SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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 May 9, 1997 6,740,770 shares of the registrant's common stock, $.01 par
value, were outstanding.
Page 1
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
Index
Page Number
Part I - Financial Information
Consolidated Unaudited Balance Sheets - March 31, 1997 and
December 31, 1996 3
Consolidated Unaudited Statements of Earnings - For the three
months ended March 31, 1997 and 1996 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the three months ended March 31, 1997 5
Consolidated Unaudited Statements of Cash Flows -
For the three months ended March 31, 1997 and 1996 6
Notes to Unaudited Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 7
Part II - Other Information 9
Page 2
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities:
Available for sale, at fair value (amortized cost 1997, $47,855; 1996, $49,244) $ 46,957 $ 48,954
Held to maturity, at amortized cost (fair value 1997, $53,457; 1996, $44,111) 54,488 44,227
Equity securities, at fair value (cost 1997, $10,717; 1996, $10,597) 12,390 12,390
Short term investments, at cost, which approximates fair value 4,900 7,000
--------- ---------
Total investments 118,735 112,571
Cash 1,725 2,979
Receivables:
Accrued investment income 1,842 1,671
Premiums receivable, net 10,859 10,494
Reinsurance recoverable 15,817 15,719
Note receivable, affiliate 75 275
--------- ---------
Total receivables 28,593 28,159
Prepaid reinsurance premiums 2,632 2,668
Deferred policy acquisition costs 7,726 7,231
Capital leases 1,929 1,950
Deferred income tax 2,515 2,211
Income tax recoverable -- 249
Other assets 523 587
--------- ---------
Total assets $ 164,378 $ 158,605
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 73,940 $ 70,728
Unearned premiums 32,128 30,865
Accounts payable and accrued expenses 991 1,773
Capitalized lease obligations 2,003 2,030
Income tax payable 645 --
Notes payable, bank 9,000 9,000
Other liabilities 2,121 1,872
--------- ---------
Total liabilities 120,828 116,268
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares;
none issued -- --
Common stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding 1997, 6,710,638 shares and 1996, 6,676,131 shares 67 67
Additional paid-in capital 22,087 21,844
Unrealized investment gains, net of tax 511 993
Unrealized loss on fixed maturities transferred to held to maturity (43) --
Retained earnings 21,015 19,533
--------- ---------
43,637 42,437
Unearned compensation from restricted stock awards (87) (100)
--------- ---------
Total stockholders' equity 43,550 42,337
--------- ---------
Total liabilities and stockholders' equity $ 164,378 $ 158,605
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 3
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(unaudited)
For the three months ended March 31, 1997 and 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996
Revenues:
<S> <C> <C>
Premiums earned $ 20,899 $ 15,623
Net investment income 1,940 1,598
Net realized investment gains 1 23
---------- ----------
Total revenues 22,840 17,244
---------- ----------
Losses and expenses:
Losses and loss adjustment expenses 13,217 9,852
Amortization of deferred policy acquisition costs 5,698 3,988
Other underwriting expenses 1,144 1,061
Interest expense 192 217
---------- ----------
Total losses and expenses 20,251 15,118
---------- ----------
Earnings before income tax 2,589 2,126
Income tax 839 697
---------- ----------
Net earnings $ 1,750 $ 1,429
========== ==========
Weighted average number of shares outstanding 6,689,457 6,649,818
========== ==========
Net earnings per share (See Note 1) $ .26 $ .21
========== ==========
Cash dividends per share (See Note 1) $ .04 $ .03
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 4
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(unaudited)
For the three months ended March 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Loss on Unearned
Transfer of Compensation
Unrealized Fixed From
Additional Investment Maturities Restricted
Common Stock Paid-In Gains to Held to Retained Stock
Shares Amount Capital (Losses), Maturity Earnings Awards Total
Net
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,676,131 $67 $21,844 $993 $ 0 $19,533 $(100) $42,337
Net earnings 1,750 1,750
Issuance of common stock 34,507 -- 243 243
Amortization of unearned
compensation from
restricted stock awards 13 13
Unrealized investment losses
from fixed maturities
available for sale and
equities, net of tax (532) (532)
Unrealized loss on fixed maturities
transferred to held to maturity 50 (50) 0
Accretion of net loss on fixed maturities
transferred to held to maturity 7 7
Cash dividends paid (268) (268)
-----------------------------------------------------------------------------------
Balance at March 31, 1997 6,710,638 $67 $22,087 $511 $(43) $21,015 $ (87) $43,550
===================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
For the three months ended March 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 1,750 $ 1,429
Adjustments to reconcile net earnings to net cash provided by
operating activities
Amortization and depreciation expense 85 71
Net realized investment gains (1) (23)
Deferred income tax (55) (93)
Net decrease in premiums and notes receivable,
prepaid reinsurance premiums and unearned premiums 1,135 454
Net increase in unpaid losses and loss adjustment expense
and reinsurance recoverable 3,114 1,912
Decrease (increase) in:
Accrued investment income (171) (89)
Deferred policy acquisition costs (495) (238)
Income tax recoverable 249 529
Other assets 37 (183)
Increase (decrease) in:
Accounts payable and accrued expenses (782) (406)
Income tax payable 645 500
Other liabilities 249 204
-------- --------
Net cash provided by operating activities 5,760 4,067
-------- --------
Cash flows from investing activities
Purchases of equity securities (316) (1,926)
Purchases of fixed maturities available for sale (8,000) (11,033)
Purchases of fixed maturities held to maturity (3,028) (11,064)
Proceeds from sales of equity securities 197 1,266
Proceeds from sales and maturities of fixed maturities available for sale 1,000 10,181
Proceeds from maturities of fixed maturities held to maturity 1,085 2,004
Change in short term investments 2,100 5,500
-------- --------
Net cash used by investing activities (6,962) (5,072)
-------- --------
Cash flows from financing activities
Issuance of common stock 243 66
Principal payment on note payable, affiliate -- (50)
Dividends paid (268) (177)
Principal payments on capital lease obligations (27) (24)
-------- --------
Net cash used by financing activities (52) (185)
-------- --------
Decrease in cash (1,254) (1,190)
Cash, beginning of period 2,979 5,204
======== ========
Cash, end of period $ 1,725 $ 4,014
======== ========
Supplemental disclosure of cash flow information Cash paid during the period
for:
Income tax refund -- (240)
Interest 197 189
Supplemental non-cash disclosure
Cost of securities transferred from available for sale to held to maturity 8,002 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
Penn-America Group, Inc. (the "Company") is an insurance holding company. Penn
Independent Corporation currently owns approximately 61.2% of the outstanding
common stock of the Company.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the financial statements and notes for the year ended December
31, 1996. In the opinion of management, the financial information reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of financial position, results of operations,
and cash flows for the interim periods. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
entire year.
On January 29, 1997, Penn-America declared a 3 for 2 stock split for all
shareholders of record on February 14, 1997. All earnings and dividend per share
data disclosed herein has been retroactively adjusted to reflect this split.
Note 2 - Reinsurance
Premiums earned are net of amounts ceded to reinsurers of $1.8 and $1.6 million
for the three month period ended March 31, 1997 and 1996. Losses and loss
adjustment expenses are net of amounts ceded to insurers of $1.8 and $2.5
million for the three months ended March 31, 1997 and 1996.
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of Operations
Gross written premiums increased 32.7% to $24.0 million for the first quarter of
1997, as compared to $18.0 million for the same quarter in 1996. The increase in
gross written premiums was primarily attributable to increased volume in
addition to some rate increases which occurred automatically because some risks
are exposure related. The increase in volume came primarily from a 103.8%
increase in the personal automobile lines to $9.7 million, as compared to $4.8
million for the same period in 1996. Commercial lines volume increased 7.3% to
$14.3 million.
Net written premiums increased 35.5% to $22.2 million in the first quarter of
1997 as compared to $16.4 million in the first quarter of 1996. Net earned
premium increased 33.8% to $20.9 million, as compared to $15.6 million in 1996.
These increases are attributable to the overall growth in gross and net written
premium.
Net investment income increased 21.4% to $1.9 million as compared to $1.6
million in 1996. The increase in investment income can be attributed to a 19.9%
increase in the investment portfolio to $118.7 million in 1997 as compared to
$99.1 million as of March 31, 1996. The increase in the investment portfolio was
funded by cash flow from operations.
Page 7
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations and Financial
Condition
(continued)
Losses and loss adjustment expenses increased 34.2% to $13.2 million in the
first quarter of 1997 as compared to $9.9 million in 1996. The increase in loss
and loss adjustment expenses was fairly consistent with the growth in net earned
premiums, as the loss and loss adjustment expense ratio was 63.2 and 63.1 for
the periods ended March 31, 1997 and 1996, respectively. The Company's statutory
combined ratio increased to 95.6%, as compared to 94.3% in 1996. The 1.3 point
increase is primarily attributed to growth in the personal automobile lines
premium volume. Commission rates for the personal automobile lines are
approximately 5 percentage points higher than the commercial lines commission
rates. The overall net commission rates were 24.7% and 23.2% for the periods
ended March 31, 1997 and 1996, respectively.
Amortization of deferred policy acquisition costs increased 42.9% to $5.7
million in the first quarter of 1997 as compared to $4.0 million for the same
period in 1996. This increase is attributed to the growth in gross earned
premiums and the higher percentage of written premium in the auto business.
Net earnings increased 22.4% to $1.8 million in the first quarter of 1997 as
compared to $1.4 million for the same period in 1996. This increase is
principally attributed to increased earned premiums and increased investment
return.
New Accounting Standard
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share", which defines the computation, presentation, and
disclosure requirements for earnings per share (EPS). It requires dual
presentation of Basic EPS and Diluted EPS on the face of the income statement.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to reissue common stock were exercised or
converted into common stock. The statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
earlier application is not permitted When adopted, all prior-period EPS data
presented will be restated.
Liquidity and Capital Resources
Net cash provided by operating activities was $5.8 million as compared to $4.1
million for the three months ended March 31, 1997 and 1996, respectively. This
increase in cash provided by operations primarily reflects the increase in net
premiums written during the period.
Net cash used by investing activities was $7.0 million for the three months
ended March 31, 1997 as compared to $5.1 million in the first quarter of 1996.
This increase was primarily due to the higher amount of cash provided by
operating activities for the first quarter of 1997 which was used to purchase
securities.
Page 8
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations and Financial
Condition
(continued)
Net cash used by financing activities was $52 thousand in 1997, as compared to
$185 thousand used for the same period in 1996. The decrease in the use of cash
for financing activities was primarily due to $268 thousand cash dividend paid
to stockholders offset by $243 thousand contribution to paid in capital through
the exercise of stock options by some of the Company's stockholders.
During April of 1997, the Company signed a commitment letter to increase its
credit facility with PNC Bank to $15 million from its present $9 million. The
structure of the credit facility is expected to provide that the $9 million is
to be repaid over a five year period and a $6 million revolving credit line with
principal to be repaid after the second anniversary, over a three year period.
Both portions of the credit facility are expected to incur interest at LIBOR
plus a factor which could vary between 100 and 225 basis points. The increased
facility will be used to add to the capital of the Company's insurance
subsidiary, Penn-America Insurance Company, and its newly formed subsidiary,
Penn-Star Insurance Company. Penn-Star is domiciled in the State of Pennsylvania
and its focus will be to write directly the non-standard automobile coverage
that currently is written by Penn-America Insurance Company. Until Penn-Star has
been admitted in the states where we currently write automobile coverage, it
will assume the auto premium written directly by its parent, Penn-America under
a reinsurance agreement.
Page 9
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
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 - None
Page 10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: May 9, 1997 By: /s/ Jon S. Saltzman
Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Rosemary R. Ferrero
Rosemary R. Ferrero
Principal Accounting and
Finance Officer
Page 11
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Earnings at March 31, 1997
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 46,957
<DEBT-CARRYING-VALUE> 54,488
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,390
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 118,735
<CASH> 1,725
<RECOVER-REINSURE> 15,817
<DEFERRED-ACQUISITION> 7,726
<TOTAL-ASSETS> 164,378
<POLICY-LOSSES> 73,940
<UNEARNED-PREMIUMS> 32,128
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,000
<COMMON> 67
0
0
<OTHER-SE> 43,483
<TOTAL-LIABILITY-AND-EQUITY> 164,378
20,899
<INVESTMENT-INCOME> 1,940
<INVESTMENT-GAINS> 1
<OTHER-INCOME> 0
<BENEFITS> 13,217
<UNDERWRITING-AMORTIZATION> 5,698
<UNDERWRITING-OTHER> 1,144
<INCOME-PRETAX> 2,589
<INCOME-TAX> 839
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,750
<EPS-PRIMARY> .26
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
