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, 2003
-------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22316
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Penn-America Group, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
--------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 South York Road, Hatboro, Pennsylvania 19040
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(Address of principal executive offices, including zip code)
(215) 443-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
-----
At October 30, 2003, 14,731,853 shares of the registrant's common stock, $0.01
par value, were outstanding.
Page 1
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Index
Page Number
-----------
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2003 (unaudited) and
December 31, 2002 3
Consolidated Unaudited Statements of Operations - For the three
and nine months ended September 30, 2003 and 2002 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the nine months ended September 30, 2003 5
Consolidated Unaudited Statements of Cash Flows -
For the nine months ended September 30, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
Item 4. Controls and Procedures 24
Part II - Other Information 25
Page 2
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
September 30, December 31,
2003 2002
---------------- -----------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost, $301,989 and $237,450) $ 311,028 $ 246,583
Held to maturity, at amortized cost (fair value, $295 and $2,017) 276 1,963
Equity securities, at fair value (cost, $11,405 and $17,859) 11,554 18,625
---------------- -----------------
Total investments 322,858 267,171
Cash and cash equivalents 31,513 9,796
Accrued investment income 3,272 3,196
Premiums receivable 20,967 12,564
Reinsurance recoverable 31,466 27,843
Prepaid reinsurance premiums 12,504 8,965
Deferred policy acquisition costs 16,755 13,159
Capital lease, affiliate 1,514 1,579
Deferred income taxes 2,939 2,105
Income tax recoverable -- 60
Other assets 1,010 801
---------------- -----------------
Total assets $ 444,798 $ 347,239
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 159,550 $ 137,747
Unearned premiums 87,293 65,365
Accounts payable and accrued expenses 8,152 7,700
Capitalized lease obligation, affiliate 1,312 1,428
Payable for investments purchased 26,290 --
Company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debentures 30,000 15,000
Income tax payable 825 --
Other liabilities 3,776 3,404
---------------- -----------------
Total liabilities 317,198 230,644
---------------- -----------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares;
none issued -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding, 14,729,853 and 14,572,098 shares 147 146
Additional paid-in capital 72,175 70,875
Accumulated other comprehensive income 5,769 6,401
Retained earnings 50,280 39,995
Officers' stock loans (569) (629)
Unearned compensation from restricted stock awards (202) (193)
---------------- -----------------
Total stockholders' equity 127,600 116,595
---------------- -----------------
Total liabilities and stockholders' equity $ 444,798 $ 347,239
================ =================
See accompanying notes to Consolidated Financial Statements
Page 3
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the three and nine months ended September 30, 2003 and 2002
(In thousands, except share data)
Three months ended September 30, Nine months ended September 30,
--------------------------------------- --------------------------------------
2003 2002 2003 2002
------------------ ------------------ ------------------- -----------------
Revenues
Premiums earned $ 40,337 $ 30,705 $ 110,997 $ 80,922
Net investment income 3,277 3,038 9,734 8,796
Net realized investment gain (loss) 734 1,172 1,879 (173)
------------------ ------------------ ------------------- -----------------
Total revenues 44,348 34,915 122,610 89,545
------------------ ------------------ ------------------- -----------------
Losses and expenses
Losses and loss adjustment expenses 24,594 20,799 68,791 53,449
Amortization of deferred policy acquisition costs 9,901 7,527 27,591 20,277
Other underwriting expenses 2,395 2,209 6,767 6,032
Corporate expenses 214 118 633 462
Interest expense 515 35 1,228 105
------------------ ------------------ ------------------- -----------------
Total losses and expenses 37,619 30,688 105,010 80,325
------------------ ------------------ ------------------- -----------------
Income before income tax 6,729 4,227 17,600 9,220
Income tax expense 2,094 1,330 5,392 2,655
------------------ ------------------ ------------------- -----------------
Net income $ 4,635 $ 2,897 $ 12,208 $ 6,565
================== ================== =================== =================
Net income per share:
Basic $ 0.31 $ 0.25 $ 0.83 $ 0.57
Diluted $ 0.31 $ 0.25 $ 0.82 $ 0.56
Weighted average shares outstanding:
Basic 14,717,350 11,585,043 14,648,660 11,565,749
Diluted 14,945,900 11,775,916 14,883,774 11,765,175
Cash dividends per share $ 0.04375 $ 0.03875 $ 0.13125 $ 0.11583
See accompanying notes to Consolidated Financial Statements
Page 4
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the nine months ended September 30, 2003
(In thousands, except share data)
Unearned
Accumulated Compensation
Additional Other Officers' From Total
Common Paid-In Comprehensive Retained Stock Restricted Stockholders'
Stock Capital Income Earnings Loans Stock Awards Equity
---------- ----------- ------------------------ --------- ------------ -------------
Balance at December 31, 2002 $ 146 $ 70,875 $ 6,401 $ 39,995 $ (629) $ (193) $ 116,595
Net income -- -- -- 12,208 -- -- 12,208
Other comprehensive loss:
Unrealized loss on investments, net
of tax and reclassification adjustment -- -- (562) -- -- -- (562)
Unrealized loss on cash-flow hedging
instrument, net of tax -- -- (70) -- -- -- (70)
---------
Comprehensive income
11,576
---------
Issuance of common stock 1 1,213 -- -- -- -- 1,214
Compensation expense on stock
options -- 87 -- -- -- -- 87
Unearned compensation from restricted
stock awards issued -- -- -- -- -- (51) (51)
Amortization of compensation expense
from restricted stock awards issued -- -- -- -- -- 42 42
Repayment of officers' stock loans
60 -- 60
Cash dividends paid ($0.13125 per share) -- -- -- (1,923) -- (1,923)
--------- --------- --------- --------- ------ -------- ---------
Balance at September 30, 2003 $ 147 $ 72,175 $ 5,769 $ 50,280 $ (569) $ (202) $ 127,600
========= ========= ========= ========= ====== ======== =========
See accompanying notes to Consolidated Financial Statements
Page 5
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 2003 and 2002
(In thousands)
Nine months ended September 30,
----------------------------------------
2003 2002
------------------ -----------------
Cash flows from operating activities:
Net income $ 12,208 $ 6,565
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization (accretion) and depreciation expense 1,468 (100)
Net realized investment loss (gain) (1,879) 173
Deferred income tax benefit (642) (575)
Net change in premiums receivable, prepaid reinsurance
premiums and unearned premiums 9,986 18,698
Net change in unpaid losses and loss adjustment expenses
and reinsurance recoverable 18,180 10,934
Decrease (increase) in:
Accrued investment income (76) 82
Deferred policy acquisition costs (3,596) (4,157)
Income tax recoverable/payable 885 461
Other assets 80 (29)
Increase (decrease) in:
Accounts payable and accrued expenses 452 3,348
Other liabilities 259 590
------------------ -----------------
Net cash provided by operating activities 37,325 35,990
------------------ -----------------
Cash flows from investing activities:
Purchases of equity securities (7,651) (1,500)
Purchases of fixed maturities available for sale (168,196) (69,372)
Proceeds from sales of equity securities 14,439 1,494
Proceeds from sales and maturities of fixed maturities available for sale 104,040 35,924
Proceeds from maturities and calls of fixed maturities held to maturity 1,686 13,130
Increase in payable for investments purchased 26,290 --
------------------ -----------------
Net cash used by investing activities (29,392) (20,324)
------------------ -----------------
Cash flows from financing activities:
Issuance of common stock 1,214 300
Net proceeds from the issuance of trust preferred securities 14,549 --
Principal payments on capital lease obligations, affiliate (116) (106)
Repayment of officers' loans 60 --
Dividends paid (1,923) (1,340)
------------------ -----------------
Net cash provided (used) by financing activities 13,784 (1,146)
------------------ -----------------
Increase in cash and cash equivalents 21,717 14,520
Cash and cash equivalents, beginning of period 9,796 13,129
------------------ -----------------
Cash and cash equivalents, end of period $ 31,513 $ 27,649
================== =================
See accompanying notes to Consolidated Financial Statements
Page 6
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Organization and Basis of Presentation
Penn-America Group, Inc. ("PAGI") is an insurance holding company.
Approximately 31% of the outstanding common stock of PAGI was owned by Penn
Independent Corporation ("Penn Independent") at September 30, 2003. The
accompanying financial statements include the accounts of PAGI and its
wholly-owned subsidiaries, Penn-America Insurance Company ("Penn-America") and
its wholly-owned subsidiary, Penn-Star Insurance Company ("Penn-Star");
Penn-America Statutory Trust I (the "Trust I"); and Penn-America Statutory Trust
II (the "Trust II") (collectively the "Company").
The Company markets and underwrites general liability, commercial
property, and multi-peril insurance for small businesses located primarily in
small towns and suburban and rural areas. The Company is licensed to write
business in all 50 states and the District of Columbia. The Company writes
business on both an admitted and non-admitted basis in 37 states, on only an
admitted basis in one state and on only a non-admitted basis in 12 states and
the District of Columbia.
The accompanying condensed unaudited consolidated financial statements
and notes have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of results for the interim periods have been
included. All significant intercompany accounts and transactions have been
eliminated in consolidation. It is suggested that these condensed unaudited
consolidated financial statements and notes be read in conjunction with the
financial statements and notes in the Company's 2002 Annual Report which was
incorporated by reference into the Company's Form 10-K for the year ended
December 31, 2002. The Company's results of operations for interim periods are
not necessarily indicative of the results to be expected for the entire year.
Note 2 - Reinsurance
Premiums earned are presented net of amounts ceded to reinsurers of
$7,503,000 and $5,057,000 for the three months ended September 30, 2003 and
2002, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $2,576,000 and $3,188,000 for the three months
ended September 30, 2003 and 2002, respectively.
Premiums earned are presented net of amounts ceded to reinsurers of
$20,409,000 and $12,257,000 for the nine months ended September 30, 2003 and
2002, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $10,890,000 and $5,988,000 for the nine months
ended September 30, 2003 and 2002, respectively.
Page 7
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 3 - Comprehensive Income
For the three months ended September 30, 2003, comprehensive income was
$2,153,000, which consisted of net income of $4,635,000 and other comprehensive
loss of $2,482,000 related to net unrealized loss on investments and an
unrealized gain on a cash flow hedging instrument. For the three months ended
September 30, 2002, comprehensive income was $5,197,000, which consisted of net
income of $2,897,000 and other comprehensive gain of $2,300,000 related to net
unrealized gains on investments.
For the nine months ended September 30, 2003, comprehensive income was
$11,576,000, which consisted of net income of $12,208,000 and other
comprehensive loss of $632,000 related to net unrealized loss on investments and
an unrealized loss on a cash flow hedging instrument. For the nine months ended
September 30, 2002, comprehensive income was $10,304,000, which consisted of net
income of $6,565,000 and other comprehensive gain of $3,739,000 related to net
unrealized gains on investments.
Note 4 - Net Income Per Share
Basic net income per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding for each period. Diluted net income per share includes the potential
dilution that could occur if outstanding contracts to issue common stock were
exercised and converted to common stock. The following is a reconciliation of
the basic and diluted net income per share computations:
(in thousands, except share data) Three months ended September 30, Nine months ended September 30,
-------------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Basic per share computation:
Net income $ 4,635 $ 2,897 $ 12,208 $ 6,565
Weighted average common shares (outstanding 14,717,350 11,585,043 14,648,660 11,565,749
----------- ----------- ----------- -----------
Basic net income per share $ 0.31 $ 0.25 $ 0.83 $ 0.57
=========== =========== =========== ===========
Diluted per share computation:
Net income $ 4,635 $ 2,897 $ 12,208 $ 6,565
Weighted average common shares 14,717,350 11,585,043 14,648,660 11,565,749
(1)outstanding
Additional shares outstanding after the
assumed
assumed exercise of stock options by
applying the treasury stock method
228,550 190,873 235,114 199,426
----------- ----------- ----------- -----------
Total shares 14,945,900 11,775,916 14,883,774 11,765,175
=========== =========== =========== ===========
Diluted net income per share $ 0.31 $ 0.25 $ 0.82 $ 0.56
=========== =========== =========== ===========
Page 8
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 5 - Segment Information
The Company has one reportable segment that consists of its commercial
property and casualty lines of business. In 1999, the Company exited the
non-standard personal automobile line of business and announced that it would
run-off its remaining portfolio of such business. For the three and nine months
ended September 30, 2003 and 2002, amounts relating to the non-standard personal
automobile business were not material to the financial statements presented, and
therefore, are not presented separately.
Note 6 - Stock Options
On January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure ("SFAS 148"), and SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") by implementing the modified prospective transition
method permitted under SFAS 148. This method requires the Company to record
compensation expense in 2003, and annually thereafter, as if the fair value
recognition method had been used since January 1, 1995. Compensation expense of
$41,000 and $87,000 was recorded for the three and nine months ended September
30, 2003.
Prior to January 1, 2003, the Company applied the recognition
principles of APB No. 25, Accounting for Stock Issued to Employees, and,
accordingly, no compensation expense was recognized. If the Company had applied
the fair value recognition provisions of SFAS 123 in 2002, compensation expense
of $62,000 and $186,000 would have been recorded for the three and nine months
ended September 30, 2002. The following table illustrates the effect on net
income and net income per share for the three and nine months ended September
30, 2003 and 2002 as if the Company had applied the fair value recognition
provisions of SFAS 123.
(in thousands, except share data) Three months ended September 30, Nine months ended September 30,
------------------------------- ---------------------------
2003 2002 2003 2002
------------- --------------- ------------ -----------
Net income, as reported $ 4 $ 2,897 $ 12,208 $ 6,565
Add: Stock-based employee compensation
included in net income, net of tax
27 -- 57 --
Deduct: Stock-based employee compensation
determined under the fair value based
method, net of tax
(27) (41) (57) (123)
------ --------- ---------- -------
Pro forma net income $ 4 $ 2,856 $ 12,208 $ 6,442
====== ========= ========== =======
Basic net income per share:
As reported
$ 0.31 $ 0.25 $ 0.83 $ 0.57
Pro forma
$ 0.31 $ 0.25 $ 0.83 $ 0.56
Diluted net income per share:
As reported
$ 0.31 $ 0.25 $ 0.82 $ 0.56
Pro forma $ 0.31 $ 0.24 $ 0.82 $ 0.55
Page 9
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 7 - Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trusts Holding Solely Junior Subordinated Debentures ("Trust
Preferred Securities")
On May 15, 2003, Penn-America Statutory Trust II ("the Trust II"), a
business trust subsidiary formed by PAGI, issued $15 million of floating rate
trust preferred securities. These securities have a thirty-year maturity, with a
provision that allows the Company to call these securities at par after five
years from the date of issuance. Cash distributions will be paid quarterly in
arrears at a rate of 410 basis points over three-month London Interbank Offered
Rates. Distributions on these securities can be deferred for up to five years,
but in the event of such deferral, the Company may not declare or pay cash
dividends on its common stock. The Company guarantees all obligations of the
Trust II with respect to distributions and payments of these securities.
Proceeds from the sale of these securities by the Trust II were used to
acquire $15 million of Floating Rate Junior Subordinated Deferrable Interest
Rate Debentures issued by the Company. These debentures have the same terms with
respect to maturity, payments, and distributions as the floating rate trust
preferred securities issued by the Trust II. The proceeds from these debentures
will be used to support growth in the Company's insurance operations and for
general corporate purposes.
On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS 150 establishes
standards for classifying and measuring certain financial instruments with
characteristics of both liabilities and equity. The Company's Trust Preferred
Securities are classified as a liability on the Consolidated Balance Sheets and
the related distributions are recorded as interest expense on the Consolidated
Statements of Operations, which is in accordance with SFAS 150. Therefore, the
adoption of SFAS 150 had no effect on the Company's financial statements.
Page 10
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 8 - Unpaid Losses and Loss Adjustment Expenses
During the first nine months of 2003, the Company increased incurred
losses and loss adjustment expenses attributable to insured events of prior
years by $1,974,000. This increase was primarily due to an increase of
$1,928,000 in estimates for loss and loss adjustment expense reserves for the
exited automobile lines of business. In 2003, the Company experienced an
unanticipated increase in paid allocated loss adjustment expenses on its
remaining open commercial automobile liability claims. Consequently, combined
with the unanticipated 2003 activity and review of open claims, the Company
increased its estimates for loss and loss adjustment expense reserves. The
remaining increase of $46,000 in incurred losses and loss adjustment expenses
attributable to insured events of prior years related to the Company's core
commercial property and casualty lines of business. This increase consisted of a
reduction in the Company's estimate for the commercial property lines of
business by $2,143,000 relating primarily to the 2002 accident year, offset by
an increase in the Company's estimate for the commercial liability lines of
business of $2,189,000 due to the development of outstanding claim reserves on
claims occurring in various accident years.
In October 2003, the Eighteenth Circuit Court in the State of Michigan
entered a judgment of $4.9 million against one of the Company's insureds, which
judgment the Company has appealed. While the Company issued only a $1.0 million
policy limit, the insured could allege the Company is responsible for this
entire judgment. This policy is applicable to the Company's reinsurance program
that provides coverage for losses and loss adjustment expenses, including
judgments in excess of policy limits, of $2.75 million in excess of $0.25
million. The Company believes that the judgment has no merit and the likelihood
of a loss in excess of the Company's reinsurers limit of liability of $3.0
million is remote. Therefore, the Company has not included any amounts over its
reinsurers limit of liability of $3.0 million in its unpaid losses and loss
adjustment expenses at September 30, 2003.
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, 2003 and 2002
Premiums earned increased 31.4% to $40.3 million for the three months
ended September 30, 2003, compared with $30.7 million for the same period in
2002, due to the growth in net written premiums over the last 12 months.
Gross written premiums, which represent the amount received or to be
received for insurance policies written without reduction for acquisition costs,
reinsurance costs or other deductions, increased 35.6% for the three months
ended September 30, 2003 to $58.5 million, compared with $43.1 million for the
three months ended September 30, 2002. The increase was attributable to rate
increases, growth in new business and higher average exposures per policy.
Ceded written premiums, the portion of gross written premiums reinsured
by unaffiliated insurers, increased 36.3% to $9.0 million for the three months
ended September 30, 2003, compared with $6.6 million for the three months ended
September 30, 2002. The increase in ceded written premiums was due primarily to
growth in gross written premiums and an approximately 4.0% increase in
reinsurance rates on the Company's multiple-line excess of loss treaty.
Net written premiums, which are gross written premiums less ceded
written premiums, increased 35.5% for the three months ended September 30, 2003
to $49.5 million, compared with $36.5 million for the three months ended
September 30, 2002. The increase in net written premiums was consistent with the
increase in gross written premiums, but was offset partially by higher
reinsurance costs.
Net investment income increased to $3.3 million for the three months
ended September 30, 2003, compared with $3.0 million for the three months ended
September 30, 2002, primarily due to the growth in average invested assets,
partially offset by a decrease in average yield on fixed-maturity investments.
Net realized investment gain was $0.7 million for the three months
ended September 30, 2003, compared to a net realized investment gain of $1.2
million for the three months ended September 30, 2002. The net realized
investment gain for the three months ended September 30, 2003 was primarily
attributable to the sale of certain of the Company's preferred stock securities.
The net realized investment gain for the three months ended September 30, 2002
consists primarily of $2.3 million in net realized gains recognized on the sale
of certain of the Company's fixed-maturity securities, partially offset by $1.1
million other-than-temporary impairment write-downs on certain of the Company's
common stocks.
Losses and loss adjustment expenses increased 18.2% to $24.6 million
for the three months ended September 30, 2003, compared with $20.8 million for
the three months ended September 30, 2002. The loss ratio for the three months
ended September 30, 2003 was 61.0, compared with 67.7 for the three months ended
September 30, 2002. The loss ratio is calculated by dividing losses and loss
adjustment expenses by premiums earned. The improvement in the loss ratio was
primarily attributable to rate increases implemented in 2002 and 2003 partially
offset by an increase in catastrophe-related losses, which were $1.3 million for
the three months ended September 30, 2003 versus $0.4 million for the three
months ended September 30, 2002. This increase in
Page 12
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
catastrophe-related losses was primarily due to claims the Company received
related to Hurricane Isabel which occurred in the third quarter of 2003.
Amortization of deferred policy acquisition costs ("ADAC") increased
31.5% to $9.9 million for the three months ended September 30, 2003 from $7.5
million for the three months ended September 30, 2002, primarily due to the
growth in premiums earned.
Other underwriting expenses increased 8.4% to $2.4 million for the
three months ended September 30, 2003 from $2.2 million for the three months
ended September 30, 2002, primarily due to increases in salary and benefit
expenses associated with the hiring of additional underwriting and marketing
personnel.
The overall GAAP combined ratio, which is the sum of the loss and
expense ratios, improved to 91.5 for the three months ended September 30, 2003
from 99.4 for the three months ended September 30, 2002. The loss ratio improved
to 61.0 for the three months ended September 30, 2003 from 67.7 for the three
months ended September 30, 2002. The expense ratio, which is calculated by
dividing the sum of ADAC and other underwriting expenses by premiums earned,
improved to 30.5 for the three months ended September 30, 2003 from 31.7 for the
three months ended September 30, 2002. The GAAP combined ratio is a standard
measure of underwriting profitability used throughout the property and casualty
insurance industry. A ratio below 100.0 generally indicates underwriting
profitability.
Interest expense increased to $515,000 for the three months ended
September 30, 2003 from $35,000 for the three months ended September 30, 2002,
primarily due to interest expense on the Company's Trust Preferred Securities.
Income tax expense increased to $2.1 million for the three months ended
September 30, 2003 from $1.3 million for the three months ended September 30,
2002, primarily due to improved underwriting profitability.
The factors described above resulted in net income for the three months
ended September 30, 2003 of $4.6 million or $0.31 per share (basic and diluted),
compared with $2.9 million or $0.25 per share (basic and diluted) for the three
months ended September 30, 2002.
Nine Months Ended September 30, 2003 and 2002
Premiums earned increased 37.2% to $111.0 million for the nine months
ended September 30, 2003, compared with $80.9 million for the same period in
2002, due to the growth in net written premiums over the last 12 months.
Gross written premiums, which represent the amount received or to be
received for insurance policies written without reduction for acquisition costs,
reinsurance costs or other deductions, increased 29.5% for the nine months ended
September 30, 2003 to $153.3 million, compared with $118.4 million for the nine
months ended September 30, 2002. The increase was attributable to rate
increases, growth in new business and higher average exposures per policy.
Page 13
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Ceded written premiums, the portion of gross written premiums reinsured
by unaffiliated insurers, increased 42.6% to $23.9 million for the nine months
ended September 30, 2003, compared with $16.8 million for the nine months ended
September 30, 2002. The increase in ceded written premiums was due primarily to
growth in gross written premiums and an approximately 11.0% percent increase in
reinsurance rates on the Company's multiple-line excess of loss treaty.
Net written premiums, which are gross written premiums less ceded
written premiums, increased 27.4% for the nine months ended September 30, 2003
to $129.4 million, compared with $101.6 million for the nine months ended
September 30, 2002. The increase in net written premiums was consistent with the
increase in gross written premiums, but was offset partially by higher
reinsurance costs.
Net investment income increased to $9.7 million for the nine months
ended September 30, 2003, compared with $8.8 million for the nine months ended
September 30, 2002, primarily due to the growth in average invested assets,
partially offset by a decrease in average yield on fixed-maturity investments.
Net realized investment gain was $1.9 million for the nine months ended
September 30, 2003, compared to a net realized investment loss of $0.2 million
for the nine months ended September 30, 2002. The net realized investment gain
for the nine months ended September 30, 2003 was primarily attributable to the
sale of certain of the Company's fixed-maturity securities, preferred stocks and
common stocks. The net realized investment loss for the nine months ended
September 30, 2002 consists of $2.1 million in other-than-temporary impairment
write-downs on certain of the Company's preferred stocks and common stocks and
$0.4 million in net realized losses on the sale of certain of the Company's
common stocks, partially offset by $2.3 million in net realized gains on the
sale of certain of the Company's fixed-maturity securities.
Losses and loss adjustment expenses increased 28.7% to $68.8 million
for the nine months ended September 30, 2003, compared with $53.4 million for
the nine months ended September 30, 2002. The loss ratio for the nine months
ended September 30, 2003 was 62.0, compared with 66.1 for the nine months ended
September 30, 2002. The loss ratio is calculated by dividing losses and loss
adjustment expenses by premiums earned. The improvement in the loss ratio was
primarily attributable to rate increases implemented in 2002 and 2003, partially
offset by an increase in catastrophe-related losses, which were $3.0 million for
the nine months ended September 30, 2003 and $1.2 million for the nine months
ended September 30, 2002. This increase in catastrophe-related losses was
primarily due to claims the Company received on a series of severe storms in the
Midwestern states which occurred in the second quarter of 2003 and claims the
Company received related to Hurricane Isabel which occurred in the third quarter
of 2003.
Amortization of deferred policy acquisition costs ("ADAC") increased
36.1% to $27.6 million for the nine months ended September 30, 2003 from $20.3
million for the nine months ended September 30, 2002, primarily due to the
growth in premiums earned.
Other underwriting expenses increased 12.2% to $6.8 million for the
nine months ended September 30, 2003 from $6.0 million for the nine months ended
September 30, 2002, primarily due to increases in salary and benefit expenses
associated with the hiring of additional underwriting and marketing personnel.
Page 14
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The overall GAAP combined ratio, which is the sum of the loss and
expense ratios, improved to 93.0 for the nine months ended September 30, 2003
from 98.6 for the nine months ended September 30, 2002. The loss ratio improved
to 62.0 for the nine months ended September 30, 2003 from 66.1 for the nine
months ended September 30, 2002. The expense ratio, which is calculated by
dividing the sum of ADAC and other underwriting expenses by premiums earned,
improved to 31.0 for the nine months ended September 30, 2003 from 32.5 for the
nine months ended September 30, 2002. The GAAP combined ratio is a standard
measure of underwriting profitability used throughout the property and casualty
insurance industry. A ratio below 100.0 generally indicates underwriting
profitability.
Interest expense increased to $1.2 million for the nine months ended
September 30, 2003 from $0.1 million for the nine months ended September 30,
2002 primarily due to interest expense on the Company's Trust Preferred
Securities.
Income tax expense increased to $5.4 million for the nine months ended
September 30, 2003 from $2.7 million for the nine months ended September 30,
2002, primarily due to improved underwriting profitability.
The factors described above resulted in net income for the nine months
ended September 30, 2003 of $12.2 million or $0.83 per basic share and $0.82 per
diluted share, compared with $6.6 million or $0.57 per basic share and $0.56 per
diluted share for the nine months ended September 30, 2002.
Critical Accounting Estimates and Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
The Company has identified that the establishment of reserves for
unpaid losses and loss adjustment expenses and the valuation of certain
investments are critical accounting estimates because they involve a high degree
of judgment. Although variability is inherent in these estimates, the Company
believes the amounts provided are appropriate based upon facts available at this
time. See the Investment Portfolio section beginning on page 19 for information
related to the valuation of investments.
The Company is directly liable for losses and loss adjustment expenses
under the terms of the insurance policies it writes. In many cases, several
years may lapse between the occurrence of an insured loss, the reporting of the
loss and the payment of that loss. The Company reflects its liability for the
ultimate payment of all incurred losses and loss adjustment expenses by
establishing its best estimate of loss and loss adjustment expense reserves as
balance sheet liabilities for both reported and unreported claims.
Page 15
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of its ultimate loss. The
estimate of the amount of the ultimate loss is based upon factors such as:
|X| the type of loss,
|X| the jurisdiction of the occurrence,
|X| the Company's knowledge of the circumstances surrounding the claim,
|X| the severity of injury or damage,
|X| the potential for ultimate exposure, and
|X| policy provisions relating to the claim.
The Company determines loss adjustment expenses as a percentage of
expected indemnity losses based on historical patterns adjusted to current
experience.
In addition to case reserves, the Company establishes reserves on an
aggregate basis to provide for incurred but not reported losses and loss
adjustment expenses, commonly referred to as "IBNR". To establish reserves for
IBNR, the Company must estimate the ultimate liability based primarily on past
experience. The Company applies a variety of traditional actuarial techniques to
estimate its ultimate liability. The techniques recognize, among other factors:
|X| the Company's and the industry's experience,
|X| historical trends in reserving patterns and loss payments,
|X| the impact of claim inflation,
|X| the pending level of unpaid claims,
|X| the cost of claim settlements,
|X| the line of business mix, and
|X| the economic environment in which property and casualty insurance
companies operate.
The Company continually reviews these estimates and, based on new
developments and information, the Company includes adjustments of the probable
ultimate liability in the operating results for the periods in which the
adjustments are made. In general, initial reserves are based upon the actuarial
and underwriting data utilized to set pricing levels and are reviewed as
additional information, including claims experience, becomes available.
The establishment of loss and loss adjustment expense reserves makes no
provision for the prospective broadening of coverage by legislative action or
judicial interpretation; or the extraordinary future emergence of new types of
losses not sufficiently represented in the Company's historical experience, or
that cannot yet be quantified. The Company regularly reviews pricing and
reserving methodologies to assist in estimating its reserves so that future
adjustments to prior year reserves can be minimized. However, given the
complexity of this process, reserves will require continual updates and the
ultimate liability may be higher or lower than previously indicated. The Company
does not discount its loss reserves.
Page 16
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
In the first quarter of 2003, the Company received an unexpected
increase in the number of new claims reported relating to four policies issued
to a single insured between January 1, 1980 and April 1, 1983. The insured is a
manufacturer of safety equipment including industrial masks and the new claims
reported allege existing and potential bodily injury due to a medical condition
called silicosis. The original policies covered products and completed
operations only and were issued with a $500,000 indemnity policy aggregate limit
of liability. As of September 30, 2003, the Company believes that its ultimate
obligations for these claims are included in its best estimate for unpaid losses
and loss adjustment expense reserves.
In October 2003, the Eighteenth Circuit Court in the State of Michigan
entered a judgment of $4.9 million against one of the Company's insureds, which
judgment the Company has appealed. While the Company issued only a $1.0 million
policy limit, the insured could allege the Company is responsible for this
entire judgment. This policy is applicable to the Company's reinsurance program
that provides coverage for losses and loss adjustment expenses, including
judgments in excess of policy limits, of $2.75 million in excess of $0.25
million. The Company believes that the judgment has no merit and the likelihood
of a loss in excess of the Company's reinsurers limit of liability of $3.0
million is remote. Therefore, the Company has not included any amounts over its
reinsurers limit of liability of $3.0 million in its unpaid losses and loss
adjustment expenses at September 30, 2003.
During the first nine months of 2003, the Company increased incurred
losses and loss adjustment expenses attributable to insured events of prior
years by $2.0 million. This increase was primarily due to an increase of $1.9
million in estimates for loss and loss adjustment expense reserves for the
exited automobile lines of business. In 2003, the Company experienced an
unanticipated increase in paid allocated loss adjustment expenses on its
remaining open commercial automobile liability claims. Consequently, combined
with the unanticipated 2003 activity and review of open claims, the Company
increased its estimates for loss and loss adjustment expense reserves. The
remaining increase of $0.1 million in incurred losses and loss adjustment
expenses attributable to insured events of prior years related to the Company's
core commercial property and casualty lines of business. This increase consisted
of a reduction in the Company's estimate for the commercial property lines of
business by $2.1 million relating primarily to the 2002 accident year, partially
offset by an increase in the Company's estimate for the commercial liability
lines of business of $2.2 million due to the development of outstanding claim
reserves on claims occurring in various accident years.
Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common
stock of Penn-America Insurance Company. At September 30, 2003, PAGI's capital
structure consisted of common stockholders' equity of $127.6 million and Company
Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Holding Solely Junior Subordinated Debentures ("Trust Preferred Securities") of
$30.0 million.
On May 15, 2003, Penn-America Statutory Trust II ("the Trust II"), a
business trust subsidiary formed by PAGI, issued $15 million of floating rate
trust preferred securities. These securities have a thirty-year maturity, with a
provision that allows the Company to call these securities at par after five
years from the date of issuance. Cash distributions will be paid quarterly in
arrears at a rate of 410 basis points over three-month London Interbank Offered
Rates. Distributions on these securities can be deferred for up to five years,
but in the event
Page 17
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
of such deferral, the Company may not declare or pay cash dividends on its
common stock. The Company guarantees all obligations of the Trust II with
respect to distributions and payments of these securities.
Proceeds from the sale of these securities by the Trust II were used to
acquire $15 million of Floating Rate Junior Subordinated Deferrable Interest
Rate Debentures issued by the Company. These debentures have the same terms with
respect to maturity, payments, and distributions as the floating rate trust
preferred securities issued by the Trust II. The proceeds from these debentures
will be used to support growth in the Company's insurance operations and for
general corporate purposes.
On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS 150 establishes
standards for classifying and measuring certain financial instruments with
characteristics of both liabilities and equity. The Company's Trust Preferred
Securities are classified as a liability on the Consolidated Balance Sheets and
the related distributions are recorded as interest expense on the Consolidated
Statements of Operations, which is in accordance with SFAS 150. Therefore, the
adoption of SFAS 150 had no effect on the Company's financial statements.
PAGI's principal source of cash to meet short-term and long-term
liquidity needs, including the payment of dividends to stockholders, corporate
expenses and interest on its debentures, is dividends from Penn-America
Insurance Company. PAGI has no planned capital expenditures that could have an
impact on its long-term liquidity needs.
Penn-America's principal sources of funds are underwriting operations,
investment income and proceeds from sales and redemptions of investments. Funds
are used by Penn-America Insurance Company and Penn-Star Insurance Company
principally to pay claims and operating expenses, to purchase investments and to
make dividend payments to PAGI. PAGI's future liquidity is dependent on the
ability of Penn-America Insurance Company to pay dividends to PAGI.
The Company's insurance subsidiaries are restricted by statute as to
the amount of dividends that they may pay without the prior approval of
regulatory authorities. Penn-America Insurance Company may pay dividends to PAGI
without advance regulatory approval only from unassigned surplus and only to the
extent that all dividends in the past twelve months do not exceed the greater of
10% of total statutory surplus, or statutory net income for the prior year.
Using these criteria, the available ordinary dividend payable by Penn-America
Insurance Company to PAGI for 2003 is $11,026,200. For the nine months ended
September 30, 2003, ordinary dividends paid by Penn-America Insurance Company to
PAGI were $1,900,000. Penn-America Insurance Company's ability to pay future
dividends to PAGI without advance regulatory approval is dependent upon
maintaining a positive level of unassigned and statutory surplus, which, in
turn, is dependent upon Penn-America Insurance Company and Penn-Star Insurance
Company generating net income in excess of dividends paid to PAGI. As of
September 30, 2003, Penn-America Insurance Company's statutory surplus was
$118,452,000, and included unassigned surplus of $32,912,000.
Page 18
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Penn-America and Penn-Star are required by law to maintain a certain
minimum level of statutory surplus. Statutory surplus is calculated by
subtracting total liabilities from total assets. The National Association of
Insurance Commissioners adopted risk-based capital standards designed to
identify property and casualty insurers that may be inadequately capitalized
based on inherent risks of each insurer's assets and liabilities and its mix of
net written premiums. Insurers falling below a calculated threshold may be
subject to varying degrees of regulatory action. As of December 31, 2002, the
statutory surplus of Penn-America Insurance Company and Penn-Star Insurance
Company was in excess of the prescribed risk-based capital requirements.
Penn-America Insurance Company's statutory surplus at December 31, 2002 was
$110,262,000 and its regulatory action level was $22,532,000. Penn-Star
Insurance Company's statutory surplus at December 31, 2002 was $37,356,000 and
its regulatory action level was $8,276,000.
The Company has generated positive cash flows from operations to meet
its short-term liquidity requirements. Net cash provided by operating activities
was $37.3 million for the nine months ended September 30, 2003 and $36.0 million
for the nine months ended September 30, 2002.
Net cash used by investing activities was $29.4 million for the nine
months ended September 30, 2003 and $20.3 million for the nine months ended
September 30, 2002.
Net cash provided by financing activities was $13.8 million for the
nine months ended September 30, 2003 due primarily to the issuance of $15.0
million of Trust Preferred Securities in the second quarter of 2003, compared to
net cash used by financing activities of $1.1 million for the nine months ended
September 30, 2002.
Investment Portfolio
The Company's investment strategy emphasizes quality, liquidity, and
diversification, as well as total return. With respect to liquidity, the Company
considers liability durations, specifically related to loss reserves, when
determining desired investment maturities. In addition, maturities have been
staggered to produce cash flows for loss payments and reinvestment
opportunities. The Company outsources the management of its investment portfolio
to Gen Re New England Asset Management, Inc. ("NEAMS"). In accordance with the
asset management agreement between the Company and NEAMS, all investment
transactions are approved by the Investment Committee of the Company within 60
days of their initiation by NEAMS. At September 30, 2003, the Company held a
total of $354.4 million in cash and investments. Of this amount, cash and cash
equivalents represented $31.5 million, equity securities, consisting of
preferred stocks and mutual funds invested in adjustable rate mortgages,
represented $11.6 million, and fixed-maturity securities represented $311.3
million.
Page 19
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Company's cash and investment portfolio mix as of September 30,
2003 was as follows:
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies 4.8%
Corporate securities 27.0
Mortgage-backed securities 23.2
Other structured securities 9.2
Municipal securities 23.6
-------
Total fixed maturities 87.8
Cash and cash equivalents 8.9
Equity securities 3.3
-------
100.0%
=======
The Company's fixed-maturity portfolio of $311.3 million was 87.8% of
the total cash and investments as of September 30, 2003. Approximately 94.3% of
these securities were rated "A" or better by Standard & Poor's. Standard &
Poor's rates publicly traded securities in 20 categories ranging from AAA to CC.
Securities with ratings from AAA to BBB- (the top ten categories) are commonly
referred to as having an investment grade rating. Equity securities, which
consist of preferred stocks and mutual funds invested in adjustable rate
mortgages, were $11.6 million or 3.3% of total cash and investments as of
September 30, 2003.
The quality of the fixed-maturity portfolio as of September 30, 2003
was as follows:
"AAA" 56.8%
"AA" 15.0
"A" 22.5
"BBB" 4.8
Below "BBB" 0.9
--------
100.0%
========
As of September 30, 2003, the investment portfolio contained $114.8
million of mortgage-backed, asset-backed and collateralized mortgage
obligations. These securities are publicly traded, and have market values
obtained from an independent pricing service. Changes in estimated cash flows
due to changes in prepayment assumptions from the original purchase assumptions
are revised based on current interest rates and the economic environment. The
Company had no real estate or mortgages in the investment portfolio as of
September 30, 2003. The quality of the Company's mortgage-backed, asset-backed
and collateralized mortgage obligations as of September 30, 2003 was as follows:
"AAA" 87.6%
"AA" 10.7
"A" 1.2
"BBB" 0.5
-------
100.0%
=======
Page 20
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
As of September 30, 2003, the Company's investment portfolio contained
corporate fixed-maturity and preferred stock securities with a market value of
$100.4 million. A summary of these securities by industry segment is as follows:
Financial institutions 29.8%
Consumer, non-cyclical 21.9
Utilities 20.7
Communications 10.7
Industrial 4.7
Consumer, cyclical 3.9
Energy 3.4
Basic materials 3.3
Technology 1.6
-----------
100.0%
===========
The Company regularly evaluates its investment portfolio to identify
other-than-temporary impairments of individual securities. The Company considers
many factors in determining if an other-than-temporary impairment exists,
including the length of time and extent to which the market value of the
security has been less than cost, the financial condition and near-term
prospects of the issuer of the security and the Company's ability and
willingness to hold the security until the market value is expected to recover.
The following table contains an analysis of the Company's securities with gross
unrealized losses, categorized by the period that the securities were in a
continuous unrealized loss position as of September 30, 2003:
Number Gross Six Between Six
of Fair Book Unrealized Months And Twelve
(in thousands) Securities Value Value Losses or Less Months
----------------------------------------------------------------------------------------------------------------------------------
Fixed-maturity securities 36 $ 55,909 $ 56,544 $ 635 $ 609 $ 26
Equity securities 3 8,257 8,282 25 25 --
As of September 30, 2003, the Company's fixed-maturity investment
portfolio had 36 securities with $635 thousand of gross unrealized losses. No
single issuer had a gross unrealized loss position of greater than $175 thousand
or 3% of its original cost. The Company held two preferred stocks and a mutual
fund invested in adjustable rate mortgages, included in equity securities, in a
gross unrealized loss position totaling $25,000 as of September 30, 2003.
Page 21
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Forward-Looking Statements
Certain information included in management's discussion and analysis of
financial condition and results of operations and elsewhere in this report are
not historical facts but are forward-looking statements including, but not
limited to, such matters as anticipated financial performance, business
prospects, technological developments, new and existing products, expectations
for market segment and growth and similar matters. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company provides the following cautionary remarks regarding important factors
which, among others, could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, results of the Company's business, and
the other matters referred to above include, but are not limited to: (1) risks
inherent in establishing loss and loss adjustment expense reserves; (2)
uncertainties relating to the financial ratings of the Company's insurance
subsidiaries; (3) uncertainties relating to government and regulatory policies;
(4) uncertainties arising from the cyclical nature of the Company's business;
(5) changes in the Company's relationships with, and the capacity of, its
general agents; and (6) the risk that the Company's reinsurers may not be able
to fulfill their obligations to the Company. For additional disclosure regarding
potential risk factors, refer to documents filed by the Company with the
Securities and Exchange Commission, including the Company's 2002 Annual Report
on Form 10-K.
Page 22
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk is the potential economic loss
principally arising from adverse changes in the market value of its investment
portfolio. The major component of market risk affecting the Company's investment
portfolio is interest rate risk. As of September 30, 2003, the Company had
fixed-maturity, preferred stock and mutual funds invested in adjustable rate
mortgages with a market value of $322.9 million at September 30, 2003 subject to
interest rate risk. The Company manages its exposure to interest rate risk
through a disciplined asset/liability matching and capital management process.
In the management of this risk, the characteristics of duration, credit and
variability of cash flows are critical elements. These risks constantly are
assessed and balanced within the context of the liability and capital position
of the Company. The Company's market risk associated with exposure to interest
rate risk at September 30, 2003 has not materially changed from that identified
at December 31, 2002.
As of September 30, 2003, the Company believes that its exposure to
equity price risk is minimal. The market value of its equity securities, which
consist of preferred stocks and mutual funds invested in adjustable rate
mortgages, are primarily effected by changes in interest rates. As of December
31, 2002, the Company's exposure to equity price risk was its investment in
common stocks, consisting solely of exchange-traded funds. The Company sold
these securities in the first quarter of 2003.
Page 23
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Controls and Procedures
As of September 30, 2003, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the President and CEO and Senior Vice President, CFO and Treasurer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the President and CEO and Senior Vice President, CFO and Treasurer, concluded
that the Company's disclosure controls and procedures were effective as of
September 30, 2003.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to September 30, 2003.
Page 24
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote by Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1
(b) Reports on Form 8-K
On July 2, 2003, the Company filed a current report on Form 8-K
announcing the registrant was added to the Russell 2000 Index, a
benchmark of small-capitalization stocks compiled by the Frank
Russell Company, one of the world's leading investment management
and advisory firms.
On July 23, 2003, the Company filed a current report on Form 8-K
announcing that the Company released its earnings for the second
quarter of 2003.
On August 15, 2003, the Company filed a current report on Form 8-K
announcing the availability of its second quarter statements for its
insurance subsidiaries, Penn-America Insurance Company and Penn-Star
Insurance Company, on the Company's web-site, in hard copy from the
Company, or from the Pennsylvania Department of Insurance.
On September 2, 2003, the Company filed a current report on Form 8-K
announcing a presentation by Jon S. Saltzman, President and CEO and
Joseph F. Morris, Sr. Vice President, CFO and Treasurer at two
industry conferences.
Page 25
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 6, 2003 By: /s/ Jon S. Saltzman
---------------- -------------------
Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Joseph F. Morris
--------------------
Joseph F. Morris
Senior Vice President,
Chief Financial Officer
Chief Financial Officer
and Treasurer
Page 26
Exhibit No. Description
---------- -----------
10 Endorsement to Property and Casualty Excess of Loss
Reinsurance Agreement between Penn-America Insurance
Company, Penn-Star Insurance Company and American
Re-Insurance Company effective May 1, 2003 to December 31,
2003.
31.1 Certification of Chief Executive Officer as adopted pursuant
to section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer as adopted pursuant
to section 302(a) of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer of Penn-America Group, Inc., dated November 3, 2003
in accordance with 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
E-1