferred policy acquisition costs ("ADAC") increased
51.8% to $7.5 million for the three months ended September 30, 2002 from $5.0
million for the three months ended September 30, 2001 primarily due to the
growth in premiums earned.
Other underwriting expenses increased 8.9% to $2.2 million for the
three months ended September 30, 2002 from $2.0 million for the three months
ended September 30, 2001. This increase is mainly attributable to increases in
salary and benefit expenses associated with the hiring of additional
underwriting and marketing personnel.
The overall GAAP combined ratio, which is the sum of the loss and
expense ratios, decreased to 99.4 for the three months ended September 30, 2002
from 102.8 for the three months ended September 30, 2001. This improvement was
primarily due to the decrease in the loss ratio to 67.7 in 2002 compared to 69.5
in 2001. The expense ratio decreased to 31.7 for the three months ended
September 30, 2002 from 33.3 for the three months ended September 30, 2001. The
expense ratio is calculated by dividing the sum of ADAC and other underwriting
expenses by premiums earned. The GAAP combined ratio is a standard measure of
underwriting profitability used throughout the property and casualty insurance
industry. A ratio below 100.0 generally indicates profitable underwriting
results.
The factors described above resulted in net income for the three months
ended September 30, 2002 of $2.9 million or $0.25 per share (basic and diluted)
compared to net income of $1.6 million or $0.14 per basic and $0.13 per diluted
share for the three months ended September 30, 2001.
Nine Months Ended September 30, 2002 and 2001
Premiums earned were $80.9 million for the nine months ended September
30, 2002 compared to $66.2 million for the nine months ended September 30, 2001.
The Company previously announced that it was exiting both commercial automobile
and non-standard personal automobile lines of business. Premiums earned for
these exited lines of business decreased to $26,000 for the nine months ended
September 30, 2002 compared to $4.4 million for the nine months ended September
30, 2001. The Company's core commercial lines premiums earned (excluding exited
lines of business) increased $19.1 million, or 31.0%, attributable to the
increase in net written premiums for the nine months ended September 30, 2002 as
compared to the same period of 2001.
Gross written premiums increased 66.8% for the nine months ended
September 30, 2002 to $118.4 million compared to $71.0 million for the nine
months ended September 30, 2001. This increase was attributable to rate
increases, strong growth in new business and higher average exposures per
policy.
Ceded written premiums, the portion of gross written premiums reinsured
by other unaffiliated insurers, increased to $16.8 million for the nine months
ended September 30, 2002 compared to $8.0 million for the nine months ended
September 30, 2001. The increase in ceded written premiums was primarily due to
growth in gross written premiums, and approximately a 42% increase in
reinsurance rates on the Company's multiple-line excess of loss reinsurance
treaty.
Page 15
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Net written premiums, which are gross written premiums less ceded
premiums, increased 61.3% for the nine months ended September 30, 2002 to $101.6
million compared to $63.0 million for the nine months ended September 30, 2001.
The increase in net written premiums was consistent with the increase in gross
written premiums, but was partially offset by higher reinsurance costs.
Net investment income increased to $8.8 million for the nine months
ended September 30, 2002 compared to $8.5 million for the same period last year,
primarily due to growth in the average invested assets, which was partially
offset by a lower average investment yield on the Company's fixed-income
securities and lower interest rates on the Company's overnight cash balances.
Net realized investment loss was $0.2 for the nine months ended
September 30, 2002 and 2001. The net realized loss for the current period
consists of a $2.1 million other-than-temporary write-down on certain of the
Company's preferred and common stocks, along with a loss on the sale of certain
of the Company's common stocks of $0.3 million. This loss was partially offset
by $2.3 million in net realized gains on the sale of certain of the Company's
fixed-income investments.
Losses and loss adjustment expenses increased 14.4% to $53.4 million
for the nine months ended September 30, 2002 from $46.7 million for the nine
months ended September 30, 2001. The loss ratio for the nine months ended
September 30, 2002 was 66.1 compared to 70.6 for the nine months ended September
30, 2001. This improvement is attributable to rate increases implemented in 2001
and 2002 and exiting of the commercial automobile line of business, primarily
offset by an increase in the severity of property claims.
Amortization of deferred policy acquisition costs ("ADAC") increased
18.0% to $20.3 million for the nine months ended September 30, 2002 from $17.2
million for the nine months ended September 30, 2001 primarily due to the growth
in premiums earned. This increase was partially offset by a decline in the ratio
of ADAC to premiums earned of 25.1 for the nine months ended September 30, 2002
compared to 26.0 for the nine months ended September 30, 2001. The improvement
in this ratio was attributable to the Company writing a larger portion of its
business on a non-admitted basis, which is not subject to premium tax expense
and has a lower overall commission rate.
Other underwriting expenses increased 15.0% to $6.0 million for the
nine months ended September 30, 2002 from $5.2 million for the nine months ended
September 30, 2001. This increase is mainly attributable to increases in salary
and benefit expenses associated with the hiring of additional underwriting and
marketing personnel.
The overall GAAP combined ratio for the Company decreased to 98.6 for
the nine months ended September 30, 2002, from 104.5 for the nine months ended
September 30, 2001, primarily due to the decrease in the loss ratio to 66.1 in
2002 compared to 70.6 in 2001. The expense ratio was 32.5 for the nine months
ended September 30, 2002 and 33.9 for the nine months ended September 30, 2001.
The factors described above resulted in net income for the nine months
ended September 30, 2002 of $6.6 million or $0.57 per basic share and $0.56 per
diluted share compared to net income of $3.5 million or $0.31 per share (basic
and diluted) for the nine months ended September 30, 2001.
Page 16
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Critical Accounting Estimates
The Company is directly liable for losses and loss adjustment expenses
under the terms of the insurance policies it writes. In many cases, several
years may lapse between the occurrence of an insured loss, the reporting of the
loss and the payment of that loss. The Company reflects its liability for the
ultimate payment of all incurred losses and loss adjustment expenses by
establishing its best estimate of loss and loss adjustment expense reserves as
balance sheet liabilities for both reported and unreported claims.
When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of its ultimate loss. The
estimate of the amount of the ultimate loss is based upon factors such as:
|X| the type of loss,
|X| the jurisdiction of the occurrence,
|X| the Company's knowledge of the circumstances surrounding the claim,
|X| the severity of injury or damage,
|X| the potential for ultimate exposure, and
|X| policy provisions relating to the claim.
The Company determines loss adjustment expenses via a formula method
that estimates loss adjustment expenses as a percentage of expected indemnity
losses based on historical patterns adjusted to current experience.
In addition to case reserves, the Company establishes reserves on an
aggregate basis to provide for incurred but not reported losses and loss
adjustment expenses, commonly referred to as "IBNR". To establish reserves for
IBNR, the Company must estimate the ultimate liability based primarily on past
experience. The Company applies a variety of traditional actuarial techniques to
estimate its ultimate liability. The techniques recognize, among other factors:
|X| the Company's and the industry's experience,
|X| historical trends in reserving patterns and loss payments,
|X| the impact of claim inflation,
|X| the pending level of unpaid claims,
|X| the cost of claim settlements,
|X| the line of business mix, and
|X| the economic environment in which property and casualty insurance
companies operate.
The Company continually reviews these estimates and, based on new
developments and information, the Company includes adjustments of the probable
ultimate liability in the operating results for the periods in which the
adjustments are made. In general, initial reserves are based upon the actuarial
and underwriting data utilized to set pricing levels and are reviewed as
additional information, including claims experience, becomes available.
Page 17
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The establishment of loss and loss adjustment expense reserves makes no
provision for the broadening of coverage by legislative action or judicial
interpretation or for the extraordinary future emergence of new types of losses
not sufficiently represented in our historical experience, or which cannot yet
be quantified. The Company regularly analyzes its reserves and reviews pricing
and reserving methodologies so that future adjustments to prior year reserves
can be minimized. However, given the complexity of this process, reserves will
require continual updates and the ultimate liability may be higher or lower than
previously indicated. The Company does not discount its loss reserves.
During the first nine months of 2002, there were no material
adjustments in the aggregate to prior year reserves. During the first nine
months of 2002, the Company decreased its estimate for the commercial
multi-peril property line of business by $2.5 million, primarily relating to
claims occurring in 2001. This reduction was offset by an increase in the
Company's estimate for the commercial multi-peril liability line of business due
to the development of outstanding claim reserves on claims occurring primarily
in 1998 and 1999.
Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common
stock of Penn-America Insurance Company. The principal source of cash to meet
PAGI's short-term liquidity needs, including the payment of dividends to PAGI's
stockholders and PAGI operating expenses is dividends from Penn-America
Insurance Company. PAGI has no long-term debt obligations or planned capital
expenditures that could impact its long term liquidity needs. Penn-America
Insurance Company's principal sources of funds are underwriting operations,
investment income and proceeds from sales and redemptions of investments. Funds
are used by Penn-America Insurance Company and Penn-Star Insurance Company
principally to pay claims and operating expenses, to purchase investments and to
make dividend payments to PAGI. PAGI's future liquidity is dependant on the
ability of Penn-America Insurance Company to pay dividends to PAGI.
PAGI's insurance subsidiaries are restricted by statute as to the
amount of dividends that they may pay without the prior approval of regulatory
authorities. Penn-America Insurance Company may pay dividends to PAGI without
advance regulatory approval only from unassigned surplus and only to the extent
that all dividends in the past twelve months do not exceed the greater of 10% of
total statutory policyholders' surplus, or statutory net income for the prior
year. Using these criteria, the available ordinary dividend payable by
Penn-America Insurance Company to PAGI for 2002 is $6,473,325. Ordinary
dividends paid by Penn-America Insurance Company to PAGI were $0.5 milion during
the nine months ended September 30, 2002 and $1.6 million in 2001. Penn-America
Insurance Company's ability to pay future dividends to PAGI without advance
regulatory approval is dependent upon maintaining a positive level of unassigned
and policyholders' surplus, which in turn, is dependent upon Penn-America
Insurance Company and Penn-Star Insurance Company generating net income in
excess of dividends to PAGI. As of September 30, 2002, Penn-America Insurance
Company's unassigned surplus was $21.2 million and policyholders' surplus was
$69.2 million, both up $4.5 million from December 31, 2001.
Penn-America Insurance Company provides strong incentives to its
general agents to produce profitable business through a contingent profit
commission structure that is tied directly to underwriting profitability.
Payment of these contingent profit commissions has been through the issuance of
PAGI common stock and cash. In 2002, PAGI issued 62,836 shares of its common
stock at an average value of $7.79 per share as part of the payment of the 2001
contingent profit commission due to the general agents of Penn-America Insurance
Company.
Page 18
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Penn-America Insurance Company and Penn-Star Insurance Company are
required by law to maintain a certain minimum level of policyholders' surplus on
a statutory accounting basis. Policyholders' surplus is calculated by
subtracting total liabilities from total assets. The National Association of
Insurance Commissioners adopted risk-based capital standards designed to
identify property and casualty insurers that may be inadequately capitalized
based on inherent risks of each insurer's assets and liabilities and its mix of
net written premiums. Insurers falling below a calculated threshold may be
subject to varying degrees of regulatory action. As of December 31, 2001, the
policyholders' surplus of Penn-America Insurance Company and Penn-Star Insurance
Company was in excess of the prescribed risk-based capital requirements.
Penn-America Insurance Company's policyholders' surplus at December 31, 2001 was
$64,733,251 and its regulatory action level was $17,124,648. Penn-Star Insurance
Company's policyholders' surplus at December 31, 2001 was $33,389,965 and its
regulatory action level was $5,675,459.
Net cash provided by operating activities was $36.0 million for the
nine months ended September 30, 2002 compared to $2.8 million for the nine
months ended September 30, 2001. This improvement is mostly attributable to the
increase in net written premiums combined with a decrease in paid losses.
Net cash used by investing activities was $20.3 million for the nine
months ended September 30, 2002, compared to $5.4 million for the nine months
ended September 30, 2001. This increase is mostly attributable to the improved
operating cash flows that were primarily used to purchase fixed maturities
available for sale.
Net cash used by financing activities was $1.1 million for the nine
months ended September 30, 2002, compared to $1.0 million for the nine months
ended September 30, 2001.
On June 27, 2002, PAGI filed a registration statement with the
Securities and Exchange Commission relating to a proposed offering of 4,000,000
shares of its common stock. Until the registration statement is effective, these
securities may not be sold nor may offers to buy be accepted. On October 27,
2002, the Company signed a non-binding letter of intent to issue approximately
$15 million of trust preferred securities by a business trust subsidiary to be
established by the Company. The intended use of the net proceeds of these
offerings are to support the Company's operations, including contributing
capital to the insurance subsidiaries and capitalizing new insurance
subsidiaries to support the growth in business, and for working capital and
other general corporate purposes.
Investment Portfolio
The Company seeks to maintain sufficient liquidity from operations,
investing and financing activities to meet its anticipated insurance obligations
and operating and capital expenditure needs. The Company's investment strategy
emphasizes quality, liquidity and diversification, as well as total return. With
respect to liquidity, the Company considers liability durations, specifically
related to loss reserves, when determining desired investment maturities. In
addition, maturities have been staggered to produce cash flows for loss payments
and reinvestment opportunities. At September 30, 2002, the Company held a total
of $229.1 million in cash and investments. Of this amount, cash represented
$27.6 million, equity securities represented $23.4 million, and fixed-income
securities represented $178.1 million.
Page 19
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The Company's cash and investments portfolio mix as of September 30,
2002 was as follows:
Fixed-income:
U.S. Treasury securities and obligations of U.S. government agencies 8%
Corporate securities 27%
Mortgage-backed securities 6%
Other structured securities 21%
Municipal securities 16%
--------
Total fixed income 78%
Cash 12%
Preferred stock 7%
Common stock 3%
--------
100%
========
The Company's fixed-income portfolio of $178.1 million was 78% of the
total cash and investments as of September 30, 2002. Approximately 90% of these
securities were rated "A" or better by Standard & Poor's. Standard & Poor's
rates publicly traded securities in twenty categories ranging from AAA to CC.
Securities with ratings from AAA to BBB- (the top ten categories) are commonly
referred to as having an investment grade rating. Equity securities, which
consist of preferred stocks and common stocks (comprised exclusively of exchange
traded funds), were $23.4 million or 10% of total cash and investments as of
September 30, 2002.
As of September 30, 2002, our investment portfolio contained corporate
fixed-income and preferred stock securities with a market value of $79.6
million. A summary of these securities by industry segment is as follows:
Financial institutions 39%
Communications 15%
Utilities 15%
Consumer, non-cyclical 8%
Industrial 6%
Basic materials 6%
Consumer, cyclical 5%
Technology 3%
Energy 3%
---------
100%
=========
As of September 30, 2002, the investment portfolio contained $61.2
million of mortgage-backed, asset-backed and collateralized mortgage
obligations. All of these securities were rated "A" or better and 78% were rated
"AAA" by Standard & Poor's. These securities are publicly traded, and have
market values obtained from an independent 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. The Company had no derivative financial instruments, real estate or
mortgages in the investment portfolio as of September 30, 2002.
Page 20
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The quality of the fixed-income portfolio as of September 30, 2002 was
as follows:
"AAA" 49%
"AA" 22%
"A" 19%
"BBB" 8%
Below "BBB" 2%
--------
100%
========
The Company regularly evaluates its investment portfolio to identify
other-than-temporary impairments of individual securities. The Company considers
many factors in determining if an other-than-temporary impairment exists,
including the length of time and extent to which the market value of the
security has been less than cost, the financial condition and near-term
prospects of the issuer of the security and the Company's ability and
willingness to hold the security until the market value is expected to recover.
The following table contains an analysis of the Company's securities
with gross unrealized losses, categorized by the period that the securities were
in a continuous unrealized loss position as of September 30, 2002:
Investment Securities with Gross Unrealized Losses, Categorized by Period of Continuous
Unrealized Loss Position
---------------------------------------------------------------------------------------------------
Over
Six
Number Gross Six Months Over
of Fair Book Unrealized Months to One One
(in thousands) Securities Value Value Losses or Less Year Year
---------- ---------- ---------- ----------- --------- ------------ ------------
Fixed income securities 6 $6,078 $6,462 $384 $ 8 $51 $ 325
Preferred stock 2 1,276 1,289 13 13 - -
Common stock 1 550 602 52 52 - -
----------- --------- ------------ ------------
$449 $73 $51 $325
=========== ========= ============ ============
As of September 30, 2002, the Company's fixed-income investment
portfolio had six securities with $384,000 of gross unrealized losses. No single
issuer had an unrealized loss position of greater than $150,000. The over one
year gross unrealized losses of $325,000 represents two public utility
securities and one other structured security. The two public utility securities
had a combined unrealized loss of $225,000. These securities have maturity dates
in 2004, were upgraded to B- and BB by Standard and Poor's in February 2002 and
the unrealized loss position was 8.9% of original cost. The other structured
security has a maturity date in 2003, a Standard & Poor's rating of AA and the
unrealized loss position was 10% of book value. The over six months to one year
gross unrealized loss for fixed-income securities of $51,000 consists primarily
of one corporate security with a Standard & Poor's rating of BBB and an
unrealized loss position of 3.2% of original cost.
Page 21
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
As of September 30, 2002, the Company's preferred stock portfolio has
two securities with a gross unrealized loss of $13,000. Both securities are
investment grade with Standard and Poor's ratings of BBB- and A+.
As of September 30, 2002, the Company's common stock portfolio contains
one security, an exchange-traded fund, with a gross unrealized loss of $52,000.
The unrealized loss position on this security is 8.7 % of its book value and has
been in a continuous unrealized loss position for less than three months at
September 30, 2002.
Three-for-Two Stock Split
On April 11, 2002, the Company announced a three-for-two stock split to
be effected in the form of a 50% stock dividend payable to stockholders of
record as of April 25, 2002. The distribution date was May 9, 2002.
Page 22
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the potential economic loss principally arising from
adverse changes in the market value of financial instruments. The major
components of market risk affecting the Company are interest rate risk and
equity price risk.
Interest Rate Risk
The Company had fixed-income and preferred stock investments with a
market value of $195.0 million at September 30, 2002 that are subject to
interest rate risk. The Company manages its exposure to interest rate risk
through a disciplined asset/liability matching and capital management process.
In the management of this risk, the characteristics of duration, credit and
variability of cash flows are critical elements. These risks constantly are
assessed and balanced within the context of the Company's liability and capital
position.
Equity Price Risk
Equity rice risk is the Company's underlying exposure to an economic
loss from the decline of common stock prices. The Company's common equity
portfolio was $6.6 million at September 30, 2002.
The Company attempts to mitigate equity price risk to its common stock
portfolio by investing exclusively in exchange-traded funds or ETFs. ETFs are
securities that represent an interest in a trust that owns and holds a basket of
common stocks that replicate a major market index (such as the S&P 500 or the
Dow Jones Industrial Average) or a portion of a major market index (such as the
Value Component of the S&P). Since these securities represent an interest in the
equity capital markets as a whole, or a sub-sector thereof, they are a
diversified, index-based exposure to common stocks. As such, the value of these
ETFs will be determined by the performance of the equity capital markets in
general or of a particular sub-sector and reduces equity price risk to a single
issuer of stock.
The Company's market risk at September 30, 2002 has not materially
changed from that identified at December 31, 2001.
Page 23
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Controls and Procedures
As of September 30, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the President and CEO and Senior Vice President, CFO and Treasurer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the President and CEO and Senior Vice President, CFO and Treasurer, concluded
that the Company's disclosure controls and procedures were effective as of
September 30, 2002. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to September 30, 2002.
Page 24
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote by Security Holders - None
Item 5. Other Information
On June 27, 2002, PAGI filed a registration statement with the
Securities and Exchange Commission relating to a proposed offering
of 4,000,000 shares of its common stock. Until the registration
statement is effective, these securities may not be sold nor may
offers to buy be accepted. On October 27, 2002, the Company signed
a non-binding letter of intent to issue approximately $15 million
of trust preferred securities by a business trust subsidiary to be
established by the Company.
The intended use of the net proceeds of these offerings are to
support the Company's operations, including contributing capital
to the insurance subsidiaries and capitalizing new insurance
subsidiaries to support the growth in business, and for working
capital and other general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
On August 13, 2002, the Company filed a current report on Form 8-K
announcing the availability of the second quarter statements of
its insurance subsidiaries, Penn-America Insurance Company and
Penn-Star Insurance Company, on the Company's website, in hard
copy from the Company, or from the Pennsylvania Insurance
Department.
Page 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: November 13, 2002 By: /s/ Jon S. Saltzman
Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Joseph F. Morris
Joseph F. Morris
Senior Vice President,
Chief Financial Officer
Chief Financial Officer
and Treasurer
Page 26
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS ADOPTED PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Jon S. Saltzman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penn-America
Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Jon S. Saltzman
Jon S. Saltzman
President and Chief Executive Officer
Page 27
CERTIFICATION OF CHIEF FINANCIAL OFFICER AS ADOPTED PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph F. Morris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penn-America
Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
e) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Joseph F. Morris
Joseph F. Morris
Senior Vice President, Chief Financial Officer
and Treasurer
Page 28
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Penn-America Group, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, Jon
S. Saltzman , Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a)
and 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Jon S. Saltzman
Jon S. Saltzman
President and Chief Executive Officer
November 13, 2002
Page 29
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Penn-America Group, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Joseph F. Morris, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a)
and 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Joseph F. Morris
Joseph F. Morris
Senior Vice President, Chief Financial Officer
and Treasurer
November 13, 2002
Page 30