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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________________to_______________
Commission file number 022316
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PENN-AMERICA GROUP, INC.
------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
- ---------------------------- ------------------------------
(State or other jurisdiction o (I.R.S. Employer Identification Number
incorporation or organization)
420 S. York Road
Hatboro, Pennsylvania 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:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(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. [ X ]
As of March 24,1998, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $66,695,525. As of March
24,1998 there were 9,901,013 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, 1997 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 1998 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, 1997
Page
PART I
ITEM 1. BUSINESS.............................................................. 3
ITEM 2. PROPERTIES............................................................17
ITEM 3. LEGAL PROCEEDINGS.....................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS......................................................18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.......................................19
ITEM 6. SELECTED FINANCIAL DATA...............................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE............................................................19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT...........................................................20
ITEM 11. EXECUTIVE COMPENSATION...............................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.....................................21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K..................................................22
page 2
PART I
ITEM 1. BUSINESS
(a) General
Penn-America Group, Inc. is a specialty property and casualty insurance
holding company which, through its subsidiaries, markets and underwrites
commercial property, general liability and multi-peril insurance for small
businesses located primarily in small towns and suburban and rural areas, and
nonstandard personal automobile insurance. The Company provides commercial
property and casualty insurance on both an excess and surplus lines basis and an
admitted basis, and personal automobile insurance on an admitted basis. The
Company markets its products through 55 high quality general agents, who in turn
produce business through over 25,000 retail insurance brokers located throughout
the United States. The Company focuses on serving the insurance needs of small
or nonstandard markets which are generally characterized by small average policy
premiums and serviced by retail insurance brokers with limited access to larger,
standard lines insurers. The Company believes that these markets are generally
underserved by larger, standard lines insurers who often limit their
underwriting to policies above a certain minimum premium size or to certain risk
classes and who operate in large-scale markets in which they can achieve
economies of scale. The Company believes that its distribution network enables
it to effectively access these numerous small markets at a relatively low fixed
cost through the marketing, underwriting and administrative support of its
general agents, as well as the localized market knowledge and expertise of its
general agents and their retail insurance brokers.
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1993 to 1997, gross written premiums
grew at a 31.0% compound annual rate, from $35.5 million to $104.7 million, and
net operating earnings (excluding realized investment gains) grew at a 44.6%
compound annual rate, from $2.0 million to $8.8 million. The Company has
operated at a statutory combined ratio under 100.0% in every year since 1992.
The Company's average SAP combined ratio from 1992 to 1997 was 95.0%, and the
Company's average return on average stockholders' equity during the same period
was 14.8%.
The Company's distribution strategy is to maintain strong relationships with
fewer and higher quality general agents than its competitors. The Company
carefully selects a limited number of agents in each state based on their
experience and reputation and strives to preserve each agent's franchise value
within its marketing territory. The Company seeks to grow with these general
agents and develop strong, longstanding relationships by providing a high level
of service and support. From 1993 to 1997, the Company achieved 194.7%
cumulative growth in gross written premiums with a 44.7% increase in the number
of general agents from 38 to 55. The Company maintains low fixed costs by
underwriting the substantial majority of its policies on a binding authority
basis. The Company closely monitors the quality of business it underwrites by
maintaining close relationships with a small number of general agents. The
Company provides its general agents with a comprehensive, regularly updated
underwriting manual which clearly outlines the Company's pricing and
underwriting guidelines. The Company does not write high risk policies (e.g.,
medical malpractice, environmental and aviation liability). The Company
generally reviews new and renewal commercial policies on a continuous basis and
nonstandard personal automobile policies on a quarterly basis to ensure that its
underwriting guidelines are being followed. In addition to standard commissions,
the Company provides strong incentives to its general agents to produce
profitable business through a contingent commission structure which is
substantially tied to underwriting profitability and through the issuance of
shares of common stock in lieu of cash for a portion of the contingent
commissions.
Page 3
Historically, the Company has underwritten the majority of its commercial
lines business on an excess and surplus lines basis. In recent years, the
Company has underwritten a greater proportion of its commercial lines business
on an admitted basis, as it has identified profitable admitted markets which
remain under-served by larger standard insurers. Currently, the Company
underwrites all of its nonstandard personal automobile business on an admitted
basis. The Company expects to continue to expand its commercial lines business
by offering additional products and packages which enhance its current property
and liability coverages, by identifying profitable programs and books of
business and by selectively adding high quality general agents. Examples of such
additional products and programs include a commercial automobile product and
specialty programs, which may include miscellaneous professional liability
coverage. The Company currently writes nonstandard personal automobile policies
in five states. The Company has filed applications to write personal automobile
policies in three additional states and is considering expanding into several
other states.
The Company's commercial insureds consist primarily of small, "Main Street"
businesses, including restaurants, taverns, retailers and artisan contractors,
located principally in small towns and suburban and rural areas. In addition,
the Company has developed customized products and coverages for other small
commercial insureds such as day care facilities, fitness centers and special
events. The Company believes it has benefited from a general migration of small
businesses out of urban centers and into suburban and rural areas. Industry
consolidation, corporate downsizing and the increased use of communications
technology and personal computers, among other factors, have contributed to the
high growth in the number of small businesses in these areas. The Company's
nonstandard automobile insurance products are designed for insureds who do not
qualify for preferred or standard automobile insurance because of their payment
history, driving record, age, vehicle type or other underwriting criteria or
market conditions. Underwriting standards in the preferred and standard markets
have become more restrictive, thereby requiring more insureds to seek
nonstandard coverage and contributing to an increase in the size of the
nonstandard automobile market.
Penn-America was formed in 1975 by Irvin Saltzman, who began working in the
insurance industry in 1947 when he founded a general agency. Jon S. Saltzman,
Irvin Saltzman's son, is President and Chief Executive Officer of the Company
and has been employed by the Company since 1986. The Company completed an
initial public offering ("IPO") on October 28, 1993, at a price to the public of
$6.00 per share. Currently, the Saltzman family, substantially through their
ownership of Penn Independent Corporation, owns approximately 31.2% of the
Company's Common Stock.
(b) Financial Information About Industry Segments
The Company is of the opinion that all of its operations are within one
industry segment and that no information as to industry segments is required
pursuant to Statement of Financial Accounting Standards No. 14 or Regulation
S-X.
Page 4
(c) Lines of Business
The following table sets forth an analysis of gross earned premium by
specific product lines during the periods indicated:
Year ended
---------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------- --------- ---------- ----------- ---------- ---------
(dollars in thousands)
Commercial multi-peril $ 35,687 35.9% $ 29,345 38.7% $ 23,781 37.7%
Liability 23,486 23.6 21,418 28.2 20,431 32.4
Auto liability 29,310 29.5 15,772 20.8 11,524 18.3
Property 5,502 5.6 5,556 7.3 4,957 7.9
Auto physical damage 5,400 5.4 3,785 5.0 2,312 3.7
--------- ------- ------- -------- --------- ------
Total gross earned premium $ 99,385 100% $ 75,876 100% $ 63,005 100.0%
=========== ========= ========== =========== ========== ========
o Commercial General Liability. The Company's commercial general liability
insurance is written on an occurrence policy form (as opposed to a
claims--made policy form) and provides limits generally ranging from
$25,000 to $3 million, with the majority of such policies having limits
of between $500,000 and $1 million. The Company's general liability
policies pay defense and related expenses in addition to per occurrence and
aggregate policy limits. General liability insureds include restaurants,
bars and taverns, retail operations, garage liability, contractors and
similar classes.
o Commercial Property. The Company's commercial property lines provide limits
usually no higher than $4 million, with almost all of the policies being
written at limits less than $1 million. Properties insured include
restaurants, bars and taverns, retail operations, vacant buildings and
other similar classes.
o Commercial Multi-Peril. The Company also writes the same commercial
property and general liability risks together as a "package" for its
insureds, generally referred to as "commercial multi-peril." The limits on
these policies are the same as if written on a monoline basis. Consistent
with the current industry trend, the Company has been writing more
commercial multi-peril policies over the last several years than individual
property and liability policies. The Company expects this trend to continue
in light of the fact that a substantial number of the Company's commercial
insureds customarily require both liability and property insurance
coverage, together with the revisions to Insurance Services Office ("ISO")
forms which make it easier and more efficient to write such multi-peril
policies.
o Business Automobile and Commercial Umbrella. In late 1997, the Company
added both business automobile and commercial umbrella coverages to enhance
its commercial multi-peril ("package") writings. The types of risks and
insureds targeted are similar to those already written, such as,
restaurants, bars and taverns, retail operations, artisan contractors and
similar classes. The business automobile insurance (cars and light trucks)
can be written up to $1 million liability limits. Commercial umbrella
insurance can be written for limits up to $5 million with significant
reinsurance support from General Reinsurance. For commercial umbrella,
Penn-America must write the primary $1 million liability limit. The Company
expects that the addition of these coverages in 1998 will further expand
package writings and help increase renewal retention of existing policies.
In all of its commercial product lines, the Company is continuously
developing specialized programs for certain industry segments
Page 5
to meet the needs of these market-places. For example, the Company has
developed programs for independent fitness centers, day care operations,
artisan contractors, low-hazard miscellaneous professional liability
coverages and special events. As a group, these programs are a significant
benefit to the Company's marketing efforts, although individually they do
not generate a material amount of the Company's gross written premiums.
Non-Standard Personal Automobile. The Company currently writes non-standard
personal automobile policies in the states of Washington, California,
Alabama, South Dakota and Nevada. These risks typically do not qualify for
preferred or standard insurance because of a driver's age, driving record,
vehicle type or other factors. The personal automobile business is written
at very low coverage limits. The Company writes a majority of this coverage
on a six-month basis in Washington, Alabama and South Dakota. In California
and Nevada, the coverage is written predominantly on a monthly policy
basis.
(d) Marketing and Distribution
The Company currently markets its insurance products through a select
number of high quality general agents. The Company believes that it benefits
significantly from a general agency system because it obtains the significant
underwriting and marketing expertise of the general agents who have strong
business experience and relationships in their local territory. In addition, the
general agency system allows the Company to avoid the expense of maintaining
national or regional sales forces. This enables the Company to focus its efforts
on reviewing the underwriting decisions of its agents and evaluating submission
business, rather than devoting greater resources to making routine underwriting
decisions. The Company actively competes for quality general agents to
distribute its products. The Company selectively appoints general agents and
grants authority on a state-by-state basis so that each general agent only has
authority in a state(s) where they have marketing expertise. Prior to appointing
a general agent, the Company extensively reviews the candidate's financial
condition, geographic diversification of risk, historical loss experience and
reputation, as well as the agent's results and practices with other insurers. An
on-site review is made of the prospective agent's office, including an audit of
selected policy files and confirmation that the agent has sufficient experience
to merit authority to bind the Company only to appropriate risks. The agent is
also interviewed at the Company's office in order to confirm the compatibility
between the agent and the Company's underwriting staff. Such a comprehensive
review is necessitated by the Company's philosophy of establishing an agent
relationship only if it has long-term potential.
Once appointed, the Company provides each general agent with a
comprehensive agency manual which enables the agent to begin writing business
immediately. The manual allows the agent to write coverages effectively and
consistently within the Company's comprehensive underwriting guidelines. The
agents are provided limited binding authority, based primarily on Insurance
Services Office ("ISO") rates and forms, to write a variety of property, general
liability, commercial multi-peril and personal automobile business, provided
that the risks and terms involved in a particular coverage are within the
guidelines set forth in the agency manual. The Company has devoted extensive
research to the development of its detailed agency manual to enable its agents
to select and price risks consistently. The Company's agency manual is regularly
updated to be responsive to changes in the marketplace. The Company devotes
substantial resources to the continuous monitoring and support of its general
agents.
The general agents are compensated on a commission basis, which is on
average 21.4% of the gross written premium for commercial business and 27.4% for
Page 6
personal lines automobile business. A portion of this commission is passed on to
the retail insurance broker. In addition, the general agency contracts between
the Company and its general agents contain profit contingency inducements under
the Agents' Profit Sharing and Performance Award Program, which is designed to
reward general agents who meet the Company's loss ratio and premium volume
criteria. The Company also provides performance awards under this program to its
commercial agents for timely policy issuance, timely premium payments and
successful underwriting audits. Such contingent commissions and performance
awards accounted for 5.5% of the total commissions paid by the Company in 1997.
During 1995, the Agents' Profit Sharing and Performance Award Program was
modified to provide that at least one-third of the contingent commission awards
would be given in the form of common stock. The Company authorized 75,000 shares
of common stock for issuance under this program. Stock awards for 1996, which
were issued in May 1997, amounted to 27,746 shares, accounting for 51.4% of the
total contingent commissions paid for 1996. In May 1997, the Company began a new
program under which the Company will award $1,000 in the form of Common Stock to
each new general agent it appoints. The contingent stock award for 1997 will be
issued in May 1998.
The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:
Year ended Year ended Year ended
------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995
--------------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent
(in thousand) (in thousands) (in thousand)
Pacific 26,126 25.0% $ 29,435 36.6% $ 24,823 37.2%
South 16,236 15.5 15,677 19.5 12,519 18.7
Mid-Atlantic 9,876 9.4 10,665 13.2 10,607 15.8
New England 7,514 7.2 7,832 9.7 7,849 11.7
Southwest 18,625 17.8 11,693 14.5 7,949 11.9
Midwest 12,198 11.7 4,685 5.8 2,977 4.4
Mountain 14,119 13.4 509 0.7 229 0.3
========= ======== ========== ======= ======= =======
104,694 100.0% $ 80,496 100.0% $ 66,953 100.0%
========== ========= ========== ========= ======= =======
(e) Underwriting and Pricing
In the commercial property and casualty market, the rates and terms of
coverage provided by property and casualty insurance carriers are frequently
based on ISO rates and forms. ISO makes available to its members advisory,
rating, statistical and actuarial services, policy language and related
services. ISO and its related organizations currently provide such services,
including rates and forms, to more than 1,500 property and casualty insurance
companies in the U.S. One of the important services that ISO provides is an
actuarial-based estimate of the "ideal" premium rate for risks in each of
approximately 1,250 risk classifications. These rates reflect an analysis of the
loss and loss adjustment expenses on claims reported to ISO. ISO statistics,
however, include only claims and policy information reported to ISO, and
therefore do not reflect all of the loss experience for each class. Also, the
historical results for a particular class may not be sufficient to provide
actuarially meaningful results.
The Company primarily uses ISO statistics as a benchmark for risk selection
and pricing. Other carriers may or may not rely heavily on this information, and
several of the larger standard carriers have developed their own actuarial
databases. As a general rule, most standard carriers set rates lower than ISO
Page 7
rates. However, the Company, because of its strategy of providing insurance to
underserved markets, typically charges 100% of prescribed ISO rates or more.
All policies written by the Company are either generated by the general
agents pursuant to their binding authority or on a submit basis from the general
agents if the risk falls outside of that authority. In 1997, approximately 93%
of the commercial policies written by the Company were on a binding authority
basis, generating approximately 82% of the Company's commercial lines gross
written premiums. The personal automobile program is written solely on a binding
authority basis. The Company has established strict commercial underwriting
guidelines within the terms of its agency manual which identify the risks that:
(i) are within the binding authority of the general agents; (ii) must be
submitted to the Company and (iii) the Company would not insure on any basis
The agency manual was prepared after extensive research, including input from
its commercial reinsurers, and is regularly updated by the Company's
underwriting staff. Generally, the Company provides its general agents with
pricing flexibility on a per-policy basis, with the objective that in the
aggregate, the weighted average premium of all new and renewal commercial
policies written by a general agent are at approximately 110% of ISO rates. Most
standard carriers typically price at 60-80% of ISO rates, based on ISO data. The
Company's underwriting staff carefully monitors its general agents and performs
on-site reviews and underwriting audits of its agents on a periodic basis for
quality and compliance with Company guidelines.
With respect to commercial risks written by general agents under binding
authority, the Company generally has 60 days from the effective date to cancel a
policy if the risk insured does not comply with the Company's underwriting
guidelines. In the event an agent exceeds its authority by binding the Company
on a risk when it had no authority to do so, the Company is at risk for that
policy until it receives the policy and effects a cancellation. General agents
must deliver all policies to the Company within 35 days of the date written.
The Company monitors this activity closely through its computer system and
underwriting department.
The commercial risks the Company writes on a submit basis are generally
similar to the binding authority classes, but may have larger coverage limits or
greater complexity. In determining whether to accept such risks, the Company's
underwriting staff will review such factors as the type of risk, the agent's
knowledge and control of the risk, potential underwriting profitability and
historical data regarding any similar risk previously underwritten by the
Company. During this process, the Company will quote a proposed premium
reflecting relevant ISO rates, if available, and adjustments that may be
warranted based on the individual characteristics of the particular risk. The
underwriting staff then assembles a complete underwriting file with respect to
the particular submission and specific approval procedures are employed,
depending on the characteristics and magnitude of the particular risk.
The Company generally reviews all commercial policies as they are received
from general agents for completeness, accuracy, and compliance with the
Company's underwriting guidelines. Further, the Company conducts a detailed
audit of each of its general agents at least once a year. The audit involves
thoroughly reviewing between 50 and 100 policies to check for completeness,
accuracy, pricing, use of proper exclusions, verification of information, and
compliance with the Company's regulatory filings, as well as the general agent's
use of the Company's overall product lines.
The Company routinely reviews selected data for nonstandard personal
automobile policies as such data is received from general agents for
completeness, accuracy, and compliance with the Company's underwriting
guidelines. Generally, the Company conducts detailed on-site audits of its
general agents on a quarterly basis. These audits involve thoroughly reviewing
between 50 and 100 policies to verify proper classifications, ratings, accident
Page 8
and violation surcharges, adherence to manual guidelines, use of proper
exclusions, verification of information relative to inspections and compliance
with the Company's regulatory filings. The Company provides its general agents
with written feedback based on the results of its audits and monitors their
timely responses to any issues highlighted in such audits.
(f) 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. All commercial and
personal lines claims are supervised and processed centrally by the Company's
claims management staff. Senior management reviews all claims over $25,000.
(g) Reserves
The Company is directly liable for loss and loss adjustment expense payments
under the terms of the insurance policies that it writes. In many cases, several
years may elapse between the occurrence of an insured loss, the reporting of the
loss to the Company and the Company's payment of that loss. The Company reflects
its liability for the ultimate payment of all incurred losses and loss
adjustment expenses by establishing loss and loss adjustment expense reserves
for both reported and unreported claims, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses.
When a claim involving a probable loss is reported, the Company establishes
a case reserve for the estimated amount of the Company's ultimate loss and loss
adjustment expense payments. The estimate of the amount of the ultimate loss is
based upon such factors as the type of loss, jurisdiction of the occurrence,
knowledge of the circumstances surrounding the claim, severity of injury or
damage, potential for ultimate exposure and policy provisions relating to the
claim. The loss adjustment expenses include the estimated expenses of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment process.
All newly reported claims received with respect to personal automobile
policies are set up with an initial average reserve. The average reserves for
these claims are determined every quarter by dividing all of the closed claims
into the total amount paid during the three month period. If a claim is open
more than 90 days, that open case reserve is evaluated and the reserve is
adjusted upward or downward according to the facts and damages of that
particular claim.
In addition, management establishes reserves on an aggregate basis to
provide for Incurred But Not Reported Losses ("IBNR"). The Company's independent
actuarial consultant annually reviews the provision for IBNR and the reserves
taken as a whole. The Company does not discount its loss reserves. The estimates
of reserves are subject to the effect of trends in claims severity and frequency
and are continually reviewed. As part of this process, the Company reviews
historical data and considers various factors, including known and anticipated
legal developments, changes in social attitudes, inflation and economic
conditions. As experience develops and other data become available, these
estimates are revised, as required, resulting in increases or decreases to
existing reserves. Adjustments are reflected in results of operations in the
period in which they are made and may deviate substantially from prior
estimates.
Page 9
The following table sets forth a reconciliation of beginning and ending
reserves as shown on the Company's financial statements (on a GAAP basis gross
of reinsurance) for unpaid losses and loss adjustment expenses for the periods
indicated:
Year ended December 31,
----------------------------------
1997 1996 1995
----------- ---------- ----------
(in thousands)
Reserves for unpaid losses and loss adjustment expenses,
at beginning of year 70,728 $ 60,139 $ 44,796
----------- ---------- ----------
Incurred losses and loss adjustment expenses:
Provision for insured events of the current year 61,916 48,076 40,606
Increase (decrease) in provision for insured
events of prior years 916 3,744 3,377
---------- ----------- ----------
Total incurred losses and loss adjustment expenses 62,832 51,820 43,983
--------- ----------- ----------
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year 21,408 17,931 13,054
Losses and loss adjustment expenses attributable
to insured events of prior years 27,586 23,300 15,586
--------- ---------- ---------
Total payments 48,994 41,231 28,640
--------- ---------- ---------
Reserves for unpaid losses and loss adjustment expenses,
at end of year $ 84,566 $ 70,728 $ 60,139
========== ========== ===========
The Company has experienced adverse development of gross reserves of
$916,000, $3.7 million and $3.4 million in 1997, 1996 and 1995, respectively,
for prior years' insured events. The net reserves had unfavorable development of
$341,000 for 1997 and favorable development of $804,000 and $1.7 million in 1996
and 1995, respectively. The unfavorable development on the gross reserves
occurred primarily on the gross reserves held as of December 31, 1993, which
deficiency is ceded to the Company's reinsurers. The unfavorable development on
the net reserves in 1997 was primarily due to the personal auto line. The
establishment of reserves is an inherently subjective process and, therefore,
the historical gross or net redundancies or deficiencies are not indicative of
the likelihood or amount of future redundancies or deficiencies.
The following table represents the development of unpaid loss and loss
adjustment expense reserves during the ten years ended December 31, 1996. The
top of the table reflects the ten year development of the Company's reserves net
of reinsurance. The bottom of the table reconciles 1997, 1996, 1995, 1994, 1993,
and 1992 ending reserves to the gross reserves in the Company's consolidated
financial statements. Prior to 1992, the Company developed its reserves on a net
of reinsurance basis and restatement for those prior years is not presented. The
top line of the table shows the estimated reserve for unpaid loss and loss
adjustment expenses at the balance sheet date for each of the indicated years.
These figures represent the estimated amount of unpaid loss and loss adjustment
expenses for claims arising in all prior years that were unpaid at the balance
sheet date, including losses that had been incurred but not yet reported. The
table also shows the re-estimated amount of the previously recorded reserve
based on experience as of the end of each succeeding year. The estimate changes
as more information becomes available about the frequency and severity of
claims.
Page 10
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Reserves for unpaid losses and $18,618 $21,741 $25,391 $25,352 $25,681 $26,110 $26,830 $35,307 $46,512 $55,656 $68,863
loss adjustment expenses,
as stated
a. Net cumulative paid as of
1 year later $4,641 $4,911 $8,655 $6,929 $6,605 $7,381 $6,852 $12,383 $17,208 $23,660
2 years later 6,995 10,743 13,361 11,610 10,988 11,127 13,127 20,617 29,612
3 years later 11,728 14,132 16,952 14,667 13,325 15,546 18,656 27,266
4 years later 14,127 15,823 19,050 16,341 16,417 19,253 22,254
5 years later 15,209 17,074 20,359 18,363 19,283 21,503
6 years later 16,023 17,405 21,866 20,214 20,872
7 years later 16,219 18,303 23,383 21,470
8 years later 16,636 19,248 24,476
9 years later 17,157 20,133
10 years later 17,788
b. Reserves re-estimated as
of end of year
1 year later $18,483 $21,036 $25,128 $23,468 $23,228 $24,478 $23,897 $33,601 $45,708 $55,997
2 years later 18,054 21,396 24,329 22,658 22,383 21,945 23,489 34,281 47,225
3 years later 18,370 20,570 23,923 22,252 20,471 22,032 24,558 36,453
4 years later 17,739 20,206 23,615 21,465 20,819 22,767 26,335
5 years later 17,552 19,822 23,639 21,469 21,726 23,935
6 years later 17,342 19,499 24,021 21,990 22,550
7 years later 17,488 19,621 24,683 22,609
8 years later 17,432 20,222 25,379
9 years later 17,932 20,829
10 years later 18,374
Net cumulative redundancy $244 $912 $12 $2,743 $3,131 $2,175 $495 ($1,146) ($713) ($341)
(deficiency)
Gross liability for unpaid
losses and loss adjustment
expenses, as stated $31,703 $33,314 $44,796 $60,139 $70,728 $84,566
Reinsurance recoverable 5,593 6,484 9,489 13,627 15,072 15,703
Net liability for unpaid losses
and loss adjustment
expenses, as stated $26,110 $26,830 $35,307 $46,512 $55,656 $68,863
Gross liability re-estimated -
1 year later $30,609 $32,796 $48,173 $63,884 $71,644
Reinsurance recoverable
Net Liability re-estimated 6,131 8,899 14,572 18,176 15,647
1 year later $24,478 $23,897 $33,601 $45,708 $55,997
------- ------- ------- ------ ------- -------- ------- ------- ------- -------- -------
Gross liability re-estimated
- 2 years later $30,390 $36,243 $53,009 $66,405
Reinsurance recoverable
re-estimated 8,445 12,754 18,728 19,180
Net liability re-estimated
- 2 years later $21,945 $23,489 $34,281 47,225
------- ------- ------- ------ ------- -------- ------- ------- -------- ------- ------
Gross liability re-estimated
- 3 years later $33,992 $41,600 $56,042
Reinsurance recoverable
re-estimated 11,960 17,042 19,589
Net liability re-estimated
- 3 years later $22,032 $24,558 36,453
-------- ------- ------- ------ ------- -------- ------- ------- -------- ------- ------
Gross liability re-estimated
- 4 years later $38,165 $43,824
Reinsurance recoverable
re-estimated 15,398 17,489
Net liability re-estimated
- 4 years later $22,767 $26,335
-------- ------- ------- ------ ------- -------- ------- ------- -------- ------- -----
Gross liability re-estimate
- 5 years later $39,956
Reinsurance recoverable
re-estimated 16,021
Net liability re-estimated
-5 years later $23,935
-------- ------- ------- ------ ------- -------- ------- ------- -------- ------- -----
Gross cumulative deficiency ($8,253) ($10,510) ($11,246) ($6,266) ($916)
a. Net cumulative paid "as of" equals the amounts of paid losses and loss
adjustment expenses subsequent to the year in which the original reserves
were established.
b. Reserves re-estimated "as of" equals the amounts of unpaid losses and loss
adjustment expenses which the company would have originally established
based on experience as of the end of each succeeding year. These amounts
were calculated as the sum of the cumulative paid amounts described
described in (a.) above plus the amounts of unpaid losses and loss
adjustment expenses reevaluated at the end of each succeeding year end.
Page 11
The cumulative redundancy or deficiency represents the aggregate change in
the reserve estimates over all prior years. It should be emphasized that the
table presents a run-off of balance sheet reserves rather than accident or
policy year loss development. Therefore, each amount in the table includes the
effects of changes in reserves for all prior years.
The following table sets forth ratios for the Company and the industry
prepared in accordance with statutory accounting practices ("SAP") prescribed or
permitted by state insurance authorities. The statutory combined ratio, which
reflects underwriting results but not investment income, is a traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio is the sum of (i) the ratio of incurred losses and loss adjustment
expenses to net earned premium ("loss ratio"); and (ii) the ratio of expenses
incurred for commissions, premium taxes, administrative and other underwriting
expenses to net written premium ("expense ratio").
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ---------- ------------
The Company:
SAP Basis
Loss and loss adjustment expense ratio 63.0% 62.7% 62.6%
Expense ratio 32.3 31.6 30.4
=========== ========== ============
Combined ratio 95.3% 94.3% 93.0%
=========== ========== ============
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ---------- ------------
Property and casualty insurance industry (1):
SAP Basis
Loss and loss adjustment expense ratio 73.4% 78.6% 78.9%
Expense ratio 26.6 26.2 26.1
Dividend ratio 1.1 1.1 1.4
=========== ========== ============
Combined ratio 101.1% 105.9% 106.4%
=========== ========== ============
(1) Source: Industry Estimate for the first nine months of 1997, Best Week,
P/C Supplement, December 29, 1997 edition, including dividend ratios. 1996
and 1995, Best Aggregates & Averages - P/C.
(h) 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
Page 12
insolvency of its reinsurers, the Company evaluates the acceptability and
reviews the financial condition of each reinsurer annually. The Company's policy
is to use only reinsurers that have an A.M. Best rating of "A (Excellent)" or
better and that have at least $250 million in policyholder surplus.
The Company's current treaty reinsurance is with General Re, which is rated
"A++ (Superior)" by A.M. Best. Since January 1995, the Company has maintained
net retention limits of $500,000 (including indemnity and/or loss adjustment
expense) for casualty insurance and $200,000 for property insurance, with a
combined Company retention for any one loss resulting from a common occurrence
involving both the property and casualty coverage on a single risk of $500,000.
Effective January 1, 1998, the Company increased its retention for property
insurance to $300,000 from $200,000 per risk. The retention for casualty risk
for 1998 remained the same. The Company also maintains casualty contingent
excess coverage with General Re, which covers exposures such as punitive damages
and other extra-contractual obligations, losses in excess of policy limits (such
as bad faith and errors and omissions) and liability actions brought by two
or more of the Company's insureds against each other resulting from the same
occurrence.
The Company is covered for catastrophe losses by a consortium of reinsurers
for 1998 such as General Re and Lloyds of London and other "A" rated or
better reinsurers. Under the terms of the agreement, the Company retains the
first $2 million of losses and the consortium reinsures 95.0% of the next $23
million, with the Company retaining 5.0% of each of the layers within the $21
million.
The Company may write individual risks with limits greater than the treaty
limits on a per policy basis by using facultative reinsurance. The facultative
reinsurers must also meet Penn-America's reinsurer guidelines.
The following table reflects the amount of premiums written and ceded under
reinsurance treaties:
Year ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Gross written premiums $ 104,694 $ 80,496 $ 66,953
Ceded written premiums 8,133 7,027 5,667
(i) Investments
The Company's investment policy seeks to maximize investment income consistent
with the overriding objective of maintaining liquidity and minimizing risk.
Approximately 84.4% of the Company's investment portfolio as of December 31,
1997 consisted of investment-grade fixed income securities and short-term
investments. Approximately 98.5% of the Company's fixed income securities as of
December 31, 1997 were rated "A-" or better by Standard & Poor's or an
equivalent rating by Moody's. As of December 31, 1997, the Company's fixed
maturity investments had an average duration of 3.01 years. Publicly traded
equity securities, the majority of which consisted of preferred stocks,
represented 15.6% of the Company's investment portfolio as of December 31, 1997.
As of December 31, 1997, the Company's investment portfolio contained $38.4
million (21.8%) of mortgage-backed and asset-backed securities. All of these
securities are "AAA"-rated securities issued by government and
government-related agencies, are publicly traded, and have market values
obtained from an external pricing service. Changes in estimated cash flows due
Page 13
to changes in prepayment assumptions from the original purchase assumptions are
revised based on current interest rates and the economic environment. Although
the Company is permitted to invest in other derivative financial instruments,
real estate mortgages and real estate, the Company does not participate in these
markets and does not have any such investments in its investment portfolio.
The Company's investment portfolio is under the direction of the Board of
Directors of Penn-America acting through its Investment Committee (consisting of
Irvin Saltzman, Chairman, Jon Saltzman and Robert Lear). The Investment
Committee establishes and monitors the Company's investment policies, which are
intended to maximize after-tax income while maintaining a high level of quality
and liquidity in its portfolio for insurance operations. All investment
transactions must receive approval from the Chairman of the Investment Committee
prior to their initiation by the Company's outside investment advisors.
In April 1997, the Company retained General Re, New England Asset Management
("NEAM"), to manage the fixed income portfolio. The Investment Committee retains
Carl Domino Associates, L.P. ("CDA"), a registered investment advisor, to
recommend purchases and sales for the equity portfolio.
The following table shows the classifications of the Company's investments at
December 31, 1997:
Amount
reflected
Fair on balance Percent of
value sheet total
-------------- ---------------- -------------
(In thousands)
Fixed maturities:
Available for sale
U.S. Treasury securities and obligations of
U.S. government agencies $ 22,831 $ 22,831 13.0%
Corporate securities 30,537 30,537 17.4
Mortgage-backed securities 11,792 11,792 6.7
Other structured securities 18,694 18,694 10.6
Public utilities 6,125 6,125 3.5
---------- -------- --------
Total available for sale 89,979 89,979 51.2
---------- -------- --------
Held to maturity
U.S. Treasury securities and obligations of
U.S. government agencies 21,535 21,466 12.2
Corporate securities 11,326 11,284 6.4
Mortgage-backed securities 7,965 7,901 4.5
Public utilities 6,058 6,041 3.5
Other securities 150 150 0.1
--------- -------- -------
Total held to maturity 47,034 46,842 26.7
--------- --------- -------
Total fixed maturities 137,013 136,821 77.9
--------- --------- -------
Equity investments:
Common stock 6,435 6,435 3.7
Preferred stock 20,945 20,945 11.9
------- --------- ------
Total equity investments 27,380 27,380 15.6
-------- --------- -------
Short-term investments 11,455 11,455 6.5
========= ========= =======
Total investments $ 175,848 $ 175,656 100.0%
========= ========= =======
Page 14
The following table sets forth the composition of the Company's portfolio of
fixed maturity investments by rating at December 31, 1997:
Amortized Percentage Cumulative
Cost of portfolio percentage
-----------------------------------------------
(in thousands)
Ratings (1)
- ------------------------------------------
AAA (including U.S. government obligations) $ 83,449 61.3% 61.3%
AA 14,765 10.9 72.2
A 35,810 26.3 98.5
BBB 2,003 1.5 100.0
-----------------------------------------------
Total $ 136,027 100.0% 100.0%
===============================================
(1) Ratings are assigned primarily by Standard & Poor's with the remaining
ratings assigned by Moody's and converted to the equivalent Standard &
Poor's ratings.
The following table sets forth investment results of the Company for each of
the years in the three years ended December 31, 1997:
1997 1996 1995
(in thousands)
Interest on fixed maturities $ 7,506 $ 6,108 $ 4,615
Dividends on equity securities 1,123 691 533
Interest on short-term
investments and cash 852 380 291
Other 42 61 42
-------------------------------------------
Total investment income 9,523 7,240 5,481
Investment expense (305) (535) (414)
-------------------------------------------
Net investment income 9,218 $ 6,705 $ 5,067
===========================================
(j) Competition
The property and casualty insurance industry is highly competitive and
includes several thousand insurers, ranging from large companies offering a wide
variety of products worldwide to smaller, specialized companies in a single
state or region and offering in some cases only a single product. The Company
competes with a significant number of these insurers in attracting quality
general agents and in selling insurance products. Many of the Company's existing
or potential competitors are larger, have considerably greater financial and
other resources, have greater experience in the insurance industry and offer a
broader line of insurance products than the Company. In commercial lines, the
Company competes with excess and surplus lines and specialty admitted insurers
including Scottsdale Insurance Company (part of Nationwide Mutual Insurance
Company), Essex Insurance Company (Markel Corporation), Nautilus Insurance
Company (W.R. Berkley Corporation), Acceptance Insurance Company and Western
World Insurance Company. The Company competes in nonstandard personal automobile
lines with, among others, Viking Insurance Company (Orion Capital), Financial
Indemnity Company (Unitrin, Inc.), Essex Insurance Company and Five Star
Insurance Company.
Page 15
The Company also competes with new forms of insurance organizations (such
as risk retention groups) and alternative self-insurance mechanisms. The Company
believes that in order to be successful in its market, it must be aware of
pricing cycles, must be able to minimize the impact of such cycles through tight
expense control and superior customer service and must continually identify
profitable opportunities. Other competitive factors include ratings by A.M.
Best, pricing and admitted versus excess and surplus lines status in a given
state.
(k) Regulation
General. The Company is subject to regulation under the insurance statutes
and regulations, including insurance holding company statutes, of the various
states in which it does business. These statutes are generally designed to
protect the interests of insurance policyholders, as opposed to the interests of
stockholders, and they relate to such matters as the standards of solvency which
must be met and maintained; the licensing of insurers and their agents; the
nature and limitations of investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates; periodic examination
of the affairs of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums and losses; and
requirements regarding numerous other matters. All insurance companies must file
annual statements with certain state regulatory agencies and are subject to
regular and special financial examinations by those agencies. The last
regulatory financial examination of Penn-America was completed by the
Pennsylvania Insurance Department in 1995, covering the five-year period ended
December 31, 1994.
Since 1993, Penn-America has maintained an "A (Excellent)" rating from A.M.
Best company, Inc.("A.M. Best"), which rating was reaffirmed by A.M. Best on May
27, 1997. A.M.Best's ratings are based upon factors of concern to policyholders,
including financial condition and solvency, and are not directed to the
protection of investors.
Penn-America is licensed as an admitted insurer in 27 states and is an
approved non-admitted (excess and surplus lines) insurer in the other 23 states
and the District of Columbia as of December 31, 1997. All insurance is written
through licensed agents and brokers. In states in which the Company operates on
a non-admitted basis, general agents and their retail insurance brokers
generally are required to certify that a certain number of licensed admitted
insurers will not write a particular risk prior to placing that risk with the
Company.
Insurance Holding Company Laws. Pennsylvania, Penn-America'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 PAGI, Penn-America or Penn-Star. The insurance department's
determination of whether to approve any such acquisition is based on a variety
of factors, including an evaluation of the acquirer's financial condition, the
competence of its management and whether competition would be reduced. All
transactions within a holding company's group affecting an insurer must be fair
and reasonable, and the insurer's policyholders' surplus following any such
transaction must be both reasonable in relation to its outstanding liabilities
and adequate for its needs. Notice to applicable regulators is required prior to
the consummation of certain transactions affecting insurance subsidiaries of the
holding company group.
Page 16
Dividend Restrictions. As an insurance holding company, PAGI is primarily
dependent on dividends and other permitted payments from Penn-America to provide
cash for the payment of any cash dividends to its stockholders. The payment of
dividends to PAGI by Penn-America and to Penn-America by Penn-Star are subject
to state regulations, primarily the insurance laws of Pennsylvania. Generally,
these laws provide that, unless prior approval is obtained, dividends of a
property and casualty insurance company in any consecutive 12-month period
shall not exceed the greater of 100% of its statutory net income for the most
recent calendar year or 10% of its statutory policyholders' surplus as of the
preceding year end. The maximum annual dividends payable by Penn-America
without prior approval in 1998 is approximately $9.5 million. Penn-America paid
a dividend of approximately $1.6 million to PAGI in 1997. Insurance regulators
have broad powers to prevent reduction of statutory surplus to inadequate
levels, and there is no assurance that dividends of the maximum amounts
calculated under any applicable formula would be permitted.
Insurance Guaranty Funds. Under insolvency or guarantee laws in states in
which Penn-America is licensed as an admitted insurer and in New Jersey,
organizations have been established (often referred to as guaranty funds) with
the authority to assess admitted insurers up to prescribed limits for the claims
of policyholders insured by insolvent, admitted insurance companies. Surplus
lines insurance companies are generally not subject to such assessments, but
neither are their policyholders eligible to file claims against the guaranty
funds, except in New Jersey.
Additional Legislation or Regulations. New regulations and legislation are
proposed from time to time to limit damage awards, to bring the industry under
regulation by the federal government, to control premiums, policy terminations
and other policy terms, and to impose new taxes and assessments. Difficulties
with insurance availability and affordability have increased legislative
activity at both the federal and state levels. Some state legislatures and
regulatory agencies have enacted measures, particularly in personal lines, to
limit midterm cancellations by insurers and require advance notice of renewal
intentions. In addition, Congress is investigating possible avenues for federal
regulation of the insurance industry.
(l) Employees
The Company has approximately 105 employees. The Chairman of the Board of
Directors of the Company and certain Directors devote a portion of their time to
the management of Penn Independent, the Company's largest stockholder. 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 22,000 square feet in an office building
located in Hatboro, Pennsylvania. The office building also houses Penn
Independent and its subsidiaries. The Company leases the space from Mr. Irvin
Saltzman, Chairman of the Board of Directors of the Company, pursuant to a lease
agreement which expires on June 30, 2000, and provides for an annual rental
payment of approximately $260,000, which amount is considered by the Company to
be at fair market value.
Page 17
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to routine legal proceedings in the normal course of
operating its insurance business. The Company is not involved in any legal
proceedings which reasonably could be expected to have a material adverse effect
on the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1997 to a vote of
holders of the Company's Common Stock.
Page 18
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
page 28 of the Company's annual report to stockholders for the year ended
December 31, 1997, which is included as Exhibit (13) to this Form 10-K Report,
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Data" section on page 8 of the
Company's Annual Report to stockholders for the year ended December 31, 1997,
which is included as Exhibit (13) to this Form 10-K Report, is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Results of Operations and
Financial Condition" section on pages 9 to 15 of the Company's Annual Report to
stockholders for the year ended December 31, 1997, which is included as Exhibit
(13) to this Form 10-K Report, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements on pages 16 to 27 of the Company's
Annual Report to stockholders for the year ended December 31, 1997, 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 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Director's information will be contained in the Company's definitive
Proxy Statement with respect to the Company's 1998 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 10, 1998 are as follows:
Irvin Saltzman 75 Chairman of the Board of Directors of PAGI
and Penn-America
Jon S. Saltzman 40 President and Chief Executive Officer of PAGI
and Penn-America, and Director
Rosemary R. Ferrero, CPA 42 Vice President - Finance, Secretary and
Treasurer of PAGI, Vice President, Secretary
and Chief Financial Officer of Penn-America
John M. DiBiasi, CPCU 43 Executive Vice President, Underwriting and
Marketing of Penn-America
Mr. Irvin Saltzman is the founder of Penn-America and of Penn Independent, and
for more than six years was the Chief Executive Officer and Chairman of the
boards of directors of both corporations. Mr. Saltzman has been Chairman of
the Board of Directors of the Company since its formation in July 1993.
Mr.Saltzman has been active in the insurance industry since 1947. See "Principal
and Selling Stockholders" and "Certain Relationships and Related Party
Transactions."
Mr. Jon S. Saltzman has been President and Chief Executive Officer of PAGI
since its formation in July 1993. He has been President and Chief Executive
Officer of Penn-America since June 1993. Mr. Saltzman was President and Chief
Operating Officer of Penn-America from June 1989 until June 1993, and was Vice
President, Marketing of Penn-America from January 1986 until June 1988.
Mr. Saltzman is Mr. Irvin Saltzman's son.
Ms. Rosemary R. Ferrero has been Vice President-Finance, Chief Financial
Officer, Treasurer of PAGI since May 1995 and Secretary since February 1997. She
has been Vice President and Chief Financial Officer of Penn-America since May
1994. From 1977 until joining Penn-America in 1994, Ms. Ferrero was a Senior
Financial Services Manager at Coopers & Lybrand, LLP.
Mr. John M. DiBiasi has been Executive Vice President--Underwriting and
Marketing since May 1994 and Vice President--Underwriting and Marketing of
Penn-America since January 1989. From January 1988 until January 1989 he was
Manager-Marketing Research and Product Development of Penn-America. From 1983
Page 20
until joining Penn-America in 1988, Mr. DiBiasi was Senior Manager, Commercial
Lines of American Reliance Insurance Companies, of Lawrenceville, New Jersey.
Mr. DiBiasi was employed by ISO from 1977 to 1983.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1998 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 1998 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 1998 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Page 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following consolidated financial statements, financial statement
schedules and exhibits are filed as part of this report:
1. Consolidated Financial Statements
Page*
------
Consolidated Balance Sheets at December 31, 1997 and 1996 16
Consolidated Statements of Earnings for the years ended
December 31, 1997, 1996, and 1995 17
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 18
1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995 19
Notes to Consolidated Financial Statements 20-26
Independent Auditors' Report 27
The following consolidated financial statement schedules for the years 1997,
1996 and 1995 are submitted herewith:
2. Financial Statement Schedules
Schedule I. Summary of Investments - Other Than Investments in Related Parties
Schedule II. Condensed Financial Information of Parent Company
Schedule III. Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI. Supplemental Insurance Information Concerning Property and Casualty
Subsidiaries 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.
* Refers to the respective page of Penn-America Group's 1997 Annual Report to
Stockholders attached as Exhibit(13). The Consolidated Financial Statements and
Independent Auditors' Report on pages 16 to 27 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 the Securities and Exchange Act of 1934.
Page 22
3. Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No.33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1
(No. 33-66892) filed with the Securities and Exchange Commission
on August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance Company
("Penn-America")and Carnegie General Agency. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998.
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) filed with the Securities and Exchange
Commission on August 2, 1993.
10.3(i) Endorsement Nos.4 through 6 (Termination Endorsement) to Casualty
Excess of Loss Reinsurance Agreement with National Reinsurance
Corporation. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
the Securities and Exchange Commission.
10.4 1993 Underlying Homeowners and Dwelling Fire Property Per Risk
Excess of Loss Reinsurance (Run-off Business) Agreement with
National Reinsurance Corporation. Incorporated by referenc e to
Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial) Reinsurance
Agreement with Employers Reinsurance Corporation. Incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (No.33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
10.5(i) Endorsement No.3 to Property Per Risk of Excess Loss (Commercial)
Reinsurance Agreement with Employers Reinsurance Corporation.
Filed with the Registrant's Report on Form 10-K for the period
ending December 31, 1994 which has been filed with the Securities
and Exchange Commission.
Page 23
Exhibit No. Description
10.6 1993 Property Catastrophe Excess Reinsurance Agreement with
Employers Reinsurance Corporation. Incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.6(i) Endorsement No. 6 to Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation. Filed with
the Registrant's Report on Form 10-K for the period ending
December 31, 1994 which has been filed with the Securities and
Exchange Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance Corporation
effective January 1, 1995. Filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1994 which has been
filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993 between Penn Independent
Corporation ("Penn Independent") and the Registrant regarding the
reimbursement of certain employment costs. Incorporated by
reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20,1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs. Filed with Registrant's Report on Form
10-K for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996, to August 20,
1993 Agreement between Penn Independent and Registrant regarding
the sharing of certain operating costs. Filed with Registrant's
Report on Form 10-K for the period ended December 31, 1996, which
has been filed with the SEC.
10.7(iii) Amendment dated March 1, 1997 to August 20, 1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs.
Page 24
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) 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.
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.
* 10.10 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.10 to Amendment No. 4 to the Registrant's Registration
Statement Form S-1 (No. 33-66892) filed with the Securities and
Exchange Commission on September 29, 1993.
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended
and restated April 4, 1994. Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (No.
33-82728) filed with the Securities and Exchange Commission
on August 11, 1994.
10.11(ii) Lease effective June 30, 1995 between Registrant and Irvin
Saltzman. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.12 Demand Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America.
Incorporated by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the Registrant to
Penn Independent. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.13(i) Amendment No.1 dated November 30, 1995, to Demand Promissory Note
dated January 12, 1993 from Penn Independent Financial Services,
Inc. to Penn-America. Filed with the Registrant's Report on Form
10-K for the period ended December 31, 1996 which has been filed
with the Securities and Exchange Commission.
10.14 1995 Multiple Line Excess of Loss (Casualty and Property)
Reinsurance Agreement with National Reinsurance Corporation.
Filed with Registrant's Report on Form 10-K for the period
ended December 31, 1995 which has been filed with the Securities
and Exchange Commission.
* Constitutes a compensatory plan arrangementrequired to be filed as an exhibit
to form.
Page 25
Exhibit No. Description
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as
of January 1, 1995. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed with
the Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with General Re
Corporation effective May 1, 1996. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996 which
has been filed with the Securities and Exchange Commission.
10.15 1995 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1994 which
has been filed with the Securities and Exchange Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996 which
has been filed with the Securities and Exchange Commission.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive Compensation
Plan, incorporated as Part I to Registrant's Registration
Statement on Form S-8 (No. 333-00050) filed with the Securities
and Exchange Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and Profit Sharing
Plan, incorporated as Exhibit 4 to Registrant's Registration
Statement on Form S-3 (No. 333-00046) filed with the Securities
and Exchange Commission on January 4, 1996.
10.18 Stipulation of Termination of Property and Liability Reinsurance
Agreement with National Reinsurance Corporation effective May 1,
1996. Filed with the Registrant's Report on Form 10-K for the
period ended December 31, 1996 which has been file with the
Securities and Exchange Commission.
13. 1997 Annual Report to Shareholders.
21. As of December 31, 1997, the Registrant's only subsidiary is
Penn-America Insurance Company, a Pennsylvania Corporation.
23. Independent Auditor's Consent and Report on Schedules.
Page 26
Exhibit No. Description
28.1 Loan and Security Agreement, Term Note and Stock Pledge Agreement
dated December 20, 1995 between Registrant and PNC Bank
(successor to Midlantic Bank, N.A). Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1995 which
has been filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
Page 27
PENN-AMERICA GROUP, INC.
Schedule I - Summary of Investments - Other than Investments in Related Parties
(in thousands)
December 31, 1997
Amortized Amount shown on
Cost Fair Value Balance Sheet
Fixed maturities:
Available for sale
U.S. treasury securities and obligations of
U.S. government agencies $ 22,730 $ 22,831 $ 22,831
Corporate securities 30,053 30,537 30,537
Mortgage-backed securities 11,751 11,792 11,792
Other structured securities 18,602 18,694 18,694
Public utilities 6,049 6,125 6,125
---------- --------- ----------
Total available for sale 89,185 89,979 89,979
---------- --------- ----------
Held to maturity
U.S. treasury securities and obligations of
U.S. government agencies $ 21,466 $ 21,535 $ 21,466
Corporate securities 11,284 11,326 11,284
Mortgage-backed securities 7,901 7,965 7,901
Public utilities 6,041 6,058 6,041
Other securities 150 150 150
--------- --------- ---------
Total held to maturity 46,842 47,034 46,842
--------- --------- ---------
Total fixed maturities 136,027 137,013 136,821
--------- --------- ---------
Equity investments:
Common stocks 4,902 6,434 6,434
Preferred stocks 20,760 20,946 20,946
--------- -------- --------
Total equity investments 25,662 27,380 27,380
--------- --------- --------
Short term investments: 11,455 11,455 11,455
-------- --------- -------
Total investments $ 173,144 $ 175,848 $ 175,656
========== ========== ==========
Page 28
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Balance Sheets
(in thousands except share data)
December 31,
1997 1996
ASSETS
Cash $ 1,516 $ 369
Investment in subsidiary, equity method 95,390 50,669
Other assets 594 514
========= =========
Total assets $ 97,500 $ 51,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 193 $ 215
Note payable, bank --- 9,000
---------- ---------
Total liabilities 193 9,215
---------- ---------
Stockholders' equity:
Preferred stock, $ .01 par value; authorized 2,000,000 shares;
none issued
Common stock, $.01 par value; authorized 20,000,000 shares
in 1997 and 10,000,000 shares in 1996; issued and
outstanding 1997; 9,883,384 and 1996; 6,676,131 shares,
respectively 99 67
Additional paid-in capital 68,221 21,844
Unrealized investment gains, net 1,649 993
Retained earnings 27,849 19,533
------------ ----------
97,818 42,437
Unearned compensation from restricted stock awards (511) (100)
------------ -----------
Total stockholders' equity 97,307 42,337
------------ -----------
Total liabilities and stockholders' equity $ 97,500 $ 51,522
=========== ===========
Page 29
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Statements of Earnings
(in thousands except per share data)
(per share data adjusted for the adoption of FASB 128
and restated for 3-for-2 stock split in January,1997)
Year ended December 31,
1997 1996 1995
----------- ---------- --------------
Dividend income $ 1,555 $ 3,258 $ 1,300
Other 122 10 ---
Operating expenses (1,636) (1,653) (1,121)
Income tax benefit 539 552 380
----------- ----------- ------------
Income before equity in undistributed
net income of subsidiary 580 2,167 559
Equity in undistributed net earnings
of subsidiary 9,065 4,826 5,467
----------- ----------- ------------
Net earnings $ 9,645 $ 6,993 $ 6,026
=========== =========== ============
Net earnings per share
Basic $ 1.19 $ 1.05 $ 0.91
Diluted $ 1.17 $ 1.04 $ 0.91
Weighted average number of shares used
in calculating per share data
Basic 8,126 6,663 6,645
Diluted 8,228 6,743 6,655
Cash dividends per share $ 0.16 $ 0.11 $ 0.06
=========== =========== ============
Page 30
PENN-AMERICA GROUP, INC.
Schedule II - Condensed Financial Information of Parent Company
Condensed Statements of Cash Flows
(in thousands)
Year ended
December 31,
1997 1996 1995
Cash flows from operating activities:
Net earnings $ 9,645 $6,993 $ 6,026
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed net earnings of subsidiary (9,065) (4,826) (5,467)
Increase (decrease) in :
Accounts payable and accrued expenses (22) (54) 30
Other, net (200) (352) (129)
Amortization 221 133 83
-------- ------- -------
Net cash provided by operating activities 579 1,894 543
-------- ------- -------
Cash flows from financing activities:
Repayment of note payable, bank (9,000) (1,000) (1,000)
Proceeds of note payable, bank --- --- 10,000
Issuance of common stock (net of expense) 45,897 259 ---
Repayment of note payable, affiliate --- (150) (200)
Equity contributions to subsidiary (35,000) --- (9,000)
Dividends paid (1,329) (711) (398)
-------- -------- ---------
Net cash provided (used) by financing activities 568 (1,602) (598)
-------- -------- ---------
Increase (decrease) in cash 1,147 292 (55)
Cash, beginning of period 369 77 132
========= ========= =========
Cash, end of period $ 1,516 $ 369 $ 77
========= ========= =========
Page 31
PENN-AMERICA GROUP, INC.
Schedule III - Supplementary Insurance Information
Years Ended December 31, 1997, 1996, 1995
(in thousands)
Liability Amortization
for Unpaid of
Deferred Losses and Losses Deferred
Policy Loss Net and Loss Policy Other
Acquisition Adjustment Unearned Earned Investment Adjustment Acquisition Underwriting Premiums
Costs Expenses Premiums Premiums Income Expenses Costs Expenses Written
Year Ended:
December 31, 1997 $8,563 $84,566 $36,173 $91,649 $9,218 $57,728 $24,984 $5,840 $96,561
December 31, 1996 7,231 70,728 30,865 69,081 6,705 43,292 17,785 4,349 73,469
December 31, 1995 5,716 60,139 26,245 57,228 5,067 35,835 14,237 4,356 61,286
Page 32
PENN-AMERICA GROUP, INC.
Schedule IV - Reinsurance
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
Percentage
Ceded to Assumed of Amount
Other from Other Assumed to Net
Gross Amount Companies Companies Net Amount
1997
Premiums
Property and
liability insurance $ 104,694 $ 8,133 --- $ 96,561 0
============== ============== ============= ============= ===============
Total
Premiums $ 104,694 $ 8,133 --- $ 96,561 0
============== ============== ============= ============= ===============
1996
Premiums
Property and
liability insurance $ 80,496 $ 7,027 --- $73,469 0
============== ============== ============= ============= ===============
Total
Premiums $ 80,496 $ 7,027 --- $ 73,469 0
============== ============== ============= ============= ===============
1995
Premiums
Property and
liability insurance $66,953 $ 5,667 --- $61,286 0
============== ============== ============= ============= ===============
Total
Premiums $ 66,953 $ 5,667 --- $ 61,286 0
============== ============== ============= ============= ===============
Page 33
PENN-AMERICA GROUP, INC.
Schedule VI - Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries
Years Ended December 31, 1997, 1996 and 1995
(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
Year Ended
December 31, 1997 $ 84,566 $ 57,387 $ 341 $ 44,521
December 31, 1996 70,728 44,096 (804) 34,148
December 31, 1995 60,139 37,541 (1,706) 24,630
Page 34
PENN-AMERICA GROUP, INC.
Exhibit II-- Statement re:
Computation of Per Share Earnings
Years ended December 31, 1997, 1996, 1995
(in thousands except per share data)
(per share data adjusted for the adoption of FASB 128
and restated for 3 for 2 stock split in January, 1997)
Year ended December 31,
1997 1996 1995
Basic EPS:
Net earnings $ 9,645 $ 6,993 $ 6,026
----------- ----------- ------------
Weighted average common shares outstanding 8,126 6,663 6,645
============= ============= =============
Basic EPS $1.19 $1.05 $0.91
============= ============= =============
Diluted EPS:
Net Earnings $ 9,645 $ 6,993 $ 6,026
---------- ---------- -----------
Weighted average common shares outstanding 8,126 6,663 6,645
Additional shares outstanding after the
assumed exercise of options by applying
the treasury stock method 102 80 10
------------- ------------- -------------
Total 8,228 6,743 6,655
============= ============= =============
Diluted EPS $ 1.17 $ 1.04 $ 0.91
============= ============= =============
Page 35
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 , 1998 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 , 1998
Irvin Saltzman and Director
/s/ Jon S. Saltzman President, Chief Executive Officer and March , 1998
Jon S. Saltzman Director (Principal Executive Officer)
/s/ James E. Heerin, Jr. Director March , 1998
James E. Heerin, Jr.
/s/ Robert A. Lear Director March , 1998
Robert A. Lear
/s/ Rosemary R. Ferrero Vice President-Finance, Secretary and March , 1998
Rosemary R. Ferrero Treasurer (Principal Financial and
Accounting Officer)
/s/ Paul Simon Director March , 1998
Paul Simon
/s/ Charles Ellman Director March , 1998
Charles Ellman
/s/ M. Moshe Porat Director March , 1998
M. Moshe Porat
/s/ Jami Saltzman-Levy Director March , 1998
Jami Saltzman-Levy
/s/ Thomas Spiro Director March , 1998
Thomas Spiro
Page 36
3. Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No.33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1
(No. 33-66892) filed with the Securities and Exchange Commission
on August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance Company
("Penn-America")and Carnegie General Agency. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998.
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) filed with the Securities and Exchange
Commission on August 2, 1993.
10.3(i) Endorsement Nos.4 through 6 (Termination Endorsement) to Casualty
Excess of Loss Reinsurance Agreement with National Reinsurance
Corporation. Filed with the Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.4 1993 Underlying Homeowners and Dwelling Fire Property Per Risk
Excess of Loss Reinsurance (Run-off Business) Agreement with
National Reinsurance Corporation. Incorporated by referenc e to
Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial) Reinsurance
Agreement with Employers Reinsurance Corporation. Incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (No.33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
10.5(i) Endorsement No.3 to Property Per Risk of Excess Loss (Commercial)
Reinsurance Agreement with Employers Reinsurance Corporation.
Filed with the Registrant's Report on Form 10-K for the period
ending December 31, 1994 which has been filed with the Securities
and Exchange Commission.
Page 37
Exhibit No. Description
10.6 1993 Property Catastrophe Excess Reinsurance Agreement with
Employers Reinsurance Corporation. Incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.6(i) Endorsement No. 6 to Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation. Filed with
the Registrant's Report on Form 10-K for the period ending
December 31, 1994 which has been filed with the Securities and
Exchange Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance Corporation
effective January 1, 1995. Filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1994 which has been
filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993 between Penn Independent
Corporation ("Penn Independent") and the Registrant regarding the
reimbursement of certain employment costs. Incorporated by
reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20,1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs. Filed with Registrant's Report on Form
10-K for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996, to August 20,
1993 Agreement between Penn Independent and Registrant regarding
the sharing of certain operating costs. Filed with Registrant's
Report on Form 10-K for the period ended December 31, 1996, which
has been filed with the SEC.
10.7(iii) Amendment dated March 1, 1997 to August 20, 1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs.
Page 38
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) 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.
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.
* 10.10 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.10 to Amendment No. 4 to the Registrant's Registration
Statement Form S-1 (No. 33-66892) filed with the Securities and
Exchange Commission on September 29, 1993.
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended
and restated April 4, 1994. Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (No.
33-82728) filed with the Securities and Exchange Commission
on August 11, 1994.
10.11(ii) Lease effective June 30, 1995 between Registrant and Irvin
Saltzman. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.12 Demand Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America.
Incorporated by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the Registrant to
Penn Independent. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.13(i) Amendment No.1 dated November 30, 1995, to Demand Promissory Note
dated January 12, 1993 from Penn Independent Financial Services,
Inc. to Penn-America. Filed with the Registrant's Report on form
10-K for the period ended December 31, 1996 which has been filed
with the Securities and Exchange Commission.
10.14 1995 Multiple Line Excess of Loss (Casualty and Property)
Reinsurance Agreement with National Reinsurance Corporation.
Filed with Registrant's Report on Form 10-K for the period
ended December 31, 1995 which has been filed with the Securities
and Exchange Commission.
* Constitutes a compensatory plan arrangementrequired to be filed as an exhibit
to form.
Page 39
Exhibit No. Description
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as
of January 1, 1995. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed with
the Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with General Re
Corporation effective May 1, 1996. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996 which
has been filed with the Securities and Exchange Commission.
10.15 1995 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1994 which
has been filed with the Securities and Exchange Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996 which
has been filed with the Securities and Exchange Commission.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive Compensation
Plan, incorporated as Part I to Registrant's Registration
Statement on Form S-8 (No. 333-00050) filed with the Securities
and Exchange Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and Profit Sharing
Plan, incorporated as Exhibit 4 to Registrant's Registration
Statement on Form S-3 (No. 333-00046) filed with the Securities
and Exchange Commission on January 4, 1996.
10.18 Stipulation of Termination of Property and Liability Reinsurance
Agreement with National Reinsurance Corporation effective May 1,
1996. Filed with the Registrant's Report on Form 10-K for the
period ended December 31, 1996 which has been filed with the
Securities and Exchange Commission.
13. 1997 Annual Report to Shareholders.
21. As of December 31, 1997, the Registrant's only subsidiary is
Penn-America Insurance Company, a Pennsylvania Corporation.
23. Independent Auditor's Consent and Report on Schedules.
Page 40
Exhibit No. Description
28.1 Loan and Security Agreement, Term Note and Stock Pledge Agreement
dated December 20, 1995 between Registrant and PNC Bank
(successor to Midlantic Bank, N.A). Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1995 which
has been filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
Page 41