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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 1998
of
PENN-AMERICA GROUP, INC.
A Pennsylvania Corporation
IRS Employer Identification No. 23-2731409
SEC File Number 022316
420 S. York Road
Hatboro, Pa. 19040
(215) 443-3600
Penn America Group, Inc. does not have any securities registered pursuant to
Section 12 (b) and 12 (g) of the Act.
Penn America Group, Inc. (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.
Penn America Group, Inc. is unaware of any delinquent filers pursuant to Item
405 or Regulation 3-K.
As of March 22, 1999, the aggregate market value of the outstanding Common Stock
held by non-affiliates of the Registrant was approximately $62,400,000. As of
March 22, 1999, there were 8,739,901 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, 1998 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 1999 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, 1998
Page
PART I
ITEM 1. BUSINESS............................................... 3
ITEM 2. PROPERTIES..............................................20
ITEM 3. LEGAL PROCEEDINGS.......................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS........................................20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.........................21
ITEM 6. SELECTED FINANCIAL DATA.................................21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..............................................21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT..............................................22
ITEM 11. EXECUTIVE COMPENSATION..................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.....................................23
Page 2
PART I
ITEM 1. BUSINESS
General
Penn-America Group, Inc. is a specialty property and casualty insurance
holding company which, through its subsidiaries, Penn-America Insurance Company
and Penn-Star Insurance Company markets and underwrites commercial property,
general liability, business automobile, and multi-peril insurance for small
businesses located primarily in small towns and suburban and rural areas, and
non-standard 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 57 high-quality general agents, who in turn
produce business through over 25,000 retail insurance brokers located throughout
the United States. The Company focuses on serving the insurance needs of small
or non-standard markets which are generally characterized by small to average
policy premiums and serviced by retail insurance brokers with limited access to
larger, standard lines insurers. The Company believes that these markets are
generally under-served by larger, standard lines insurers who often limit their
underwriting to policies above a certain minimum premium size or to certain risk
classes and who operate in large-scale markets in which they can achieve
economies of scale. The Company believes that its distribution network enables
it to effectively access these numerous small markets at a relatively low fixed
cost through the marketing, underwriting and administrative support of its
general agents, as well as the localized market knowledge and expertise of its
general agents and their retail insurance brokers.
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1993 to 1998, gross written premiums
grew at a 168.8% cumulative annual rate, from $35.5 million to $95.1 million,
and net operating earnings (excluding realized investment gains) grew at a 34.6%
compound annual rate, from $2.0 million to $8.9 million. The Company has
operated at a statutory combined ratio under 100.0% in every year since 1993.
The Company's average combined ratio from 1993 to 1998 under Statutory
Accounting Practices(SAP) was 95.4%, and the Company's average return on
average stockholders' equity during the same period was 13.8%
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 the agent's
experience and reputation and strives to preserve each agent's franchise value
within their market territory. The Company seeks to grow with these general
agents and develop strong, longstanding relationships by providing a high level
of service and support. From 1993 to 1998, the Company achieved 168.8%
cumulative growth in gross written premiums with a 50% increase in the number of
general agents from 38 to 57. 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
non-standard 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 non-standard 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 recently announced in January, 1999, that it would focus
its premium writings of non-standard automobile in the state of California and
would run-off the non-standard automobile premium in the six remaining states.
In 1998, the automobile premium written in California represented approximately
60% of total automobile premium. The six states where the Company expects to
run-off the automobile premium represented the remaining 40%.
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 non-standard personal automobile insurance product is 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. Non-standard personal automobile
business represented approximately 25% of the Company's gross written premiums
in 1998 as compared to 35% of gross written premium in 1997. In 1999,
non-standard personal automobile premium is not expected to represent more than
10% of the Company's gross written premiums.
Penn-America Insurance Company was formed in 1975 by Irvin Saltzman, who
began working in the insurance industry in 1947 when he founded a general
agency. Jon S. Saltzman, Irvin Saltzman's son, is President and Chief Executive
Officer of the Company and has been employed by the Company since 1986. The
Company completed an initial public offering ("IPO") on October 28, 1993, at a
price to the public of $6.00 per share. Currently, the Saltzman family,
substantially through their ownership of Penn Independent Corporation, owns
approximately 32.9% of the Company's Common Stock.
Financial Information About Business Segments
The Company has two reported segments: commercial and personal lines. These
segments are managed separately because they have different customers, and
require different pricing and expense structures. The Company does not allocate
assets between segments because assets are reviewed in total by management for
decision-making purposes.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Company's 1998 annual
report. The Company evaluates segment profit based on profit or loss from
operating activities. Segment profit or loss from operations is pre-tax and does
not include unallocated expenses, but does include investment income
attributable to insurance transactions.
Page 4
Segment profit or loss, therefore, excludes federal income taxes,
unallocated expenses and investment income attributable to equity as opposed to
investment income attributable to insurance transactions. The Company currently
has one major customer accounting for over 10% of the Company's revenue. In 1998
and 1997, the Company derived approximately 18.4% and 21.3% of its revenues
from this one agent. In 1996, the Company had two major customers and derived
24.7% of its revenues from these two agents.
The following is a summary of our segment revenue and segment profit for the
years ended December 31, 1998, 1997 and 1996:
1998
----
Commercial Personal Total
---------- -------- ------
(in thousands)
Premiums earned $62,949 $26,544 $89,493
Net investment income from insurance
operations 4,126 945 5,071
----------- -------- ------
Total segment revenues 67,075 27,489 94,564
----------- -------- ------
Segment losses and LAE 37,121 18,612 55,733
Segment expenses 18,687 8,547 27,234
----------- --------- -------
Total segment losses and expenses 55,808 27,159 82,967
----------- --------- -------
Segment profit $11,267 $330 $11,597
============ ========= =======
Unallocated items:
Net investment income from equity 5,710
Unallocated expenses (4,784)
Income taxes (3,642)
-------
Net earnings $ 8,881
=======
1997
------
Commercial Personal Total
---------- -------- -----
Premiums earned $ 57,189 $ 34,460 $ 91,649
Net investment income from insurance
operations 4,764 934 5,698
Other income 442 230 672
---------- ------- ------
Total segment revenues 62,395 35,624 98,019
---------- ------- ------
Segment losses and LAE 32,723 25,005 57,728
Segment expenses 15,822 11,004 26,826
---------- ------- ------
Total segment losses and expenses 48,545 36,009 84,554
========== ======= ======
Segment profit (loss) $ 13,850 $ (385) $ 13,465
========== ======= ======
Unallocated items:
Net investment income from equity 4,834
Unallocated expenses (4,518)
Income taxes (4,136)
--------
Net earnings $ 9,645
========
1996
-----
Commercial Personal Total
---------- -------- ------
Premiums earned $ 49,667 $ 19,414 $69,081
Net investment income from insurance
operations 3,832 433 4,265
---------- -------- ------
Total segment revenues 53,499 19,847 73,346
----------- -------- ------
Segment losses and LAE 30,887 12,405 43,292
Segment expenses 13,026 6,147 19,173
----------- -------- ------
Total segment losses and expenses 43,913 18,552 62,465
=========== ======== ======
Segment profit $ 9,586 $ 1,295 $ 10,881
=========== ======== ======
Unallocated items:
Net investment income from equity 3,346
Unallocated expenses (3,845)
Income taxes (3,389)
-------
Net earnings $ 6,993
========
Page 5
Total segment revenues of $94.6 million, $98.0 million and $73.3 million
plus unallocated net investment income from equity of $5.7 million, $4.8 million
and $3.3 million equals total Company revenues of $100.3 million, $102.9
million, and $76.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Lines of Business
The following table sets forth an analysis of gross earned premium by
specific product lines during the periods indicated:
Years ended
-------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
----------- ---------- ---------- ----------- ---------- -----------
(dollars in thousands)
-------------------------------------------------------------------------
Commercial lines:
Commercial multi-peril $39,113 40.3% $35,687 35.9% $29,345 38.7%
Liability 24,863 25.6 23,486 23.6 21,418 28.2
Property 5,398 5.6 5,502 5.6 5,556 7.3
----------- ---------- ---------- ----------- ---------- -----------
69,374 71.5 64,675 65.1 56,319 74.2
----------- ---------- ---------- ----------- ---------- -----------
Personal Lines:
Auto liability 22,844 23.5 29,310 29.5 15,772 20.8
Auto physical damage 4,799 5.0 5,400 5.4 3,785 5.0
----------- ---------- ---------- ----------- ---------- -----------
27,643 28.5 34,710 34.9 19,557 25.8
----------- ---------- ---------- ----------- ---------- -----------
Total gross earned premium $97,017 100.0% $ 99,385 100.0% $ 75,876 100.0%
=========== ========== ========== =========== ========== ===========
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 standard Insurance Services Office ("ISO") forms
which make it easier and more efficient to write such multi-peril policies.
o Business Automobile and Commercial Umbrella. The Company wrote both
business automobile and commercial umbrella coverages to enhance its
commercial multi-peril ("package") writings.The types of risks and insureds
targeted are similar to those covered by other policies, such as,
restaurants, bars and taverns, retail operations, artisan contractors and
similar classes. The business automobile insurance (cars and light trucks)
can be written up to $1 million liability limits. Commercial umbrella
insurance can be
Page 6
written for limits up to $5 million with significant reinsurance support
from General Reinsurance Corporation. For commercial umbrella, Penn-America
must write the primary $1 million liability limit. The Company expects that
these coverages will further expand package writings and help increase
renewal retention of existing policies. In all of its commercial product
lines, the Company is continuously developing specialized programs for
certain industry segments to meet the needs of these markets. For example,
the Company has developed programs for independent fitness centers,
day-care operations, low-hazard miscellaneous professional liability
coverages and special events. As a group, these programs are a significant
benefit to the Company's marketing efforts, although individually they do
not generate a material amount of the Company's gross written premiums.
Non-Standard Personal Automobile. The Company announced in January 1999,
that it would run-off its non-standard personal automobile business in the
states of Washington, Montana, Alabama, North Dakota, South Dakota and
Nevada and focus its efforts on non-standard personal automobile in the
state of California. The California non-standard personal automobile
business is written at very low statutory coverage limits, and, is written
predominantly on a monthly policy basis.
Marketing and Distribution
The Company currently markets its insurance products through a select
number of high quality general agents. The Company believes that it benefits
significantly from a general agency system because it obtains the significant
underwriting and marketing expertise of the general agents who have strong
business experience and relationships in their local territory. In addition, the
general agency system allows the Company to avoid the expense of maintaining
national or regional sales forces. This enables the Company to focus its efforts
on reviewing the underwriting decisions of its agents and evaluating submission
business, rather than devoting greater resources to making routine underwriting
decisions.
The Company actively competes for quality general agents to distribute its
products. The Company selectively appoints general agents and grants authority
on a state-by-state basis so that each general agent only has authority in the
area where they have marketing expertise. Prior to appointing a general agent,
the Company extensively reviews the candidate's financial condition, geographic
diversification of risk, historical loss experience and reputation, as well as
the agent's results and practices with other insurers. An on-site review is made
of the prospective agent's office, including an audit of selected policy files
and confirmation that the agent has sufficient experience to merit authority to
bind the Company only to appropriate risks. 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 commercial automobile business, provided
that the risks and terms involved in a particular coverage are within the
guidelines set forth in the agency manual. The Company has devoted extensive
research to the development of its detailed agency manual to enable its agents
to select and price risks consistently. The Company's agency manual is regularly
updated to be responsive to changes in the marketplace. The Company devotes
substantial resources to the continuous monitoring and support of its general
agents.
Page 7
The general agents are compensated on a commission basis. During 1998, the
Company, increased by 10%, the commission on commercial business from 20% to
22%. For personal lines automobile business, the average commission is 26.5%. A
portion of this commission is passed on to the retail insurance broker. In
addition, the general agency contracts between the Company and its general
agents contain profit sharing incentives under the Agents' Profit Sharing and
Performance Award Program, which is designed to reward general agents who meet
the Company's loss ratio and premium volume criteria. 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 3.8% of the total
commissions paid by the Company in 1998. The Agents' Profit Sharing and
Performance Award Program provides for at least one-third of the contingent
commission awards 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
1997, which were issued in May 1998, amounted to 20,437 shares, accounting for
50.0% of the total contingent commissions paid for 1997. In May 1998, 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 1998 will be issued in May 1999.
The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:
Years ended
-----------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1996
-----------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
(in thousands) (in thousands) (in thousands)
Pacific $23,969 25.3% $ 26,126 25.0% $ 29,435 36.6%
South 16,346 17.2 16,236 15.5 15,677 19.5
Southwest 16,027 16.6 18,625 17.8 11,693 14.5
Midwest 14,392 15.2 12,198 11.7 4,685 5.8
Mountain 9,321 9.8 14,119 13.4 509 0.7
Mid-Atlantic 8,998 9.5 9,876 9.4 10,665 13.2
New England 6,044 6.4 7,514 7.2 7,832 9.7
============== ============ =============== ============= ============== =============
$95,097 100.0% $104,694 100.0% $ 80,496 100.0%
============== ============ =============== ============= ============== =============
Underwriting and Pricing
In the commercial property and casualty market, the rates and terms of
coverage provided by property and casualty insurance carriers are frequently
based on ISO rates and forms. ISO makes available to its members advisory,
rating, statistical and actuarial services, policy language and related
services. ISO and its related organizations currently provide such services,
including rates and forms, to more than 1,500 property and casualty insurance
companies in the U.S. One of the important services that ISO provides is an
actuarial-based estimate of the "ideal" rate for risks in each of approximately
1,250 risk classifications. These rates reflect an analysis of the loss and loss
adjustment expenses on claims reported to ISO. ISO statistics, however, include
only claims and policy information reported to ISO, and therefore do not reflect
all of the loss experience for each class. Also, the historical results for a
particular class may not be sufficient to provide actuarially meaningful
results.
The Company primarily uses ISO statistics as a benchmark for risk selection
and pricing. Other carriers may or may not rely as heavily on this information,
and several of the larger standard carriers have developed their own actuarial
databases. As a general rule, most standard carriers set rates lower than ISO
rates. However,
Page 8
the Company, because of its strategy of providing insurance to under-served
markets, typically charges 100% or more of prescribed ISO rates.
All policies written by the Company are either generated by the general
agents pursuant to their binding authority or on approval by the Company upon
submission by the general agents if the risk falls outside of that authority. In
1998, approximately 92% of the commercial policies written by the Company were
on a binding authority basis, generating approximately 91% 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 the Company's 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.
According to ISO data, most standard carriers typically price at 60-80% of ISO
rates. The Company's underwriting staff carefully monitors its general agents
and performs on-site reviews and underwriting audits of its agents on a periodic
basis for quality and compliance with Company guidelines.
With respect to commercial risks written by general agents under binding
authority, the Company generally has 60 days from the effective date to cancel a
policy if the risk insured does not comply with the Company's underwriting
guidelines. In the event an agent exceeds its authority by binding the Company
on a risk when it had no authority to do so, the Company is at risk for that
policy until it receives the policy and effects a cancellation. General agents
must deliver all policies to the Company within 35 days of the date written. The
Company monitors this activity closely through its computer system and
underwriting department.
The commercial risks the Company writes on a submit basis are generally
similar to the binding authority classes, but may have larger coverage limits or
greater complexity. In determining whether to accept such risks, the Company's
underwriting staff will review such factors as the type of risk, the agent's
knowledge and control of the risk, potential underwriting profitability and
historical data regarding any similar risk previously underwritten by the
Company. During this process, the Company will quote a proposed premium
reflecting relevant ISO rates, if available, and adjustments that may be
warranted based on the individual characteristics of the particular risk. The
underwriting staff then assembles a complete underwriting file with respect to
the particular submission and specific approval procedures are employed,
depending on the characteristics and magnitude of the particular risk.
The Company generally reviews all commercial policies as they are received
from general agents for completeness, accuracy, and compliance with the
Company's underwriting guidelines. In addition, the Company conducts a detailed
audit of each of its general agents at least once a year. The audit involves
thoroughly reviewing between 50 and 100 policies to check for completeness,
accuracy, pricing, use of proper exclusions, verification of information, and
compliance with the Company's regulatory filings, as well as the general agent's
use of the Company's overall product lines.
The Company routinely reviews selected data for its non-standard personal
automobile policies as such data is received from its general agent for
completeness, accuracy, and compliance with the Company's underwriting
guidelines. Generally, the Company conducts detailed on-site audits of its
personal lines general agent on a quarterly basis. These audits involve
Page 9
thoroughly reviewing between 50 and 100 policies to verify proper
classifications, ratings, accident and violation surcharges, adherence to manual
guidelines, use of proper exclusions, verification of information regarding
inspections and compliance with the Company's regulatory filings. The Company
provides its general agent with written feedback based on the results of its
audits and monitors its timely responses to any issues highlighted in such
audits.
Claims Management and Administration
Commercial Claims
The Company's approach to commercial claims management is designed to
investigate reported incidents at the earliest juncture, to select, manage and
supervise all legal and adjustment aspects thereof and to provide a high level
of service and support to general agents, retail insurance brokers and insureds
throughout the claims process. The Company's commercial general agents have no
authority to settle claims or otherwise exercise control over the claims
process. All commercial lines claims are supervised and processed centrally by
the Company's claims management staff. Senior management reviews all claims over
$25,000.
Personal Automobile Claims
Prior to November 1998, all personal automobile claims were handled by the
Company. All claims for the personal automobile run-off business in the state of
Alabama, Nevada, Montana and North and South Dakota are continuing to be handled
by the Company's internal claims unit. When the claims are received by the
Company, an initial reserve is established using an average reserve which
reflects that state's automobile loss experience. Subsequent to the
establishment of the initial reserve, adjustments are made to the reserve to
reflect the latest information on the claims'estimated settlement costs.
For personal automobile business written in the state of California, The
Company's agent has a claims management company, which as of November 1998,
handles all claims on all newly written business as well as any claims that
are made on previously written business. Existing open claim files in
California will continue to be managed by the Company's internal claims unit.
The agent has pre-established settlement authority depending on coverage.
The agent establishes an initial average reserve based on California's
experience. Any changes to the initial average reserve must be approved by the
Company.
For claims in the state of Washington, the Company has established similar
settlement authority for the management of claims. An outside claims adjusting
company has been retained by the Company to manage the run-off claim activity in
that state.
For both outside claims management companies, the Company conducts quarterly
audits and reviews the claim file management.
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.
Page 10
When a claim involving a probable loss is reported, the Company establishes
a case reserve for the estimated amount of the Company's ultimate loss and loss
adjustment expense payments. The estimate of the amount of the ultimate loss is
based upon such factors as the type of loss, jurisdiction of the occurrence,
knowledge of the circumstances surrounding the claim, severity of injury or
damage, potential for ultimate exposure and policy provisions relating to the
claim. The loss adjustment expenses include the estimated expenses of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment process.
All newly reported claims received with respect to personal automobile
policies are established with an initial average reserve. The average reserves
for these claims are determined every quarter by dividing all of the closed
claims into the total amount paid during the three month period. If a claim is
open more than 90 days, that open case reserve is evaluated and the reserve is
adjusted upward or downward according to the facts of that particular claim.
In addition, management establishes reserves on an aggregate basis to
provide for Incurred But Not Reported Losses ("IBNR"). The Company's independent
actuarial consultant annually reviews the provision for IBNR and the reserves
taken as a whole. The Company does not discount its loss reserves. The estimates
of reserves are subject to the effect of trends in claims severity and frequency
and are continually reviewed. As part of this process, the Company reviews
historical data and considers various factors, including known and anticipated
legal developments, changes in social attitudes, inflation and economic
conditions. As experience develops and other data become available, these
estimates are revised, as required, resulting in increases or decreases to
existing reserves. Adjustments are reflected in results of operations in the
period in which they are made and may deviate substantially from prior
estimates.
The following table sets forth a reconciliation of beginning and ending
reserves as shown on the Company's financial statements (on a GAAP basis,
without regard to reinsurance) for unpaid losses and loss adjustment expenses
for the periods indicated:
Years ended December 31,
------------------------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
(in thousands)
Reserves for unpaid losses and loss adjustment expenses,
at beginning of year $84,566 $70,728 $ 60,139
---------------- ----------------- -----------------
Incurred losses and loss adjustment expenses:
Provision for insured events of the current year 60,740 61,916 48,076
Increase in provision for insured
events of prior years 1,074 916 3,744
---------------- ----------------- -----------------
Total incurred losses and loss adjustment expenses 61,814 62,832 51,820
---------------- ----------------- -----------------
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year 22,716 21,408 17,931
Losses and loss adjustment expenses attributable
to insured events of prior years 34,727 27,586 23,300
---------------- ----------------- -----------------
Total payments 57,443 48,994 41,231
---------------- ----------------- -----------------
Reserves for unpaid losses and loss adjustment expenses,
at end of year $88,937 $84,566 $ 70,728
================ ================= =================
Page 11
The Company has experienced adverse development of gross reserves of
$1.1 million, $916,000 and $3.7 million in 1998, 1997 and 1996, respectively,for
prior years' insured events. The net reserves had unfavorable development of
$86,000 and $341,000 for 1998 and 1997 respectively and favorable development of
$804,000 in 1996. The unfavorable development on the gross reserves occurred
primarily on reserves held as of December 31, 1993, which deficiency is ceded to
the Company's reinsurers. The unfavorable development on the net reserves in
1998 and 1997 was primarily due to the personal automobile line. The
establishment of reserves is an inherently subjective process and, therefore,
the historical gross or net redundancies or deficiencies may not be indicative
of the likelihood or amount of future redundancies or deficiencies.
The following table represents the development of unpaid loss and loss
adjustment expense reserves during the ten years ended December 31, 1997. The
top of the table reflects the ten year development of the Company's reserves net
of reinsurance. The bottom of the table reconciles 1992 through 1998 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 12
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Reserves for unpaid losses and
Loss Adjustment expense, as stated $21,741 $25,391 $25,352 $25,681 $26,110 $26,830 $35,307 $46,512 $55,656 $68,863 $72,435
a. Net cumulative paid as of
1 year later $4,911 $8,655 $6,929 $6,605 $7,381 $6,852 $12,383 $17,208 23,660 $30,236
2 years later 10,743 13,361 11,610 10,988 11,127 13,127 20,617 29,612 38,819
3 years later 14,132 16,952 14,667 13,325 15,546 18,656 27,266 38,091
4 years later 15,823 19,050 16,341 16,417 19,253 22,254 32,119
5 years later 17,074 20,359 18,363 19,283 21,503 24,303
6 years later 17,405 21,866 20,214 20,872 22,796
7 years later 18,303 23,383 21,470 21,881
8 years later 19,248 24,476 22,084
9 years later 20,133 24,978
10 years later 20,658
b. Reserves re-estimated as of end of year
1 year later $21,036 $25,128 $23,468 $23,228 $24,478 $23,897 $33,601 $45,708 $55,997 $68,946
2 years later 21,396 24,329 22,658 22,383 21,945 23,489 34,281 47,225 57,913
3 years later 20,570 23,923 22,252 20,471 22,032 24,558 36,453 47,378
4 years later 20,206 23,615 21,465 20,819 22,767 26,335 36,359
5 years later 19,822 23,639 21,469 21,726 23,935 26,380
6 years later 19,499 24,021 21,990 22,550 24,143
7 years later 19,621 24,683 22,609 22,761
8 years later 20,222 25,379 22,609
9 years later 20,829 25,460
10 years later 21,079
Net cumulative redundancy (deficiency) $662 ($69) $2,743 $2,920 $1,967 $450 ($1,052) ($866) ($2,257) ($86)
Gross liability for unpaid losses and
loss adjustment expenses, as stated $31,703 $33,314 $44,796 $60,139 $70,728 $84,566 $88,937
Reinsurance recoverable 5,593 6,484 9,489 13,627 15,072 15,703 16,502
Net liability for unpaid losses and
loss adjustment expenses, as stated $26,110 $26,830 $35,307 $46,512 $55,656 $68,863 $72,435
Gross liability re-estimated - 1 year later $30,609 $32,796 $48,173 $63,884 $71,644 $85,640
Reinsurance recoverable re-estimated 6,131 8,899 14,572 18,176 15,647 16,694
Net liability re-estimated - 1 year later $24,478 $23,897 $33,601 $45,708 $55,997 $68,946
---------------------------------------------------------------------------- ------- -------
Gross liability re-estimated - 2 years later $30,390 $36,243 $53,009 $66,405 $74,312
Reinsurance recoverable re-estimated 8,445 12,754 18,728 19,180 16,399
Net liability re-estimated - 2 years later $21,945 $23,489 $34,281 $47,225 57,913
---------------------------------------------------------------------------- ------- -------
Gross liability re-estimated - 3 years later $33,992 $41,600 $56,042 $66,891
Reinsurance recoverable re-estimated 11,960 17,042 19,589 19,513
Net liability re-estimated - 3 years later $22,032 $24,558 $36,453 $47,378
------------------------------------------------------------------------------ ------- ------
Gross liability re-estimated - 4 years later $38,165 $43,824 $56,167
Reinsurance recoverable re-estimated 15,398 17,489 19,808
Net liability re-estimated - 4 years later $22,767 $26,335 $36,359
------------------------------------------------------------------------------ ------- ------
Gross liability re-estimate - 5 years later $39,956 $44,466
Reinsurance recoverable re-estimated 16,021 18,086
Net liability re-estimated - 5 years later $23,935 $26,380
------------------------------------------------------------------------ ------- ------
Gross liability re-estimate - 6 years later $40,670
Reinsurance recoverable re-estimated 16,527
Net liability re-estimated - 6 years later $24,143
Gross cumulative deficiency ($8,967)($11,152)($11,371)($6,752)($3,584)($1,074)
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 year. Amounts were calculated as the sum
of the cumulative paid amounts described in (a.) above plus the amounts of
unpaid losses and loss adjustment expenses reevaluated at the end o f each
succeeding year end.
Page 13
The cumulative redundancy or deficiency represents the aggregate change in
the reserve estimates over all prior years. It should be emphasized that the
table presents a run-off of balance sheet reserves rather than accident or
policy year loss development. Therefore, each amount in the table includes the
effects of changes in reserves for all prior years.
The following table sets forth ratios for the Company and the industry
prepared in accordance with Statutory Accounting Practices ("SAP") prescribed or
permitted by state insurance authorities. The statutory combined ratio, which
reflects underwriting results but not investment income, is a traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio is the sum of (i) the ratio of incurred losses and loss adjustment
expenses to net earned premium ("loss ratio"); and (ii) the ratio of expenses
incurred for commissions, premium taxes, administrative and other underwriting
expenses to net written premium ("expense ratio").
Years ended December 31,
----------------------------------------
1998 1997 1996
------------ ----------- ------------
The Company:
SAP Basis
Loss and loss adjustment expense ratio 62.3% 63.0% 62.7%
Expense ratio 35.0 32.3 31.6
============ =========== ============
Combined ratio 97.3% 95.3% 94.3%
============ =========== ============
Years ended December 31,
----------------------------------------
1998 (1) 1997 (2) 1996 (2)
------------ ----------- ------------
Property and casualty insurance industry :
SAP Basis
Loss and loss adjustment expense ratio 75.7% 73.4% 78.6%
Expense ratio 27.2% 26.6% 26.2%
Dividend ratio 1.4% 1.1% 1.1%
============ =========== ============
Combined ratio 104.3% 101.1% 105.9%
============ =========== ============
(1) Source: Industry Estimate for the first nine months of 1998, Best Week,
P/C Supplement, December 14, 1998 edition, including dividend ratios.
(2) 1997 and 1996, Best Aggregates & Averages - P/C.
Reinsurance
The Company purchases reinsurance through contracts called "treaties" to
reduce its exposure to liability on individual risks, and to protect against
catastrophic losses. Reinsurance involves an insurance company transferring or
"ceding" a portion of its exposure on a risk to another insurer (the
"reinsurer"). The reinsurer assumes the exposure in return for a portion of the
premium. The ceding of liability to a reinsurer does not legally discharge the
primary insurer from its liability for the full amount of the policies on which
it obtains reinsurance. The primary insurer will be required to pay the entire
loss if the reinsurer fails to meet its obligations under the reinsurance
agreement.
In formulating its reinsurance programs, the Company is selective in its
choice of reinsurers and considers numerous factors, the most important of which
are the financial stability of the reinsurer, its history of responding to
claims and its overall reputation. In an effort to minimize its exposure to the
insolvency of its reinsurers, the Company evaluates the acceptability and
Page 14
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. Net retention limits for property insurance
were $300,000 for 1998 and $200,000 per risk for 1997 and 1996. The 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. 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.
For 1998 and 1999, the Company is covered for catastrophe losses by a
consortium of reinsurers including General Re, Lloyds and other "A" rated or
better reinsurers. Under the terms of the agreement, the Company retains the
first $2 million of losses and the consortium reinsures 95.0% of the next $23
million, with the Company retaining 5.0% of each layer (1st layer, $3 million,
2nd layer, $5 million, 3rd layer, $15 million) within the $23 million.
The Company may write individual risks with limits greater than the treaty
limits on a per policy basis by using facultative reinsurance. The facultative
reinsurers must also meet Penn-America's reinsurer guidelines.
The following table reflects the amount of premiums written and ceded under
reinsurance treaties:
Years ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Gross written premiums $ 95,097 $ 104,694 $ 80,496
Ceded written premiums 7,268 8,133 7,027
Investments
The Company's investment policy seeks to maximize investment income consistent
with the overriding objective of maintaining liquidity and minimizing risk.
Approximately 98% of the Company's fixed income securities as of December 31,
1998 were rated "A" or better by Standard & Poor's or an equivalent rating by
Moody's. As of December 31, 1998, the Company's fixed maturity investments had
an average duration of 3.0 years. Publicly traded equity securities, the
majority of which consisted of preferred stocks, represented 15.9% of the
Company's investment portfolio as of December 31, 1998.
As of December 31, 1998, the Company's investment portfolio contained $31.0
million of mortgage- 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 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.
Page 15
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.
The Investment Committee retained New England Asset Management ("NEAM"), a
subsidiary of Gen Re to manage its fixed income portfolio and Carl Domino
Associates, L.P. ("CDA"), a registered investment advisor, to recommend
purchases and sales for the equity portfolio.
The following table shows the classifications of the Company's investments at
December 31, 1998:
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 $ 5,661 $ 5,661 3.6%
Corporate securities 29,748 29,748 18.7%
Mortgage-backed securities 10,167 10,167 6.4%
Other structured securities 15,737 15,737 9.9%
Municipal 35,919 35,919 22.6%
Public Utilities 8,366 8,366 5.3%
-------------- --------------- -------------
Total 105,598 105,598 66.5%
-------------- --------------- -------------
Held to maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 11,194 11,046 7.0%
Corporate securities 9,496 9,396 5.9%
Mortgage-backed securities 5,158 5,123 3.2%
Municipal 403 399 0.3%
Public utilities 1,019 992 0.6%
-------------- --------------- --------------
Total 27,270 26,956 17.0%
-------------- ---------------- -------------
Total fixed maturity securities 132,868 132,554 83.5%
-------------- ---------------- -------------
Equity securities:
Common stock 8,112 8,112 5.1%
Preferred stock 17,126 17,126 10.8%
-------------- --------------- -------------
Total equity investments 25,238 25,238 15.9%
-------------- --------------- -------------
Short-term investments 997 997 0.6%
============== =============== =============
Total investments $159,103 $158,789 100.0%
============== =============== =============
Page 16
The following table sets forth the composition of the Company's portfolio of
fixed maturity investments by rating at December 31, 1998:
Amortized Percentage Cumulative
Cost of portfolio percentage
---------------------------------------
(in thousands)
Ratings (1)
- -------------------------------------------
AAA (including U.S. government obligations) $73,219 56.2 % 56.2 %
AA 20,674 15.9 72.1
A 33,420 25.6 97.7
BBB 3,008 2.3 100.0
---------------------------------------
Total $130,321 100.0 % 100.0 %
=======================================
(1) Ratings are assigned primarily by Standard & Poor's with the remaining
ratings assigned by Moody's and converted to the equivalent Standard &
Poor's ratings.
The following table sets forth the net investment income results of the
Company for each of the years in the periods indicated:
1998 1997 1996
------ ------ ------
(in thousands)
Interest on fixed maturities $8,921 $ 7,506 $ 6,108
Dividends on equity securities 1,528 1,123 691
Interest on short-term
investments and cash 732 852 380
Other 2 42 61
-------------------------------------------
Total investment income 11,183 9,523 7,240
Investment expense (420) (305) (535)
-------------------------------------------
Net investment income $10,763 $ 9,218 $ 6,705
===========================================
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 also competes with new forms of insurance
organizations (such as risk retention groups) and alternative self-insurance
mechanisms. The Company believes that in order to be successful in its market,
it must be aware of pricing cycles, must be able to minimize the impact of such
cycles through tight expense control and superior customer service and must
continually identify profitable opportunities. Other competitive factors include
ratings by A.M. Best, pricing and admitted versus excess and surplus lines
status in a given state.
Page 17
Regulation
General. The Company is subject to regulation under the insurance statutes
and regulations, including insurance holding company statutes, of the various
states in which it does business. These statutes are generally designed to
protect the interests of insurance policyholders, as opposed to the interests of
stockholders, and they relate to such matters as the standards of solvency which
must be met and maintained; the licensing of insurers and their agents; the
nature and limitations of investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates; periodic examination
of the affairs of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums and losses; and
requirements regarding numerous other matters. All insurance companies must file
annual statements with certain state regulatory agencies and are subject to
regular and special financial examinations by those agencies. The last
regulatory financial examination of Penn-America Insurance Company was completed
by the Pennsylvania Insurance Department in 1995, covering the five-year period
ended December 31, 1994, and for Penn-Star Insurance Company in 1997, covering
its initial licensing by the Department.
Since 1993, Penn-America Insurance Company has maintained an "A (Excellent)"
rating from A.M. Best Company, Inc. ("A.M. Best"), which rating was reaffirmed
by A.M. Best on August 31, 1998, and included Penn-Star as a pooled rating.
A.M. Best's ratings are based upon factors of concern to policyholders,
including financial condition and solvency, and are not directed to the
protection of investors.
Penn-America Insurance Company and Penn-Star Insurance Company combined are
licensed as an admitted insurer in 34 states and are approved non-admitted
(excess and surplus lines) insurer in the other 16 states and the District of
Columbia as of December 31, 1998. All insurance is written through licensed
agents and brokers. In states in which the Company operates on a non-admitted
basis, general agents and their retail insurance brokers generally are required
to certify that a certain number of licensed admitted insurers will not write a
particular risk prior to placing that risk with the Company.
Insurance Holding Company Laws. Pennsylvania, the Companies' state of
domicile, has laws governing insurers and insurance holding companies. The
Pennsylvania statutes generally require insurers and insurance holding companies
to register and file reports concerning their capital structure, ownership,
financial condition and general business operations. Under the statutes, a
person must generally obtain the Pennsylvania Insurance Department's approval to
acquire, directly or indirectly, 10% or more of the outstanding voting
securities of the Company or any of its insurance company subsidiaries. The
insurance department's determination of whether to approve any such acquisition
is based on a variety of factors, including an evaluation of the acquirer's
financial condition, the competence of its management and whether competition
would be reduced. All transactions within a holding company's group affecting an
insurer must be fair and reasonable, and the insurer's policyholders' surplus
following any such transaction must be both reasonable in relation to its
outstanding liabilities and adequate for its needs. Notice to applicable
regulators is required prior to the consummation of certain transactions
affecting insurance subsidiaries of the holding company group.
Page 18
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 1999 is approximately $9.5 million. Penn-America paid a dividend of
approximately $8.0 million to PAGI in 1998. 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.
During 1998, the Board of Directors of PAGI approved a corporate stock
repurchase plan. Initially, up to 1 million shares were authorized by the Board.
Subsequently, in February 1999, an additional 500,000 shares were authorized for
a total of 1.5 million shares authorized by the Board. As of December 31, 1998,
542,325 shares were acquired by the Company at a cost of approximately $5.6
million. As of March 15, 1999, an additional 666,000 shares have been acquired
by the Company.
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.
Employees
The Company has approximately 105 employees. The Company is not a party to
any collective bargaining agreements and believes that its employee relations
are good.
Page 19
ITEM 2. PROPERTIES
The Company leases approximately 23,000 square feet in an office building
located in Hatboro, Pennsylvania. The office building also houses Penn
Independent and its subsidiaries. The Company leases the space from Mr. Irvin
Saltzman, Chairman of the Board of Directors of the Company, pursuant to a lease
agreement which expires on June 30, 2000, and provides for an annual rental
payment of approximately $281,112, which amount is considered by the Company to
be at fair market value. The lessee has the option to renew the lease for one
additional five year period at the expiration of the original term of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to routine legal proceedings in the normal course of
operating its insurance business. The Company is not involved in any legal
proceedings which reasonably could be expected to have a material adverse effect
on the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 to a vote of
holders of the Company's Common Stock.
Page 20
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 31 of the Company's annual report to stockholders for the year ended
December 31, 1998, 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, 1998,
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 17 of the Company's Annual Report to
stockholders for the year ended December 31, 1998, 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 18 to 30 of the Company's
Annual Report to stockholders for the year ended December 31, 1998, 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 21
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 1999 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is hereby incorporated
by reference thereto.
Executive Officers of the Registrant as of March 12, 1999 are as follows:
Irvin Saltzman 76 Chairman of the Board of Directors of
PAGI and Penn-America
Jon S. Saltzman 41 President and Chief Executive Officer
of PAGI and Penn-America, and Director
Rosemary R. Ferrero, CPA 43 Vice President-Finance, and Treasurer
of PAGI, Vice President, and Chief
Financial Officer of Penn-America
John M. DiBiasi, CPCU 44 Executive Vice President,Underwriting
and Marketing of Penn-America
Garland P. Pezzuolo 34 Secretary and General Counsel
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1999 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 1999 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 1999 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 22
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, 1998 and 1997 18
Consolidated Statements of Earnings for the years ended
December 31, 1998, 1997, and 1996 19
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997, and 1996 20
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996 21
Notes to Consolidated Financial Statements 22-29
Independent Auditors' Report 30
The following consolidated financial statement schedules for the years 1998,
1997 and 1996 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.
EPS - Statement if not included in notes to financial statements.
- ---------------
*Refers to the respective pages of Penn-America Group's 1998 Annual Report to
Stockholders attached as Exhibit (13). The Consolidated Financial Statements and
Independent Auditors' Report on pages 18 to 30 are incorporated herein by
reference. With the exception of the portions of such Annual Reports
specifically incorporated by reference in this Item and Items 5,6,7 and 8, such
Annual Report shall not be deemed filed as part of this Form 10-K or otherwise
subject to the liabilities of section 18 of the Securities and Exchange Act of
1934.
Page 23
Exhibit Index
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1
(No.33-66892) filed with the Securities and Exchange Commission
on August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance Company
("Penn-America") and Carnegie General Agency. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998, filed
with the Registrant's report on Form 10-K for the period ended
December 13, 1997, which has been filed with the Securities
and Exchange Commission.
10.3 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 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
reference 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 24
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, filed with Registrant's Report
on Form 10-K for the period ended December 31, 1997, which has
been filed with the Securities and Exchange Commission.
10.7(iv) Amendment dated January 1, 1999 to August 20, 1993 Agreement
between Penn Independent and Registrant regarding the sharing
of certain operating costs.
Page 25
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. filed with the
Registrant's Report on Form 10-K for the period ending
December 31, 1997, which was filed with the SEC.
10.9(ii) Agreement dated April 15, 1997, between and among General Re,
New England Asset Management, Inc., Penn-America, and its
subsidiary, Penn-Star filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1997, which was
filed with the SEC.
10.10 1993 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.10 to Amendment No. 4 to the Registrant's
Registration Statement on Form S-1 (No.33-66892)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.
Page 26
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 GeneralRe
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.
10.17(i) Penn-America Insurance Company's Agency Award and Profit
Sharing Plan, attached as Exhibit 4 to Registrant's
Registration Statement on Form S-3 (No. 333-49055) filed with
the SEC on March 31, 1998.
10.18 Stipulation of Termination of Property and Liability
Reinsurance Agreement with National Reinsurance Coproration
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 1998 Annual Report to Shareholders.
21 As of December 31, 1997, the Registrant's only subsidiary is
Penn-America Insurance Company, a Pennsylvania Corporation.
Page 27
Exhibit No. Description
23 Independent Auditor's Consent and Report on Schedules
28.1 Loan and Security Agreement, Term Note and Stock Pledge
Agreement dated December 20, 1995 between Registrant and
PNC Bank (successor to Midlantic Bank, N.A). Filed with the
Registrant's Report on Form 10-K for the period ending
December 31,1995 which has been filed with the Securities and
Exchange Commission.
28.2 Credit Agreement among Registrant, Certain Lenders and First
Union National Bank dated September 28, 1998
30.0 Reinsurance Pooling Agreement between Penn-America Insurance
Company and Penn-Star Insurance Company dated July 1, 1998.
Page 28
PENN-AMERICA GROUP, INC.
Schedule I - Summary of Investments - Other than Investments in Related Parties
(in thousands)
December 31, 1998
--------------------------------------------------------------------
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 $ 5,512 $ 5,661 $ 5,661
Corporate securities 28,725 29,748 29,748
Mortgage-backed securities 10,074 10,167 10,167
Other structured securities 15,668 15,737 15,737
Municipal 35,295 35,919 35,919
Public Utilities 8,091 8,366 8,366
------------------ ----------------- -----------------
Total available for sale 103,365 105,598 105,598
------------------ ----------------- -----------------
Held to maturity
U.S. treasury securities and obligations of
U.S. government agencies 11,046 11,194 11,046
Corporate securities 9,396 9,496 9,396
Mortgage-backed securities 5,123 5,158 5,123
Municipal 399 403 399
Public Utilities 992 1,019 992
------------------ ----------------- -----------------
Total held to maturity 26,956 27,270 26,956
------------------ ----------------- -----------------
Total fixed maturities 130,321 132,868 132,554
------------------ ----------------- -----------------
Equity securities:
Common stock 6,556 8,112 8,112
Preferred stock 16,802 17,126 17,126
----------------- -----------------
------------------
Total equity investments 23,358 25,238 25,238
------------------ ----------------- -----------------
Short term investments: 997 997 997
------------------ -----------------
================== ================= =================
Total investments $ 154,676 $ 159,103 $ 158,789
================== ================= =================
Page 29
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Balance Sheets
(in thousands except share data)
December 31,
-------------------------------------
1998 1997
---------------- ----------------
ASSETS
Cash $ 316 $ 1,516
Short-term investments 997 ---
Investment in subsidiary, equity method 98,355 95,390
Other assets 962 594
================ ================
Total assets $100,630 $ 97,500
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ --- $ 193
--------------- ----------------
---------------- ----------------
---------------- ----------------
Total liabilities $ --- $ 193
---------------- ----------------
Stockholders' equity:
Preferred stock, $ .01 par value;
authorized 2,000,000 shares; none issued
Common stock, $.01 par value;
authorized 20,000,000 in 1998 and 1997;
issued and outstanding 1998; 9,938,179;
and 9,395,854 respectively; issued and
outstanding 1997; 9,883,384 shares 99 99
Additional paid-in capital 69,035 68,221
Accumulated Other comprehensive income 2,714 1,649
Treasury stock, 542,325 shares, at cost (5,643) ---
Retained earnings 34,779 27,849
---------------- ----------------
100,984 97,818
Unearned compensation from restricted
stock awards (354) (511)
---------------- ----------------
Total stockholders' equity 100,630 97,307
---------------- ----------------
Total liabilities and stockholders'
equity $100,630 $ 97,500
================ ================
Page 30
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Statements of Earnings
(in thousands except per share data)
Years ended December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Dividend income $7,950 $ 1,555 $ 3,258
Other 65 122 10
Operating expenses (1,532) (1,636) (1,653)
Income tax benefit 499 539 552
------------- ------------- -------------
Income before equity in undistributed
net income of subsidiary 6,982 580 2,167
Equity in undistributed net earnings
of subsidiary 1,899 9,065 4,826
------------- ------------- -------------
Net earnings $8,881 $ 9,645 $ 6,993
============= ============= =============
Net earnings per share
Basic $0.91 $ 1.19 $ 1.05
Diluted $0.90 $ 1.17 $ 1.04
Weighted average number of shares used in calculating
per share data
Basic 9,766 8,126 6,663
Diluted 9,873 8,228 6,743
Cash dividends per share $0.20 $ 0.16 $ 0.11
============= ============= =============
Page 31
PENN-AMERICA GROUP, INC.
Schedule II - Condensed Financial Information of Parent Company
Condensed Statements of Cash Flows
(in thousands)
Years ended
December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net earnings $8,881 $ 9,645 $6,993
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed net earnings of subsidiary (1,899) (9,065) (4,826)
Increase (decrease) in :
Accounts payable and accrued expenses (193) (22) (54)
Other, net (522) (200) (352)
Amortization 309 221 133
------------- ------------- --------------
Net cash provided by operating activities 6,576 579 1,894
------------- ------------- --------------
Cash flows from financing activities:
Repayment of notes payable --- (9,000) (1,150)
Issuance of common stock (net of expenses) 815 45,897 259
Purchase of treasury stock (5,643) --- ---
Dividends paid (1,951) (1,329) (711)
------------ ------------- --------------
Net cash (used)provided by financing activities (6,779) 35,568 (1,602)
------------ ------------- --------------
Cash flows from investing activities:
Purchase of short- term investments (997) --- ---
Equity contributions to subsidiary --- (35,000) ---
----------- -------------- --------------
Net cash (used) by investing activities (997) (35,000) ---
----------- -------------- --------------
(decrease) increase in cash (1,200) 1,147 292
Cash, beginning of period 1,516 369 77
============ ============= ==============
Cash, end of period $ 316 $ 1,516 $ 369
============ ============= ==============
Page 32
PENN-AMERICA GROUP, INC.
Schedule III - Supplementary Insurance Information
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
Liability Amorrtization
for Unpaid of
Deferred Losses and Losses Deferred
Policy Loss Net and Loss Policy Other Net
Acquisition Adjustment Unearned Earned Investment Adjustment Acquisition Underwriting Premiums
Costs Expenses Premiums Premiums Income Expenses Costs Expenses Written
----- ------- -------- -------- ------ -------- ----- -------- -------
1998
Commercial $ 7,553 $ 69,845 $ 30,625 $ 62,949 $ 4,119 $ 37,121 $ 17,112 $ 1,575 $ 64,283
Personal 1,175 19,092 3,628 26,544 943 18,612 8,340 207 23,546
Unallocated - - - - 5,701 - - 4,607 -
--------- -------- -------- ------- ------- -------- -------- ------- -------
Total $ 8,728 $ 88,937 $ 34,253 $ 89,493 $ 10,763 $ 55,733 $ 25,452 $ 6,389 $ 87,829
--------- -------- -------- ------- ------- -------- -------- ------- -------
1997
Commercial $ 6,449 $ 69,022 $ 29,546 $ 57,189 $ 4,214 $ 32,723 $ 14,327 $ 1,495 $ 60,768
Personal 2,114 15,544 6,627 34,460 774 25,005 10,657 347 35,793
Unallocated - - - - 4,230 - - 3,998 -
--------- -------- -------- ------- ------- -------- -------- ------- -------
Total $ 8,563 $ 84,566 $ 36,173 $ 91,649 $ 9,218 $ 57,728 $ 24,984 $ 5,840 $ 95,561
--------- -------- -------- ------- ------- -------- -------- ------- -------
1996
Commercial $ 5,612 $ 63,000 $ 25,570 $ 49,667 $ 3,375 $ 30,887 $ 11,785 $ 1,241 $ 51,768
Personal 1,619 7,728 5,295 19,414 382 12,405 6,000 147 21,701
Unallocated - - - - 2,948 - - 2,961 -
--------- -------- -------- ------- ------- -------- -------- ------- ------
Total $ 7,231 $ 70,728 $ 30,865 $ 69,081 $ 6,705 $ 43,292 $ 17,785 $ 4,349 $ 73,469
--------- -------- -------- ------- ------- -------- -------- ------- ------
Page 33
PENN-AMERICA GROUP, INC.
Schedule IV - Reinsurance
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
Ceded to Assumed Percentage
Other from Other of Assumed to
Direct Companies Companies Net Amount Net
-------------- -------------- ------------- ------------- ---------------
1998
Premiums
Property and $ 94,831 $7,268 $266 $87,829 0.3%
liability insurance
============== ============== ============= ============= ===============
Total
premiums $ 94,831 $7,268 $266 $87,829 0.3%
============== ============== ============= ============= ===============
1997
Premiums
Property and
liability insurance $ 104,694 $8,133 --- $96,561 ---
============== ============== ============= ============= ===============
Total
premiums $ 104,694 $8,133 --- $96,561 ---
============== ============== ============= ============= ===============
1996
Premiums
Property and
liability insurance $ 80,496 $7,027 --- $73,469 ---
============== ============== ============= ============= ===============
Total
premiums $ 80,496 $7,027 --- $73,469 ---
============== ============== ============= ============= ===============
Page 34
PENN-AMERICA GROUP, INC.
Schedule VI - Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
Liability Loss and Loss
for Unpaid Discount Adjustment Expenses
Losses and if Any, (Benefits) Incurred Paid Losses
Loss Deducted Related to and Loss
-------------------------------
Adjustment from Current Prior Adjustment
Expenses Reserves Year Year Expenses
--------------- -------------- ------------- --------------- -------------------
Years Ended
December 31, 1998 $88,937 $55,647 $86 $52,161
December 31, 1997 84,566 57,387 341 44,521
December 31, 1996 70,728 44,096 (804) 34,148
Page 35
PENN-AMERICA GROUP, INC.
Exhibit II-- Statement re:
Computation of Per Share Basic and Diluted Earnings
Years ended December 31, 1998, 1997 and 1996
(in thousands except per share data)
Years ended December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Basic EPS:
Net earnings $8,881 $9,645 $6,993
------------- ------------- -------------
Weighted average common shares outstanding 9,766 8,126 6,663
------------- ------------- -------------
Basic EPS $0.91 $1.19 $1.05
------------- ------------- -------------
Diluted EPS:
Net Earnings $8,881 $9,645 $6,993
------------- ------------- -------------
Weighted average common shares outstanding 9,766 8,126 6,663
Additional shares outstanding after the assumed exercise of
options by applying the treasury stock method 107 102 80
------------- ------------- -------------
Total 9,873 8,228 6,743
------------- ------------- -------------
Diluted EPS $0.90 $1.17 $1.04
------------- ------------- -------------
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 25, 1999 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 25, 1999
- -------------------- and Director
Irvin Saltzman
/s/ Jon S. Saltzman President, Chief Executive Officer March 25, 1999
- -------------------- and Director (Principle Executive
Jon S. Saltzman Officer)
/s/ James E. Heerin, Jr. Director March 25, 1999
- ------------------------
James E. Heerin, Jr.
/s/ Robert A. Lear Director March 25, 1999
- ------------------------
Robert A. Lear
/s/ Rosemary R. Ferrero Vice President-Finance and Treasurer March 25, 1999
- ------------------------ (Principle Financial Accounting Officer)
Rosemary R. Ferrero
/s/ Garland P. Pezzuolo Secretary and General Counsel March 25, 1999
- ------------------------
Garland P. Pezzuolo
/s/ Paul Simon Director March 25, 1999
- -----------------------
Paul Simon
/s/ Charles Ellman Director March 25, 1999
- -----------------------
Charles Ellman
/s/ M. Moshe Porat Director March 25, 1999
- -----------------------
M. Moshe Porat
/s/ Jami Saltzman-Levy Director March 25, 1999
- ------------------------
Jami Saltzman-Levy
/s/ Thomas Spiro Director March 25, 1999
- -----------------------
Thomas Spiro