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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, 2002_______________________
[ ] 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.____________________________________________
(Exact Name of Registrant as Specified in Its Charter)
____________Pennsylvania_________________________________23-2731409___________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
____________420 S. York Road, Hatboro, PA______________________19040____________
(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
------------------- -----------------------------------------
____Common stock, par value, per share_____________ New York Stock Exchange
_______________________ Securities registered pursuant to Section 12(g) of the
Act:
____None_______________________________________________________________________
(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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2of the Act).
Yes __ _ No X
As of March 21, 2003, the aggregate market value of the outstanding Common Stock
held by non-affiliates of the Registrant was approximately $100,192,443. As of
March 21, 2003, there were 14,610,577 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, 2002 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 2002 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, 2002
Page
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PART I
------
ITEM 1.BUSINESS................................................ 3
ITEM 2.PROPERTIES.............................................. 21
ITEM 3.LEGAL PROCEEDINGS...................................... 21
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS..... 21
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS................... 22
ITEM 6. SELECTED FINANCIAL DATA........................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OFOPERATIONS...... 22
ITEM 7A. QUATITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...................................... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE........................................ 22
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT....................................... 23
ITEM 11. EXECUTIVE COMPENSATION........................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................ 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS... 23
ITEM 14. CONTROLS AND PROCEDURES......................... 23
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................. 24
Page 2
ITEM 1. BUSINESS
General
Penn-America Group, Inc. ("PAGI") is a specialty property and casualty insurance
holding company which, through its subsidiary, Penn-America Insurance Company
("Penn-America") and its subsidiary, Penn-Star Insurance Company ("Penn-Star")
(collectively the "Company"), markets and underwrites commercial property,
general liability and multi-peril insurance for small businesses located
primarily in small towns and suburban and rural areas. Penn-America writes
business in all fifty states and the District of Columbia.
Penn-America's insureds consist primarily of small businesses including
restaurants, apartments, retail stores and non-residential service contractors.
In addition, the Company has developed customized products and coverages for
other small commercial insureds such as day-care facilities, fitness centers and
special events. The Company selects only insurance lines of business and
industry segments for which it reasonably can evaluate the probability of future
loss exposure. Therefore, the Company avoids high-hazard risks and high-hazard
lines of business such as medical malpractice and environmental liability. The
small businesses that the Company targets and their retail brokers have limited
access to larger standard lines insurers. The industry calls this underserved
market the "excess and surplus lines marketplace".
The excess and surplus lines marketplace is a secondary or residual market for
businesses that are unable to obtain coverage from standard lines carriers for a
variety of reasons, which include:
o the "non-standard" nature of the insureds is not within the risk-taking
appetite of standard lines carriers;
o the relatively small account size generates insufficient premiums for the
standard lines carriers to cover their overhead expenses;
o the location of the businesses in small towns or rural areas is too remote
to be reached economically by the retail agent system of standard lines
carriers; and
o the retail agents produce insufficient premiums to warrant a direct
appointment from a standard lines carrier.
The Company believes these challenges in its marketplace are balanced by the
benefits of operating in the excess and surplus lines marketplace which include:
o higher prices than the standard lines segment;
o more flexibility in offering coverage forms, particularly in designing
exclusions for specific loss exposures; and
o lower premium taxes and guaranty fund assessments.
The Company writes business on both an admitted and non-admitted basis in
thirty-seven states, on only an admitted basis in one state and on only a
non-admitted basis in twelve states and the District of Columbia. The Company c
hooses in each state whether to write business on an admitted or non-admitted
basis based upon the Company's analysis of competition in each state. Writing
business on an admitted basis is highly regulated. The regulations, which vary
by state, generally govern licensing, underwriting rules, rates and policy
forms, and require insurance companies to pay premium taxes and guaranty fund
assessments. Writing business on a non-admitted basis is significantly less
regulated and provides much more freedom in setting rules, rates and policy
forms and removes insurance companies from premium taxes and guaranty fund
assessment liabilities. Coverage written on a non-admitted basis is less
comprehensive than coverage issued on an admitted basis. If the Company chooses
non-admitted status, the Company could be at a competitive disadvantage to
carriers writing on an admitted basis if those competitors choose to offer
coverages which are more comprehensive and attractive to an insured.
The Company maintains an internet website at http://www.penn-america.com. The
Company makes available free of charge on its website its annual report on form
10-K, its quarterly reports on 10-Q, current reports on
Page 3
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the
Securities and Exchange Commission.
Penn-America Insurance Company was formed in 1975 by Irvin Saltzman, Chairman of
the Board of Directors, who began working in the insurance industry in 1947 when
he founded a general agency. The Company completed an initial public offering
("IPO") on October 28, 1993, at a price of $4.00 per share, which was followed
by additional offerings in July of 1997 and December of 2002, where 4,537,500
and 2,990,000 shares were sold by the Company for net proceeds of approximately
$9.67 and $7.99 per share, respectively. Currently, the Saltzman family,
substantially through their ownership of Penn Independent Corporation
("Penn-Independent"), owns approximately 32% of the Company's Common Stock. Jon
S. Saltzman, Irvin Saltzman's son, is a Director, President and Chief Executive
Officer of the Company and has been employed by the Company since 1986. Prior to
1986, Jon Saltzman was employed by Penn Independent from 1976 to 1986.
Strategy
The Company's primary strategy is to produce a superior return to stockholders
by being the first-choice insurance carrier for a select group of general agents
who serve the specialized needs of the small business marketplace. The Company
accomplishes this primary strategy by focusing on the following:
o Serving small businesses in small cities and towns. This market is
traditionally underserved by standard lines carriers who avoid writing
this business for a variety of reasons. As a result, the Company
generally commands higher premiums and generally has more coverage
form flexibility than standard lines carriers.
o Using small and selective general agency distribution network. The
Company's distribution strategy is to maintain strong relationships
with a select group of wholesale general agents. The Company currently
has 57 general agents, who in turn, produce business through more than
25,000 retail insurance brokers. This distribution network allows the
Company to maintain low overhead costs while reaching insureds
nationwide. The Company has approximately one-half the number of
general agents as its nearest competitor, which allows it to create
"franchise value" with each general agent by providing relative market
exclusivity and a high level of service and support. In return, the
Company expects to become each general agents first-choice insurance
carrier for the types of business it writes.
o Maintaining a disciplined underwriting process. The Company is
selective in establishing relationships with general agents and
engages in a comprehensive review process before appointing a general
agent. The Company extends only limited underwriting authority to each
general agent. The Company monitors and controls the underwriting
process of the general agents and audits each general agent both
remotely and on-site on a regular basis.
o Providing innovative technology to our general agents. The Company's
technology helps it to build strong relationships with its general
agents and improve the quality of its underwriting results. The
Company enhances its franchise value by acting as a consultant to its
general agents' information technology function. The Company uses
automation to improve operating efficiency, providing automated forms
and manuals and policy submission and insurance issuance systems. This
technology expedites access to information and allows the Company's
general agents to react quickly in addressing underwriting issues and
concerns.
o Maintaining an experienced, responsive management team. The Company's
management team is experienced in the insurance industry and the
excess and surplus lines marketplace and has long-standing
relationships in the industry. The Company maintains a flat
organization structure which allows it to be highly responsive and
flexible in interactions with general agents. By operating in a small
town, the Company can directly relate to the business needs and
challenges of its general agents and insureds.
Page 4
o Creating shareholder value through strong financial results. The
underpinnings of the Company's strong financial results include:
o a conservative investment strategy, focused largely on investment
grade fixed income securities;
o a conservative loss reserving philosophy designed to establish
adequate reserves as soon as a loss is known;
o a reinsurance program with financially sound and reputable reinsurers;
and
o a discipline of underwriting only risks on which the Company can
reasonably expect to generate an underwriting profit.
By focusing on these principles, the Company believes it can deliver
strong financial results and build shareholder value.
Marketing and Distribution
Penn-America markets its products through fifty-seven general agents, who in
turn produce business through more than 25,000 retail insurance brokers located
throughout the United States. Penn-America 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. These general agents and their retail insurance
brokers have local market knowledge and expertise that enable the Company to
access these markets more effectively.
Penn-America's distribution strategy is to maintain strong relationships with a
select group of high-quality general agents. The Company believes that its
network of general agents is smaller than its competitors because of a detailed
selection process. The Company carefully selects a limited number of general
agents based on their experience and reputation and strives to preserve each
agent's franchise value within its marketing territory. The Company seeks to
increase its written premiums with these general agents and to develop strong,
long-standing relationships by providing a high level of service and support.
For example, the Company tries to respond to its general agents' request for
quotes within 24 hours. The Company also supplies Internet and Web site
technology support at no cost to the general agents. The Company believes these
activities create goodwill with the general agents and strengthen its
relationship with them. The Company's strategy has resulted in strong and
consistent growth. From 1992 to 2002, the Company's commercial gross written
premiums grew from $22.6 million to $157.4 million (a 21% annual compounded
growth rate), with only a modest increase in the number of general agents from
thirty-eight (38) to fifty-seven (57).
The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:
Years ended December 31,
-------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------ ----------------------------
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
Pacific $23,050 14.6% $15,613 15.9% $19,961 18.2%
Midwest 29,727 18.9 17,338 17.6 21,768 19.8
South 21,245 13.5 17,021 17.3 16,539 15.1
Southwest 17,579 11.2 12,306 12.5 15,532 14.1
Mid-Atlantic 34,819 22.1 17,633 17.9 17,253 15.7
Mountain/Northwest 9,739 6.2 8,088 8.2 10,457 9.5
New England 21,274 13.5 10,413 10.6 8,281 7.6
------- ---------- ------- --------- ------- --------
$ 157,433 100.0% $ 98,412 100.0% $ 109,791 100.0%
======= ========== ======= ========= ======= ========
Page 5
Underwriting
Core Commercial Business
The Company underwrites its core commercial business, which excludes the
Company's exited commercial automobile business (see "Exited Lines", below) on
Binding authority, Submit and Specialty lines bases:
Binding authority business represents risks that may be quoted and bound by the
Company's general agents prior to the Company's underwriting review.
Submit business represents risks that must be submitted by the Company's general
agents to the Company prior to quoting or binding the account.
Specialty lines business represents risks that meet specific, pre-determined
industry-segment and territorial parameters and may be quoted or bound by the
Company's general agents prior to the Company's underwriting review.
Binding authority business accounted for approximately 90% of the Company's core
commercial gross written premiums in 2002. Of this amount, approximately 85% is
bound by general agents in accordance with the Company's underwriting manual,
with the remaining 15% subject to the Company's approval. The Company provides
its general agents with a comprehensive, regularly updated underwriting manual,
which also is available online through a private intranet site called PennLINK.
This manual clearly outlines the Company's risk eligibility, pricing,
underwriting guidelines and policy issuance instructions. Penn-America closely
monitors the underwriting quality of its business through on-line system edits
and in-force account reviews. The Company also periodically audits each agent's
office to determine if the Company's underwriting guidelines are followed in all
aspects of risk selection, underwriting compliance, policy issuance and pricing.
In addition to standard commissions, the 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.
Payments of these contingent profit commissions have been through the issuance
of shares of PAGI common stock and cash. Since 1996, the Company has awarded
agents approximately 360,000 shares of PAGI common stock through its contingent
profit commission structure.
The Company began writing business on a Submit basis in 1999 in response to
general agents who had risks similar to the Company's risk profile but were
outside of their underwriting authority. This provides a market to the Company's
general agents for approximately 75 classes of business. One hundred percent of
the business is quoted and bound by Penn-America underwriters; general agents
have no binding authority for Submit business. This business accounted for
approximately 5% of core commercial gross written premiums in 2002.
Specialty lines business, which accounted for approximately 5% of the Company's
core commercial gross written premiums in 2002, represents specialized
underwriting and marketing programs for individual general agents based upon
specific territorial needs and opportunities. The individual general agent
typically is given exclusive marketing authority for the program subject to
territorial limitations. The Company continuously is developing specialized
programs for certain industry segments to meet the needs of these insureds. For
example, Penn-America has developed programs for cargo and Alaska dwellings.
Exited Lines
The Company exited non-standard personal automobile business in 1999. As a
result, there were no gross written premiums in 2002 for that line of business,
compared to $2,000 in 2001 and $2.8 million in 2000.
The Company offered commercial automobile coverage from 1998 through the first
quarter of 2001. In late 2000, the Company announced that it was exiting this
line of business due to unsatisfactory underwriting results. Gross written
premiums for commercial automobile business decreased to $33,000 in 2002 from
$1.1 million in 2001 and $11.5 million in 2000.
Page 6
Lines of Business
The following table sets forth an analysis of gross written premiums by specific
product lines during the periods indicated:
Years ended December 31,
-------------------------------------------------------------------------------------
2002 2001 2000
------------------------ --------------------------- --------------------------
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent
Core commercial lines
$ $
Special property 16,013 10.2% 10,118 10.3% $ 5,930 5.4%
CMP - property 62,093 39.4 36,381 37.0 32,677 29.8
CMP - liability 39,503 25.1 27,348 27.8 27,660 25.2
Other & product liability 39,791 25.3 23,483 23.8 29,268 26.6
------- ---------- ------- ---------- ------- ----------
Total core commercial 100.0 98.9 87.0 157,400 97,330 95,535
Exited lines
Commercial auto liability 26 -- 874 0.9 8,779 8.0
Commercial auto physical damage 7 -- 206 0.2 2,690 2.5
Personal lines -- -- 2 -- 2,787 2.5
---------- ---------- ------ ---------- ------ ----------
Total exited lines 1.1 13.0 33 -- 1,082 14,256
---------- ---------- ------ ---------- ------ ----------
Total gross written premiums $ 100.0% $ 100.0% $ 100.0% 157,433 98,412 109,791
========== ========== ====== ========== ====== ==========
o The Company's Commercial General Liability insurance is written on an
occurrence policy form, which generally provides coverage for bodily
injury or property damage that arises during the policy period, even
though a claim is made after the policy expires, as opposed to a
claims-made policy form, which generally provides coverage for claims
made against an insured during the policy period, irrespective of when
the bodily injury or property damage occurred. The Company's insurance
coverage provides limits generally ranging from $25,000 to $3 million
per occurrence, with the majority of such policies having limits
between $500,000 and $1 million. The Company's general liability
policies provide for defense and related expenses in addition to per
occurrence and aggregate policy limits.
o The Company's Commercial Property lines provide limits usually no
higher than $2 million per risk, with almost all of the policies being
written at limits of $1 million per risk or less.
o The Company writes Commercial Multi-Peril policies that provide the
same commercial property and general liability coverages bundled
together as a "package" for its insureds. The limits on these policies
are the same as if written separately.
o The Company also offers Commercial Umbrella policies to enhance its
commercial multi-peril and commercial general liability writings.
Commercial umbrella insurance is written for limits up to $5 million
per occurrence. For commercial umbrella coverage, Penn-America usually
writes the primary $1 million liability limit.
o Commercial Automobile policies were written with liability limits up
to $1 million per occurrence.
o Non-Standard Personal Automobile policies were written with liability
limits up to $100,000 per person and $300,000 per occurrence.
Page 7
Financial Information about Business Segments
The Company had two reportable segments: personal lines and commercial lines.
The Company exited the non-standard personal automobile business in 1999 and
announced that it would run-off its remaining portfolio of such business.
Beginning in 2003, the Company will no longer report on this segment separately
since the amounts relating to the non-standard personal automobile business have
become immaterial. These segments were managed separately because they have
different customers, pricing and expense structures. The Company does not
allocate assets between segments because assets are reviewed in total by
management for decision-making. The accounting policies of the segments are the
same as those more fully described in the summary of significant accounting
policies in Note 1 to the Consolidated Financial Statements, included herein by
reference. 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 income
taxes, unallocated expenses and investment income attributable to equity. The
aforementioned segment information is presented in Note 10 to the Consolidated
Financial Statements incorporated herein by reference.
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
benchmarks and forms promulgated by the Insurance Services Office ("ISO"). ISO
makes available to its members advisory rating, statistical and actuarial
services, policy language and other related services. ISO currently provides
such services to more than 1,500 property and casualty insurance companies in
the United States. One of the services that ISO provides is an actuarial-based
estimate of the expected loss cost for risks in each of approximately 1,000 risk
classifications. These benchmark loss costs reflect an analysis of the loss and
allocated 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.
The Company primarily uses ISO loss cost rates as the foundation for
establishing its pricing benchmarks for all lines of business in all 50 states.
The Company then develops "loss cost multipliers," or LCMs, which are designed
to support its operating expenses, acquisition expenses and targeted return on
equity. The multiplication of LCMs by ISO loss cost rates produces the Company's
final benchmark rates. As a general rule, the Company's final benchmark rates
are set at 110% to 150% of the prescribed ISO benchmark rates because of the
Company's strategy of providing insurance to underserved markets. The Company's
final benchmark rates are regionalized to incorporate variables such as
historical loss experience, the types and lines of business written and state
regulatory considerations. For business that the Company writes on an admitted
basis, it must obtain advance regulatory approval of rates in a number of
states. 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
must equal the Company's final benchmark rates.
Page 8
Claims Management and Administration
The Company's approach to 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 general agents have no authority to settle claims
or otherwise exercise control over the claims process. The Company's claims
management staff supervises and processes all claims. The Company has a formal
claims review process, and all claims greater than $25,000 are reviewed by
senior claims management.
Insurance Loss Reserves
The Company is directly liable for losses and loss adjustment expenses 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 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 the Company's ultimate loss. 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. Loss adjustment expenses
are determined as a percentage of expected indemnity losses based on historical
patterns adjusted to reflect current experience.
In addition to case reserves, management 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 determine
its estimate of ultimate liability. The techniques recognize, among other
factors, the Company's and the industry's experience, historical trends in
reserving patterns and loss payments, the impact of claim inflation, the pending
level of unpaid claims, the cost of claim settlements, the line of business mix
and the 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. The establishment of loss and
loss adjustment expense reserves makes no provision for the broadening of
coverage by legislative action or judicial interpretation, or the emergence of
new types of losses not sufficiently represented in our historical experience or
that 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.
Page 9
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
Year ended December 31,
-----------------------------------------------
2002 2001 2000
-------------- ------------ -------------
(in thousands)
Balance, beginning of year $ 119,598 $ 115,314 $ 93,719
Less reinsurance recoverable 25,552 24,093 18,086
-------------- ------------ -------------
Net balance, beginning of year 94,046 91,221 75,633
Incurred related to:
Current year 72,702 60,885 66,214
Prior years 2,406 36 9,164
-------------- ------------ -------------
Total incurred 75,108 60,921 75,378
Paid related to:
Current year 22,906 19,913 26,273
Prior years 36,050 38,183 33,517
-------------- ------------ -------------
Total paid 58,956 58,096 59,790
Net balance, end of year 110,198 94,046 91,221
Plus reinsurance recoverable 27,549 25,552 24,093
-------------- ------------ -------------
Balance, end of year $ 137,747 $ 119,598 $ 115,314
============== ============ =============
In 2002, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $2,406,000. The increase is
attributable to an increase in estimates for loss and loss adjustment expense
reserves by $5,100,000 for commercial liability lines of business, partially
offset by reductions in estimates by $2,700,000 for the commercial property
lines of business.
The Company's change in estimates in 2002 for the commercial property lines
resulted from lower than expected costs per claim than for the 2001 accident
year. As of December 31, 2001, the Company anticipated an increase in the
average cost per claim of approximately 11% to $9,200 for the 2001 accident year
as compared to $8,300 for the 2000 accident year. During 2002, the 2001 accident
year developed more favorably than originally anticipated, as the average
settlement per claim declined to approximately $8,000. Consequently, the Company
reduced its estimates by $2,700,000 in 2002.
The Company's change in estimates in 2002 for the commercial liability lines
resulted primarily from an increase of $2,300,000 due to a lengthening of the
selected development patterns on all accident years as the number of claims
closed in 2000 varied from the Company's historical experience. The remainder of
the change is primarily due to increases in estimates for claims expenses, as
paid development patterns during 2002 were in excess of expectations at December
31, 2001.
In 2001, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $36,000. This increase related
entirely to the commercial automobile line of business. Additionally, the
Company increased its estimate for loss and loss adjustment expense reserves by
$1,800,000 for commercial multi-peril liability and reduced its estimates by
$1,400,000 for non-standard personal automobile and $400,000 in commercial
multi-peril property.
The Company increased its estimate in 2001 for the commercial multi-peril
liability line of business by $1,800,000 due to the development of outstanding
claim reserves on claims occurring primarily in 1998 and 1999. In 2001, incurred
losses on the 1998 and 1999 accident year increased approximately $1,300,000
more than anticipated based on historical development patterns. The increase is
primarily attributed to higher than expected average settlement costs per claim
for the 1998 and 1999 accident years. This increase was offset almost entirely
by a reduction in the Company's estimate for the non-standard personal
automobile line of business due to favorable settlements on closed claims. The
decrease is attributed primarily to lower than expected average settlement costs
per claim for the 1998 and 1999 accident years.
In 2000, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $9,164,000. The increase is
primarily attributable to changes in the Company's estimates for
Page 10
losses and loss adjustment expense reserves of $1,400,000 for commercial
automobile, $3,900,000 for commercial multi-peril liability and $3,400,000 for
other liability lines of business.
The Company began writing commercial automobile coverage for vehicles and light
trucks in 1998. The initial estimates for 1998 and 1999 were based on a
relatively low level of claims reported to the Company. As of December 31, 1999,
the Company's expectations of claim reporting patterns were based on industry
experience, since limited Company experience was available. In 2000, the Company
received more claims than initially expected for accident years 1998 and 1999.
Consequently, the Company increased its estimate by $1,400,000 in 2000. In the
fourth quarter of 2000, the Company exited the commercial automobile line of
business due to unsatisfactory underwriting results.
The change in estimates in 2000 for the commercial multi-peril line of business
resulted principally from an unexpected increase in reported liquor liability
claims on policies written in 1998 and 1999. In 2000, the Company increased its
estimate by $3,900,000. In 2000, the Company revised its underwriting guidelines
to reduce significantly its exposure to liquor liability for bars and taverns in
certain states. Ultimately, this revision limited liquor liability coverage only
to certain states and certain insureds.
The change in estimates in 2000 for the other liability line resulted
principally from construction defect claims, which were new types of claims that
were not anticipated when the Company wrote these policies between 1991 and
1996. In 2000, the Company received an increased number of construction defect
claims predominantly related to insureds who operated as sub-contractors in the
state of California. Prior to 2000, most construction defect litigation was
targeted at general contractors and housing developers. However, as their policy
limits became eroded to the vast number of litigants, plaintiff attorneys sought
additional recoveries from sub-contractors. Consequently, with the increased
number of claims reported combined with expected cost to defend these
construction defect claims, the Company increased its estimate by $3,400,000.
While the Company has increased loss and loss adjustment expense reserves for
prior year insured events in each of the last three years, the Company believes
that its loss and loss adjustment expense reserves at December 31, 2002
represent its best estimate of amounts required to settle its related
liabilities for two primary reasons. First, a significant portion of the prior
year reserve increases related to business the Company no longer writes
including non-standard personal and commercial automobile lines of business,
residential contractors and sub-contractors and restaurants, bars and taverns
with significant exposure to liquor liability losses. Second, in 2000, the
Company implemented improvements in the loss reserving process, including the
development of monthly and quarterly loss and loss adjustment expense reserve
analyses and the creation of a Reserve Committee that meets quarterly.
In the first quarter of 2003, the Company received an unexpected increase in the
number of new claims reported relating to four policies issued to a single
insured between January 1, 1980 and April 1, 1983. The insured is a manufacturer
of safety equipment, including industrial masks, and the new claims reported
allege existing and potential bodily injury due to a medical condition called
silicosis. This is the only insured with which the Company has open claims
relating to this type of injury. The original policies covered products and
completed operations only and were issued with a $500,000 indemnity policy
aggregate limit of liability and a $5,000 insured deductible per claim. At this
time, it is not possible to evaluate the probability of a favorable or
unfavorable outcome on these claims. The Company believes that the amount of any
losses or loss adjustment expenses, if any, will not have a material effect on
the Company's financial position or results of operations.
Incurred losses and loss adjustment expenses include estimates recorded as loss
and loss adjustment expense reserves on the balance sheet for the ultimate
payment on both reported and unreported claims. The Company changes its
estimates for loss and loss adjustment expenses
Page 11
reserves as new events occur, as more loss experience is acquired or as
additional information is received. Estimates for loss and loss adjustment
expense reserves result from a continuous review process and the change in these
estimates, as required by SFAS No. 60, Accounting and Reporting by Insurance
Enterprises, is recorded in the period that the change in these estimates is
made.
The following table presents accident year loss and loss adjustment expense
ratios (the sum of losses and loss adjustment expenses divided by premiums
earned) for the ten most recent accident years (the year in which the loss
occurred), as recorded as of December 31 for 1993 through 2002, after giving
effect to the increase in loss and loss adjustment expenses relating to changes
in estimates of insured events of prior years. These "accident year" loss ratios
differ from the loss ratios included in the Company's financial statements in
that the latter loss ratios are based upon the year in which we recognize the
loss for accounting purposes, regardless of when the loss actually occurred or
was reported to the Company.
As of December 31,
---------------------------------------------------------------------------------------
Accident Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
- --------------------- -------- ------- -------- -------- -------- ------- -------- -------- -------- --------
1993 69.5 68.0 66.1 67.3 69.7 68.9 70.9 70.2 71.3 72.2
1994 69.5 66.2 65.3 66.3 66.0 69.1 72.0 71.8 72.6
1995 65.6 63.0 61.9 62.3 63.9 65.4 65.1 66.0
1996 63.8 62.1 64.7 68.1 68.3 69.4 69.4
1997 62.6 60.6 62.4 62.0 62.1 64.2
1998 62.2 63.6 65.8 65.0 65.7
1999 63.8 68.2 70.0 72.3
2000 72.4 70.2 70.5
2001 68.5 63.8
2002 63.2
The following table presents the development of unpaid loss and loss adjustment
expenses during the ten years ended December 31, 2002. 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 2002 ending reserves to the
gross reserves in the Company's consolidated financial statements. 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.
The net cumulative deficiency presented in the following table represents the
difference between the unpaid loss and loss adjustment expense reserves recorded
as of December 31 of the respective calendar year and the re-estimation of these
reserves as of December 31, 2002. While each year of the table reflects a net
cumulative deficiency, approximately 75% to 100% of each years net cumulative
deficiency was recognized by the Company in three distinct calendar year
periods: 1999, 2000 and 2002. Please refer to "Insurance Loss Reserves" on page
9 for details regarding the prior year reserve adjustments made in calendar
periods 2000 and 2002. In 1999, the Company increased incurred loss and loss
adjustment expenses attributable to insured events of prior years by $8,419,000.
The increase is primarily attributable to changes in estimates for loss and loss
adjustment expenses for the non-standard personal automobile line of business.
During 1999, the Company received a significant number of claims relating to
accidents incurred prior to 1999, resulting in an increase in loss estimates. In
1999, the Company exited the non-standard personal automobile line of business.
Page 12
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
------- --------------------------- --------- ---------- ---------- ---------- -------- ----------------
Reserves for unpaid losses $26,110 $26,830 $35,307 $46,512 $55,656 $68,863 $72,436 $75,632 $91,221 $94,046 $110,198
and loss adjustment
Expenses, as stated (In
thousands)
a. Net cumulative paid as of
1 year later $7,381 $6,852 $12,384 $17,210 $23,654 $30,236 $36,449 $34,626 $38,183 36,052
2 years later 11,127 13,127 20,617 29,612 38,819 51,141 55,718 57,415 62,973
3 years later 15,546 18,656 27,266 38,091 50,982 63,470 70,370 73,843
4 years later 19,253 22,254 32,119 44,016 57,613 72,651 80,979
5 years later 21,503 24,303 34,883 48,236 62,724 79,028
6 years later 22,796 25,642 37,687 51,485 66,588
7 years later 23,714 27,121 39,863 54,109
8 years later 24,959 28,449 41,689
9 years later 25,979 29,572
10 years later 26,757
b. Reserves re-estimated
as of end of year
1 year later $24,478 $23,897 $33,601 $45,708 $55,997 $68,946 $80,855 $84,784 $91,257 $96,453
2 years later 21,945 23,489 34,281 47,225 57,913 76,217 86,351 86,863
3 years later 22,032 24,558 36,453 47,378 63,575 79,881 86,899 93,158
4 years later 22,767 26,335 36,359 50,704 67,310 81,226 91,156
5 years later 23,935 26,380 38,768 54,245 68,567 84,822
6 years later 24,143 27,532 41,425 54,739 70,251
7 years later 24,776 29,050 42,095 56,462
8 years later 26,485 29,804 43,321
9 years later 26,949 30,704
10 years later 27,632
Net cumulative redundancy (1,522) (3,874) (8,014) (9,950) (14,595) (15,959) (18,720) 17,526) (6,608) (2,406)
(deficiency)
Gross liability for unpaid
losses and
loss adjustment expenses, $31,703 $33,314 $44,796 $60,140 $70,728 $84,566 $88,937 $93,719 $115,314 $119,598 137,747
as stated
Reinsurance recoverable 5,593 6,484 9,489 13,628 15,072 15,703 16,502 18,086 24,093 25,552 27,549
Net liability for
unpaid losses and
loss adjustment expenses, 26,110 26,830 35,307 46,512 55,656 68,863 72,435 75,633 91,221 94,046 110,198
as stated
--------- ---------------- ---------- ------------------ ---------- ---------- -------- -------- -------
Gross liability re-estimated 30,609 32,796 48,173 63,884 71,644 85,640 98,395 101,597 115,350 122,831
- 1year later
Reinsurance recoverable 6,131 8,899 14,572 18,191 15,647 16,694 17,540 16,800 24,093 26,378
re-estimated
Net liability re-estimated
- 1 24,478 23,897 33,601 45,693 55,997 68,946 80,855 84,797 91,257 96,453
--------- ------- ------------------- ------- ---------- ------------------- -------- --------
Gross liability re-estimated
- - 2 years later 30,390 36,243 53,009 66,405 74,312 92,832 104,664 104,137 122,484
============================
Reinsurance recoverable 8,445 12,754 18,728 19,180 16,399 16,615 18,313 17,274 24,655
re-estimated
Net liability re-estimated
- - 2 years later 21,945 23,669 34,281 47,225 57,913 76,217 86,351 86,863 97,829
--------- ------- -------------------- ------- ---------- ---------- ---------- --------
Gross liability re-estimated 33,992 41,600 56,042 66,891 80,574 97,786 105,248 113,559
Reinsurance recoverable 11,960 17,042 19,589 19,513 16,999 17,905 18,349 20,401
re-estimated
Net liability re-estimated 22,032 24,558 36,453 47,378 63,575 79,881 86,899 93,158
- -3 years later
--------- ------- -------------------- ------- ---------- ---------- ---------- ---------
Gross liability re-estimated 38,165 43,824 56,167 68,927 84,831 98,244 111,019
- -4 years later
Reinsurance recoverable 15,398 17,489 19,808 18,223 17,521 17,018 19,863
re-estimated
Net liability re-estimated 22,767 26,335 36,359 50,704 67,310 81,226 91,156
- -4years later
--------- ------- -------------------- ------- ---------- ----------
Gross liability re-estimated 39,956 44,466 58,272 73,042 85,221 103,562
- -5 years later
Reinsurance recoverable 16,021 18,086 19,504 18,797 16,654 18,740
re-estimated
Net liability re-estimated 23,935 26,380 38,768 54,245 68,567 84,822
- -5 years later
--------- ------- -------------------- ------- ----------
Gross liability re-estimated 40,670 45,595 61,814 72,978 87,500
- -6 years later
Reinsurance recoverable 16,527 18,063 20,389 18,238 17,249
re-estimated
Net liability re-estimated 24,143 27,532 41,425 54,739 70,252
- -6 years later
--------- ------- -------------------- -------
Gross liability re-estimated 41,679 47,955 61,766 74,758
- -7 years later
Reinsurance recoverable 16,903 18,905 19,671 18,295
re-estimated
Net liability re-estimated 24,776 29,050 42,095 56,462
- -7 years later
--------- ------- --------------------
Gross liability re-estimated 43,958 48,032 63,081
- -8 years later
Reinsurance recoverable 17,473 18,228 19,760
re-estimated
Net liability re-estimated 26,485 29,804 43,321
- -8 years later
--------- ------- ----------
Gross liability re-estimated 44,248 49,019
- -9 years later
Reinsurance recoverable 17,300 18,316
re-estimated
Net liability re-estimated 26,949 30,704
- -9 years later
-------- --------
Gross liability re-estimated-44,868
10 years
Reinsurance recoverable 17,236
re-estimated
Net liability re-estimated 27,632
- -10 years later
---------
Gross cumulative
deficiency ($13,165) ($15,705)($18,285) ($14,618) ($16,772)($18,996) ($22,082) ($19,840)($7,170) ($3,233)
Page 13
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 $500 million in policyholders' surplus.
Since September 2001, the Company's multiple-line excess of loss treaty
reinsurance has been with American Re, part of the Munich Re Group. American Re
is rated "A+" (Superior) by A.M. Best. For the three years prior to September 1,
2001, General Reinsurance Corporation, rated "A++" (Superior) by A.M. Best, was
the Company's reinsurer on their multiple-line excess of loss treaty. The
following is a summary of the Company's multiple-line excess of loss reinsurance
treaty:
Line of Business Company Policy Limit Reinsurance Coverage / Company Retention
- ---------------- -------------------- ----------------------------------------
Property $2.0 million per risk $1.7 million per risk / $3.0 million per occurrence in excess of
$300,000 per risk
Commercial Automobile $1.0 million per occurrence $750,000 per occurrence in excess of $250,000 per occurrence
General Liability $3.0 million per occurrence $2.5 million per occurrence in excess of $500,000 per occurrence
The Company's combined retention for any one loss resulting from a common
occurrence involving both the property and general liability coverage on a
single risk is $500,000. The Company's multiple-line excess of loss reinsurance
treaty also includes casualty excess coverage, 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), liability actions
brought by two or more of the Company's insureds against each other resulting
from the same occurrence and loss adjustment expenses.
The Company offers umbrella liability policies up to $5.0 million per
occurrence. These policies are reinsured with American Re for 90% of policy
limits up to $1.0 million per occurrence and 100% of policy limits up to $4.0
million in excess of $1.0 million per occurrence.
The Company maintains a catastrophic loss reinsurance program. As of January 1,
2003, the terms of this program provide for 100% retention of the first $1.0
million per occurrence and reinsurance of 100% of $29.0 million per occurrence
in excess of $1.0 million per occurrence.
Page 14
The Company's catastrophic loss reinsurance program includes: American
Agricultural Insurance Company, Converium (North America), Converium (UK),
Everest Reinsurance Company, Hannover Ruckversicherungs, PXRE Reinsurance
Company, Shelter Reinsurance Company, Sirius International Insurance Corporation
and XL Re Ltd. All of these reinsurers are rated "A-" (excellent) or higher by
A.M. Best and have policyholders' surplus greater than $500 million.
The Company may write individual policies with limits of liability greater than
the aforementioned Company policy limits. These limits of liability are 100%
reinsured on a facultative reinsurance basis.
Information regarding the amount of premiums written and ceded under reinsurance
treaties is included in Note 7 to the Consolidated Financial Statements included
herein by reference.
Terrorism Risk Insurance Act of 2002
On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act of
2002 ("the Act") into law. The purpose of the Act is to establish a temporary
federal program that provides a system of shared public and private compensation
for insured losses resulting from certain acts of terrorism. The Act defines an
act of terrorism as any violent act that is certified by the Secretary of the
Treasury which results in $5.0 million of damage within the United States (or
outside the United States in the case of an air carrier or a vessel) and that is
committed by an individual or individuals acting on behalf of a foreign person
or foreign interest, as part of an effort to coerce the civilian population of
the United States or to influence the policy or affect the conduct of the United
States Government by coercion ("certified act(s) of terrorism").
The Act specifies that the federal share of losses resulting from a certified
act of terrorism will be 90% of all insured losses above each insurance
carrier's deductible, subject to a maximum federal aggregate liability of $100.0
billion. An insurance carrier's deductible for certified acts of terrorism will
be based on a percentage of direct earned premiums for the calendar year prior
to the start of each program year. For 2003, the Company's deductible for
certified acts of terrorism will be 7% of the Company's direct earned premium
for the year ended December 31, 2002, or $9.3 million.
The Act also specifies that exclusions for certified acts of terrorism in
property and casualty insurance contracts that were in-force on November 26,
2002 are void and may only be reinstated with a written authorization from the
insured, or if the insured fails to pay any increase in premium applicable to
coverage for certified acts of terrorism. In addition, the Act requires
insurance carriers to offer coverage for certified acts of terrorism for all
policies written after November 26, 2002.
At November 26, 2002, the Company had approximately 56,000 policies in-force
that were subject to the provisions of the Act. Approximately 89% of these
policies contained terrorism exclusions which were voided under the Act. In the
first quarter of 2003, the Company offered coverage for certified acts of
terrorism to these policyholders as required by the Act. The Company expects a
majority of these policyholders to decline this coverage either by written
request or failure to pay the additional premium due.
The Company's multiple line excess of loss reinsurance treaty provides
reinsurance protection for certified acts of terrorism, unless the insured
losses involve the use or release of nuclear, biological, chemical or
radioactive ("NBCR") materials. The Company's property catastrophic loss
reinsurance treaty excludes insureds' losses for certified acts of terrorism.
Effective January 1, 2003, the Company purchased a multiple line quota share
treaty that provides reinsurance protection for certified acts of terrorism
relating to new and renewal policies effective January 1, 2003 or later.
As a result of the provisions of the Act and the reinsurance protection provided
by the Company's reinsurance treaties and the federal program, the following
represents the Company's retention relating to certified acts of terrorism:
Page 15
Reinsurance Treaty/Program Company Retention
- -------------------------- -----------------
Multiple-line excess of loss treaty (1) The Company retains the first $300,000 per property risk, subject to a
maximum of $3.0 million per occurrence/aggregate, and the first $500,000 per
general liability occurrence, subject to a maximum of $2.0 million per
occurrence/aggregate.
Property catastrophic loss treaty This treaty excludes all losses resulting from certified acts of terrorism.
Multiple-line quota share certified
acts of terrorism The Company retains 20% of the first
$5.0 million per occurrence/aggregate plus $4.3 million in excess of
$5.0 million. This treaty applies to new and
renewal policies effective January 1, 2003 and later.
Federal Terrorism Insurance Program
The Company retains the
first $9.3 million per
occurrence/ aggregate plus
10% of losses in excess of
$9.3 million.
(1) Treaty excludes reinsurance protection for insureds' losses for certified
acts of terrorism relating to the use or release of NBCR materials.
The Company believes that its exposure to insured losses resulting from
certified acts of terrorism will not have a material affect on its financial
condition.
Investments
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. The Company out-sources the management of its investment
portfolio to Gen Re New England Asset Management Inc. ("NEAMS"). In accordance
with the asset management agreement between the Company and NEAMS, all
investment transactions are approved by the Investment Committee of the Company
within 60 days of their initiation by NEAMS. At December 31, 2002, the Company
held a total of $277.0 million in cash and investments. Of this amount, cash and
cash equivalents represented $9.8 million, equity securities represented $18.6
million, and fixed maturities represented $248.6 million.
The Company's fixed maturity portfolio of $248.6 million was 90% of the total
cash and investments as of December 31, 2002. Approximately 93% 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 $18.6 million or 7% of total cash and investments
as of December 31, 2002.
Page 16
As of December 31, 2002, the Company's investment portfolio contained corporate
fixed maturity and preferred stock securities with a market value of $101.6
million. A summary of these securities by industry segment is as follows:
Percentage of fixed maturity
Industry Segment and preferred stock portfolio
--------------- ----------------------------
Financial institutions 36%
Utilities 21%
Consumer, non-cyclical 15%
Communications 13%
Industrial 5%
Consumer, cyclical 3%
Basic materials 3%
Energy 2%
Technology 2%
---------------------------
100%
===========================
As of December 31, 2002, the Company's investment portfolio contained $63.4
million of mortgage-backed and asset-backed and collateral mortgage obligations.
All of these securities were rated "A" or better by Standard & Poor's and 80%
were "AAA" or better by Standard & Poor's These securities are publicly traded,
and had 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 real estate or mortgages in its
investment portfolio as of December 31, 2002.
The Company regularly evaluates its investment portfolio to identify
other-than-temporary impairments of individual securities. Many factors are
considered in determining if any 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 December 31, 2002:
Number of Fair Book Gross Unrealized Six Months Over Six
(Dollars in thousands) Securities Value Value Losses or Less Months
- ----------------------------- ------------ ------------- ------------- --- ------------------- --------------- ------------
Fixed maturities 14 $ 16,603 $ 16,728 $ 125 $ 124 $ 1
Equity securities 1 2,164 2,307 143 143 ---
------------------- --------------- ------------
$ 268 $ 267 $ 1
=================== =============== ============
As of December 31, 2002, the Company's fixed maturity investment portfolio had
fourteen securities with $125,000 of gross unrealized losses. No single issuer
had an unrealized loss position greater than $30,000.
Page 17
The following table shows the classifications of the Company's investments at
December 31, 2002:
Amount
Fair reflected Percent of
value on balance total
sheet
----- ----------- ----------
(In thousands)
Fixed maturities:
Available for sale:
U.S. Treasury securities and obligations
of U.S. government agencies $ 41,190 $ 41,190 15.4%
Corporate securities 69,870 69,870 26.2
Mortgage-backed securities 32,346 32,346 12.1
Other structured securities 31,021 31,021 11.6
Municipal securities 52,262 52,262 19.6
Public utilities 19,894 19,894 7.4
-------- -------- -----
Total available for sale 246,583 246,583 92.3
-------- -------- -----
Held to maturity
U.S. Treasury securities and
obligations
of U.S. government agencies 1,717 1,687 0.6
Corporate securities 300 276 0.1
-------- -------- -----
Total held to maturity 2,017 1,963 0.7
-------- -------- -----
Total fixed-maturity securities 248,600 248,546 93.0
-------- -------- -----
Equity securities:
Common stock 7,019 7,019 2.6
Preferred stock 11,606 11,606 4.4
-------- -------- -----
Total equity securities 18,625 18,625 7.0
-------- -------- -----
Total investments $267,225 267,171 100.0%
======== ======== =====
The composition of the Company's portfolio of fixed-income investments were
rated by Standard & Poor's at December 31, 2002, as follows:
"AAA" 52%
"AA" 15%
"A" 26%
"BBB" 6%
Below "BBB" 1%
------------
100%
============
The market risk of the Company's investment portfolio is descibed in
Quantitative and Qualitative Disclosures About Market Risk included in the
Company's Annual Report to Shareholders incorporated herin by reference.
Note 5 to the Consolidated Financial Statements in the Company's Annual Report
to Shareholders included herein by reference sets forth the net investment
income results of the Company for the years ended December 31, 2002, 2001 and
2000.
Page 18
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 offering only a single product in some cases. The Company competes with a
number of insurers in attracting quality general agents and in selling insurance
products. Many of the Company's existing or potential competitors are larger
excess and surplus lines and specialty admitted insurers which 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. The
Company believes that in order to be successful in its market, it must be aware
of pricing cycles and must be able to minimize the impact of such cycles through
tight expense control and superior customer service.
Another competitive factor is the rating assigned by independent rating
organizations such as A.M. Best Company. Penn-America and Penn-Star currently
have a pooled rating from A.M. Best of "A-" (Excellent). "A-" is the fourth
highest of sixteen rating categories. These ratings are based upon factors of
concern to policyholders and are not directed toward the protection of
investors.
The Company believes that its distribution strategy, which is based on building
and maintaining strong relationships with a small number of high quality general
agents that are enabled with the latest technological innovation, provides a
competitive advantage in the markets it targets. The "Marketing and
Distribution" section included herein more fully describes the elements of the
strategies which the Company believes provide this competitive advantage.
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, rules 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 was completed by the
Pennsylvania Insurance Department in 1999, covering the five-year period ended
December 31, 1998, and for Penn-Star, covering a two-year period ended December
31, 1998, since its initial licensing in 1997.
Insurance Holding Company Laws. Pennsylvania, the Company's 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
Page 19
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. PAGI is a holding company, the principal asset of which
is the common stock of Penn-America. The principal source of cash to meet the
Company's short-term liquidity needs, including the payment of dividends to
PAGI's stockholders, corporate expenses and interest on debentures, is dividends
from Penn-America. The Company has no planned capital expenditures that could
impact its long-term liquidity needs.
Penn-America's principal sources of funds are underwriting operations,
investment income and proceeds from sales and redemptions of investments. Funds
are used by Penn-America and Penn-Star principally to pay claims and operating
expenses, to purchase investments and to make dividend payments to PAGI. The
Company's future liquidity is dependent on the ability of Penn-America to pay
dividends to PAGI.
The National Association of Insurance Commissioners has adopted a system to test
the adequacy of statutory capital ("policyholders' surplus"), known as
"risk-based capital", which applies to Penn-America Insurance Company and
Penn-Star Insurance Company, Penn-America Insurance Company's wholly-owned
subsidiary. This system establishes the minimum amount of risk-based capital
necessary for a company to support its overall business operations. It
identifies property and casualty insurers that may be inadequately capitalized
by looking at certain 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, including
supervision or control. As of December 31, 2002, the policyholders' surplus of
Penn-America Insurance Company and Penn-Star Star Insurance Company was in
excess of the prescribed risk-based capital requirements. Penn-America Insurance
Company's policyholders' surplus at December 31, 2002 was $110.3 million and its
regulatory action level was $22.5 million. Penn-Star Insurance Company's
policyholders' surplus at December 31, 2002 was $37.4 million and its regulatory
action level was $8.3 million.
Penn-America is also subject to regulations under which payment of dividends
from statutory surplus may require prior approval from the Pennsylvania
Insurance Department. Penn-America 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 surplus or statutory net income for the prior year. Using these
criteria, the available ordinary dividend for 2003 is $11.0 million. Ordinary
dividends paid by Penn-America to PAGI in 2002 were $1.1 million and $1.6
million for the years ended December 31, 2002 and 2001, respectively. No
ordinary dividends were paid to PAGI in 2000. Rather, Penn-America paid a $6.4
million return of capital to PAGI in 2000, after receiving approval from the
Pennsylvania Insurance Department, which PAGI used to repurchase stock and pay
dividends and PAGI operating expenses. Penn-America's ability to pay future
dividends to us 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 the Company.
Insurance Guaranty Funds: Under insolvency or guaranty 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 are not 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
Page 20
terminations and other policy terms, and to impose new taxes and assessments.
During 2002, President Bush signed the Terrorism Risk Insurance Act of 2002 into
law. For more information see page 15 included herein. 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 110 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 renewed June 30, 2000 that expires on June 30, 2005, and
provides for an annual rental payment of $357,000. This amount is considered by
the Company to be at fair market value.
ITEM 3. Legal Proceedings
The Company's insurance subsidiaries are subject to routine legal proceedings in
connection with their property and casualty business. Penn-America has been
named as a defendant in litigation commenced in the Superior Court of
California, County of Los Angeles, on November 6, 2000 and in an identical suit
on December 18, 2000 in the County of Orange relating to the Company's exited
non-standard personal automobile business. During 2002, the Company reached
settlement on this litigation in the amount of $285,000. The Company is involved
in no other pending or threatened legal or administrative proceedings which
management believes might have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2002 to a vote of holders
of PAGI's common stock.
Page 21
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 the
inside back cover of the Company's Annual Report to Stockholders for the year
ended December 31, 2002, 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 12 of the Company's
Annual Report to stockholders for the year ended December 31, 2002, 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 13 to 27 of the Company's Annual Report to
stockholders for the year ended December 31, 2002, which is included as Exhibit
(13) to this Form 10-K Report, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The "Quantitative and Qualitative Disclosures About Market Risk" section on
pages 27 and 28 of the Company's Annual Report to stockholders for the year
ended December 31, 2002, 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 31 to 55 of the Company's Annual
Report to stockholders for the year ended December 31, 2002, 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 22
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 2002 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 15, 2003 are as follows:
Irvin Saltzman 80 Chairman of the Board of Directors
of PAGI and Penn-America
Jon S. Saltzman 45 President and Chief Executive
Officer of PAGI and Penn-America
Joseph F. Morris 48 Senior Vice President, Chief
Financial Officer and Treasurer of
PAGI and Penn-America
Garland P. Pezzuolo 38 Vice President, Secretary and
General Counsel of PAGI 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 2003 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 2003 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 2003 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 14. CONTROLS AND PROCEDURES
Within the past ninety days, 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 December 31, 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 December
31, 2002.
Page 23
PART IV
ITEM 15. 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, 2002 and 2001 31
Consolidated Statements of Operations for the years ended December 31,
2002, 2001, and 2000 32
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000. 33
Consolidated Statements of Cash Flows for the years ended December
31, 2002, 2001, and 2000.
34
Notes to Consolidated Financial Statements 35-55
Independent Auditors' Report 30
The following consolidated financial statement schedules for the years
2002, 2001, and 2000 are submitted herewith:
2. Financial Statement Schedules.
Page
--------------
Schedule I. Summary of Investments - Other Than Investments in Related Parties 34
Schedule II. Condensed Financial Information of Parent Company 35-37
Schedule III. Supplementary Insurance Information 38
Schedule IV. Reinsurance 39
Schedule VI. Supplemental Insurance Information Concerning Property and Casualty
Operations 40
Independent Auditors' Consent and Report on Schedules (filed as Exhibit 23)
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: 25-33
* Refers to the respective page of Penn-America Group's 2002 Annual Report to
Stockholders attached as Exhibit (13). The Consolidated Financial Statements and
Independent Auditors' Report on pages 30 to 55 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 24
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.
4 Placement Agreement between Registrant and its financing subsidiary,
Penn-America Statutory Trust I, and FTN Financial Capital Markets and
Keefe, Bruyette & Woods, Inc., dated November 21, 2002 filed with
Registrant's Report on Form 10-K for the period ended December 31,
2002.
4(i) Subscription Agreement among Penn-America Statutory Trust I,
Registrant and I-Preferred Term Securities I., Ltd., dated December 4,
2002 filed with Registrant's Report on Form 10-K for the period ended
December 31, 2002.
4(ii)Indenture between Registrant and U.S. Bank National Association
(f/k/a State Street Bank and Trust Company of Connecticut, N.A.),
dated December 4, 2002 filed with Registrant's Report on Form 10-K for
the period ended December 31, 2002.
4(iii) Amended and Restated Declaration of Trust among U.S Bank National
Association (f/k/a State Street Bank and Trust Company of Connecticut,
N.A.), Registrant and Jon S. Saltzman, Joseph F. Morris and Brian
Riley dated December 4, 2002 filed with Registrant's Report on Form
10-K for the period ended December 31, 2002.
4(iv)Guarantee Agreement between Registrant and U.S. Bank National
Association (f/k/a State Street Bank and Trust Company of Connecticut,
N.A.) dated December 4, 2002 filed with Registrant's Report on Form
10-K for the period ended December 31, 2002.
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) Endorsements Nos. 4 through 6 (Termination Endorsement) to 1993
Casualty Excess of Loss Reinsurance Agreement with National
Reinsurance Corporation, filed with the Securities and Exchange
Commission with Registrant's Report on Form S-2 Amendment No. 1 (No.
333-91362) on September 6, 2002.
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
Page 25
Exhibit No. Description
---------- -----------
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 Securities and Exchange Commission.
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.
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, filed with Registrant's Report on Form 10-K
for the period ended December 31, 1999, which has been filed with the
Securities and Exchange Commission.
10.7(vi) Amendment dated July 1, 2000, 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, 2000, which has been filed with the
Securities and Exchange Commission.
10.7(vii) Amendment dated January 1, 2001, 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, 2001, which has been filed with the
Securities and Exchange Commission.
10.7(viii) Amendment dated January 1, 2002, to August 20, 1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs, filed with the Securities and Exchange
Commission with the Registrant's Report on Form S-2 Amendment 1 (No.
333-91362) on September 6, 2002.
10.7(ix) Amendment dated January 1, 2003 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, 2002.
Page 26
Exhibit No. Description
---------- -----------
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
Securities and Exchange Commission.
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 Securities
and Exchange Commission.
10.9(iii) Investment Advisory Agreement effective February 19, 1999,
between Penn-America Insurance Company and Madison Monroe, Inc., filed
with Registrant's Report on Form 10-K for the period ended December
31, 1999, which has been filed with the Securities and Exchange
Commission.
10.9(iv) Notice of Termination effective July 1, 2000, of Investment
Advisory Agreement dated September 1, 1997, between and among
Penn-America Insurance Company, its subsidiary, Penn-Star Insurance
Company and Carl Domino Associates, L.P., filed with Registrant's
Report on Form 10-K for the period ended December 31, 2000, which has
been filed with the Securities and Exchange Commission.
10.9(v) Amendment dated November 7, 2000, to Agreement dated April 15,
1997, between and among General Re New England Asset Management, Inc.,
Penn-America Insurance Company, and its subsidiary, Penn-Star, filed
with Registrant's Report on Form 10-K for the period ended December
31, 2000, which has been filed with the Securities and Exchange
Commission on March 30, 2001.
10.9(vi) Amendment dated August 2, 2000, to Investment Management Agreement
dated February 25, 1999, between Penn-America Insurance Company and
Madison Monroe, Inc., filed with Registrant's Report on Form 10-K for
the period ended December 31, 2000, which has been filed with the
Securities and Exchange Commission.
10.9(vii) Notice of Termination dated November 2, 2000, of Investment
Management Agreement dated February 25, 1999, between Penn-America
Insurance Company and Madison Monroe, Inc., filed with Registrant's
Report on Form 10-K for the period ended December 31, 2000, which has
been filed with the Securities and Exchange Commission.
10.101993 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.
Page 27
Exhibit No. Description
---------- -----------
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 dated January 1, 2000, filed with
Registrant's Report on Form 10-K for the period ended December 31,
1999, which has been filed with the Securities and Exchange
Commission.
10.10(iii) Amendment dated April 1, 2000, to Penn-America Group, Inc. 1993
Stock Incentive Plan, as amended and restated April 4, 1994, filed
with Registrant's Report on Form 10-K for the period ended December
31, 2001, which has been filed with the Securities and Exchange
Commission on March 30, 2001.
10.10(iv) Amended and Restated 2002 Stock Incentive Plan (f/k/a 1993 Stock
Incentive Plan), filed as Exhibit 4 to the Registrant's Registration
Statement on Form S-8 (No. 333-89846), which was filed with the
Commission on June 5, 2002.
10.10(v) Amended 2002 Stock Incentive Plan.
10.11Lease effective July 1, 2000, between Penn-America Insurance Company
and Irvin Saltzman, filed with Registrant's Report on Form 10-K for
the period ended December 31, 2000, which has been filed with the
Securities and Exchange Commission on March 30, 2001.
10.141995 Multiple Line Excess of Loss (Casualty and Property) Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995, filed with Registrant's Report on Form S-2 Amendment
No. 1 (No. 333-91362) with the Securities and Exchange Commission on
September 6, 2002.
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 S-2 Amendment
No. 1 (No. 333-91362) with the Securities and Exchange Commission on
September 6, 2002.
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 S-2 Amendment
No. 1 (No. 333-91362) with the Securities and Exchange Commission on
September 6, 2002.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with General Re
Corporation effective May 1, 1996, filed with Registrant's Report on
Form S-2 Amendment No. 1 (No. 333-91362) with the Securities and
Exchange Commission on September 6, 2002.
Page 28
Exhibit No. Description
---------- -----------
10.14(iv) Property Catastrophe Excess of Loss Reinsurance Program between
subscribing reinsurers and Penn-America and Penn-Star Insurance
Companies effective January 1, 2000 to January 1, 2002, filed with
Registrant's Report on Form 10-K for the period ended December 31,
2001, which has been filed with the Securities and Exchange Commission
on March 28, 2002.
10.14(v) Property Catastrophe Excess of Loss Reinsurance Program between
subscribing reinsurers and Penn-America and Penn-Star Insurance
Companies effective January 1, 2002 to January 1, 2003, filed with
Registrant's Report on Form 10-K for the period ended December 31,
2002.
10.16Penn-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.
10.16(i) Penn-America Insurance Company 2001 Key Employee Incentive
Compensation Plan, effective January 1, 2001, filed with Registrant's
Report on Form 10-K for the period ended December 31, 2000, which has
been filed with the Securities and Exchange Commission on March 30,
2001.
10.17Penn-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.
10.17(ii) Form of Amended General Agency Profit Sharing Addendum to Agency
Award & Profit Sharing Plan, filed with Registrant's Report on Form
10-K for the period ended December 31, 1999, which has been filed with
the Securities and Exchange Commission on March 27, 2000.
10.17(iii) Form of General Agent Contingent Profit Commission Addendum
between agents and Penn-America and Penn-Star Insurance Companies
effective January 1, 2001, filed with Registrant's Report on Form 10-K
for the period ended December 31, 2001, which has been filed with the
Securities and Exchange Commission on March 28, 2002.
10.17(iv) Agency Performance Award and Profit Sharing Plan, filed as
Exhibit 4.1 to the Registrant's Registration Statement on Form S-2
(No.333-87698), which was filed with the Commission on May 7, 2002.
10.18Stipulation of Termination of Property and Liability Reinsurance
Agreement with National Reinsurance Corporation effective May 1, 1996,
filed with Registrant's Report on Form S-2 Amendment No. 1 (No.
333-91362) with the Securities and Exchange Commission on September 6,
2002.
Page 29
Exhibit No. Description
---------- -----------
10.19Multiple Line Excess of Loss Agreement of Reinsurance including
Endorsement No. 1 between General Reinsurance Corporation and
Penn-America and Penn-Star Insurance Companies effective January 1,
2000, filed with Registrant's Report on Form 10-K for the period ended
December 31, 2001, which has been filed with the Securities and
Exchange Commission on March 28, 2002.
10.19(i) Endorsement No. 2 to the Multiple Line Excess of Loss Agreement of
Reinsurance including Endorsement No. 1 (Exhibit 10.19) between
General Reinsurance Corporation and Penn-America and Penn-Star
Insurance Companies, effective September 1, 2001, filed with
Registrant's Report on Form 10-K for the period ended December 31,
2001, which has been filed with the Securities and Exchange Commission
on March 28, 2002.
10.20Property and Casualty Excess of Loss Reinsurance Agreement between
American Re-Insurance Company and Penn-America and Penn-Star Insurance
Companies effective September 1, 2001, filed with Registrant's Report
on Form 10-K for the period ended December 31, 2001, which has been
filed with the Securities and Exchange Commission on March 28, 2002.
10.21ISDA (International Swap Dealers Association, Inc.) Master Agreement
dated as of December 16, 2002 between Penn-America Group, Inc. and
Bear Stearns Bank PLC.
10.21(i) Schedule to the ISDA (International Swap Dealers Association,
Inc.) Master Agreement dated as of December 16, 2002 between
Penn-America Group, Inc. and Bear Stearns Bank PLC.
10.21(ii) ISDA (International Swap Dealers Association, Inc.) Credit
Support Annex to the Schedule to the ISDA Master Agreement dated as of
December 16, 2002 between Penn-America Group, Inc. and Bear Stearns
Bank PLC.
10.21(iii) Fixed Income Derivatives Confirmation to the ISDA
(International Swap Dealers Association, Inc.) Master Agreement dated
as of December 16, 2002 between Penn-America Group, Inc. and Bear
Stearns Bank PLC.
11 Statement re: computation of per share earnings, incorporated by
reference from Note 2 to the Consolidated Financial Statements, filed
with Registrant's Report on Form 10-K for the period ended December
31, 2002, which has been filed with the Securities and Exchange
Commission.
13 2002 Annual Report to Shareholders, incorporated by reference under
Item 8.
21 As of December 31, 2002, the Registrant has two subsidiaries;
Penn-America Insurance Company, a Pennsylvania Corporation and
Penn-America Statutory Trust I, a Connecticut Financing Corporation.
23 Independent Auditors' Consent and Report on Schedules
Page 30
Exhibit No. Description
---------- -----------
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, filed with Registrant's Report on Form 10-K for
the period ended December 31, 1999, which has been filed with the
Securities and Exchange Commission.
28.4 Second Amendment to Credit Agreement, dated August 26, 1999, among
registrant, certain lenders and First Union National Bank, dated
September 28, 1998, filed with Registrant's Report on Form 10-K for
the period ended December 31, 1999, which has been filed with the
Securities and Exchange Commission.
28.5 Third Amendment to Credit Agreement, dated March 15, 2000, among
registrant, certain lenders and First Union National Bank, dated
September 28, 1998, filed with Registrant's Report on Form 10-K for
the period ended December 31, 1999, which has been filed with the
Securities and Exchange Commission.
28.6 Notice of Termination of Credit Agreement, dated July 31, 2000, among
Registrant, Certain Lenders, and First Union National Bank, parties to
the Credit Agreement dated
September 28, 1998, filed with the Registrant's Report on Form 10-K
for the period ended December 31, 2000, which has been filed with the
Securities and Exchange Commission.
30.0 Reinsurance Pooling Agreement between Penn-America Insurance Company
and Penn- Star Insurance Company dated July 1, 1998, filed as Exhibit
30.0 to the Registrant's Annual Report on Form 10-K for the period
ended December 31, 1998, which was filed with the Commission on March
26, 1999.
30.0(i) Amendment No.1 to Reinsurance Pooling Agreement dated July 1, 1998,
effective July 1, 2002.
30.0(ii) Amendment No.2 to Reinsurance Pooling Agreement dated July 1,
1998, effective December 31, 2002.
31.0 Amended and Restated Promissory Note and Security Agreement effective
January 2, 2001, between Jon S. Saltzman and Penn-America Insurance
Company which amends and restates in its entirety, including any
amendments thereto, the Promissory Note and Security Agreement dated
January 17, 2000, filed with Registrant's Report on Form 10-K for the
period ended December 31, 2001, which has been filed with the
Securities and Exchange Commission on March 28, 2002.
Page 31
Exhibit No. Description
- ---------- -----------
31.0(i) Amended and Restated Promissory Note and Security Agreement
effective January 2, 2001, between Jon S. Saltzman and Penn-America
Insurance Company which amends and restates in its entirety, including
any amendments thereto, the Promissory Note and Security Agreement
dated March 10, 2000, filed with Registrant's Report on Form 10-K for
the period ended December 31, 2001, which has been filed with the
Securities and Exchange Commission on March 28, 2002.
31.0(ii) Amended and Restated Promissory Note and Security Agreement
effective January 2, 2001, between Jon S. Saltzman and Penn-America
Insurance Company which amends and restates in its entirety, including
any amendments thereto, the Promissory Note and Security Agreement
dated September 19, 2000, filed with Registrant's Report on Form 10-K
for the period ended December 31, 2001, which has been filed with the
Securities and Exchange Commission on March 28, 2002.
31.0(iii) Amended and Restated Promissory Note and Security Agreement
effective January 2, 2001, between J. Ransley Lennon and Penn-America
Insurance Company which amends and restates in its entirety, including
any amendments thereto, the Promissory Note Security Agreement dated
February 16, 2000, filed with Registrant's Report on Form 10-K for the
period ended December 31, 2001, which has been filed with the
Securities and Exchange Commission on March 28, 2002.
31.0(iv) Amended and Restated Promissory Note and Security Agreement
effective January 2, 2001, between Garland P. Pezzuolo and
Penn-America Insurance Company which amends and restates in its
entirety, including any amendments thereto, the Promissory Note and
Security Agreement dated February 11, 2000, filed with Registrant's
Report on Form 10-K for the period ended December 31, 2001, which has
been filed with the Securities and Exchange Commission on March 28,
2002.
31.0(v) Promissory Note and Security Agreement effective March 9, 2001,
between Joseph F. Morris and Penn-America Insurance Company, filed
with Registrant's Report on Form 10-K for the period ended December
31, 2001, which has been filed with the Securities and Exchange
Commission on March 28, 2002.
31.0(vi) Promissory Note and Security Agreement effective March 28, 2001,
between Joseph F. Morris and Penn-America Insurance Company, filed
with Registrant's Report on Form 10-K for the period ended December
31, 2001, which has been filed with the Securities and Exchange
Commission.
31.0(vii) Promissory Note and Security Agreement effective March 9, 2001,
between Garland P. Pezzuolo and Penn-America Insurance Company, filed
with Registrant's Report on Form 10-K for the period ended December
31, 2001, which has been filed with the Securities and Exchange
Commission on March 28, 2002.
Page 32
Exhibit No. Description
---------- -----------
31.0(viii) Promissory Note and Security Agreement effective February 16,
2001, between Thomas P. Bowie and Penn-America Insurance Company,
filed with Registrant's Report on Form 10-K for the period ended
December 31, 2001, which has been filed with the Securities and
Exchange Commission on March 28, 2002.
31.0(ix) Promissory Note and Security Agreement effective February 23,
2001, between Thomas P. Bowie and Penn-America Insurance Company,
filed with Registrant's Report on Form 10-K for the period ended
December 31, 2001, which has been filed with the Securities and
Exchange Commission on March 28, 2002.
31.0(x) Promissory Note and Security Agreement effective February 27, 2001,
between Thomas P. Bowie and Penn-America Insurance Company, filed with
Registrant's Report on Form 10-K for the period ended December 31,
2001, which has been filed with the Securities and Exchange Commission
on March 28, 2002.
31.0(xi) Promissory Note and Security Agreement effective March 21, 2001,
between Thomas P. Bowie and Penn-America Insurance Company, filed with
Registrant's Report on Form 10-K for the period ended December 31,
2001, which has been filed with the Securities and Exchange Commission
on March 28, 2002.
99.1 Certification of Chief Executive Officer of Penn-America Group, Inc.
dated March 31, 2003 in accordance with 18 U.S.C Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Executive Officer of Penn-America Group, Inc.
dated March 31, 2003 in accordance with 18 U.S.C Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Part (b)
Form 8-K dated November 15, 2002 re: Quarterly Statements of
Penn-America Insurance Company and Penn-Star Insurance Company, which
was filed with the Securities and Exchange Commission.
Page 33
PENN-AMERICA GROUP, INC.
Schedule I - Summary of Investments - Other than Investments in Related Parties
(In thousands)
December 31, 2002
-----------------------------------------------------------
Fair Amount shown
Cost Value on Balance Sheet
-----------------------------------------------------------
(In thousands)
Fixed maturities
Available for sale
U.S. Treasury securities
and obligations
of U.S. government agencies $ 40,384 $ 41,190 $ 41,190
Corporate securities 66,575 69,870 69,870
Mortgage-backed securities 31,077 32,346 32,346
Other structured securities 29,828 31,021 31,021
Municipal securities 49,992 52,262 52,262
Public utilities 19,594 19,894 19,894
-------- --------
Total available for sale 237,450 246,583 246,583
-------- -------- --------
Held to maturity
U.S. Treasury securities and obligations
of U.S. government agencies 1,687 1,717 1,687
Corporate securities 276 300 276
-------- -------- --------
Total held to maturity 1,963 2,017 1,963
-------- -------- --------
Total fixed-maturity securities 239,413 248,600 248,546
Equity securities:
Common stock 6,893 7,019 7,019
Preferred stock 10,966 11,606 11,606
-------- -------- --------
Total equity securities 17,859 18,625 18,625
-------- -------- --------
Total investments $257,272 $267,225 $267,171
======== ======== ========
Page 34
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Balance Sheets
(In thousands except share data)
December 31,
------------------------------------
2002 2001
--------------- ----------------
(Restated)(2)
ASSETS
Cash $ 1,663 $ 1,261
Investment in insurance subsidiary, equity method 130,132 79,425
Investment in Penn-America Statutory Trust I 464 ---
Deferred offering costs 456 ---
Other assets 465 359
--------------- ----------------
Total assets $ 133,180 $ 81,045
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 292 $ 25
Subordinated debentures, affiliate 15,464
Other liabilities 200 ---
--------------- ----------------
Total liabilities 15,956 25
--------------- ----------------
Stockholders' equity:
Preferred stock, $ .01 par value; authorized 2,000,000 shares;
none issued
Common stock, $.01 par value; authorized 20,000,000 in 2002 and 2001;
issued 2002, 14,572,098 and 2001, 15,228,351 shares, respectively;
outstanding 2002, 14,572,098 and 2001, 11,478,351, respectively (1) 146 152
Additional paid-in capital (1) 70,875 70,735
Accumulated other comprehensive income 6,401 3,106
Treasury stock 3,750,000 shares in 2001 at cost (1) --- (24,161)
Retained earnings 39,995 31,320
Unearned compensation from restricted stock awards (193) (132)
--------------- ---------------
Total stockholders' equity 117,224 81,020
--------------- ----------------
Total liabilities and stockholders' equity $133,180 $ 81,045
=============== ================
(1) Adjusted to reflect a three-for-two stock split of the Company's common
stock effected on May 9, 2002.
(2) The Company amended its accounting policy relating to the timing of
recording other-than-temporary declines in the market value of equity
securities and, accordingly, restated its previously issued financial
statements for the years ended December 31, 2001, 2000 and 1999. See the
Company's Management Discussion and Analysis, in the Company's Annual
Report to Shareholders, incorporated herein by reference for more
information regarding this restatement.
Page 35
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Statements of Operations
(In thousands except per share data)
Years ended December 31,
--------------------------------------------------
2002 2001 2000
------------- ------------- --------------
(Restated)(2) (Restated)(2
Revenue:
$ 1,600 $
Dividend income $ 1,100 ---
Other income 14 26 27
Operating expenses (618) (548) (791)
Interest expense (73) --- ---
-------- -------- --------
Income (loss) before income tax and undistributed net income
(loss) of subsidiary 423 1,078 (764)
Income tax benefit 230 177 260
-------- -------- --------
Income (loss) before equity in undistributed
net income of subsidiary 653 1,255 (504)
Equity in undistributed net income (loss)
of subsidiary 9,811 3,685 (4,327)
-------- -------- --------
Net income (loss) $ 10,464 $ 4,940 $ (4,831)
======== ======== ========
Net income (loss) per share:
Basic $ 0.90 $ 0.43 $ (0.42)
======== ======== ========
Diluted $ 0.88 $ 0.43 $ (0.42)
======== ======== ========
(1) Adjusted to reflect a three-for-two stock split of the Company's common
stock effected on May 9, 2002.
(2) The Company amended its accounting policy relating to the timing of
recording other-than-temporary declines in the market value of equity
securities and, accordingly, restated its previously issued financial
statements for the years ended December 31, 2001, 2000 and 1999. See the
Company's Management Discussion and Analysis, in the Company's Annual
Report to Shareholders, incorporated herein by reference for more
information regarding this restatement.
Page 36
PENN-AMERICA GROUP, INC.
Schedule II - Condensed Financial Information of Parent Company
Condensed Statements of Cash Flows
(In thousands)
Years ended
December 31,
-------------------------------------------
2002 2001 2000
---- --- ----
(Restated) (Restated)
Cash flows from operating activities:
Net income (loss) $ 10,464 $ 4,940 $ (4,831)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Return of capital from subsidiary --- --- 6,400
Equity in undistributed net (income) loss of subsidiary (9,811) (3,685) 4,327
Amortization/depreciation 158 86 246
Increase (decrease) in :
Accounts payable and accrued expenses 267 (148) 108
Other, net (115) 74 16
-------- -------- --------
Net cash provided by operating activities 963 1,267 6,266
-------- -------- --------
Cash flows from investing activities:
Change in short-term investments --- --- 449
-------- -------- --------
Net cash provided by investing activities --- --- 449
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 24,155 622 500
Net proceeds from issuance of subordinated debentures 14,538 --- ---
Capital contribution to insurance subsidiary (37,465) --- ---
Purchase of treasury stock --- --- (4,687)
Dividends paid to common stockholders (1,789) (1,600) (1,611)
-------- -------- --------
Net cash used by financing activities (561) (978) (5,798)
-------- -------- --------
Increase in cash 402 289 917
Cash, beginning of period 1,261 972 55
-------- -------- --------
Cash, end of period $ 1,663 $ 1,261 $ 972
======== ======== ========
(1) Adjusted to reflect a three-for-two stock split of the Company's common
stock effected on May 9, 2002.
(2) The Company amended its accounting policy relating to the timing of
recording other-than-temporary declines in the market value of equity
securities and, accordingly, restated its previously issued financial
statements for the years ended December 31, 2001, 2000 and 1999. See the
Company's Management Discussion and Analysis, in the Company's Annual
Report to Shareholders, incorporated herein by reference for more
information regarding this restatement.
Page 37
PENN-AMERICA GROUP, INC.
Schedule III - Supplementary Insurance Information
Years Ended December 31, 2002, 2001 and 2000
(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
-----------------------------------------------------------------------------------------------------------------------
2002
Commercial $ 13,159 $ 136,909 $ 65,365 $ 115,055 $ 6,378 $ 75,160 $ 28,994 $ 2,994 $ 134,662
Personal --- 838 --- --- --- (52 16 --- ---
Unallocated --- --- --- --- 5,379 --- --- 6,141 ---
------------- ------------- ------------- ------------- -------------------------------------- -----------------------
Total $ 13,159 $ 137,747 $ 65,365 $ $ 11,757 $ 75,108 $ 29,010 $ 9,135 $ 134,662
115,055
------------- ------------- ------------- ------------- -------------------------------------- -----------------------
2001
Commercial $ 9,067 $ 117,555 $ 40,989 $ 88,912 $ 7,665 $ 62,414 $ 22,707 $ 3,380 $ 87,121
Personal 16 2,043 45 22 --- (1,493 8 --- 2
Unallocated --- --- --- --- 3,674 --- --- 5,358 ---
------------- ------------- ------------- ------------- -------------------------------------- -----------------------
Total $ 9,083 $ 119,598 $ 41,034 $ 88,934 $ 11,339 $ 60,921 $ 22,715 $ 8,738 $ 87,123
------------- ------------- ------------- ------------- -------------------------------------- -----------------------
2000
Commercial $ 10,310 $ 109,377 $ 43,218 $ 87,556 $ 5,904 $ 72,893 $ 23,857 $ 1,757 $ 94,481
Personal 7 5,937 21 3,893 549 2,485 1,362 --- 2,769
Unallocated --- --- --- --- 4,001 --- --- 5,045 ---
------------- ------------- ------------- ------------- -------------------------------------- -----------------------
Total $ 10,317 $ 115,314 $ 43,239 $ 91,449 $ 10,454 $ 75,378 $ 25,219 $ 6,802 $ 97,250
------------- ------------- ------------- ------------- -------------------------------------- -----------------------
Page 38
PENN-AMERICA GROUP, INC.
Schedule IV - Reinsurance
Years Ended December 31, 2002, 2001 and 2000
(In thousands)
Ceded to Assumed Net Premium Percentage
Property and Liability Other from Other Written of Assumed
Insurance Premiums Direct Companies Companies to Net
-------------- -------------- ------------ ------------- --------------
2002 $ 157,435 $ 22,771 $ (2) $ 134,662 ---
============== ============== ============ ============= ==============
2001 $ 98,328 $ 11,289 $ 84 $ 87,123 0.1%
============== ============== ============ ============= ==============
2000 $ 108,622 $ 12,541 $ 1,169 $ 97,250 1.2%
============== ============== ============ ============= ==============
Page 39
PENN-AMERICA GROUP, INC.
Schedule VI- Supplemental Insurance Information Concerning
Property and Casualty Operations
Years Ended December 31, 2002, 2001 and 2000
(In thousands)
Liability Loss and Loss
for Unpaid Discount Adjustment Expenses
Losses and If Any, (Benefits) Incurred Paid Losses
Loss Deducted Related to and Loss
------------------------------
Adjustment From Current Prior Adjustment
Expenses Reserves Year Year Expenses
--------------- -------------- ------------ -------------- -------------------
Years Ended
December 31, 2001 $ 137,747 --- $ 72,702 2,406 $ 58,956
December 31, 2000 119,598 --- 60,885 36 58,096
December 31, 1999 115,314 --- 66,214 9,164 59,790
Page 40
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: _______________ 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 31, 2003
- ---------------------- and Director
Irvin Saltzman
/s/ Jon S. Saltzman President, Chief Executive Officer and March 31, 2003
- ---------------------- Director (Principal Executive Officer)
Jon S. Saltzman
/s/ Robert A. Lear Director March 31, 2003
- ----------------------
Robert A. Lear
/s/ Joseph F. Morris Senior Vice President, Chief Financial Officer March 31, 2003
- ---------------------- and Treasurer
Joseph F. Morris
/s/ Garland P. Pezzuolo Vice President, Secretary and General Counsel March 31, 2003
- ----------------------
Garland P. Pezzuolo
/s/ Paul Simon Director March 31, 2003
- ----------------------
Paul Simon
/s/ Charles Ellman Director March 31, 2003
- ----------------------
Charles Ellman
/s/ M. Moshe Porat Director March 31, 2003
- ----------------------
M. Moshe Porat
/s/ Jami Saltzman-Levy Director March 31, 2003
- ----------------------
Jami Saltzman-Levy
/s/ Richard L. Duszak Director March 31, 2003
- ----------------------
Richard L. Duszak
/s/ E. Anthony Saltzman Director March 31, 2003
- ----------------------
E. Anthony Saltzman
Page 41
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 31, 2003 By:---------------------------------------
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.
- ----------------------- Chairman of the Board of Directors March 31, 2003
Irvin Saltzman and Director
----------------------- President, Chief Executive Officer and March 31, 2003
Jon S. Saltzman Director (Principal Executive Officer)
- ----------------------- Director March 31, 2003
Robert A. Lear
- ----------------------- Senior Vice President, Chief Financial Officer March 31, 2003
Joseph F. Morris and Treasurer
- ----------------------- Vice President, Secretary & General Counsel March 31, 2003
Garland P. Pezzuolo
- ----------------------- Director March 31, 2003
Paul Simon
- ----------------------- Director March 31, 2003
Charles Ellman
- ----------------------- Director March 31, 2003
M. Moshe Porat
- ----------------------- Director March 31, 2003
Jami Saltzman-Levy
- ----------------------- Director March 31, 2003
Richard L. Duszak
- ----------------------- Director March 31, 2003
E. Anthony Saltzman
Page 42
CERTIFICATIONS
I, Jon S. Saltzman, certify that:
1. I have reviewed this annual report on Form 10-K of Penn-America Group,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 the 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
annual 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: March 31, 2003 /s/ Jon S. Saltzman
-----------------------
Jon S. Saltzman
President & CEO
Page 43
CERTIFICATIONS
I, Joseph F. Morris, certify that:
1. I have reviewed this annual report on Form 10-K of Penn-America Group,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 the 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
annual 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.
Joseph F. Morris
Date: March 31, 2003 ------------------------------
Joseph F. Morris
Senior Vice President, CFO
and Treasurer
Page 44