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 September 30, 2001
------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file number 0-22316
-----------------
Penn-America Group, Inc.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 South York Road, Hatboro, Pennsylvania 19040
-----------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 443-3600
-----------------------------------------------------------------------
(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 November 12, 2001, 7,651,234 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 - September 30, 2001 (unaudited) and
December 31, 2000 3
Consolidated Unaudited Statements of Operations - For the three and
nine months ended September 30, 2001 and 2000 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the nine months ended September 30, 2001 5
Consolidated Unaudited Statements of Cash Flows -
For the nine months ended September 30, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II - Other Information 16
Page 2
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
September 30, December 31,
2001 2000
---------------- -----------------
ASSETS (Unaudited)
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost 2001, $130,475; 2000, $ 136,522 $ 125,477
$123,873)
Held to maturity, at amortized cost (fair value 2001, $15,658; 2000, $17,441) 15,320 17,282
Equity securities, at fair value (cost 2001, $28,159; 2000, $27,324) 24,674 24,491
---------------- -----------------
Total investments 176,516 167,250
Cash 7,813 11,425
Accrued investment income 1,971 2,181
Premiums receivable, net 11,575 9,695
Reinsurance recoverable 24,842 24,447
Prepaid reinsurance premiums 3,868 4,635
Deferred policy acquisition costs 8,902 10,317
Capital lease 1,688 1,753
Deferred income taxes 3,385 4,272
Income tax recoverable 1,360 2,982
Other assets 402 529
---------------- -----------------
Total assets $ 242,322 $ 239,486
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 117,829 $ 115,314
Unearned premiums 39,257 43,239
Accounts payable and accrued expenses 2,525 2,353
Capitalized lease obligation 1,608 1,701
Other liabilities 1,817 2,828
---------------- -----------------
Total liabilities 163,036 165,435
---------------- -----------------
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 2001 and 2000, 10,128,734 and 10,076,025 shares, respectively;
outstanding 2001 and 2000, 7,628,734 and 7,576,025 shares, respectively 101 101
Additional paid-in capital 70,574 70,164
Accumulated other comprehensive income (loss) 1,691 (811)
Retained earnings 31,897 29,583
Treasury stock, 2,500,000 shares in 2001 and 2000 at cost (24,161) (24,161)
Officers' stock loans (655) (546)
Unearned compensation from restricted stock awards (161) (279)
---------------- -----------------
Total stockholders' equity 79,286 74,051
---------------- -----------------
Total liabilities and stockholders' equity $ 242,322 $ 239,486
================ =================
Page 3
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the three and nine months ended September 30, 2001 and 2000
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues
Premiums earned $ 20,946 $ 23,366 $ 66,194 $ 67,392
Net investment income 2,851 2,753 8,516 7,613
Net realized investment gain (loss) 40 (1,148) (192) (1,177)
-------- -------- -------- --------
Total revenues 23,837 24,971 74,518 73,828
-------- -------- -------- --------
Losses and expenses
Losses and loss adjustment expenses 14,553 24,546 46,740 56,445
Amortization of deferred policy acquisition costs 4,957 6,608 17,188 19,320
Other underwriting expenses 2,028 1,520 5,246 4,437
Corporate expenses 141 170 492 625
Interest expense 40 36 120 109
-------- -------- -------- --------
Total losses and expenses 21,719 32,880 69,786 80,936
-------- -------- -------- --------
Income (loss) before income tax 2,118 (7,909) 4,732 (7,108)
Income tax expense (benefit) 567 (2,831) 1,220 (2,951)
-------- -------- -------- --------
Net income (loss) $ 1,551 $ (5,078) $ 3,512 $ (4,157)
======== ======== ======== ========
Net income (loss) per share, basic and diluted $ 0.20 $ (0.67) $ 0.46 $ (0.54)
Cash dividends per share $ 0.0525 $ 0.0525 $ 0.1575 $ 0.1575
Page 4
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the nine months ended September 30, 2001
(In thousands, except per share data)
Unearned
Compensation
Accumulated From
Additional Other Officers' Restricted Total
Common Paid-In Comprehensive Retained Treasury Stock Stock Stockholders'
Stock Capital Income (Loss) Earnings Stock Loans Awards Equity
--------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 101 $ 70,164 $ ( 811) $ 29,583 $ (24,161) $ (546) $ (279) $ 74,051
Net income -- -- -- 3,512 -- -- -- 3,512
Other comprehensive income:
unrealized gains on
investments, net of
tax and reclassification
adjustment -- -- 2,502 -- -- -- -- 2,502
-----------
Comprehensive income 6,014
-----------
Issuance of common stock -- 410 -- -- -- -- -- 410
Officers' stock loans -- -- -- -- -- (109) -- (109)
Amortization of compensation
expense from restricted
stock awards issued -- -- -- -- -- -- 118 118
Cash dividends paid
($0.1575 per share) -- -- -- -- -- -- (1,198) (1,198)
--------------------------------------------------------------------------------------------------
Balance at September 30, 2001 $ 101 $ 70,574 $ 1,691 $ 31,897 $ (24,161) $ (655) $ (161) $ 79,286
==================================================================================================
Page 5
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 2001 and 2000
(In thousands)
Nine months ended September 30,
-------------------------------------
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 3,512 $ (4,157)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Amortization and depreciation expense 48 396
Net realized investment loss 192 1,177
Deferred income tax benefit (402) (306)
Net increase (decrease) in premiums receivable, prepaid reinsurance
premiums and unearned premiums (5,095) 3,891
Net increase in unpaid losses and loss adjustment expenses
and reinsurance recoverable 2,120 12,442
Accrued investment income 210 (83)
Deferred policy acquisition costs 1,415 (1,744)
Income tax recoverable 1,622 (1,705)
Other assets 20 74
Accounts payable and accrued expenses 172 789
Other liabilities (1,011) 11
--------------- ---------------
Net cash provided by operating activities 2,803 10,785
--------------- ---------------
Cash flows from investing activities:
Purchases of equity securities (3,062) (11,957)
Purchases of fixed maturities available for sale (25,625) (60,771)
Purchases of fixed maturities held to maturity -- (9,949)
Proceeds from sales of equity securities 2,020 12,753
Proceeds from sales and maturities of fixed maturities available for sale 19,242 57,972
Proceeds from maturities and calls of fixed maturities held to maturity 2,000 9,000
Change in short-term investments -- 449
--------------- ---------------
Net cash used by investing activities (5,425) (2,503)
--------------- ---------------
Cash flows from financing activities:
Issuance of common stock 410 493
Purchase of treasury stock -- (4,687)
Officers' stock loans (109) (546)
Principal payments on capital lease obligations (93) (90)
Dividends paid (1,198) (1,213)
--------------- ---------------
Net cash used by financing activities (990) (6,043)
--------------- ---------------
(Decrease) increase in cash (3,612) 2,239
Cash, beginning of period 11,425 12,045
--------------- ---------------
Cash, end of period $ 7,813 $ 14,284
=============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 120 $ 109
Taxes recovered -- (950)
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" or the "Company") is an insurance
holding company. Approximately 41% of the outstanding common stock of the
Company was owned by Penn Independent Corporation ("Penn Independent") at
September 30, 2001. The accompanying financial statements include the accounts
of the Company and its wholly owned subsidiary, Penn-America Insurance Company
("Penn-America") and its wholly owned subsidiary, Penn-Star Insurance Company
("Penn-Star").
Penn-America and Penn-Star underwrite commercial property and general
liability insurance and multi-peril insurance for small businesses located
primarily in small towns and suburban and rural areas. Penn-America and
Penn-Star can write business in all 50 states and the District of Columbia. The
companies write business on both an admitted and excess and surplus lines basis
in 36 states, on an admitted basis only in 2 states and on an excess and surplus
lines basis only in 12 states and the District of Columbia.
The accompanying condensed unaudited consolidated financial statements
and notes have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of results for the interim periods have been
included. All significant intercompany accounts and transactions have been
eliminated in consolidation. It is suggested that these condensed unaudited
consolidated financial statements and notes be read in conjunction with the
financial statements and notes in the Company's 2000 Annual Report which was
incorporated by reference into the Company's Form 10-K for the year ended
December 31, 2000. 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
$2.8 million and $2.9 million for the three months ended September 30, 2001 and
2000, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $1.1 million and $400,000 for the three months
ended September 30, 2001 and 2000, respectively.
Premiums earned are net of amounts ceded to reinsurers of $8.8 million
and $8.4 million for the nine months ended September 30, 2001 and 2000,
respectively. Losses and loss adjustment expenses are net of amounts ceded to
reinsurers of $4.5 million and $2.9 million for the nine months ended September
30, 2001 and 2000, respectively.
Note 3 - Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) of the Company consists
solely of unrealized gains or losses on investment securities net of applicable
income tax expense or benefit and reclassification adjustments. Comprehensive
income was $3.6 million for the three months ended September 30, 2001, compared
with a comprehensive loss of $3.1 million for the three months ended September
30, 2000. Comprehensive income was $6.0 million for the nine months ended
September 30, 2001 compared with a comprehensive loss of $1.9 million for the
nine months ended September 30, 2000.
Page 7
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 4 - Income (Loss) Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted income (loss) per share computations:
Three months ended Nine Month Ended
(in thousands, except per share data) September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
------- ------- ------- -------
Basic per share computation:
Net income (loss) $ 1,551 $(5,078) $ 3,512 $(4,157)
Weighted average common shares outstanding 7,625 7,558 7,603 7,714
------- ------- ------- -------
Basic net income (loss) per share $ 0.20 $(0.67) $ 0.46 $ (0.54)
======= ======= ======= =======
Diluted per share computation:
Net income (loss) $ 1,551 $(5,078) $ 3,512 $(4,157)
Weighted average common shares outstanding 7,625 7,558 7,603 7,714
Additional shares outstanding after the assumed
exercise of stock options by applying the
treasury stock method 63 * 57 *
------- ------- ------- -------
Total shares 7,688 7,558 7,660 7,714
======= ======= ======= =======
Diluted net income (loss) per share $ 0.20 $ (0.67) $ 0.46 $ (0.54)
======= ======= ======= =======
*The potential impact of common stock purchase options is not considered as the
impact is anti-dilutive.
Page 8
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 5- Segment Information
The Company has two reportable segments: non-standard personal
automobile and commercial lines. The Company announced in April 1999 that it
would run-off its remaining personal lines automobile business, which was
underwritten through a single agent in California. This followed a decision
earlier in 1999 to eliminate the Company's non-standard personal automobile
business in nine other states. 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.
These segments are managed separately because they have different customers,
pricing and expense structures. The Company does not allocate assets between
segments because assets are reviewed in total by management for decision-making
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 2000 Annual Report, which was incorporated by reference into the
Company's 2000 Form 10-K. The Company evaluates segment profit 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 as opposed to investment income attributable to insurance
transactions.
The following is a summary of the Company's segment revenues, expenses
and profit:
(in thousands) Three months ended September 30, 2001
-------------------------------------
Personal
Commercial Automobile Total
------------------------------------------
Premiums earned $20,946 $ 0 $ 20,946
Net investment income from insurance operations 1,926 85 2,011
------------------------------------------
Total segment revenues 22,872 85 22,957
------------------------------------------
Segment losses and loss adjustment expenses 14,553 0 14,553
Segment expenses 5,731 5 5,736
------------------------------------------
Total segment expenses 20,284 5 20,289
------------------------------------------
Segment income $ 2,588 $ 80 $ 2,668
------------------------------------------
Unallocated items:
Net investment income from equity 880
Unallocated expenses (1,430)
Income tax expense (567)
-----------
Net income $1,551
===========
Page 9
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 5- Segment Information (Continued)
(in thousands) Three months ended September 30, 2000
-------------------------------------
Personal
Commercial Automobile Total
-------- -------- --------
Premiums earned $ 22,749 $ 617 $ 23,366
Net investment income from insurance operations 831 100 931
-------- -------- --------
Total segment revenues 23,580 717 24,297
-------- -------- --------
Segment losses and loss adjustment expenses 24,359 187 24,546
Segment expenses 5,367 217 5,584
-------- -------- --------
Total segment expenses 29,726 404 30,130
-------- -------- --------
Segment income (loss) $ (6,146) $ 313 $ (5,833)
-------- -------- --------
Unallocated items:
Net investment income from equity 674
Unallocated expenses (2,750)
Income tax benefit 2,831
--------
Net loss $ (5,078)
========
(in thousands) Nine months ended September 30, 2001
------------------------------------
Personal
Commercial Automobile Total
-------- -------- --------
Premiums earned $66,172 $ 22 $66,194
Net investment income from insurance operations 5,360 240 5,600
-------- -------- --------
Total segment revenues 71,532 262 71,794
-------- -------- --------
Segment losses and loss adjustment expenses 48,233 (1,493) 46,740
Segment expenses 18,880 15 18,895
-------- -------- --------
Total segment expenses 67,113 (1,478) 65,635
-------- -------- --------
Segment income $ 4,419 $ 1,740 $ 6,159
-------- -------- --------
Unallocated items:
Net investment income from equity 2,724
Unallocated expenses (4,151)
Income tax expense (1,220)
--------
Net income $3,512
========
Page 10
(in thousands) Nine months ended September 30, 2000
------------------------------------
Personal
Commercial Automobile Total
-------- -------- --------
Premiums earned $ 63,616 $ 3,776 $ 67,392
Net investment income from insurance operations 3,332 402 3,734
-------- -------- --------
Total segment revenues 66,948 4,178 71,126
-------- -------- --------
Segment losses and loss adjustment expenses 54,047 2,398 56,445
Segment expenses 17,904 1,358 19,262
-------- -------- --------
Total segment expenses 71,951 3,756 75,707
-------- -------- --------
Segment income (loss) $ (5,003) $ 422 $ (4,581)
-------- -------- --------
Unallocated items:
Net investment income from equity 2,702
Unallocated expenses (5,229)
Income tax benefit 2,951
--------
Net loss $ (4,157)
========
Page 11
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended September 30, 2001 and 2000
Premiums earned decreased 10.4% to $20.9 million for the three months
ended September 30, 2001 from $23.4 million for the three months ended September
30, 2000. The Company previously announced that it was exiting both commercial
and non-standard personal automobile business. Earned premiums for these exited
lines of business decreased $1.8 million, or 69.1% for the three months ended
September 30, 2001 compared to the three months ended September 30, 2000. In
addition, the Company's core commercial lines earned premiums (excluding exited
lines of business) decreased $0.6 million, or 2.9%, due to the withdrawal from
writing certain classes of residential contractors.
Gross written premiums decreased 17.4% for the three months ended
September 30, 2001 to $23.6 million compared to $28.5 million for the three
months ended September 30, 2000. Of this decline, $3.4 million resulted from the
Company's decision in October 2000 to exit the commercial automobile line of
business.
Net written premiums decreased 16.6% for the three months ended
September 30, 2001 to $21.1 million compared to $25.3 million for the three
months ended September 30, 2000. This is primarily due to the Company's decision
to exit the commercial automobile line of business which accounts for $2.7
million of the decline.
Net investment income increased 3.6 % to $2.9 million for the three
months ended September 30, 2001, from $2.8 million for the three months ended
September 30, 2000. This increase resulted principally from an increase in the
investment yield of the fixed income investment portfolio and the growth in
invested assets which were partially offset by a decline in interest rates on
overnight cash balances.
Losses and loss adjustment expenses decreased 40.7% to $14.6 million
for the three months ended September 30, 2001, from $24.5 million for the three
months ended September 30, 2000. The three months ended September 30, 2000
included a strengthening of prior year loss reserves of $7.6 million.
Amortization of deferred policy acquisition costs ("DAC") decreased
25.0% to $5.0 million for the three months ended September 30, 2001, from $6.6
million for the three months ended September 30, 2000 due to a reduction in
overall commissions which are a function of the decline in earned premium.
Other underwriting expenses increased 33.4% to $2.0 million for the
three months ended September 30, 2001, from $1.5 million for the three months
ended September 30, 2000.
The overall statutory combined ratio for the Company decreased to 100.5
for the three months ended September 30, 2001, from 139.5 for the three months
ended September 30, 2000, primarily due to the decrease in the loss ratio to
69.5 in 2001 compared to 105.1 in 2000. The ratios for the three months ended
September 30, 2000 included a strengthening of prior year loss reserves of $7.6
million which added 32.4 points to the ratio for that period. The expense ratio
was 31.0 for the three months ended September 30, 2001 and 34.4 for the three
months ended September 30, 2000.
Page 12
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The factors described above resulted in net income for the three months
ended September 30, 2001 of $1.6 million or $0.20 per share (basic and diluted),
compared to net loss of $5.1 million or $0.67 per share (basic and diluted) for
the three months ended September 30, 2000.
Nine Months Ended September 30, 2001 and 2000
Premiums earned decreased 1.8% to $66.2 million for the nine months
ended September 30, 2001 from $67.4 million for the nine months ended September
30, 2000. Premiums earned for the Company's core commercial lines (excluding
exited lines of business) increased $3.1 million, or 5.3%. This was offset by a
decrease in premiums earned on the exited commercial and non-standard personal
automobile lines of business of $4.3 million, or 49.4%.
Gross written premiums decreased 14.6% for the nine months ended
September 30, 2001 to $71.0 million compared to $83.1 million for the nine
months ended September 30, 2000. Of this decline, $10.4 million is attributable
to the Company's decision to exit the commercial and non-standard personal
automobile lines of business.
Net written premiums decreased 14.5% for the nine months ended
September 30, 2001 to $63.0 million compared to $73.7 million for the nine
months ended September 30, 2000. This is due primarily to the Company's decision
to exit the commercial and non-standard personal automobile lines of business.
Net investment income increased 11.9% to $8.5 million for the nine
months ended September 30, 2001, from $7.6 million for the nine months ended
September 30, 2000. This increase resulted principally from an increase in the
investment yield of the fixed income investment portfolio and the growth in
invested assets, partially offset by a decline in interest rates on overnight
cash balances.
Losses and loss adjustment expenses decreased 17.2% to $46.7 million
for the nine months ended September 30, 2001, from $56.4 million for the nine
months ended September 30, 2000. The nine months ended September 30, 2000
included a strengthening of prior year loss reserves of $9.4 million.
Amortization of deferred policy acquisition costs ("DAC") decreased
11.0% to $17.2 million for the nine months ended September 30, 2001 compared to
$19.3 million for the nine months ended September 30, 2000. This is due to a
reduction in overall commissions which are a function of the decline in earned
premiums.
Other underwriting expenses increased 18.2% to $5.2 million for the
nine months ended September 30, 2001, from $4.4 million for the nine months
ended September 30, 2000.
The overall statutory combined ratio for the Company decreased to 103.9
for the nine months ended September 30, 2001, from 118.6 for the nine months
ended September 30, 2000, primarily due to the decrease in the loss ratio to
70.6 in 2001 compared to 83.8 in 2000. The loss ratio for the nine months ended
September 30, 2000 included the effect of a prior year loss reserve
strengthening of $9.4 million that added 13.9 points to the ratios for that
period. The expense ratio decreased to 33.3 for the nine months ended September
30, 2001, compared to 34.8 for the nine months ended September 30, 2000.
Page 13
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The factors described above resulted in net income for the nine months
ended September 30, 2001 of $3.5 million or $0.46 per share (basic and diluted),
compared to net loss of $4.2 million or $0.54 per share (basic and diluted) for
the nine months ended September 30, 2000.
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 and Penn-Star. Penn-America's principal sources of
funds are 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 and
other payments to PAGI.
Penn-America is required by law to maintain a certain minimum surplus
on a statutory basis and is subject to risk-based capital requirements and
regulations under which payment of dividends from statutory surplus may require
prior approval from the Pennsylvania Insurance Department. Penn-America may pay
dividends to PAGI without advance regulatory approval only from unassigned
surplus and only to the extent that all dividends in the past twelve months do
not exceed the greater of 10% of total statutory surplus, or statutory net
income for the prior year. Using this criteria, the available ordinary dividend
for 2001 is $5.5 million. No ordinary dividends were paid to PAGI in 2000. In
2000, Penn-America paid a $6.4 million return of capital to PAGI, after
receiving approval from the Pennsylvania Insurance Department, which PAGI used
to repurchase stock and to pay dividends and PAGI operating expenses.
Penn-America paid ordinary dividends of $1.1 million to PAGI in 2001 through
September 18, 2001.
Net cash provided by operating activities was $2.8 million for the nine
months ended September 30, 2001, compared to $10.8 million provided by operating
activities for the nine months ended September 30, 2000.
Net cash used by investing activities was $5.4 million for the nine
months ended September 30, 2001, compared to $2.5 million for the nine months
ended September 30, 2000.
Net cash used by financing activities was $1.0 million for the nine
months ended September 30, 2001, compared to $6.0 million for the nine months
ended September 30, 2000. In 2000, $4.7 million was used to purchase treasury
stock, and no such purchases were made in 2001.
Statutory surplus as of September 30, 2001 increased to $61.9 million
from $55.5 million as of December 31, 2000. This increase is due to statutory
net income of $5.0 million and a $3.3 million net positive impact from adopting
the standard set of statutory accounting principles known as "codification."
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
Page 14
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 $151.8 million was 86.0% of
the total investment portfolio as of September 30, 2001. Approximately 97% 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 September 30, 2001 was
approximately 3.6 years. Equity securities, the majority of which consist of
preferred stocks and exchange traded funds, were $24.7 million or 14.0% of total
investments as of September 30, 2001.
As of September 30, 2001, the investment portfolio contained $50.6
million of mortgage/asset-backed obligations, which represents 28.6% of the
total investments as of September 30, 2001. All of these securities were
"AA"-rated or better and 75.5% 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 September 30, 2001.
Page 15
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 August 16, 2001, the Company filed a current report on Form 8-K
announcing the availability of second quarter 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.
Page 16
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: November 13, 2001 By: /s/ Jon S. Saltzman
----------------- -----------------------------
Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Joseph F. Morris
-----------------------------
Joseph F. Morris
Senior Vice President and
Chief Financial Officer
Page 17