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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22316
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Penn-America Group, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
- ---------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 South York Road, Hatboro, Pennsylvania 19040
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(Address of principal executive offices, including zip code)
(215) 443-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- ----
At August 1, 2003, 14,713,480 shares of the registrant's common stock, $0.01 par
value, were outstanding.
Page 1
Penn-America Group, Inc. and SubsidiarIES
Index
Page Number
-----------
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2003 (unaudited) and
December 31, 2002 3
Consolidated Unaudited Statements of Operations - For the three
and six months ended June 30, 2003 and 2002 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the six months ended June 30, 2003 5
Consolidated Unaudited Statements of Cash Flows -
For the six months ended June 30, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Item 4. Controls and Procedures 22
Part II - Other Information 23
Page 2
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
June 30, December 31,
2003 2002
---------------- -----------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost, $272,127 and $237,450) $ 283,893 $ 246,583
Held to maturity, at amortized cost (fair value, $1,306 and $2,017) 1,276 1,963
Equity securities, at fair value (cost, $10,716 and $17,859) 12,000 18,625
--------- ---------
Total investments 297,169 267,171
Cash and cash equivalents 14,871 9,796
Accrued investment income 3,115 3,196
Premiums receivable 20,042 12,564
Reinsurance recoverable 29,582 27,843
Prepaid reinsurance premiums 10,993 8,965
Deferred policy acquisition costs 14,883 13,159
Capital lease, affiliate 1,535 1,579
Deferred income taxes 1,289 2,105
Income tax recoverable -- 60
Other assets 1,098 801
--------- ---------
Total assets $ 394,577 $ 347,239
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 148,205 $ 137,747
Unearned premiums 76,659 65,365
Accounts payable and accrued expenses 7,332 7,700
Capitalized lease obligation, affiliate 1,351 1,428
Company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debentures 30,000 15,000
Income tax payable 159 --
Other liabilities 4,993 3,404
--------- ---------
Total liabilities 268,699 230,644
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares;
None issued -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding, 14,708,980 and 14,572,098 shares 147 146
Additional paid-in capital 71,991 70,875
Accumulated other comprehensive income 8,251 6,401
Retained earnings 46,289 39,995
Officers' stock loans (583) (629)
Unearned compensation from restricted stock awards (217) (193)
--------- ---------
Total stockholders' equity 125,878 116,595
--------- ---------
Total liabilities and stockholders' equity $ 394,577 $ 347,239
========= =========
Page 3
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the three and six months ended June 30, 2003 and 2002
(In thousands, except share data)
Three months ended June 30, Six months ended June 30,
---------------------------------- -------------------------------
2003 2002 2003 2002
------------------ ------------- ------------------- ----------
Revenues
Premiums earned $ 36,295 $ 27,234 $ 70,660 $ 50,217
Net investment income 3,244 2,925 6,457 5,758
Net realized investment gain (loss) 431 (1,093) 1,145 (1,345)
------------ ------------ ------------ ------------
Total revenues 39,970 29,066 78,262 54,630
------------ ------------ ------------ ------------
Losses and expenses
Losses and loss adjustment expenses 22,185 17,364 44,197 32,650
Amortization of deferred policy acquisition costs 9,073 6,739 17,690 12,750
Other underwriting expenses 2,326 2,166 4,372 3,823
Corporate expenses 234 233 419 344
Interest expense 409 35 713 70
------------ ------------ ------------ ------------
Total losses and expenses 34,227 26,537 67,391 49,637
------------ ------------ ------------ ------------
Income before income tax 5,743 2,529 10,871 4,993
Income tax expense 1,744 647 3,298 1,325
------------ ------------ ------------ ------------
Net income $ 3,999 $ 1,882 $ 7,573 $ 3,668
============ ============ ============ ============
Net income per share:
Basic $ 0.27 $ 0.16 $ 0.52 $ 0.32
Diluted $ 0.27 $ 0.16 $ 0.51 $ 0.31
Weighted average shares outstanding:
Basic 14,636,147 11,574,913 14,613,746 11,555,944
Diluted 14,905,122 11,791,719 14,852,142 11,754,854
Cash dividends per share $ 0.04375 $ 0.03875 $ 0.08750 $ 0.07708
Page 4
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the six months ended June 30, 2003
(In thousands, except share data)
Unearned
Accumulated Compensation
Additional Other Officers' From Total
Common Paid-In Comprehensive Retained Stock Restricted Stockholders'
Stock Capital Income Earnings Loans Stock Awards Equity
--------- --------- ------- --------- ------ --------- ---------
Balance at December 31, 2002 $ 146 $ 70,875 $ $ 39,995 $ (629) $ (193) $ 116,595
6,401
Net income -- -- -- -- --
7,573 7,573
Other comprehensive gain:
Unrealized gain on investments, net
of tax and reclassification adjustment -- -- --
2,080 -- -- 2,080
Unrealized loss on cash-flow hedging
instrument, net of tax -- -- (230) --
-- -- (230)
---------
Comprehensive income
9,423
---------
Issuance of common stock 1 1,070 -- --
-- -- 1,071
Compensation expense on stock
options -- 46 -- --
-- -- 46
Unearned compensation from restricted
stock awards issued -- -- --
-- -- (51) (51)
Amortization of compensation expense
from restricted stock awards issued -- -- --
-- -- 27 27
Repayment of officers' stock loans
46 -- 46
Cash dividends paid ($0.08750 per share) -- -- --
(1,279) -- -- (1,279)
--------- --------- ------- --------- ------ --------- ---------
Balance at June 30, 2003 $ 147 $ 71,991 $ 8,251 $ 46,289 $(583) $ (217) $ 125,878
========= ========= ======= ========= ====== ========= =========
Page 5
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended June 30, 2003 and 2002
(In thousands)
Six months ended June 30,
----------------------------------------
2003 2002
------------------ -----------------
Cash flows from operating activities:
Net income $ 7,573 $ 3,668
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization (accretion) and depreciation expense 813 (185)
Net realized investment loss (gain) (1,145) 1,345
Deferred income tax benefit (137) (516)
Net change in premiums receivable, prepaid reinsurance
premiums and unearned premiums 1,788 13,298
Net change in unpaid losses and loss adjustment expenses
and reinsurance recoverable 8,719 8,011
Decrease (increase) in:
Accrued investment income 81 (513)
Deferred policy acquisition costs (1,724) (3,108)
Income tax recoverable/payable 219 177
Other assets 67 11
Increase (decrease) in:
Accounts payable and accrued expenses (368) 1,840
Other liabilities (827) 82
--------- ---------
Net cash provided by operating activities 15,059 24,110
--------- ---------
Cash flows from investing activities:
Purchases of fixed maturities available for sale (100,869) (54,296)
Proceeds from sales of equity securities 6,697 1,000
Proceeds from sales and maturities of fixed maturities available for sale 69,192 9,451
Proceeds from maturities and calls of fixed maturities held to maturity 686 12,130
--------- ---------
Net cash used by investing activities (24,294) (31,715)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 1,071 295
Net proceeds from the issuance of trust preferred securities 14,549 --
Principal payments on capital lease obligations, affiliate (77) (71)
Repayment of officers' loans 46 --
Dividends paid (1,279) (891)
--------- ---------
Net cash provided (used) by financing activities 14,310 (667)
--------- ---------
Increase (decrease) in cash and cash equivalents 5,075 (8,272)
Cash and cash equivalents, beginning of period 9,796 13,129
--------- ---------
Cash and cash equivalents, end of period $ 14,871 $ 4,857
========= =========
Page 6
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Organization and Basis of Presentation
Penn-America Group, Inc. ("PAGI") is an insurance holding company.
Approximately 31% of the outstanding common stock of PAGI was owned by Penn
Independent Corporation ("Penn Independent") at June 30, 2003. The accompanying
financial statements include the accounts of PAGI and its wholly-owned
subsidiaries, Penn-America Insurance Company ("Penn-America") and its
wholly-owned subsidiary, Penn-Star Insurance Company ("Penn-Star"); Penn-America
Statutory Trust I (the "Trust I"); and Penn-America Statutory Trust II (the
"Trust II") (collectively the "Company").
The Company markets and underwrites general liability, commercial
property, and multi-peril insurance for small businesses located primarily in
small towns and suburban and rural areas. The Company is licensed to write
business in all 50 states and the District of Columbia. The Company writes
business on both an admitted and non-admitted basis in 37 states, on only an
admitted basis in one state and on only a non-admitted basis in 12 states and
the District of Columbia.
The accompanying condensed unaudited consolidated financial statements
and notes have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of results for the interim periods have been
included. All significant intercompany accounts and transactions have been
eliminated in consolidation. It is suggested that these condensed unaudited
consolidated financial statements and notes be read in conjunction with the
financial statements and notes in the Company's 2002 Annual Report which was
incorporated by reference into the Company's Form 10-K for the year ended
December 31, 2002. The Company's results of operations for interim periods are
not necessarily indicative of the results to be expected for the entire year.
Note 2 - Reinsurance
Premiums earned are presented net of amounts ceded to reinsurers of
$6,706,000 and $4,100,000 for the three months ended June 30, 2003 and 2002,
respectively. Losses and loss adjustment expenses are presented net of amounts
ceded to reinsurers of $4,445,000 and $1,100,000 for the three months ended June
30, 2003 and 2002, respectively.
Premiums earned are presented net of amounts ceded to reinsurers of
$12,906,000 and $7,200,000 for the six months ended June 30, 2003 and 2002,
respectively. Losses and loss adjustment expenses are presented net of amounts
ceded to reinsurers of $8,314,000 and $2,800,000 for the six months ended June
30, 2003 and 2002, respectively.
Page 7
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 3 - Comprehensive Income
For the three months ended June 30, 2003, comprehensive income was
$6,051,000, which consisted of net income of $3,999,000 and other comprehensive
gain of $2,052,000 related to net unrealized gains on investments and an
unrealized loss on a cash flow hedging instrument. For the three months ended
June 30, 2002, comprehensive income was $4,338,000, which consisted of net
income of $1,882,000 and other comprehensive gain of $2,456,000 related to net
unrealized gains on investments.
For the six months ended June 30, 2003, comprehensive income was
$9,423,000, which consisted of net income of $7,573,000 and other comprehensive
gain of $1,850,000 related to net unrealized gains on investments and an
unrealized loss on a cash flow hedging instrument. For the six months ended June
30, 2002, comprehensive income was $5,107,000, which consisted of net income of
$3,668,000 and other comprehensive gain of $1,439,000 related to net unrealized
gains on investments.
Note 4 - Net Income Per Share
Basic net income per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding for each period. Diluted net income per share includes the potential
dilution that could occur if outstanding contracts to issue common stock were
exercised and converted to common stock. The following is a reconciliation of
the basic and diluted net income per share computations:
(in thousands, except share data) Three months ended June 30, Six months ended June 30,
------------------------------------- -----------------------------
2003 2002 2003 2002
---------------- ----------------- --------------- -------------
Basic per share computation:
Net income $ 3,999 $ 1,882 $ 7,573 $
3,668
1,786
Weighted average common shares (outstanding 14,636,147 11,574,913 14,613,746 11,555,944
11,536,694
----------- ----------- ----------- -----------
Basic net income per share $ 0.27 $ 0.16 $ 0.52 $ 0.32
=========== =========== =========== ===========
Diluted per share computation:
Net income $ $ 1,882 $ 7,573 $ 3,668
3,999
Weighted average common shares (1)outstanding 14,636,147 11,574,913 14,613,746 11,555,944
Additional shares outstanding after the assumed
assumed exercise of stock options by
applying the treasury stock method 268,975 216,806 238,396 198,910
----------- ----------- ----------- -----------
Total shares 14,905,122 11,791,719 14,852,142 11,754,854
=========== =========== =========== ===========
Diluted net income per share $ 0.27 $ 0.16 $ 0.51 $ 0.31
=========== =========== =========== ===========
Page 8
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 5 - Segment Information
The Company has only one reportable segment. In 1999, the Company
exited the non-standard personal automobile line of business and announced that
it would run-off its remaining portfolio of such business. For the three and six
months ended June 30, 2003 and 2002, amounts relating to the non-standard
personal automobile business were not material to the financial statements
presented, and therefore, are not presented separately.
Note 6 - Stock Options
On January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure ("SFAS 148"), and SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") by implementing the modified prospective transition
method permitted under SFAS 148. This method requires the Company to record
compensation expense in 2003, and annually thereafter, as if the fair value
recognition method had been used since January 1, 1995. Compensation expense of
$24,000 and $46,000 was recorded for the three and six months ended June 30,
2003.
Prior to January 1, 2003, the Company applied the recognition
principles of APB No. 25, Accounting for Stock Issued to Employees, and,
accordingly, no compensation expense was recognized. If the Company had applied
the fair value recognition provisions of SFAS 123 in 2002, compensation expense
of $62,000 and $124,000 would have been recorded for the three and six months
ended June 30, 2002. The following table illustrates the effect on net income
and net income per share for the three and six months ended June 30, 2003 and
2002 as if the Company had applied the fair value recognition provisions of SFAS
123.
(in thousands, except share data) Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 3,999 $ 1,882 $ 7,573 $ 3,668
Add: Stock-based employee compensation
included in net income, net of tax -- 30 --
16
Deduct: Stock-based employee compensation
determined under the fair value based
method, net of tax (16) (41) (30) (82)
--------- --------- --------- ---------
Pro forma net income $ 3,999 $ 1,841 $ 7,573 $ 3,586
========= ========= ========= =========
Basic net income per share:
As reported $ 0.27 $ 0.16 $ 0.52 $ 0.32
Pro forma $ 0.27 $ 0.16 $ 0.52 $ 0.31
Diluted net income per share:
As reported $ 0.27 $ 0.16 $ 0.51 $ 0.31
Pro forma $ 0.27 $ 0.16 $ 0.51 $ 0.31
Page 9
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 7 -Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures
On May 15, 2003, Penn-America Statutory Trust II ("the Trust II"), a
business trust subsidiary formed by PAGI, issued $15 million of floating rate
trust preferred securities ("Trust Preferred Securities"). These securities have
a thirty-year maturity, with a provision that allows the Company to call these
securities at par after five years from the date of issuance. Cash distributions
will be paid quarterly in arrears at a rate of 410 basis points over three-month
London Interbank Offered Rates. Distributions on these securities can be
deferred for up to five years, but in the event of such deferral, the Company
may not declare or pay cash dividends on its common stock. The Company
guarantees all obligations of the Trust II with respect to distributions and
payments of these securities.
Proceeds from the sale of these securities by the Trust II were used to
acquire $15 million of Floating Rate Junior Subordinated Deferrable Interest
Rate Debentures issued by the Company. These debentures have the same terms with
respect to maturity, payments, and distributions as the floating rate trust
preferred securities issued by the Trust II. The intended use of the proceeds
from these debentures is to support growth in the Company's insurance operations
and for general corporate purposes.
In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period after
June 15, 2003. In accordance with SFAS 150, the Company's Trust Preferred
Securities were classified as a liability on the Consolidated Balance Sheets and
the related distributions were recorded as interest expense on the Consolidated
Statements of Operations. Therefore, the adoption of SFAS 150 will have no
effect on the Company's financial statements.
Note 8 - Unpaid Losses and Loss Adjustment Expenses
During the first six months of 2003, the Company increased incurred
losses and loss adjustment expenses attributable to insured events of prior
years by $0.9 million. This increase is primarily due to an increase of $1.9
million in estimates for loss and loss adjustment expense reserves for the
exited commercial automobile lines of business. In 2003, the Company experienced
an unanticipated increase in paid allocated loss adjustment expenses on its
remaining open commercial automobile liability claims. Consequently, combined
with the unanticipated 2003 activity and review of open claims at June 30, 2003,
the Company increased its estimates for loss and loss adjustment expense
reserves.
Significantly offsetting the increase in incurred losses and loss
adjustment expenses attributable to insured events of prior years for the exited
commercial automobile lines of business is a reduction of $1.0 million in
estimates for the commercial property and casualty lines of business. This
reduction consists of a reduction in the Company's estimate for the commercial
property lines of business by $2.1 million relating primarily to the 2002
accident year, partially offset by an increase in the Company's estimate for the
commercial liability lines of business of $1.1 million due to the development of
outstanding claim reserves on claims occurring in various accident years.
Page 10
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months Ended June 30, 2003 and 2002
Premiums earned increased 33.3% to $36.3 million for the three months
ended June 30, 2003, compared with $27.2 million for the same period in 2002,
due to the growth in net written premiums over the last 12 months.
Gross written premiums, which represent the amount received or to be
received for insurance policies written without reduction for acquisition costs,
reinsurance costs or other deductions, increased 20.4% for the three months
ended June 30, 2003 to $54.5 million, compared with $45.2 million for the three
months ended June 30, 2002. The increase was attributable to rate increases,
growth in new business and higher average exposures per policy.
Ceded written premiums, the portion of gross written premiums reinsured
by unaffiliated insurers, increased to $8.6 million for the three months ended
June 30, 2003, compared with $6.5 million for the three months ended June 30,
2002. The increase in ceded written premiums was due primarily to growth in
gross written premiums and an approximately 7.0% percent increase in reinsurance
rates on the Company's multiple-line excess of loss treaty.
Net written premiums, which are gross written premiums less ceded
written premiums, increased 18.7% for the three months ended June 30, 2003 to
$45.9 million, compared with $38.7 million for the three months ended June 30,
2002. The increase in net written premiums was consistent with the increase in
gross written premiums, but was offset partially by higher reinsurance costs.
Net investment income increased to $3.2 million for the three months
ended June 30, 2003, compared with $2.9 million for the three months ended June
30, 2002, primarily due to the growth in average invested assets, partially
offset by a decrease in average yield on fixed-maturity investments.
Net realized investment gain was $0.4 for the three months ended June
30, 2003, compared to a net realized investment loss of $1.1 million for the
three months ended June 30, 2002. The net realized investment gain for the three
months ended June 30, 2003 was primarily attributable to the sale of certain of
the Company's fixed-maturity securities. The net realized investment loss for
the three months ended June 30, 2002 was primarily attributable to
other-than-temporary impairment write-downs of $1.1 million on the Company's
equity investment in exchange-traded funds.
Losses and loss adjustment expenses increased 27.8% to $22.2 million
for the three months ended June 30, 2003, compared with $17.4 million for the
three months ended June 30, 2002. The loss ratio for the three months ended June
30, 2003 was 61.1, compared with 63.8 for the three months ended June 30, 2002.
The loss ratio is calculated by dividing losses and loss adjustment expenses by
premiums earned. The improvement in the loss ratio was primarily attributable to
rate increases implemented in 2002 and 2003 partially offset by an increase in
catastrophe related losses, which were $1.1 million for the three months ended
June 30, 2003 and $0.7 million for the three months ended June 30, 2002. This
increase in catastrophe related losses was primarily
Page 11
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
due to claims the Company received on a series of severe storms in the
Midwestern states which occurred in the second quarter of 2003.
Amortization of deferred policy acquisition costs ("ADAC") increased
34.6% to $9.1 million for the three months ended June 30, 2003 from $6.7 million
for the three months ended June 30, 2002 primarily due to the growth in premiums
earned.
Other underwriting expenses increased 7.4% to $2.3 million for the
three months ended June 30, 2003 from $2.2 million for the three months ended
June 30, 2002, primarily due to increases in salary and benefit expenses
associated with the hiring of additional underwriting and marketing personnel.
The overall GAAP combined ratio, which is the sum of the loss and
expense ratios, improved to 92.5 for the three months ended June 30, 2003 from
96.5 for the three months ended June 30, 2002. The loss ratio improved to 61.1
for the three months ended June 30, 2003 from 63.8 for the three months ended
June 30, 2002. The expense ratio, which is calculated by dividing the sum of
ADAC and other underwriting expenses by premiums earned, improved to 31.4 for
the three months ended June 30, 2003 from 32.7 for the three months ended June
30, 2002. The GAAP combined ratio is a standard measure of underwriting
profitability used throughout the property and casualty insurance industry. A
ratio below 100.0 generally indicates underwriting profitability.
Interest expense increased to $409,000 for the three months ended June
30, 2003 from $35,000 for the three months ended June 30, 2002, primarily due to
interest expense on the Company's Trust Preferred Securities.
The factors described above resulted in net income for the three months
ended June 30, 2003 of $4.0 million or $0.27 per share (basic and diluted),
compared with $1.9 million or $0.16 per share (basic and diluted) for the three
months ended June 30, 2002.
Six Months Ended June 30, 2003 and 2002
Premiums earned increased 40.7% to $70.7 million for the six months
ended June 30, 2003, compared with $50.2 million for the same period in 2002,
due to the growth in net written premiums over the last 12 months.
Gross written premiums, which represent the amount received or to be
received for insurance policies written without reduction for acquisition costs,
reinsurance costs or other deductions, increased 26.1% for the six months ended
June 30, 2003 to $94.9 million, compared with $75.3 million for the six months
ended June 30, 2002. The increase was attributable to rate increases, growth in
new business and higher average exposures per policy.
Page 12
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Ceded written premiums, the portion of gross written premiums reinsured
by unaffiliated insurers, increased to $15.0 million for the six months ended
June 30, 2003, compared with $10.2 million for the six months ended June 30,
2002. The increase in ceded written premiums was due primarily to growth in
gross written premiums and an approximately 16.0% percent increase in
reinsurance rates on the Company's multiple-line excess of loss treaty.
Net written premiums, which are gross written premiums less ceded
written premiums, increased 22.8% for the six months ended June 30, 2003 to
$79.9 million, compared with $65.1 million for the six months ended June 30,
2002. The increase in net written premiums was consistent with the increase in
gross written premiums, but was offset partially by higher reinsurance costs.
Net investment income increased to $6.5 million for the six months
ended June 30, 2003, compared with $5.8 million for the six months ended June
30, 2002, primarily due to the growth in average invested assets, partially
offset by a decrease in average yield on fixed-maturity investments.
Net realized investment gain was $1.1 million for the six months ended
June 30, 2003, compared to a net realized investment loss of $1.3 million for
the six months ended June 30, 2002. The net realized investment gain for the six
months ended June 30, 2003 was primarily attributable to the sale of certain of
the Company's fixed-maturity securities and all of the Company's common stock
investments. The net realized investment loss for the six months ended June 30,
2002 was primarily attributable to other-than-temporary impairment write-downs
of $1.3 million on the Company's equity investment in exchange-traded funds.
Losses and loss adjustment expenses increased 35.4% to $44.2 million
for the six months ended June 30, 2003, compared with $32.7 million for the six
months ended June 30, 2002. The loss ratio for the six months ended June 30,
2003 was 62.5, compared with 65.0 for the six months ended June 30, 2002. The
loss ratio is calculated by dividing losses and loss adjustment expenses by
premiums earned. The improvement in the loss ratio was primarily attributable to
rate increases implemented in 2002 and 2003, partially offset by an increase in
catastrophe related losses, which were $1.7 million for the six months ended
June 30, 2003 and $0.8 million for the six months ended June 30, 2002. This
increase in catastrophe related losses was primarily due to claims the Company
received on a series of severe storms in the Midwestern states which occurred in
the second quarter of 2003.
Amortization of deferred policy acquisition costs ("ADAC") increased
38.7% to $17.7 million for the six months ended June 30, 2003 from $12.8 million
for the six months ended June 30, 2002, primarily due to the growth in premiums
earned.
Other underwriting expenses increased 14.4% to $4.4 million for the six
months ended June 30, 2003 from $3.8 million for the six months ended June 30,
2002, primarily due to increases in salary and benefit expenses associated with
the hiring of additional underwriting and marketing personnel.
Page 13
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The overall GAAP combined ratio, which is the sum of the loss and
expense ratios, improved to 93.7 for the six months ended June 30, 2003 from
98.0 for the six months ended June 30, 2002. The loss ratio improved to 62.5 for
the six months ended June 30, 2003 from 65.0 for the six months ended June 30,
2002. The expense ratio, which is calculated by dividing the sum of ADAC and
other underwriting expenses by premiums earned, improved to 31.2 for the six
months ended June 30, 2003 from 33.0 for the six months ended June 30, 2002. The
GAAP combined ratio is a standard measure of underwriting profitability used
throughout the property and casualty insurance industry. A ratio below 100.0
generally indicates underwriting profitability.
Interest expense increased to $713,000 for the six months ended June
30, 2003 from $70,000 for the six months ended June 30, 2002 primarily due to
interest expense on the Company's Trust Preferred Securities.
The factors described above resulted in net income for the six months
ended June 30, 2003 of $7.6 million or $0.52 per basic share and $0.51 per
diluted share, compared with $3.7 million or $0.32 per basic share and $0.31 per
diluted share for the six months ended June 30, 2002.
Critical Accounting Estimates and Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
The Company has identified that the establishment of reserves for
unpaid losses and loss adjustment expenses and the valuation of certain
investments are critical accounting estimates because they involve a high degree
of judgment. Although variability is inherent in these estimates, the Company
believes the amounts provided are appropriate based upon facts available at this
time. See the Investment Portfolio section beginning on page 18 for information
related to the valuation of investments.
The Company is directly liable for losses and loss adjustment expenses
under the terms of the insurance policies it writes. In many cases, several
years may lapse between the occurrence of an insured loss, the reporting of the
loss and the payment of that loss. The Company reflects its liability for the
ultimate payment of all incurred losses and loss adjustment expenses by
establishing its best estimate of loss and loss adjustment expense reserves as
balance sheet liabilities for both reported and unreported claims.
When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of its ultimate loss. The
estimate of the amount of the ultimate loss is based upon factors such as:
|X| the type of loss,
|X| the jurisdiction of the occurrence,
|X| the Company's knowledge of the circumstances surrounding the claim,
|X| the severity of injury or damage,
|X| the potential for ultimate exposure, and
|X| policy provisions relating to the claim.
Page 14
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Company determines loss adjustment expenses as a percentage of
expected indemnity losses based on historical patterns adjusted to current
experience.
In addition to case reserves, the Company establishes reserves on an
aggregate basis to provide for incurred but not reported losses and loss
adjustment expenses, commonly referred to as "IBNR". To establish reserves for
IBNR, the Company must estimate the ultimate liability based primarily on past
experience. The Company applies a variety of traditional actuarial techniques to
estimate its ultimate liability. The techniques recognize, among other factors:
|X| the Company's and the industry's experience,
|X| historical trends in reserving patterns and loss payments,
|X| the impact of claim inflation,
|X| the pending level of unpaid claims,
|X| the cost of claim settlements,
|X| the line of business mix, and
|X| the economic environment in which property and casualty insurance
companies operate.
The Company continually reviews these estimates and, based on new
developments and information, the Company includes adjustments of the probable
ultimate liability in the operating results for the periods in which the
adjustments are made. In general, initial reserves are based upon the actuarial
and underwriting data utilized to set pricing levels and are reviewed as
additional information, including claims experience, becomes available.
The establishment of loss and loss adjustment expense reserves makes no
provision for the prospective broadening of coverage by legislative action or
judicial interpretation; or the extraordinary future emergence of new types of
losses not sufficiently represented in the Company's historical experience, or
that cannot yet be quantified. The Company regularly reviews pricing and
reserving methodologies to assist in estimating its reserves 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.
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. As of June 30, 2003, the Company believes
that its ultimate obligations for these claims are included in its best estimate
for unpaid losses and loss adjustment expense reserves. Therefore, the Company
believes that the amount of losses or loss adjustment expenses related to these
claims will not have a material effect on the Company's financial position or
results of operations.
During the first six months of 2003, the Company increased incurred
losses and loss adjustment expenses attributable to insured events of prior
years by $0.9 million. This increase is primarily due to an increase of $1.9
million in estimates for loss and loss adjustment expense reserves for the
exited commercial
Page 15
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
automobile lines of business. In 2003, the Company experienced an unanticipated
increase in paid allocated loss adjustment expenses on its remaining open
commercial automobile liability claims. Consequently, combined with the
unanticipated 2003 activity and review of open claims at June 30, 2003, the
Company increased its estimates for loss and loss adjustment expense reserves.
Significantly offsetting the increase in incurred losses and loss
adjustment expenses attributable to insured events of prior years for the exited
commercial automobile lines of business is a reduction of $1.0 million in
estimates for the commercial property and casualty lines of business. This
reduction consists of a reduction in the Company's estimate for the commercial
property lines of business by $2.1 million relating primarily to the 2002
accident year, partially offset by an increase in the Company's estimate for the
commercial liability lines of business of $1.1 million due to the development of
outstanding claim reserves on claims occurring in various accident years.
Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common
stock of Penn-America Insurance Company. At June 30, 2003, PAGI's capital
structure consisted of common stockholders' equity of $125.9 million and Company
Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Holding Solely Junior Subordinated Debentures of $30.0 million.
On May 15, 2003, Penn-America Statutory Trust II ("the Trust II"), a
business trust subsidiary formed by PAGI, issued $15 million of floating rate
trust preferred securities ("Trust Preferred Securities"). These securities have
a thirty-year maturity, with a provision that allows the Company to call these
securities at par after five years from the date of issuance. Cash distributions
will be paid quarterly in arrears at a rate of 410 basis points over three-month
London Interbank Offered Rates. Distributions on these securities can be
deferred for up to five years, but in the event of such deferral, the Company
may not declare or pay cash dividends on its common stock. The Company
guarantees all obligations of the Trust II with respect to distributions and
payments of these securities.
Proceeds from the sale of these securities by the Trust II were used to
acquire $15 million of Floating Rate Junior Subordinated Deferrable Interest
Rate Debentures issued by the Company. These debentures have the same terms with
respect to maturity, payments, and distributions as the floating rate trust
preferred securities issued by the Trust II. The intended use of the proceeds
from these debentures is to support growth in the Company's insurance operations
and for general corporate purposes.
In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period after
June 15, 2003. In accordance with SFAS 150, the Company's Trust Preferred
Securities were classified as a liability on the Consolidated Balance Sheets and
the related distributions were recorded as interest expense on the Consolidated
Statements of Operations. Therefore, the adoption of SFAS 150 will have no
effect on the Company's financial statements.
Page 16
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
PAGI's principal source of cash to meet short-term and long-term
liquidity needs, including the payment of dividends to stockholders, corporate
expenses and interest on its debentures, is dividends from Penn-America
Insurance Company. PAGI has no planned capital expenditures that could have an
impact on 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 Insurance Company and Penn-Star Insurance Company
principally to pay claims and operating expenses, to purchase investments and to
make dividend payments to PAGI. PAGI's future liquidity is dependent on the
ability of Penn-America Insurance Company to pay dividends to PAGI.
The Company's insurance subsidiaries are restricted by statute as to
the amount of dividends that they may pay without the prior approval of
regulatory authorities. Penn-America Insurance Company may pay dividends to PAGI
without advance regulatory approval only from unassigned surplus and only to the
extent that all dividends in the past twelve months do not exceed the greater of
10% of total statutory surplus, or statutory net income for the prior year.
Using these criteria, the available ordinary dividend payable by Penn-America
Insurance Company to PAGI for 2003 is $11,026,200. For the six months ended June
30, 2003, ordinary dividends paid by Penn-America Insurance Company to PAGI were
$1,400,000. Penn-America Insurance Company's ability to pay future dividends to
PAGI without advance regulatory approval is dependent upon maintaining a
positive level of unassigned and statutory surplus, which, in turn, is dependent
upon Penn-America Insurance Company and Penn-Star Insurance Company generating
net income in excess of dividends paid to PAGI. As of June 30, 2003,
Penn-America Insurance Company's statutory surplus was $116,760,000, and
included unassigned surplus of $31,220,000.
Penn-America and Penn-Star are required by law to maintain a certain
minimum level of statutory surplus. Statutory surplus is calculated by
subtracting total liabilities from total assets. The National Association of
Insurance Commissioners adopted risk-based capital standards designed to
identify property and casualty insurers that may be inadequately capitalized
based on inherent risks of each insurer's assets and liabilities and its mix of
net written premiums. Insurers falling below a calculated threshold may be
subject to varying degrees of regulatory action. As of December 31, 2002, the
statutory surplus of Penn-America Insurance Company and Penn-Star Insurance
Company was in excess of the prescribed risk-based capital requirements.
Penn-America Insurance Company's statutory surplus at December 31, 2002 was
$110,262,000 and its regulatory action level was $22,532,000. Penn-Star
Insurance Company's statutory surplus at December 31, 2002 was $37,356,000 and
its regulatory action level was $8,276,000.
The Company has generated positive cash flows from operations to meet
its short-term liquidity requirements. Net cash provided by operating activities
was $15.1 million for the six months ended June 30, 2003 and $24.1 million for
the six months ended June 30, 2002.
Net cash used by investing activities was $24.3 million for the six
months ended June 30, 2003 and $31.7 million for the six months ended June 30,
2002.
Net cash provided by financing activities was $14.3 million for the six
months ended June 30, 2003 due primarily to the issuance of $15.0 million of
Trust Preferred Securities in the second quarter of 2003 compared to net cash
used by financing activities of $0.7 million for the six months ended June 30,
2002.
Page 17
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Investment Portfolio
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 outsources 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 June 30, 2003, the Company held a total of
$312.0 million in cash and investments. Of this amount, cash and cash
equivalents represented $14.9 million, equity securities, consisting solely of
preferred stock, represented $12.0 million, and fixed-maturity securities
represented $285.1 million.
The Company's cash and investment portfolio mix as of June 30, 2003 was
as follows:
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies 5.1%
Corporate securities 32.8
Mortgage-backed securities 18.3
Other structured securities 16.0
Municipal securities 19.2
--------
Total fixed maturities 91.4
Cash and cash equivalents 4.8
Equity securities 3.8
--------
100.0%
========
The Company's fixed-maturity portfolio of $285.1 million was 91.4% of
the total cash and investments as of June 30, 2003. Approximately 94% of these
securities were rated "A" or better by Standard & Poor's. Standard & Poor's
rates publicly traded securities in 20 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 solely of preferred stocks, were $12.0 million or 3.8% of total cash and
investments as of June 30, 2003.
The quality of the fixed-maturity portfolio as of June 30, 2003 was as
follows:
"AAA" 53.6%
"AA" 13.8
"A" 26.3
"BBB" 5.3
Below "BBB" 1.0
--------
100.0%
========
Page 18
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
As of June 30, 2003, the investment portfolio contained $107.0 million
of mortgage-backed, asset-backed and collateralized mortgage obligations. These
securities are publicly traded, and have market values obtained from an
independent pricing service. Changes in estimated cash flows due to changes in
prepayment assumptions from the original purchase assumptions are revised based
on current interest rates and the economic environment. The Company had no real
estate or mortgages in the investment portfolio as of June 30, 2003. The quality
of the Company's mortgage-backed, asset-backed and collateralized mortgage
obligations as of June 30, 2003 was as follows:
"AAA" 86.0%
"AA" 12.1
"A" 1.4
"BBB" 0.5
---------
100.0%
=========
As of June 30, 2003, the Company's investment portfolio contained
corporate fixed-maturity and preferred stock securities with a market value of
$114.4 million. A summary of these securities by industry segment is as follows:
Financial institutions 31.4%
Consumer, non-cyclical 21.9
Utilities 20.1
Communications 9.5
Energy 5.0
Industrial 4.2
Consumer, cyclical 3.4
Basic materials 3.0
Technology 1.5
-----------
100.0%
===========
Page 19
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Company regularly evaluates its investment portfolio to identify
other-than-temporary impairments of individual securities. The Company considers
many factors in determining if an other-than-temporary impairment exists,
including the length of time and extent to which the market value of the
security has been less than cost, the financial condition and near-term
prospects of the issuer of the security and the Company's ability and
willingness to hold the security until the market value is expected to recover.
The following table contains an analysis of the Company's securities with gross
unrealized losses, categorized by the period that the securities were in a
continuous unrealized loss position as of June 30, 2003:
Number Gross Six More
of Fair Book Unrealized Months Than
(in thousands) Securities Value Value Losses or Less Six Months
- --------------------------- -- ----------- -- ----------- -- ----------- -- ---------------- -- --------------- --- --------------
Fixed-maturity securities 29 $ 27,282 $ 27,463 $ 181 $ 181
--
Equity securities 1 1,020 1,025 5
5 --
As of June 30, 2003, the Company's fixed-maturity investment portfolio
had 29 securities with $181 thousand of gross unrealized losses. No single
issuer had an unrealized loss position of greater than $27 thousand. There was
one equity security, a preferred stock, in an unrealized loss position of $5,000
as of June 30, 2003.
Forward-Looking Statements
Certain information included in management's discussion and analysis of
financial condition and results of operations and elsewhere in this report are
not historical facts but are forward-looking statements including, but not
limited to, such matters as anticipated financial performance, business
prospects, technological developments, new and existing products, expectations
for market segment and growth and similar matters. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company provides the following cautionary remarks regarding important factors
which, among others, could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, results of the company's business, and
the other matters referred to above include, but are not limited to: (1) risks
inherent in establishing loss and loss adjustment expense reserves; (2)
uncertainties relating to the financial ratings of the company's insurance
subsidiaries; (3) uncertainties relating to government and regulatory policies;
(4) uncertainties arising from the cyclical nature of the company's business;
(5) changes in the company's relationships with, and the capacity of, its
general agents; and (6) the risk that the company's reinsurers may not be able
to fulfill their obligations to the company. For additional disclosure regarding
potential risk factors, refer to documents filed by the company with the
Securities and Exchange Commission, including the Company's 2002 Annual Report
on Form 10-K.
Page 20
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk is the potential economic loss
principally arising from adverse changes in the market value of its investment
portfolio. The major component of market risk affecting the Company's investment
portfolio is interest rate risk. The Company eliminated its underlying exposure
to equity price risk, as all of its common stock investments was sold in the
first quarter of 2003.
The Company had fixed-maturity and preferred stock investments with a
market value of $297.2 million at June 30, 2003 subject to interest rate risk.
The Company manages its exposure to interest rate risk through a disciplined
asset/liability matching and capital management process. In the management of
this risk, the characteristics of duration, credit and variability of cash flows
are critical elements. These risks constantly are assessed and balanced within
the context of the liability and capital position of the Company.
The Company's market risk associated with exposure to interest rate
risk at June 30, 2003 has not materially changed from that identified at
December 31, 2002.
Page 21
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Controls and Procedures
As of June 30, 2003, 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 June 30, 2003.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to June 30, 2003.
Page 22
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote by Security Holders
On May 14, 2003, Penn-America Group, Inc. held its annual meeting of
stockholders. Nine board nominees for director were elected for terms expiring
at the 2004 annual meting of stockholders. There was one stockholder proposal
presented and voted on at the meeting. A stockholder proposal regarding
amendments to the 2002 Stock Incentive Plan relating to an increase in the
number of shares available for issuance under the Plan and to amendments to the
definition of "change in control" did receive a majority vote of the shares
represented and entitled to vote at the meeting.
Election of Directors
Nominee Votes for Votes Withheld
- --------------------------------------------------------------------------------
Irvin Saltzman 12,606,966 964,676
Jon S. Saltzman 12,607,166 964,476
Richard L. Duszak 12,607,466 964,176
Charles Ellman 13,391,616 180,026
Robert A. Lear 12,607,916 963,726
Jami Saltzman-Levy 12,607,716 963,926
M. Moshe Porat 12,607,916 963,726
E. Anthony Saltzman 12,607,716 963,926
Paul Simon 12,589,016 173,126
Stockholder proposal for amendments to the 2002 Stock Incentive Plan relating to
an increase in the number of shares available for issuance under the Plan and to
amendments to the definition of "change in control"
Votes For Votes Against Votes Withheld
- --------------------------------------------------------------------------------
9,002,563 1,540,298 291,203
Item 5. Other Information - None
Page 23
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1
(b) Reports on Form 8-K
On April 2, 2003, the Company filed a current report on Form 8-K
announcing the availability of its Combined Annual Statement for its
insurance subsidiaries, Penn-America Insurance Company and Penn-Star
Insurance Company, on the Company's web-site, in hard copy from the
Company, or from the Pennsylvania Department of Insurance.
On April 23, 2003, the Company filed a current report on Form 8-K
announcing that the Company released its earnings for the first
quarter of 2003.
On April 25, 2003, the Company filed a current report on Form 8-K
announcing that the Company executed an agreement for the private
placement sale of $15 million of thirty-year floating rate trust
preferred securities through a wholly owned trust subsidiary.
On May 2, 2003, the Company filed a current report on Form 8-K
announcing that Richard W. Slomiany, CPCU, AIM was appointed vice
president of Claims for the registrant's insurance subsidiaries.
On May 6, 2003, the Company filed a current report on Form 8-K
announcing the dismissal of Ernst & Young LLP ("E&Y") as its
independent auditors and its appointment of PricewaterhouseCoopers LLP
("PwC") as independent auditors for 2003 and retained E&Y as its
consulting actuary.
On May 9, 2003, the Company filed a current report on Form 8-K
announcing the availability of materials presented by Jon Saltzman,
President and CEO and Joseph Morris, Sr. Vice President, CFO and
Treasurer presented to various groups of investors.
On May 15, 2003, the Company filed a current report on Form 8-K
announcing the availability of its first quarter statements for its
insurance subsidiaries, Penn-America Insurance Company and Penn-Star
Insurance Company, on the Company's web-site, in hard copy from the
Company, or from the Pennsylvania Department of Insurance.
Page 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: August 7, 2003 By: /s/ Jon S. Saltzman
------------------ -------------------
Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Joseph F. Morris
--------------------
Joseph F. Morris
Senior Vice President,
Chief Financial Officer
Chief Financial Officer
and Treasurer
Page 25
Exhibit No. Description
---------- ------------
4 Placement Agreement between Registrant and it financing
subsidiary, Penn-America Statutory Trust II, and FTN
Capital Markets and Keefe, Bruyette & Woods, Inc., date
April 25, 2003.
4(i) Subscription Agreement among Penn-America Statutory
Trust II, Registrant and I-Preferred Term Securities II,
Ltd., dated May 15, 2003.
4(ii) Indenture between Registrant and U.S. Bank National
Association, dated May 15, 2003.
4(iii) Amended and Restated Declaration of Trust by and among
U.S. Bank National Association, Registrant, and Jon S.
Saltzman, Joseph F. Morris, and Brian Riley, dated May
15, 2003.
4(iv) Guarantee Agreement by and between Registrant and U.S.
Bank National Association, dated May 15, 2003.
10.1 Certified Terrorism Loss Aggregate Quota Share Agreement
between Penn-America Insurance Company, Penn-Star
Insurance Company and American Re-Insurance Company
effective January 1, 2003 to December 31, 2004.
10.2 General Liability and Commercial Umbrella Liability
Quota Share Reinsurance Agreement between Penn-America
Insurance Company, Penn-Star Insurance Company and
American Re-Insurance Company effective September 1,
2001.
10.2(i) Endorsement No. 1 to General Liability and Commercial
Umbrella Liability Quota Share Reinsurance Agreement
between Penn-America Insurance Company, Penn-Star
Insurance Company and American Re-Insurance Company
effective September 1, 2001.
10.2(ii) Endorsement No. 2 to General Liability and Commercial
Umbrella Liability Quota Share Reinsurance Agreement
between Penn-America Insurance Company, Penn-Star
Insurance Company and American Re-Insurance Company
effective January 1, 2003.
10.2(iii) Endorsement No. 3 to General Liability and Commercial
Umbrella Liability Quota Share Reinsurance Agreement
between Penn-America Insurance Company, Penn-Star
Insurance Company and American Re-Insurance Company
effective June 1, 2003.
10.3 Investment Management Agreement between Registrant and
General Re - New England Asset Management, Inc., date
May 15, 2003.
E-1
Exhibit No. Description
---------- ------------
10.4 Registrant's 2002 Stock Incentive Plan (f/k/a Amended
and Restated 1993 Stock Incentive Plan.
31.1 Certification of Chief Executive Officer as adopted
pursuant to section 302(a) of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Financial Officer as adopted
pursuant to section 302(a) of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer of Penn-America Group, Inc., dated
August 12, 2003 in accordance with 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
E-2