SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22316
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Penn-America Group, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 South York Road, Hatboro, Pennsylvania 19040
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(Address of principal executive offices, including zip code)
(215) 443-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----- ----
At May 9, 2002, 11,569,886 shares of the registrant's common stock, $.01 par
value, were outstanding.
Page 1
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Index
Page Number
Part I - Financial Information
Consolidated Balance Sheets - March 31, 2002 (unaudited) and
December 31, 2001 3
Consolidated Unaudited Statements of Operations - For the three
months ended March 31, 2002 and 2001 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the three months ended March 31, 2002 5
Consolidated Unaudited Statements of Cash Flows -
For the three months ended March 31, 2002 and 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Quantitative and Qualitative Disclosure About Market Risk 14
Part II - Other Information 15
Page 2
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
March 31, December 31,
2002 2001
---------------- -----------------
ASSETS (Unaudited)
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost 2002, $145,412; 2001, $ 148,232 $ 135,253
$130,976)
Held to maturity, at amortized cost (fair value 2002, $9,885; 2001, $15,317) 9,779 15,084
Equity securities, at fair value (cost 2002, $26,518; 2001, $27,770) 23,812 25,149
---------------- -----------------
Total investments 181,823 175,486
Cash 16,361 13,129
Accrued investment income 2,110 2,199
Premiums receivable 10,354 12,285
Reinsurance recoverable 25,839 25,804
Prepaid reinsurance premiums 4,800 4,241
Deferred policy acquisition costs 9,785 9,083
Capital lease 1,644 1,666
Deferred income taxes 4,467 3,790
Income tax recoverable -- 66
Other assets 373 366
---------------- -----------------
Total assets $ 257,556 $ 248,115
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 124,177 $ 119,598
Unearned premiums 44,989 41,034
Accounts payable and accrued expenses 3,534 3,800
Capitalized lease obligation 1,534 1,570
Income tax payable 765 --
Other liabilities 1,362 1,722
---------------- -----------------
Total liabilities 176,361 167,724
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Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares;
None issued -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
issued 2002 and 2001, 15,299,954 and 15,228,351 shares, respectively;
outstanding 2002 and 2001, 11,549,954 and 11,478,351 shares, respectively 153 152
Additional paid-in capital 71,191 70,735
Accumulated other comprehensive income 75 1,092
Retained earnings 34,678 33,334
Treasury stock, 3,750,000 shares at cost (24,161) (24,161)
Officers' stock loans (629) (629)
Unearned compensation from restricted stock awards (112) (132)
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Total stockholders' equity 81,195 80,391
---------------- -----------------
Total liabilities and stockholders' equity $ 257,556 $ 248,115
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Page 3
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the three months ended March 31, 2002 and 2001
(In thousands, except per share data)
Three months ended March 31,
---------------------------------
2002 2001
---------------- --------------
Revenues
Premiums earned $ 22,983 $ 23,042
Net investment income 2,833 2,850
Net realized investment gain (loss) (252) 102
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Total revenues 25,564 25,994
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Losses and expenses
Losses and loss adjustment expenses 15,286 16,734
Amortization of deferred policy acquisition costs 6,011 6,224
Other underwriting expenses 1,657 1,534
Corporate expenses 111 162
Interest expense 35 40
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Total losses and expenses 23,100 24,694
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Income before income tax 2,464 1,300
Income tax expense 678 333
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Net income $ 1,786 $ 967
================ ==============
Net income per share
Basic $ 0.15 $ 0.09
Diluted $ 0.15 $ 0.08
Weighted average shares outstanding
Basic 11,536,694 11,367,942
Diluted 11,710,482 11,453,118
Cash dividend per share $ 0.0383 $ 0.0350
Page 4
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the three months ended March 31, 2002
(In thousands, except per share data)
Accumulated
Additional Other
Common Paid-In Comprehensive Retained Treasury
Stock Capital Income Earnings Stock
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Balance at December 31, 2001 $ 152 $ 70,735 $ 1,092 $ 33,334 $ (24,161)
Net income -- -- -- 1,786 --
Other comprehensive income:
net unrealized gain (loss) on investments,
net of tax and reclassification adjustment -- -- (1,017) -- --
Comprehensive income
Issuance of common stock 1 456 -- -- --
Amortization of compensation expense from
restricted stock awards issued -- -- -- -- --
Cash dividend paid ($0.0383 per share) -- -- -- (442) --
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Balance at March 31, 2002 $ 153 $ 71,191 $ 75 $ 34,678 $ (24,161)
====================================================================================
Unearned
Compensation
From
Officers' Restricted Total
Stock Stock Stockholders'
Loans Awards Equity
----------------------------------------------------
Balance at December 31, 2001 $ (629) $ (132) $ 80,391
Net income -- -- 1,786
Other comprehensive income:
net unrealized gain (loss) on investments,
net of tax and reclassification adjustment -- -- (1,017)
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Comprehensive income 769
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Issuance of common stock -- -- 457
Amortization of compensation expense from
restricted stock awards issued -- 20 20
Cash dividend paid ($0.0383 per share) -- -- (442)
----------------------------------------------------
Balance at March 31, 2002 $ (629) $ (112) $ 81,195
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Page 5
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended March 31, 2002 and 2001
(In thousands)
Three months ended March 31,
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2002 2001
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Cash flows from operating activities:
Net income $ 1,786 $ 967
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Amortization and depreciation expense (43) (26)
Net realized investment (gain) loss 252 (102)
Deferred income tax (154) (175)
Net increase (decrease) in premiums receivable, prepaid reinsurance premiums
and unearned premiums 5,327 (2,913)
Net increase in unpaid losses and loss adjustment expenses
and reinsurance recoverable 4,544 209
Accrued investment income 89 206
Deferred policy acquisition costs (702) 601
Income tax recoverable/payable 831 508
Other assets (36) (41)
Accounts payable and accrued expenses (266) 226
Other liabilities (3) 341
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Net cash provided (used) by operating activities 11,625 (199)
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Cash flows from investing activities:
Purchases of equity securities -- (2,065)
Purchases of fixed maturities available for sale (17,476) (9,905)
Proceeds from sales of equity securities 1,000 --
Proceeds from sales and maturities of fixed maturities available for sale 3,146 6,636
Proceeds from maturities and calls of fixed maturities held to maturity 5,315 --
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Net cash used by investing activities (8,015) (5,334)
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Cash flows from financing activities:
Issuance of common stock 100 62
Officers' stock loans -- (109)
Principal payments on capital lease obligations (36) (31)
Dividends paid (442) (398)
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Net cash used by financing activities (378) (476)
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Increase (decrease) in cash 3,232 (6,009)
Cash, beginning of period 13,129 11,425
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Cash, end of period $ 16,361 $ 5,416
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Page 6
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Organization and Basis of Presentation
Penn-America Group, Inc. ("PAGI") is an insurance holding company.
Approximately 40% of the outstanding common stock of PAGI was owned by Penn
Independent Corporation ("Penn Independent") at March 31, 2002. The accompanying
financial statements include the accounts of PAGI and its wholly owned
subsidiary, Penn-America Insurance Company ("Penn-America") and its wholly owned
subsidiary, Penn-Star Insurance Company ("Penn-Star"), (collectively the
"Company").
The Company underwrites commercial property, general liability and
multi-peril insurance for small businesses located primarily in small towns and
suburban and rural areas. The Company can write business in all fifty states and
the District of Columbia. The Company writes business on both an admitted and
non-admitted (excess and surplus lines) basis in thirty-six states, on only an
admitted basis in two states and on only a non-admitted basis in twelve states
and the District of Columbia.
The accompanying condensed unaudited consolidated financial statements
and notes have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of results for the interim periods have been
included. All significant intercompany accounts and transactions have been
eliminated in consolidation. It is suggested that these condensed unaudited
consolidated financial statements and notes be read in conjunction with the
financial statements and notes in the Company's 2001 Annual Report which was
incorporated by reference into the Company's Form 10-K for the year ended
December 31, 2001. The Company's results of operations for interim periods are
not necessarily indicative of the results to be expected for the entire year.
Note 2 - Reinsurance
Premiums earned are presented net of amounts ceded to reinsurers of
$3.1 million and $3.0 million for the three months ended March 31, 2002 and
2001, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $1.7 million and $2.7 million for the three
months ended March 31, 2002 and 2001, respectively.
Note 3 - Comprehensive Income
Accumulated other comprehensive income consists solely of unrealized
gains or losses on investment securities net of applicable income tax expense or
benefit and reclassification adjustments. Comprehensive income was $769,000 for
the three months ended March 31, 2002 compared with $1.6 million for the three
months ended March 31, 2001.
Page 7
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 4 - Income Per Share
Income per share for the three months ended March 31, 2002 and 2001 are
computed by dividing net income by the basic and diluted weighted average number
of common shares outstanding during the quarter. On April 11, 2002, PAGI
announced a three-for-two stock split to be effected in the form of a 50% stock
dividend payable to stockholders of record as of April 25, 2002. The
distribution date was May 9, 2002. The following table is a reconciliation of
the numerators and denominators of the basic and diluted income per share
computations on both a pre stock split and post stock split basis:
Three Months Ended March 31,
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(in thousands, except per share data) Pre Stock Split Basis Post Stock Split Basis
--------------------------------- -------------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Basic per share computation:
Net income $ 1,786 $ 967 $ 1,786 $ 967
Weighted average common shares outstanding 7,691,129 7,578,628 11,536,694 11,367,942
----------- ----------- ----------- -----------
Basic net income per share $ 0.23 $ 0.13 $ 0.15 $ 0.09
=========== =========== =========== ===========
Diluted per share computation:
Net income $ 1,786 $ 967 $ 1,786 $ 967
Weighted average common shares outstanding 7,691,129 7,578,628 11,536,694 11,367,942
Additional shares outstanding after the assumed
assumed exercise of stock options
by applying the treasury stock method 115,859 56,784 173,788 85,176
----------- ----------- ----------- -----------
Total shares 7,806,988 7,635,412 11,710,482 11,453,118
=========== =========== =========== ===========
Diluted net income per share $ 0.23 $ 0.13 $ 0.15 $ 0.08
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Page 8
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 5 - Retroactive Adjustment for Stock Split
The common stock issued and outstanding and treasury stock at December
31, 2001 have been restated to reflect the three-for-two stock split announced
on April 11, 2002. Accordingly, the balance sheet values for common stock and
additional paid-in capital have been adjusted for the effect of the stock split.
This adjustment resulted in a $51,000 increase in common stock and a $51,000
decrease in additional paid-in capital. The following table illustrates share
information on a pre stock split and a post stock split basis as of December 31,
2001:
Pre Stock Split Post Stock Split
Basis Basis
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Common stock issued 10,152,234 15,228,351
Common stock outstanding 7,652,234 11,478,351
Treasury stock 2,500,000 3,750,000
Note 6- Segment Information
The Company had two reportable segments: non-standard personal
automobile and commercial lines. These segments were managed separately because
they have different customers, pricing and expense structures. The Company
exited the non-standard personal automobile business in 1999 and announced that
it would run-off its remaining portfolio of such business. The Company will
continue to report on this segment separately until the amounts relating to the
non-standard personal automobile business become immaterial to the financial
statements presented. The Company does not allocate assets between segments
because assets are reviewed in total by management for decision-making purposes.
The accounting policies of the segments are the same as those more
fully described in the summary of significant accounting policies in Note 1 of
the Company's 2001 Annual Report, which was incorporated by reference into the
Company's 2001 Form 10-K. The Company evaluates segment results based on profit
or loss from operating activities. Segment profits or losses from operations are
pre-tax and do not include unallocated expenses but do include investment income
attributable to insurance transactions. Segment profit or loss therefore
excludes federal income taxes, unallocated expenses and investment income
attributable to equity.
Page 9
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
The following is a summary of the Company's segment revenues, expenses and
profit:
(in thousands) Three months ended March 31, 2002
---------------------------------
Personal
Commercial Automobile Total
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Premiums earned $ 22,983 $ -- $ 22,983
Net investment income from insurance operations 1,437 -- 1,437
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Total segment revenues 24,420 -- 24,420
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Segment losses and loss adjustment expenses 15,286 -- 15,286
Segment expenses 6,321 -- 6,321
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Total segment expenses 21,607 -- 21,607
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Segment income $ 2,813 $ -- $ 2,813
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Unallocated items:
Net investment income from equity 1,144
Unallocated expenses (1,493)
Income tax expense (678)
-----------
Net income $ 1,786
===========
(in thousands) Three months ended March 31, 2001
---------------------------------
Commercial Personal
Automobile Total
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Premiums earned $ 23,026 $ 16 $ 23,042
Net investment income from insurance operations 1,866 84 1,950
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Total segment revenues 24,892 100 24,992
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Segment losses and loss adjustment expenses 17,930 (1,196) 16,734
Segment expenses 6,591 5 6,596
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Total segment expenses 24,521 (1,191) 23,330
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Segment income $ 371 $ 1,291 $ 1,662
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Unallocated items:
Net investment income from equity 1,002
Unallocated expenses (1,364)
Income tax expense (333)
-----------
Net income $ 967
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Page 10
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended March 31, 2002 and 2001
Premiums earned was $23.0 million for the three months ended March 31,
2002, unchanged from $23.0 million for the three months ended March 31, 2001.
The Company previously announced that it was exiting both commercial automobile
and non-standard personal automobile lines of business. Earned premiums for
these exited lines of business decreased $2.1 million, or 100.0%, for the three
months ended March 31, 2002 compared to the three months ended March 31, 2001.
The Company's core commercial lines earned premiums (excluding exited lines of
business) increased $2.1 million, or 9.9%, attributable to the increase in net
written premiums for the three months ended March 31, 2002 as compared to the
same period of 2001.
Gross written premiums increased 26.1% for the three months ended March
31, 2002 to $30.0 million compared to $23.8 million for the three months ended
March 31, 2001. Gross written premiums for core commercial lines increased 32.6%
to $30.0 million for the three months ended March 31, 2002 compared to $22.7
million for the three months ended March 31, 2001. This increase was
attributable mainly to rate increases and, to a lesser extent, growth in new
business.
Net written premiums increased 25.3% for the three months ended March
31, 2002 to $26.4 million compared to $21.1 million for the three months ended
March 31, 2001. Consistent with gross written premiums, net written premiums for
the core commercial lines increased 30.8% to $26.4 million for the three months
ended March 31, 2002 compared to $20.2 million for the three months ended March
31, 2001.
Net investment income was $2.8 million for the three months ended March
31, 2002 which was unchanged from the same period of last year. While average
invested assets increased 7.2% for the first quarter of 2002, this increase was
offset by a decine in the investment yield of the fixed-income portfolio and
interest rates on overnight cash balances compared to the first quarter of 2001.
Net realized investment loss was $252,000 for the three months ended
March 31, 2002 compared to a net investment gain of $102,000 for the three
months ended March 31, 2001. The current quarter included an
other-than-temporary impairment writedown on the Company's equity investments of
$199,000.
Losses and loss adjustment expenses decreased 8.7% to $15.3 million
for the three months ended March 31, 2002 from $16.7 million for the three
months ended March 31, 2001. This reduction is the result of improved loss
experience in both property and liability lines of business.
Amortization of deferred policy acquisition costs ("DAC") decreased
3.4% to $6.0 million for the three months ended March 31, 2002, from $6.2
million for the three months ended March 31, 2001. The Company is writing a
larger portion of its business in its non-admitted company which resulted in
lower premium taxes.
Other underwriting expenses increased 8.0% to $1.7 million for the
three months ended March 31, 2002 from $1.5 million for the three months ended
March 31, 2001.
Page 11
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The overall GAAP combined ratio for the Company decreased to 99.9 for
the three months ended March 31, 2002, from 106.3 for the three months ended
March 31, 2001, primarily due to the decrease in the loss ratio to 66.5 in 2002
compared to 72.6 in 2001. The expense ratio was 33.4 for the three months ended
March 31, 2002 and 33.7 for the three months ended March 31, 2001.
The factors described above resulted in net income for the three months
ended March 31, 2002 of $1.8 million or $0.15 per share (basic and diluted),
compared to net income of $1.0 million or $0.09 per share (basic and diluted)
for the three months ended March 31, 2001.
Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common
stock of Penn-America. The principal source of cash for the payment of dividends
to PAGI's stockholders, PAGI operating expenses and repurchase of PAGI stock is
dividends from Penn-America. Penn-America's principal sources of funds are
underwriting operations, investment income and proceeds from sales and
redemptions of investments. Funds are used by Penn-America and Penn-Star
principally to pay claims and operating expenses, to purchase investments and to
make dividend payments to PAGI.
Penn-America and Penn-Star are restricted by statute as to the amount
of dividends that they may pay without the prior approval from the Pennsylvania
Insurance Department. Penn-America may pay dividends to PAGI without advance
regulatory approval only from unassigned surplus and only to the extent that all
dividends in the past twelve months do not exceed the greater of 10% of total
statutory policyholders surplus, or statutory net income for the prior year.
Using these criteria, the available ordinary dividend for 2002 is $6,473,325. No
ordinary dividends have been paid to PAGI during the three months ended March
31, 2002. Ordinary dividends paid by Penn-America to PAGI in 2001 were $1.6
million.
Penn-America and Penn-Star are required by law to maintain a certain
minimum level of policyholders' surplus on a statutory basis. The National
Association of Insurance Commissioners adopted risk-based capital standards
designed to identify property and casualty insurers that may be inadequately
capitalized based on inherent risks of each insurer's assets and liabilities and
its mix of net written premiums. Insurers falling below a calculated threshold
may be subject to varying degrees of regulatory action. Based on the currently
adopted standards, Penn-America's and Penn-Star's capital and surplus are in
excess of the prescribed risk-based capital requirements.
Penn-America provides strong incentives to its general agents to
produce profitable business through a contingent profit commission structure
that is tied directly to underwriting profitability. Payment of these contingent
profit commissions has been through the issuance of PAGI common stock and cash.
In the first quarter of 2002, PAGI issued 33,900 shares of its common stock at a
value of $10.55 per share as part of the payment of the 2001 contingent profit
commission due to the general agents of Penn-America.
Net cash provided by operating activities was $11.6 million for the
three months ended March 31, 2002, compared to net cash used by operating
activities of $0.2 million for the three months ended March 31, 2001.
Page 12
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Net cash used by investing activities was $8.0 million for the three
months ended March 31, 2002, compared to $5.3 million for the nine months ended
March 31, 2001.
Net cash used by financing activities was $0.4 million for the three
months ended March 31, 2002, compared to $0.5 million for the three months ended
March 31, 2001.
Statutory surplus as of March 31, 2002 increased to $65.7 million from
$64.7 million as of December 31, 2001. This increase is due to statutory net
income of $1.0 million.
The Company believes it has sufficient liquidity to meet its
anticipated insurance obligations and operating and capital expenditure needs.
The Company's investment strategy emphasizes quality, liquidity and
diversification, as well as total return. With respect to liquidity, the Company
considers liability durations, specifically related to loss reserves, when
determining desired investment maturities. In addition, maturities have been
staggered to produce cash flows for loss payments and reinvestment
opportunities.
The Company's fixed maturity portfolio of $158.0 million was 86.9% of
the total investment portfolio as of March 31, 2002. Approximately 90% of these
securities were rated "A" or better by Standard & Poor's or Moody's. The average
duration of the fixed maturity portfolio as of March 31, 2002 was approximately
3.7 years. Equity securities, the majority of which consist of preferred stocks
and exchange traded funds, were $23.8 million or 13.1% of total investments as
of March 31, 2002.
As of March 31, 2002, the investment portfolio contained $46.2 million
of mortgage-backed, asset-backed and collateralized mortgage obligations, which
represented 25.4% of the total investments as of March 31, 2002. All of these
securities were "AA-"- rated or better and 76.6% were "AAA"-rated by Standard &
Poor's or Moody's. These securities, which were issued by government,
government-related agencies or publicly held corporations, are publicly traded,
and have market values obtained from an independent pricing service. Changes in
estimated cash flows due to changes in prepayment assumptions from the original
purchase assumptions are revised based on current interest rates and the
economic environment. The Company had no derivative financial instruments, real
estate or mortgages in the investment portfolio as of March 31, 2002.
Critical Accounting Estimates
The establishment of loss and loss adjustment expense reserves requires
an estimate of the ultimate liability based primarily on past experience. The
Company applies a variety of traditional actuarial techniques to determine its
estimate of ultimate liability. The techniques recognize, among other factors,
the Company's and the industry's experience, historical trends in reserving
patterns and loss payments, the pending level of unpaid claims, the cost of
claim settlements, the line of business mix and the economic environment in
which property and casualty insurance companies operate. Estimates continually
are reviewed and, based on subsequent developments and new information,
adjustments of the probable ultimate liability are included in operating results
for the periods in which the adjustments are made. In general, reserves are
established initially based upon the actuarial and underwriting data utilized to
set pricing levels and are reviewed as additional information, including claims
experience, becomes available. The establishment of loss and loss adjustment
Page 13
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
expense reserves makes no provision for the broadening of coverage by
legislative action or judicial interpretation or for the extraordinary future
emergence of new types of losses not sufficiently represented in the Company's
historical experience, or which cannot yet be quantified. The Company regularly
analyzes its reserves and reviews its pricing and reserving methodologies so
that future adjustments to prior year reserves can be minimized. However, given
the complexity of this process, reserves will require continual updates and the
ultimate liability may be higher or lower than previously indicated.
During the first quarter of 2002, there were no material adjustments to
prior year reserves.
Three-for-Two Stock Split
On April 11, 2002, the Company announced a three-for-two stock split to
be effected in the form of a 50% stock dividend payable to stockholders of
record as of April 25, 2002. The distribution date was May 9, 2002. Cash was
paid in lieu of fractional shares based on the closing price of the Company's
common stock on the record date.
Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk is the potential economic loss principally
arising from adverse changes in the market value of financial instruments. The
major components of market risk affecting the Company are interest rate risk and
equity price risk.
The Company had fixed-income and preferred stock investments with a
market value of $173.9 million at March 31, 2002 subject to interest rate risk.
The Company manages its exposure to interest rate risk through a disciplined
asset/liability matching and capital management process. In the management of
this risk, the characteristics of duration, credit and variability of cash flows
are critical elements. These risks constantly are assessed and balanced within
the context of the liability and capital position of the Company.
The Company had common equity investments with a market value of $8.0
million at March 31, 2002. The Company attempts to mitigate equity price risk to
its common stock portfolio by investing exclusively in exchange-traded funds
(ETFs). ETFs are securities that represent an interest in a trust that owns and
holds a basket of common stocks that replicate a major market index (such as the
S&P 500 or the Dow Jones Industrial Average) or a portion of a major market
index (such as the Value Component of the S&P). Since these securities represent
an interest in the equity capital markets as a whole, or a sub-sector thereof,
they are a diversified, index-based exposure to common stocks. As such, the
value of these ETFs will be determined by the performance of the equity capital
markets in general or of a particular sub-sector and reduces equity price risk
to a single issuer of stock.
The Company's market risk at March 31, 2002 has not materially changed
from those identified at December 31, 2001.
Page 14
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote by Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
On March 1, 2002, the Company filed a current report on Form 8-K
announcing the availability of annual statements of its insurance
subsidiaries, Penn-America Insurance Company and Penn-Star
Insurance Company, on the Company's website, in hard copy from the
Company, or from the Pennsylvania Insurance Department.
On April 1, 2002, the Company filed a current report on Form 8-K
announcing the availability of the Combined Annual Statement of
its insurance subsidiaries, Penn-America Insurance Company and
Penn-Star Insurance Company, on the Company's website, in hard
copy from the Company, or from the Pennsylvania Insurance
Department.
On April 11, 2002, the Company filed a current report on Form 8-K
announcing that the Board of Directors of the Company unanimously
approved a three-for-two stock split of the common stock of the
Company. The three-for-two stock split is in the form of a 50%
stock dividend, effective for stockholders of record on April 25,
2002 and was distributed on May 9, 2002.
Page 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: May 14, 2002 By: /s/ Jon S. Saltzman
--------------------- -------------------------
Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Joseph F. Morris
-------------------------
Joseph F. Morris
Senior Vice President,
Chief Financial Officer
Chief Financial Officer
and Treasurer
Page 16