SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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 022316
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 Number
incorporation or organization)
420 S. York Road
Hatboro, Pennsylvania 19040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 443-3600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
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 shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 10, 1997, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $32,776,540. As of March 10,
1997, there were 6,691,138 shares of the Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's annual report to stockholders for the fiscal
year-ended December 31, 1996 are incorporated by reference in Parts I, II and IV
of this report.
Part III - Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 1997 Annual Meeting of Shareholders, to be filed not later
than 120 days after the close of the Registrant's fiscal year.
<PAGE>
PENN-AMERICA GROUP, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1996
Page
PART I
ITEM 1. BUSINESS................................................ 3
ITEM 2. PROPERTIES..............................................17
ITEM 3. LEGAL PROCEEDINGS.......................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS........................................18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.........................19
ITEM 6. SELECTED FINANCIAL DATA.................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..............................................19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT..............................................20
ITEM 11. EXECUTIVE COMPENSATION..................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.....................................22
Page 2
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General
Penn-America Group, Inc. ("PAGI") is an insurance holding company which
engages, through its wholly-owned subsidiary Penn-America Insurance Company
("Penn-America"), in the property and casualty insurance business. Except where
the context otherwise indicates the term "Company" includes PAGI and
Penn-America.
On February 21, 1997, Penn-Star Insurance Company, a newly formed
wholly-owned subsidiary of Penn-America, received its certificate of authority
from the Insurance Department of Pennsylvania. Penn-Star will eventually
directly write the non-standard personal automobile coverage that is currently
written by Penn-America once it is admitted in those states where the auto
business is currently written. In the meantime, Penn-America will continue to
directly write the automobile coverage and will reinsure it through Penn-Star as
of April 1, 1997.
The Company writes commercial property, general liability and multi-peril
insurance and personal automobile insurance on a surplus lines or nonstandard
basis. Premium levels in the surplus lines or nonstandard market are generally
higher than for comparable risks in the standard insurance market. The Company
focuses on smaller, main street businesses in this surplus lines market, such as
restaurants, taverns, retail businesses, contractors and similar classes, as
well as personal automobile from insureds that may not have access to standard
insurance and where management believes the potential for loss is not excessive
and can be adequately quantified. The Company does not write unique or high risk
policies (e.g., medical malpractice, environmental and aviation liability).
The Company currently markets its commercial insurance products nationally
through a select number of high quality general agents. The Company's personal
automobile coverage is currently written in the states of Washington,
California, Nevada, Kentucky and South Dakota. The Company's commercial general
agents have binding authority for the Company's products based on comprehensive
guidelines established by the Company. In 1996, approximately 85% of the
Company's policies were issued on a binding authority basis. The remaining
commercial business consists of larger or slightly more complex policies issued
on a submit basis from its agents. All personal automobile policies are issued
on a binding authority basis. The Company's general agency network provides it
with significant underwriting support and marketing expertise through the
agents' strong business experience and relationships.
The Company's distribution strategy is to maintain a general agency network
with fewer and more productive general agents than its competitors. By
concentrating its resources on a more limited number of general agents, the
Company believes it enhances not only the volume and quality of business
generated by the general agents, but also the Company's ability to monitor the
agents' performance with respect to Company underwriting policies and
guidelines.
The Company has received a rating of A (Excellent), financial size category
VI, by A.M. Best Company, Inc. ("Best") based upon recent operating performance.
According to Best, an A (Excellent) rating is assigned to those companies that
in Best's opinion, after an extensive review of the company's financial
condition and operating performance, have demonstrated an excellent ability to
meet their respective policyholder and other contractual obligations when
compared to the norms of the property and casualty insurance industry. Best's
ratings are based upon factors relevant to policyholders and are not directed
toward the protection of investors.
Page 3
<PAGE>
The Company believes that an A (Excellent) rating is an important factor in
marketing its products to its general agents.
Prior to July 1993, Penn-America was a wholly-owned subsidiary of Penn
Independent Corporation ("Penn Independent"), a company owned primarily by Mr.
Irvin Saltzman, Chairman of the Board of Directors of the Company. In July 1993,
in anticipation of an initial public offering, PAGI was incorporated in
Pennsylvania and the ownership of Penn-America was transferred to PAGI, which
resulted in Penn-America becoming a wholly-owned subsidiary of PAGI. In October
1993, PAGI completed an initial public offering of 1,600,000 shares of its
Common Stock.
On January 29, 1997, PAGI declared a three-for-two stock split on its common
shares for shareholders of record on February 14, 1997, payable as of March 7,
1997. All per share calculations heretofore have been retroactively adjusted to
reflect this three-for-two stock split.
(b) Financial Information About Industry Segments
The Company is of the opinion that all of its operations are within one
industry segment and that no information as to industry segments is required
pursuant to Statement of Financial Accounting Standards No. 14 or Regulation
S-X.
(c) Lines of Business
The following table sets forth an analysis of gross earned premium by
specific product lines during the periods indicated:
<TABLE>
<CAPTION>
Year ended
1996 1995 1994
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial multi-peril $29,345 38.7% $23,781 37.7% $17,171 37.6%
Liability 21,418 28.2 20,431 32.4 15,953 34.9
Auto liability 15,772 20.8 11,524 18.3 3,506 7.7
Property 5,556 7.3 4,957 7.9 4,105 8.9
Auto physical damage 3,785 5.0 2,312 3.7 4,963 10.9
------- ----- ------- ----- ------- -----
Total gross earned premium $75,876 100.0% $63,005 100.0% $45,698 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
o Commercial General Liability. The Company's commercial general liability
insurance is written on an occurrence policy form (as opposed to a claims
made policy form) and provides limits generally ranging from $25,000 to $3
million, with the majority of such policies having limits of between
$500,000 and $1 million. The average premium written on policies currently
in force is approximately $1,200 and the standard deductible is $500. The
Company's general liability policies pay defense and related expenses in
addition to per occurrence and aggregate policy limits. General liability
insureds include restaurants, bars and taverns, retail operations, garage
liability, contractors and similar classes.
Page 4
<PAGE>
o Commercial Property. The Company's commercial property lines provide limits
usually no higher than $3 million, with almost all of the policies being
written at limits below $1 million. The average premium written on policies
currently in force is approximately $1,100 and the standard deductible is
$500. Properties insured include restaurants, bars and taverns, retail
operations, vacant buildings and other similar classes.
o Commercial Multi-Peril. The Company also writes the same commercial
property and general liability risks together as a "package" for its
insureds, generally referred to as "commercial multi-peril." The limits on
these policies are the same as if written on a monoline basis. The average
premium written on such policies currently in force is approximately $2,200
and the standard deductible is $500, which applies separately for the
property and general liability coverage. Consistent with the current
industry trend, the Company has been writing more commercial multi-peril
policies over the last several years than individual property and liability
policies. The Company expects this trend to continue in light of the fact
that a substantial number of the Company's commercial insureds customarily
require both liability and property insurance coverage, together with the
revisions to Insurance Services Office ("ISO") forms which make it easier
and more efficient to write such multi-peril policies.
In all of its commercial product lines, the Company is continuously
developing specialized programs for certain industry segments to meet the
needs of its marketplace. Examples are programs for independent fitness
centers, day care operations, artisan contractors, low-hazard miscellaneous
professional liability coverages and special events. As a group, these
programs are a significant benefit to the Company's marketing efforts,
although individually they do not generate a material amount of the
Company's gross written premiums.
o Personal Automobile. The Company currently writes personal automobile
policies in the states of Washington, California, Nevada, Kentucky and
South Dakota on a nonstandard basis. These risks typically do not qualify
for preferred or standard insurance because of a driver's age, driving
record, vehicle type or other factors. The personal automobile business is
written at very low coverage limits with the average premium written being
approximately $475. The policies in force at December 31, 1996 provide
physical damage coverage of $35,000 or less, and the Company writes minimum
state statutory liability limits. The Company writes this coverage on a
one, three, six or twelve month policy basis. The Company is seeking
approval to write personal automobile insurance in selected other states,
and anticipates writing in at least one and possibly several additional
states during 1997.
(d) Marketing and Distribution
The Company currently markets its insurance products through a select
number of high quality general agents. The Company believes that it benefits
significantly by using a general agency system because it obtains the
significant underwriting and marketing expertise of the general agents, who have
strong business experience and relationships in their local territory. In
addition, the general agency system allows the Company to avoid the expense of
maintaining a national sales force. This enables the Company to focus its
efforts on reviewing the underwriting decisions of the agents and evaluating
submission business, rather than devoting greater resources to making routine
underwriting decisions. Each general agent operates in a particular geographic
region. The Company actively competes for quality general agents to distribute
its products.
Page 5
<PAGE>
Prior to appointing a general agent, the Company extensively reviews the
candidate's financial condition, spread of risk, historical loss experience and
reputation, as well as the agent's results and practices with other insurers. An
on-site review is made of the agent's office, including an audit of selected
policy files and confirmation that the agent has sufficient experience to merit
authority to bind the Company only to appropriate risks. The agent is also
interviewed at the Company's office in order to confirm the compatibility
between the agent and the Company's underwriting staff. Such a comprehensive
review is necessitated by the Company's philosophy of establishing an agent
relationship only if it has long-term potential. These same standards of review
are applied to all agents regardless of affiliation.
Once appointed, the Company provides each general agent with a
comprehensive agency manual which enables the agent to begin writing business
immediately. The manual allows the agent to efficiently write coverages
consistent with the Company's comprehensive underwriting guidelines. The agents
are provided carefully detailed limited binding authority, based on the
simplified ISO rates and forms, to write a variety of property, general
liability, commercial multi-peril and personal automobile business, provided
that the risks and terms involved in a particular coverage are within the
guidelines set forth in the agency manual. The Company has devoted extensive
research to the development of the detailed agency manual to enable its agents
to consistently select and price risks. The Company's manual is regularly
updated to be responsive to the realities of the changing marketplace.
The Company also writes business on a submit basis from its general agents.
The Company devotes substantial personal attention and resources to the
continuous monitoring and support of its general agents.
The Company's general agents that operate under the name Delaware Valley
Underwriting Agency ("DVUA") are wholly-owned subsidiaries of Penn Independent,
the Company's largest shareholder. DVUA generated approximately 4.8% of the
Company's gross written premiums in 1996.
The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1996 December 31, 1995 December 31, 1994
Amount Percent Amount Percent Amount Percent
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Pacific $29,435 36.6% $24,823 37.2% $21,560 40.0%
South 15,677 19.5 12,519 18.7 9,601 17.8
Mid-Atlantic 10,665 13.2 10,607 15.8 8,976 16.6
New England 7,832 9.7 7,849 11.7 6,228 11.6
Southwest 11,693 14.5 7,949 11.9 5,601 10.4
Midwest 4,685 5.8 2,977 4.4 1,911 3.5
Mountain 509 0.7 229 0.3 49 0.1
======= ===== ======= ===== ======= =====
$80,496 100.0% $66,953 100.0% $53,926 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
Page 6
<PAGE>
(e) Underwriting and Pricing
All policies written by the Company are either generated by the general
agents pursuant to their binding authority or on a submission basis from the
general agents if the risk falls outside of that authority. In 1996,
approximately 85% of the commercial policies written by the Company were on a
binding authority basis, generating approximately 80% of the Company's
commercial lines gross written premiums. The personal automobile program is
written 100% on a binding authority basis. The Company has established strict
underwriting guidelines within the terms of its agency manual which identify the
risks that (1) are within the binding authority of the general agents, (2) must
be submitted to the Company, and (3) risks which are prohibited from their
binding authority. The agency manual was prepared and is continuously updated by
the Company's underwriting staff after extensive research, including input from
its reinsurers. Generally, the Company provides its agents with pricing
flexibility on a per policy basis, with the objective that in the aggregate the
weighted average premium of all new policies and renewals written by an agent
are at approximately 120% and 110% of ISO, respectively. The Company's rates
generally range from 50%-100% higher than the rates of most standard carriers
for comparable risks, who typically price lower than ISO rates. The Company's
underwriting staff carefully monitors its general agents and performs on-site
reviews and underwriting audits of its agents on a periodic basis for quality
and compliance with Company guidelines.
With respect to risks written by general agents under binding authority, the
Company generally has 60 days from the effective date to cancel a policy if the
risk insured does not comply with the Company's underwriting guidelines. In the
event an agent exceeds its authority by binding the Company on a risk where the
agent had no authority to do so, the Company is at risk for that policy until it
receives the policy and effects a cancellation. General agents must deliver all
policies to the Company within 35 days of the date written. The Company monitors
this activity closely through its computer system and underwriting department.
The risks the Company writes on a submit basis are generally similar to the
binding authority classes, but may have larger loss limits or greater
complexity. In determining whether to accept such risks, the Company's
underwriting staff will review such factors as the type of risk, the agent's
knowledge and control of the risk, potential underwriting profitability, and
historical data regarding any similar risk previously underwritten by the
Company. During this process, the Company will quote a proposed premium
reflecting relevant ISO rates, if available, and adjustments that may be
warranted based on the individual characteristics of the particular risk. The
underwriting staff then assembles a complete underwriting file with respect to
the particular submission and specific approval procedures are employed,
depending on the characteristics and magnitude of the particular risk.
(f) Claims Management and Administration
The Company's approach to claims management is designed to investigate
reported incidents at the earliest juncture, to select, manage and supervise all
legal and adjustment aspects thereof, and generally to service producing agents
and insureds throughout the claims process. The Company's general agents have no
authority to settle claims or otherwise exercise control over the claims
process. All commercial and personal lines claims are supervised and processed
centrally by the Company's claims management staff.
(g) Losses and Loss Adjustment Expenses
The Company is directly liable for losses and loss adjustment expenses
payments under the terms of
Page 7
<PAGE>
insurance policies that it writes. In many cases, several years may elapse
between the occurrence of an insured loss, the reporting of the loss to the
Company and the Company's payment of that loss. The Company reflects its
liability for the ultimate payment of all incurred losses and loss adjustment
expenses by establishing loss and loss adjustment expense reserves for both
reported and unreported claims, which are balance sheet liabilities representing
estimates of future amounts needed to pay claims and related expenses.
When a claim involving a probable loss is reported, the Company establishes
a case reserve for the estimated amount of the Company's ultimate loss and loss
adjustment expense payments. The estimate of the amount of the ultimate loss is
based upon such factors as the type of loss, jurisdiction of the occurrence,
knowledge of the circumstances surrounding the claim, severity of injury or
damage, potential for ultimate exposure and policy provisions relating to the
claim. The estimate of the amount of the loss adjustment expense is determined
by management and reviewed by the Company's independent actuarial consultant and
includes the estimated expense of settling the claim, including legal and other
fees, and general expenses of administering the claims adjustment process.
Annually, management, in conjunction with its independent actuarial consultant,
establishes reserves on an aggregate basis to provide for incurred but not
reported losses ("IBNR"), as well as future developments on losses reported to
the Company. The Company does not discount its loss reserves based upon the
expected time lag until payment.
The estimates of reserves are subject to the effect of trends in claims
severity and frequency and are continually reviewed. As part of this process,
historical data are reviewed and consideration is given to the anticipated
effect of various factors, including known and anticipated legal developments,
changes in social attitudes, inflation and economic conditions. As experience
develops and other data become available, these estimates are revised, as
required, resulting in increases or decreases to existing reserves. Adjustments
are reflected in results of operations in the period in which they are made.
The following table sets forth a reconciliation of beginning and ending
reserves as shown on the Company's financial statements (on a GAAP basis gross
of reinsurance) for unpaid losses and loss adjustment expenses for the periods
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Reserves for unpaid losses and loss adjustment expenses,
at beginning of year $60,139 $44,796 $33,314
-------- -------- --------
Incurred losses and loss adjustment expenses:
Provision for insured events of the current year 48,076 40,606 30,652
Increase (decrease) in provision for insured
events of prior years 3,744 3,377 (518)
-------- -------- --------
Total incurred losses and loss adjustment expenses 51,820 43,983 30,134
-------- -------- --------
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year 17,931 13,054 9,855
Losses and loss adjustment expenses attributable
to insured events of prior years 23,300 15,586 8,797
-------- -------- --------
Total payments 41,231 28,640 18,652
-------- -------- --------
Reserves for unpaid losses and loss adjustment expenses,
at end of year $70,728 $60,139 $44,796
======== ======== ========
</TABLE>
Page 8
<PAGE>
The Company has experienced an (unfavorable) development of gross reserves
of ($3.7) million and ($3.4) million in 1996 and 1995, and favorable development
of $518,000 in 1994, respectively, for prior year's insured events, while the
net reserves had favorable development during that same time period of $804,000,
$1.0 million and $2.3 million in 1996, 1995 and 1994, respectively. The
unfavorable development on the gross reserves occurred primarily on the gross
reserves held as of December 31, 1993. Prior to 1993, the Company focused
primarily on net reserving, rather than direct reserving, consequently, the
direct IBNR reserves were insufficient to cover future development.
Additionally, the Montrose decision in California set precedent by establishing
that California was a "continuous trigger" state. Therefore, a loss occurrence
can be triggered on many dates and for multiple policy periods rather than just
one. This decision caused the Company to reevaluate our contractor business in
California, and was a primary factor in the reduction of commercial general
liability premium for 1996.
The following table represents the development of unpaid loss and loss
adjustment expense reserves during the ten years ended December 31, 1996. The
top of the table reflects the ten year development of the Company's reserves net
of reinsurance. The bottom of the table reconciles 1996, 1995, 1994, 1993, and
1992 ending reserves to the gross reserves in the Company's consolidated
financial statements. Prior to 1992, the Company developed its reserves on a net
of reinsurance basis and restatement for those prior years is not presented. The
top line of the table shows the estimated reserve for unpaid losses and loss
adjustment expenses at the balance sheet date for each of the indicated years.
These figures represent the estimated amount of unpaid losses and loss
adjustment expenses for claims arising in all prior years that were unpaid at
the balance sheet date, including losses that had been incurred but not yet
reported. The table also shows the re-estimated amount of the previously
recorded reserve based on experience as of the end of each succeeding year. The
estimate changes as more information becomes known about the frequency and
severity of claims.
Page 9
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, (in thousands)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid losses and $12,200 $18,618 $21,741 $25,391 $25,352 $25,681 $26,110 $26,830 $35,307 $46,512 $55,656
loss adjustment expenses,
as stated
a. Net cumulative paid as of
1 year later $4,232 $4,641 $4,911 $8,655 $6,929 $6,605 $7,381 $6,852 $12,384 $17,210
2 years later 6,491 6,995 10,743 13,361 11,610 10,988 11,127 13,127 20,617
3 years later 7,884 11,728 14,132 16,952 14,667 13,325 15,546 18,656
4 years later 9,827 14,127 15,823 19,050 16,341 16,417 19,253
5 years later 11,171 15,209 17,074 20,359 18,363 19,283
6 years later 11,623 16,023 17,405 21,866 20,214
7 years later 12,043 16,219 18,303 23,383
8 years later 12,052 16,636 19,248
9 years later 12,399 17,157
10 years later 12,512
b. Reserves re-estimated as
of end of year
1 year later $13,734 $18,483 $21,036 $25,128 $23,468 $23,228 $24,478 $23,897 $33,601 $45,708
2 years later 13,777 18,054 21,396 24,329 22,658 22,383 21,945 23,489 34,281
3 years later 13,505 18,370 20,570 23,923 22,252 20,471 22,032 24,558
4 years later 13,555 17,739 20,206 23,615 21,465 20,819 22,767
5 years later 13,440 17,552 19,822 23,639 21,469 21,726
6 years later 12,861 17,342 19,499 24,021 21,990
7 years later 12,983 17,488 19,621 24,683
8 years later 12,878 17,432 20,222
9 years later 12,964 17,932
10 years later 13,091
Net cumulative redundancy
(deficiency) ($891) $686 $1,519 $708 $3,362 $3,955 $3,343 $2,272 $1,026 $804
Gross liability for unpaid
losses and loss adjustment
expenses, as stated $31,703 $33,314 $44,796 $60,140 $70,728
Reinsurance recoverable 5,593 6,484 9,489 13,628 15,072
Net liability for unpaid losses
and loss adjustment
expenses, as stated $26,110 $26,830 $35,307 $46,512 $55,656
Gross liability re-estimated
- 1 year later $30,609 $32,796 $48,173 $63,884
Reinsurance recoverable
re-estimated 6,131 8,899 14,572 18,191
Net liability re-estimated
- 1 year later $24,478 $23,897 $33,601 $45,693
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross liability re-estimated
- 2 years later $30,390 $36,243 $53,009
Reinsurance recoverable
re-estimated 8,445 12,574 18,728
Net liability re-estimated
- 2 years later $21,945 $23,699 $34,281
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross liability re-estimated
- 3 years later $33,992 $41,600
Reinsurance recoverable
re-estimated 11,960 17,041
Net liability re-estimated
- 3 years later $22,032 $24,588
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross liability re-estimated
- 4 years later $38,165
Reinsurance recoverable
re-estimated 15,399
Net liability re-estimated
- 4 years later $22,767
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross cumulative redundancy
(deficiency) ($6,462) ($8,286) ($8,213) ($3,744)
</TABLE>
a. Net cumulative paid "as of" equals the amounts of paid losses and loss
adjustment expenses subsequent to the year in which the original reserves
were established.
b. Reserves re-estimated "as of" equals the amounts of unpaid losses and loss
adjustment expenses which the company would have originally established
based on experience as of the end of each succeeding year. These amounts
were calculated as the sum of the cumulative paid amounts described in (a.)
above plus the amounts of unpaid losses and loss adjustment expenses
reevaluated at the end of each succeeding year end.
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<PAGE>
The cumulative redundancy or deficiency represents the aggregate change in
the reserve estimates over all prior years. It should be emphasized that the
table presents a run-off of balance sheet reserves rather than accident or
policy year loss development. Therefore, each amount in the table includes the
effects of changes in reserves for all prior years.
The following table sets forth ratios for the Company and the industry
prepared in accordance with statutory accounting practices ("SAP") prescribed or
permitted by state insurance authorities. The statutory combined ratio, which
reflects underwriting results but not investment income, is a traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio is the sum of (i) the ratio of incurred losses and loss adjustment
expenses to net earned premium ("loss ratio"); and (ii) the ratio of expenses
incurred for commissions, premium taxes, administrative and other underwriting
expenses to net written premium ("expense ratio").
Year ended December 31,
1996 1995 1994
The Company:
SAP Basis
Loss and loss adjustment expense ratio 62.7% 62.6% 62.2%
Expense ratio 31.6 30.4 32.3
==== ==== ====
Combined ratio 94.3% 93.0% 94.5%
==== ==== ====
Year ended December 31,
1996 1995 1994
Property and casualty insurance industry (1):
SAP Basis
Loss and loss adjustment expense ratio 79.8% 78.9% 81.2%
Expense ratio 26.2 26.3 26.0
Dividend ratio 1.0 1.3 1.3
===== ===== =====
Combined ratio 107.0% 106.5% 108.5%
===== ===== =====
(1) Source: Industry Estimate for 1997, Best Week, P/C Supplement, January 6,
1997 edition, including dividend ratios.
(h) Reinsurance
Consistent with industry practice for companies of its size, the Company
purchases reinsurance through contracts called "treaties" to reduce its exposure
to liability on individual risks, and to protect against catastrophic losses.
Reinsurance involves an insurance company transferring or "ceding" a portion of
its exposure on a risk to another insurer (the "reinsurer"). The reinsurer
assumes the exposure in return for a portion of the premium. The ceding of
liability to a reinsurer does not legally discharge the primary insurer from its
liability for the full amount of the policies on which it obtains reinsurance.
The primary insurer will be required to pay the entire loss if the reinsurer
fails to meet its obligations under the reinsurance agreement.
Page 11
<PAGE>
In formulating its reinsurance programs, the Company is selective in its
choice of reinsurers and considers numerous factors, the most important of which
are the financial stability of the reinsurer, its history of responding to
claims and its overall reputation. In an effort to minimize its exposure to the
insolvency of its reinsurers, the Company evaluates the acceptability and
monitors the financial condition of each reinsurer and, on an annual basis,
conducts a detailed review. The Company's policy is to use only reinsurers that
have Best ratings of at least A (Excellent) and are within a Best financial size
category of a least IX; ($250 million or greater in assets).
In May of 1996, the Company transferred all of its commercial casualty and
property treaty reinsurance programs to General Reinsurance Corporation ("Gen
Re") from National Reinsurance Corporation which had previously provided this
coverage. In so doing, the Company maintained all of its existing net retention
limits of $500,000 (including indemnity and/or loss adjustment expense) for
casualty insurance and $200,000 for property insurance, with a combined Company
retention for any one loss resulting from a common occurrence involving both the
property and casualty coverage on a single risk of $500,000. Gen Re also
provides casualty contingent excess coverage for the Company which covers
exposures such as extra contractual obligations, losses in excess of policy
limits (bad faith, errors & omissions) and the event of two or more of a
Company's insureds bringing a liability action against each other (known as
CLASH coverage).
In 1996 and 1995 the Company was covered for catastrophe losses by a
consortium of reinsurers, all of which have a Best rating of A or better, led by
Gen Re. Under the terms of the Gen Re agreement, the Company's 1996 and 1995
retention was $1.1 and $1 million, respectively. A consortium led by Gen Re
covers the next $14 and $13.9 million, respectively, of losses, with the Company
subject to a 5% participation at various layers of reinsurance coverage. In 1994
the Company purchased catastrophe coverage from Employers Re for all of its
property lines (including automobile physical damage) to limit its retention in
a case involving multiple losses such as windstorm or hurricane. In such event,
the Company retains $500,000 of the loss and Employers Re covers 95% of the next
$9,500,000 (up to a $10 million limit).
The Company may write individual risks with limits greater than the treaty
limits on a per policy basis by using facultative reinsurance. The facultative
reinsurers must also meet Penn-America's stringent guidelines and have at least
a Best rating of A and financial size category of IX.
The following table reflects the amount of premiums written and ceded under
reinsurance treaties:
Year ended December 31,
1996 1995 1994
(in thousands)
Gross written premiums $80,496 $66,953 $53,926
Total premiums ceded 7,027 5,667 5,583
(i) Investments
Insurance company investments are subject to laws and regulations that
prescribe the kind, quality and concentration of investments. In general, these
laws and regulations permit investments, within specified limits and subject to
certain qualifications, in Federal, state and municipal obligations, corporate
bonds, preferred and common equity securities, real estate mortgages and real
estate.
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<PAGE>
Penn-America's investment portfolio is under the direction of its Board of
Directors acting through an Investment Committee. The Investment Committee
establishes and monitors the Company's investment policies, which are intended
to maximize after-tax income while maintaining a high level of quality and
liquidity in its portfolio for insurance operations. The investment portfolio
consists primarily of fixed maturity, United States Government and governmental
agency securities and corporate bonds. Although Penn-America is permitted to
invest in real estate mortgages and real estate, the Company does not actively
participate in these markets and does not currently have any such investments in
its portfolio.
The Investment Committee has retained Carl Domino Associates Limited
("CDA"), a registered investment advisor, to recommend purchases and sales of
securities. CDA has limited discretionary authority to independently make
investment decisions in accordance with the investment policy established by the
Board of Directors.
The following table shows the classifications of the Company's investments at
December 31, 1996:
<TABLE>
<CAPTION>
Amount
reflected
Fair on balance Percent of
value sheet total
(In thousands)
<S> <C> <C> <C>
Fixed Maturities:
Available for sale
U.S. Treasury securities and obligations of
U.S. government agencies $20,503 $20,503 18.2%
Corporate securities 16,167 16,167 14.4
Mortgage-backed securities 8,281 8,281 7.3
Public utilities 4,003 4,003 3.6
-------- -------- -----
Total available for sale 48,954 48,954 43.5
-------- -------- -----
Held to maturity
U.S. Treasury securities and obligations of
U.S. government agencies 28,685 28,727 25.5
Corporate securities 9,266 9,294 8.3
Public utilities 6,010 6,056 5.4
Other securities 150 150 0.1
-------- -------- -----
Total held to maturity 44,111 44,227 39.3
-------- -------- -----
Total fixed maturities 93,065 93,181 82.8
-------- -------- -----
Equity investments:
Common stock 4,130 4,130 3.7
Preferred stock 8,260 8,260 7.3
-------- -------- -----
Total equity investments 12,390 12,390 11.0
-------- -------- -----
Short-term investments 7,000 7,000 6.2
======== ======== =====
Total investments $112,455 $112,571 100.0%
======== ======== =====
</TABLE>
Page 13
<PAGE>
The following table sets forth the composition of the Company's portfolio of
fixed maturity investments by rating at December 31, 1996:
<TABLE>
<CAPTION>
Amortized Percentage Cumulative
Cost of portfolio percentage
(in thousands)
Ratings (1)
<S> <C> <C> <C>
AAA (including U.S. government obligations) $59,604 63.8% 63.8%
AA 2,999 3.2 67.0
AA- 5,300 5.7 72.7
A+ 9,061 9.7 82.4
A 10,325 11.0 93.4
A- 5,034 5.4 98.8
BBB 998 1.0 99.8
Non rated 150 0.2 100.0
------- ----- -----
Total $93,471 100.0% 100.0%
======= ===== =====
</TABLE>
(1) Ratings are assigned primarily by Standard & Poor's with the remaining
ratings assigned by Moody's and converted to the equivalent Standard &
Poor's ratings.
The following table sets forth investment results of the Company for each of
the years in the three years ended December 31, 1996:
1996 1995 1994
(in thousands)
Interest on fixed maturities $6,108 $4,615 $3,294
Dividends on equity securities 691 533 564
Interest on short-term investments 380 291 139
Other 61 42 35
------- ------- -------
Total investment income 7,240 5,481 4,032
Investment expense (535) (414) (397)
------- ------- -------
Net investment income $6,705 $5,067 $3,635
======= ======= =======
(j) Competition
The property and casualty insurance industry is highly competitive and
includes several thousand insurers, ranging from large companies offering a wide
variety of products worldwide to smaller, specialized companies in a single
state or region and offering in some cases only a single product. The Company
competes with a significant number of these insurers in attracting quality
agents and in selling insurance products. Some of the Company's existing or
potential competitors are larger, have considerably greater financial and other
resources, have greater experience in the insurance industry and offer a broader
line of insurance products than the
Page 14
<PAGE>
Company. The Company competes with other insurers and surplus lines or
nonstandard insurers, new forms of insurance organizations (such as risk
retention groups), and alternative self-insurance mechanisms. The Company
believes that in order to be successful in its market, it must be aware of
pricing cycles, must be able to minimize the impact of the cycle by good expense
control and good customer service, and must continuously identify profitable
opportunities.
(k) Regulation
General. The Company is subject to regulation under the insurance statutes,
including insurance holding company statutes, of the various states in which
Penn-America does business. These statutes are generally designed to protect the
interests of insurance policyholders, as opposed to the interests of
shareholders, and they relate to such matters as the standards of solvency which
must be met and maintained; the licensing of insurers and their agents; the
nature and limitations of investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates; periodic examination
of the affairs of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums and losses; and
requirements regarding numerous other matters. All insurance companies must file
annual statements with certain state regulatory agencies and are subject to
regular and special financial and other examinations by those agencies. The last
regulatory financial examination of Penn-America was completed by the
Pennsylvania Insurance Department in 1995 covering the five year period ended
December 31, 1994.
Penn-America is licensed as an admitted insurer in 22 states and is an
approved non-admitted (surplus lines) insurer in the other 28 states plus the
District of Columbia. All surplus lines insurance is written through licensed
surplus lines insurance agents and brokers who are required to certify that a
certain number of licensed admitted insurers will not write a particular risk
prior to placing that risk with the surplus lines insurer.
Insurance Holding Company Laws. Pennsylvania, Penn-America's state of
domicile, and California, where Penn-America is considered to be "commercially
domiciled" by that state's insurance department, have laws governing insurers
and insurance holding companies such as the Company. The Pennsylvania and
California statutes generally require insurers and insurance holding companies
to register and file reports concerning their capital structure, ownership,
financial condition and general business operations. Under both statutes, a
person generally must obtain the respective Insurance Department's approval to
acquire, directly or indirectly, 10% or more of the outstanding voting
securities of the Company or its insurance subsidiary. In both states, the
insurance department's determination of whether to approve any such acquisition
is based on a variety of factors, including an evaluation of the acquirer's
financial condition, the competence of its management and whether competition
would be reduced. All transactions within a holding company's system affecting
an insurer must be fair and reasonable, and the insurer's policyholders' surplus
following any such transaction must be both reasonable in relation to its
outstanding liabilities and adequate for its needs. Notice to applicable
regulators is required prior to the consummation of certain transactions
affecting insurance subsidiaries of the holding company system.
Dividend Restrictions. As an insurance holding company, PAGI is dependent on
dividends and other permitted payments from Penn-America to provide cash for the
payment of any cash dividends to its shareholders and repayment of its loan
obligation and related interest expense. The payment of dividends to PAGI by
Penn-America is subject to state regulations, primarily the insurance laws of
Pennsylvania and
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<PAGE>
California. Generally, these laws provide that, unless prior approval is
obtained, dividends of a property and casualty insurance company in any
consecutive 12-month period shall not exceed the greater of 100% of its
statutory net income for the most recent calendar year or 10% of its statutory
policyholders' surplus as of the preceding year end. See Note 10 to the
consolidated financial statements for disclosures of statutory policyholders'
surplus and the maximum annual dividends payable by Penn-America without prior
approval. Insurance regulators have broad powers to prevent reduction of
statutory surplus to inadequate levels, and there is no assurance that dividends
of the maximum amounts calculated under any applicable formula would be
permitted.
Insurance Guaranty Funds. Under insolvency or guarantee laws in states in
which Penn-America is licensed as an admitted insurer, organizations have been
established (often referred to as guaranty funds) with the authority to assess
admitted insurers up to prescribed limits for the claims of policyholders
insured by insolvent, admitted insurance companies. Surplus lines insurance
companies are generally not subject to such assessments, but neither are their
policyholders eligible to file claims against the guaranty funds.
Additional Legislation or Regulations. New regulations and legislation are
proposed from time to time to limit damage awards, to bring the industry under
regulation by the Federal government, to control premiums, policy terminations
and other policy terms, and to impose new taxes and assessments. Regulations
adopted in November 1993 by the National Association of Insurance Commissioners
("NAIC") and a number of states, have imposed higher minimum policyholders'
surplus requirements and risk based capital rules on domestic insurance
companies. These regulations require insurers generally to improve their capital
positions to remain competitive.
Difficulties with insurance availability and affordability have increased
legislative activity at both the Federal and state levels. Some state
legislatures and regulatory agencies have enacted measures to limit midterm
cancellations and require advance notice of renewal intentions. In addition,
Congress is investigating possible avenues for Federal regulation of the
insurance industry. The Company believes that none of the legislation mentioned
above will not have a material effect on its financial position.
(l) Employees
As of March 10, 1997, the Company had 96 employees. The Chairman of the
Board of Directors of the Company and certain other Directors devote a portion
of their time to the management of Penn Independent, the Company's largest
shareholder. See Item 13; "Certain Relationships and Related Transactions". The
Company is not a party to any collective bargaining agreements and believes that
its employee relations are good.
ITEM 2. PROPERTIES
The Company leases approximately 22,000 square feet in a stone and masonry
office building located in Hatboro, Pennsylvania. The office building also
houses Penn Independent and its subsidiaries. The Company leases the space from
Mr. Irvin Saltzman, Chairman of the Board of Directors of the Company, pursuant
to a lease agreement which expires on June 30, 2000, and provides for an annual
rental payment of $260,232, which amount is considered by the Company and Mr.
Irvin Saltzman to be at fair market value. See Item 13 "Certain Relationships
and Related Transactions."
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to routine legal proceedings in the normal course of
operating its insurance business. The Company is not involved in any legal
proceedings which reasonably could be expected to have a materially adverse
impact on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1996 to a vote of
holders of the Company's Common Stock.
Page 17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The "Market for Common Stock and Related Security Holder Matters" section on
page 25 of the Company's annual report to stockholders for the year ended
December 31, 1996, which is included as Exhibit (13) to this Form 10-K Report,
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Data" section on page 8 of the
Company's Annual Report to stockholders for the year ended December 31, 1996,
which is included as Exhibit (13) to this Form 10-K Report, is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The "Management's Discussion and Analysis of Results of Operations and
Financial Condition" section on pages 9 to 13 of the Company's Annual Report to
stockholders for the year ended December 31, 1996, which is included as Exhibit
(13) to this Form 10-K Report, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements on pages 14 to 24 of the Company's
Annual Report to stockholders for the year ended December 31, 1996, which is
included as Exhibit (13) to this Form 10-K Report, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Director's information will be contained in the Company's definitive
Proxy Statement with respect to the Company's 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is hereby incorporated
by reference thereto.
Executive Officers of the Registrant as of March 10, 1997 are as follows:
Irvin Saltzman 74 Chairman of the Board of Directors of PAGI
and Penn-America
Jon S. Saltzman 39 President and Chief Executive Officer of PAGI
and Penn-America, and Director
Rosemary R. Ferrero, CPA 41 Vice President - Finance, Secretary and
Treasurer of PAGI, Vice President, Secretary
and Chief Financial Officer of Penn-America
John M. DiBiasi, CPCU 42 Executive Vice President, Underwriting and
Marketing of Penn-America
Thomas J. Reed 52 Senior Vice President, Claims of Penn-America
Mr. Irvin Saltzman is the founder of Penn-America and of Penn Independent,
and for more than five years was the Chief Executive Officer and Chairman of the
Board of both corporations. Mr. Saltzman has been Chairman of the Board of
Directors of PAGI since its formation in July 1993. Mr. Saltzman has been active
in the insurance industry since 1947.
Mr. Jon S. Saltzman has been President and Chief Executive Officer of PAGI
since its formation in July 1993. He has been President and Chief Executive
Officer of Penn-America since June 1993. Mr. Saltzman was President and Chief
Operating Officer of Penn-America from June 1989 until June 1993, was Executive
Vice President and Chief Operating Officer of Penn-America from June 1988 until
June 1989 and was Vice President, Marketing of Penn-America from January 1986
until June 1988. Mr. Saltzman is Mr. Irvin Saltzman's son.
Ms. Ferrero has been Vice President-Finance of PAGI since March 1995,
Treasurer of PAGI since August 1994 and Vice President and Chief Financial
Officer of Penn-America since May 1994. She has been Secretary of PAGI and
Penn-America since January 1997. Prior to joining Penn-America, Ms. Ferrero was
employed by Coopers and Lybrand for over 18 years as a Senior Financial Services
Manager in their audit practice.
Mr. DiBiasi has been Executive Vice President, Underwriting and Marketing
of Penn-America since May 1994. Previously, Mr. DiBiasi had served in the same
capacity as Vice President since January 1989. From January 1988 until January
1989 he was Manager, Marketing Research and Product Development of Penn-
Page 19
<PAGE>
America. From 1983 until joining Penn-America in 1988, Mr. DiBiasi was Senior
Manager, Commercial Lines of American Reliance Insurance Companies, of
Lawrenceville, New Jersey. Mr. DiBiasi was employed by Insurance Services Office
(ISO) from 1977 to 1983.
Mr. Reed has been Senior Vice President, Claims of Penn-America since May
1995 and was Vice President, Claims from 1987 to May 1995. Prior to joining
Penn-America, Mr. Reed was the Claims Manager for the Philadelphia office of The
Hartford Group.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1997 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1997 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1997 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Page 20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements, financial statement
schedules and exhibits are filed as part of this report:
1. Consolidated Financial Statements
Page*
Consolidated Balance Sheets at December 31, 1996 and 1995 14
Consolidated Statements of Earnings for the years ended
December 31, 1996, 1995, and 1994 15
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994 16
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 17
Notes to Consolidated Financial Statements 18-23
Independent Auditors' Report 24
The following consolidated financial statement schedules for the years 1996,
1995 and 1994 are submitted herewith:
2. Financial Statement Schedules
Schedule I. Summary of Investments - Other Than Investments
in Related Parties
Schedule II. Condensed Financial Information of Parent Company
Schedule III. Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI. Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries
Independent Auditors' Consent and Report on Schedules (filed as Exhibit 23).
All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes
thereto.
* Refers to the respective page of Penn-America Group's 1996 Annual Report to
Stockholders. The Consolidated Financial Statements and Independent Auditors'
Report on pages 14 to 24 are incorporated herein by reference. With the
exception of the portions of such Annual Report specifically incorporated by
reference in this Item and Items 5, 6, 7 and 8, such Annual Report shall not be
deemed filed as part of this Form 10-K or otherwise subject to the liabilities
of Section 18 of the Securities and Exchange Act of 1934. * Constitutes a
compensatory plan or arrangement required to be filed as an exhibit to this
form.
Page 21
<PAGE>
3. Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 (No.
33-66892) filed with the Securities and Exchange Commission on
August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance Company
("Penn-America") and Carnegie General Agency. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.3 1993 Casualty Excess of Loss Reinsurance Agreement with National
Reinsurance Corporation. Incorporated by reference to Exhibit
10.3 to the Registrant's Registration Statement on Form S-1 (No.
33-66892) filed with the Securities and Exchange Commission on
August 2, 1993.
10.3(i) Endorsement Nos. 4 through 6 (Termination Endorsement) to
Casualty Excess of Loss Reinsurance Agreement with National
Reinsurance Corporation.
10.4 1993 Underlying Homeowners and Dwelling Fire Property Per Risk
Excess of Loss Reinsurance (Run-off Business) Agreement with
National Reinsurance Corporation. Incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial) Reinsurance
Agreement with Employers Reinsurance Corporation. Incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.5(i) Endorsement No. 3 to Property Per Risk of Excess Loss
(Commercial) Reinsurance Agreement with Employers Reinsurance
Corporation. Filed with the Registrant's Report on Form 10-K for
the period ending December 31, 1994 which has been filed with the
Securities and Exchange Commission.
10.6 1993 Property Catastrophe Excess Reinsurance Agreement with
Employers Reinsurance Corporation. Incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on Form
S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
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<PAGE>
Exhibit No. Description
10.6(i) Endorsement No. 6 to Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation. Filed with to
the Registrant's Report on Form 10-K for the period ending
December 31, 1994 which has been filed with the Securities and
Exchange Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance Corporation
effective January 1, 1995. Filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1994 which has been
filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993 between Penn Independent
Corporation ("Penn Independent") and the Registrant regarding the
reimbursement of certain employment costs. Incorporated by
reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20, 1993
Agreement between Penn Independent and Registrant regarding the
sharing of certain operating costs. Filed with Registrant's
Report on Form 10-K for the period ended December 31, 1995 which
has been filed with the Securities and Exchange Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996, to August 20,
1993 Agreement between Penn Independent and Registrant regarding
the sharing of certain operating costs.
10.8 Agreement dated August 20, 1993 between Penn Independent and the
Registrant regarding the sharing of certain operating costs.
Incorporated by reference to Exhibit 10.8 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (No.
33-66892) filed with the Securities and Exchange Commission on
August 26, 1993.
10.9 Restated Investment Advisory Agreement effective July 1, 1990
between Penn America and Carl Domino Associates, L.P.
Incorporated by reference to Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 2, 1993.
* 10.10 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.10 to Amendment No. 4 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on September 29, 1993.
* Constitutes a compensatory plan or arrangement required to be filed as an
exhibit to this form.
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<PAGE>
Exhibit No. Description
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended
and restated April 4, 1994. Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (No.
33-82728) filed with the Securities and Exchange Commission on
August 11, 1994.
10.11(ii) Lease effective June 30, 1995 between Registrant and Irvin
Saltzman. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.12 Demand Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America.
Incorporated by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the Registrant to
Penn Independent. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.13(i) Amendment No.1 dated November 30, 1995, to Demand Promissory Note
dated January 12, 1993 from Penn Independent Financial Services,
Inc. to Penn-America.
10.14 1995 Multiple Line Excess of Loss (Casualty and Property)
Reinsurance Agreement with National Reinsurance Corporation.
Filed with Registrant's Report on Form 10-K for the period ended
December 31, 1995 which has been filed with the Securities and
Exchange Commission.
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with General
Reinsurance Corporation effective May 1, 1996.
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<PAGE>
Exhibit No. Description
10.15 1995 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1994 which
has been filed with the Securities and Exchange Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive Compensation
Plan, incorporated as Part I to Registrant's Registration
Statement on Form S-8 (No. 333-00050) filed with the Securities
and Exchange Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and Profit Sharing
Plan, incorporated as Exhibit 4 to Registrant's Registration
Statement on Form S-3 (No. 333-00046) filed with the Securities
and Exchange Commission on January 4, 1996.
10.18 Stipulation of Termination of Property and Liability Reinsurance
Agreement with National Reinsurance Corporation effective May 1,
1996.
13. 1996 Annual Report to Shareholders.
21. As of December 31, 1996, the Registrant's only subsidiary is
Penn-America Insurance Company, a Pennsylvania Corporation.
23. Independent Auditor's Consent and Report on Schedules.
28.1 Loan and Security Agreement, Term Note and Stock Pledge Agreement
dated December 20, 1995 between Registrant and PNC Bank
(successor to Midlantic Bank, N.A). Filed with Registrant's
Report on Form 10-K for the period ending December 31, 1995 which
has been filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
Page 25
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule I - Summary of Investments - Other than Investments in Related Parties
(in thousands)
<TABLE>
<CAPTION>
December 31, 1996
Amortized Amount shown on
Cost Fair Value Balance Sheet
<S> <C> <C> <C>
Fixed maturities:
Available for sale
U.S. treasury securities and obligations of
U.S. government agencies $20,767 $20,503 $20,503
Corporate securities 16,053 16,167 16,167
Mortgage-backed securities 8,376 8,281 8,281
Public utilities 4,048 4,003 4,003
-------- -------- --------
Total available for sale 49,244 48,954 48,954
-------- -------- --------
Held to maturity
U.S. treasury securities and obligations of
U.S. government agencies $28,727 28,685 28,727
Corporate securities 9,294 9,266 9,294
Public utilities 6,056 6,010 6,056
Other securities 150 150 150
-------- -------- --------
Total held to maturity 44,227 44,111 44,227
-------- -------- --------
Total fixed maturities 93,471 93,065 93,181
-------- -------- --------
Equity investments:
Common stocks 2,503 4,130 4,130
Preferred stocks 8,094 8,260 8,260
-------- -------- --------
Total equity investments 10,597 12,390 12,390
-------- -------- --------
Short term investments: 7,000 7,000 7,000
-------- -------- --------
Total investments $111,068 $112,455 $112,571
======== ======== ========
</TABLE>
Page 26
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Balance Sheets
(in thousands except share data)
(share and per share data restated for 3-for-2 stock split in January, 1997)
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
Cash $369 $77
Investment in subsidiary, equity method 50,669 46,352
Other assets 514 240
------------ ------------
Total assets $51,552 $46,669
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $215 $269
Note payable, affiliate -- 150
Note payable, bank 9,000 10,000
------------ ------------
Total liabilities 9,215 10,419
------------ ------------
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 1996; 6,676,131 and 1995; 4,430,000
shares, respectively 67 44
Additional paid-in capital 21,844 21,608
Unrealized investment gains, net 993 1,501
Retained earnings 19,533 13,251
------------ ------------
42,437 36,404
Unearned compensation from restricted stock awards (100) (154)
------------ ------------
Total stockholders' equity 42,337 36,250
------------ ------------
Total liabilities and stockholders' equity 51,552 $46,669
============ ============
</TABLE>
Page 27
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Statements of Earnings
(in thousands except per share data)
(per share data restated for 3-for-2 stock split in January, 1997)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Dividend income $3,258 $1,300 $450
Other 10 -- --
Operating expenses (1,653) (1,121) (600)
Income tax benefit 552 380 203
------- ------- -------
Income before equity in undistributed
net income of subsidiary 2,167 559 53
Equity in undistributed net earnings
of subsidiary 4,826 5,467 3,358
------- ------- -------
Net earnings $6,993 $6,026 $3,411
======= ======= =======
Net earnings per share $1.05 $0.91 $0.51
======= ======= =======
Cash dividends per share $0.11 $0.06 --
======= ======= =======
</TABLE>
Page 28
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule II - Condensed Financial Information of Parent Company
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $6,993 $6,026 $3,411
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed net earnings of subsidiary (4,826) (5,467) (3,358)
Increase (decrease) in :
Accounts payable and accrued expenses (54) 30 18
Other, net (352) (129) (87)
Amortization 133 83 56
-------- -------- --------
Net cash provided by operating activities 1,894 543 40
-------- -------- --------
Cash flows from financing activities:
Expenses related to 1993 Initial Stock Offering -- -- (29)
Repayment of note payable, bank (1,000) (1,000) --
Proceeds of note payable, bank -- 10,000 1,000
Issuance of common stock 259 -- --
Repayment of note payable, affiliate (150) (200)
Equity contributions to subsidiary -- (9,000) (1,000)
Dividends paid (711) (398) --
-------- -------- --------
Net cash used by financing activities (1,602) (598) (29)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 292 (55) 11
Cash and cash equivalents, beginning of period 77 132 121
-------- -------- --------
Cash and cash equivalents, end of period $369 $77 $132
======== ======== ========
</TABLE>
Page 29
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule III - Supplementary Insurance Information
Years Ended December 31, 1996, 1995, 1994
(in thousands)
<TABLE>
<CAPTION>
Liability Amortization
for Unpaid of
Deferred Losses and Losses Deferred
Policy Loss Net and Loss Policy Other
Acquisition Adjustment Unearned Earned Investment Adjustment Acquisition Underwriting Premiums
Costs Expenses Premiums Premiums Income Expenses Costs Expenses Written
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net of reinsurance:
Year Ended:
December 31, 1996 $7,231 $55,656 $28,197 $69,081 $6,705 $43,292 $17,785 $4,349 $73,469
December 31, 1995 5,716 46,512 23,807 57,228 5,067 35,835 14,237 4,356 61,286
December 31, 1994 4,821 35,307 19,750 39,985 3,635 24,855 9,381 3,600 48,343
Gross:
Year Ended:
December 31, 1996 $7,231 $70,728 $30,865 $75,876 $6,705 $51,820 $17,785 $4,349 $80,496
December 31, 1995 5,716 60,139 26,245 63,005 5,067 43,983 14,237 4,356 66,953
December 31, 1994 4,821 44,796 22,296 45,698 3,635 30,134 9,381 3,600 53,926
</TABLE>
Page 30
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule IV - Reinsurance
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Assumed to
Amount Companies Companies Net Amount Net
<S> <C> <C> <C> <C> <C>
1996
Premiums
Property and
liability insurance $80,496 $7,027 -- $73,469 0
------- ------- --- ------- -------
Total
Premiums $80,496 $7,027 -- $73,469 0
======= ======= === ======= =======
1995
Premiums
Property and
liability insurance $66,953 $5,667 -- $61,286 0
------- ------- --- ------- -------
Total
Premiums $66,953 $5,667 -- $61,286 0
======= ======= === ======= =======
1994
Premiums
Property and
liability insurance $53,926 $5,583 -- $48,343 0
------- ------- --- ------- -------
Total
Premiums $53,926 $5,583 -- $48,343 0
======= ======= === ======= =======
</TABLE>
page 31
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule VI - Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Liability Loss and Loss
for Unpaid Discount Adjustment Expenses
Losses and if Any, (Benefits) Incurred Paid Losses
Loss Deducted Related to and Loss
Adjustment from Current Prior Adjustment
Expenses Reserves Year Year Expenses
<S> <C> <C> <C> <C>
Year Ended
December 31, 1996 $ 70,728 $ 48,076 $ 3,744 $ 41,233
December 31, 1995 60,139 40,606 3,377 28,640
December 31, 1994 44,796 30,652 (518) 18,652
</TABLE>
Page 32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: March , 1997 By: /s/ Jon S. Saltzman
Jon S. Saltzman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
/s/ Irvin Saltzman Chairman of the Board of Directors March , 1997
Irvin Saltzman and Director
/s/ Jon S. Saltzman President, Chief Executive Officer and March , 1997
Jon S. Saltzman Director (Principal Executive Officer)
/s/ James E. Heerin, Jr. Director March , 1997
James E. Heerin, Jr.
/s/ Robert A. Lear Director March , 1997
Robert A. Lear
/s/ Rosemary R. Ferrero Vice President-Finance, Secretary and March , 1997
Rosemary R. Ferrero Treasurer (Principal Financial and
Accounting Officer)
/s/ David P. Cohen Director March , 1997
David P. Cohen
/s/ Charles Ellman Director March , 1997
Charles Ellman
/s/ M. Moshe Porat Director March , 1997
M. Moshe Porat
/s/ Jami Saltzman-Levy Director March , 1997
Jami Saltzman-Levy
/s/Lawrence J. Schoenberg Director March , 1997
Lawrence J. Schoenberg
<PAGE>
Exhibit Index
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 (No.
33-66892) filed with the Securities and Exchange Commission on
August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance Company
("Penn-America") and Carnegie General Agency. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.3 1993 Casualty Excess of Loss Reinsurance Agreement with National
Reinsurance Corporation. Incorporated by reference to Exhibit
10.3 to the Registrant's Registration Statement on Form S-1 (No.
33-66892) filed with the Securities and Exchange Commission on
August 2, 1993.
10.3(i) Endorsement Nos. 4 through 6 (Termination Endorsement) to
Casualty Excess of Loss Reinsurance Agreement with National
Reinsurance Corporation.
10.4 1993 Underlying Homeowners and Dwelling Fire Property Per Risk
Excess of Loss Reinsurance (Run-off Business) Agreement with
National Reinsurance Corporation. Incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial) Reinsurance
Agreement with Employers Reinsurance Corporation. Incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.5(i) Endorsement No. 3 to Property Per Risk of Excess Loss
(Commercial) Reinsurance Agreement with Employers Reinsurance
Corporation. Filed with the Registrant's Report on Form 10-K for
the period ending December 31, 1994 which has been filed with the
Securities and Exchange Commission.
10.6 1993 Property Catastrophe Excess Reinsurance Agreement with
Employers Reinsurance Corporation. Incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on Form
S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
<PAGE>
Exhibit No. Description
10.6(i) Endorsement No. 6 to Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation. Filed with to
the Registrant's Report on Form 10-K for the period ending
December 31, 1994 which has been filed with the Securities and
Exchange Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance Corporation
effective January 1, 1995. Filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1994 which has been
filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993 between Penn Independent
Corporation ("Penn Independent") and the Registrant regarding the
reimbursement of certain employment costs. Incorporated by
reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20, 1993
Agreement between Penn Independent and Registrant regarding the
sharing of certain operating costs. Filed with Registrant's
Report on Form 10-K for the period ended December 31, 1995 which
has been filed with the Securities and Exchange Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996, to August 20,
1993 Agreement between Penn Independent and Registrant regarding
the sharing of certain operating costs.
10.8 Agreement dated August 20, 1993 between Penn Independent and the
Registrant regarding the sharing of certain operating costs.
Incorporated by reference to Exhibit 10.8 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (No.
33-66892) filed with the Securities and Exchange Commission on
August 26, 1993.
10.9 Restated Investment Advisory Agreement effective July 1, 1990
between Penn America and Carl Domino Associates, L.P.
Incorporated by reference to Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 2, 1993.
* 10.10 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.10 to Amendment No. 4 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on September 29, 1993.
* Constitutes a compensatory plan or arrangement required to be filed as an
exhibit to this form.
<PAGE>
Exhibit No. Description
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended
and restated April 4, 1994. Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (No.
33-82728) filed with the Securities and Exchange Commission on
August 11, 1994.
10.11(ii) Lease effective June 30, 1995 between Registrant and Irvin
Saltzman. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.12 Demand Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America.
Incorporated by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the Registrant to
Penn Independent. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.13(i) Amendment No.1 dated November 30, 1995, to Demand Promissory Note
dated January 12, 1993 from Penn Independent Financial Services,
Inc. to Penn-America.
10.14 1995 Multiple Line Excess of Loss (Casualty and Property)
Reinsurance Agreement with National Reinsurance Corporation.
Filed with Registrant's Report on Form 10-K for the period ended
December 31, 1995 which has been filed with the Securities and
Exchange Commission.
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with General
Reinsurance Corporation effective May 1, 1996.
<PAGE>
Exhibit No. Description
10.15 1995 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1994 which
has been filed with the Securities and Exchange Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive Compensation
Plan, incorporated as Part I to Registrant's Registration
Statement on Form S-8 (No. 333-00050) filed with the Securities
and Exchange Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and Profit Sharing
Plan, incorporated as Exhibit 4 to Registrant's Registration
Statement on Form S-3 (No. 333-00046) filed with the Securities
and Exchange Commission on January 4, 1996.
10.18 Stipulation of Termination of Property and Liability Reinsurance
Agreement with National Reinsurance Corporation effective May 1,
1996.
13. 1996 Annual Report to Shareholders.
21. As of December 31, 1996, the Registrant's only subsidiary is
Penn-America Insurance Company, a Pennsylvania Corporation.
23. Independent Auditor's Consent and Report on Schedules.
28.1 Loan and Security Agreement, Term Note and Stock Pledge Agreement
dated December 20, 1995 between Registrant and PNC Bank
(successor to Midlantic Bank, N.A). Filed with Registrant's
Report on Form 10-K for the period ending December 31, 1995 which
has been filed with the Securities and Exchange Commission.
Exhibit 10.7(ii)
Service Agreement Amendment
Agreement effective March 1, 1996, by and between Penn Independent
Corporation, 420 S. York Road, Hatboro, Pennsylvania, 19040 ("PIC") and
Penn-America Group, Inc., 420 S. York Road, Hatboro, Pennsylvania, 19040
("PAG").
WHEREAS, the parties hereto are parties to a Service Agreement dated
August 20, 1993, as most recently amended effective January 1, 1996 (the
"Service Agreement"), and
WHEREAS, the parties wish to amend the Service Agreement effective as
of the effective date of this Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements contained herein, and intending to be legally bound,
the parties hereto agree that Exhibit A of the Service Agreement is amended to
read in its entirety as set forth on Exhibit A attached hereto and incorporated
herein by reference.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PENN INDEPENDENT CORPORATION PENN-AMERICA GROUP, INC.
BY: /s/ Robert A. Lear BY: /s/ Jon S. Saltzman
-------------------------- ------------------------------
<PAGE>
Exhibit A
Penn-Independent Employees:
Percent of Annual Total Annual
Annual Salary Charged to Salary Charged
Name Salary PAG to PAG
Irvin Saltzman $256,000 25% $64,000
James Heerin 80,000 7% 6,000
Robert A. Lear 194,000 7% 14,000
Executive Support 34,000 9% 3,000
Human Resources 209,000 35% 73,000
Mail & Supplies 58,000 35% 20,000
Maintenance 130,000 42% 55,000
-----------
$235,000
Penn Independent Allocated Overhead and Administrative Support:
Total Annual
Percent of Annual Cost Charged to
Description Annual Cost Cost Charged to PAG PAG
Office $10,000 20% $2,000
Professional 25,000 20% 5,000
Telephone 20,000 20% 4,000
Insurance 11,000 18% 2,000
Travel & Entertain. 10,000 20% 2,000
Rent 100,000 20% 20,000
Miscellaneous 10,000 20% 2,000
------------
$37,000
Retirement Packages: $53,000
============
Total Annualized Charges to PAG $325,000
Monthly Charges to PAG $27,083
<PAGE>
Service Agreement Amendment
Agreement effective January 1, 1996, by and between Penn Independent
Corporation, 420 S. York Road, Hatboro, Pennsylvania, 19040 ("PIC") and
Penn-America Group, Inc., 420 S. York Road, Hatboro, Pennsylvania, 19040
("PAG").
WHEREAS, the parties hereto are parties to a Service Agreement dated
August 20, 1993, as most recently amended effective January 1, 1995 (the
"Service Agreement"), and
WHEREAS, the parties wish to amend the Service Agreement effective as
of the effective date of this Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements contained herein, and intending to be legally bound,
the parties hereto agree that Exhibit A of the Service Agreement is amended to
read in its entirety as set forth on Exhibit A attached hereto and incorporated
herein by reference.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PENN INDEPENDENT CORPORATION PENN-AMERICA GROUP, INC.
BY: /s/ Robert A. Lear BY: /s/ Rosemary Ferrero
------------------------ --------------------
<PAGE>
Exhibit A
Penn-Independent Employees:
Percent of Annual Total
Annual Salary Charged to Annual Salary
Name Salary PAG Charged to PAG
Irvin Saltzman $256,000 64% $164,000
James Heerin 80,000 7% 6,000
Robert A. Lear 194,000 7% 14,000
Executive Support 34,000 22.5% 8,000
Human Resources 209,000 35% 73,000
Mail & Supplies 58,000 35% 20,000
Maintenance 130,000 42% 55,000
----------
$340,000
Penn Independent Allocated Overhead and Administrative Support:
Percent of Annual Total Annual
Cost Charged Cost Charged to
Description Annual Cost to PAG PAG
Office $10,000 20% $2,000
Professional 25,000 20% 5,000
Telephone 20,000 20% 4,000
Insurance 11,000 18% 2,000
Travel & Entertain. 10,000 20% 2,000
Rent 100,000 20% 20,000
Miscellaneous 10,000 20% 2,000
---------
$37,000
Retirement Packages: $53,000
=========
Total Annualized Charges to PAG $430,000
Monthly Charges to PAG $35,833
Exhibit 10.13(i)
Amendment No. 1 to
Demand Promissory Note
WHEREAS, Penn-America Insurance Company ("Penn-America") has lent Penn
Independent Financial Services, Inc. ("Borrower") $500,000.00, payable upon
demand, with interest thereon payable monthly at Continental (now Midlantic)
Bank's Floating Prime Rate plus 1/4 percent, and evidenced by a December 28,
1993 Demand Promissory Note (the "1993 Note"); and
WHEREAS, a condition of Penn-America making the loan evidenced by the 1993 Note
was Penn-America's ability to carry the 1993 Note as an admitted asset for
statutory accounting purposes; and
WHEREAS, Penn-America has been requested by its insurance regulatory authority
to, inter alia, amend the terms of the 1993 Note to provide for repayment as
specified herein; and
WHEREAS, the balance due on the 1993 Note has been reduced through payments from
Borrower to $400,000.00.
IN CONSIDERATION OF THE FOREGOING, and for other good and valuable
consideration, receipt of which is hereby acknowledged, Borrower hereby agrees
to amend the first paragraph of the 1993 Note to read as follows:
"On demand, but in no event later than by October 31, 1997, the
undersigned Penn Independent Financial Services, Inc. ("Borrower"), promises to
pay to the order of Penn-America Insurance Company the sum of Four Hundred
Thousand and No/100 Dollars ($400,000.00), with interest thereon, payable
monthly, at Midlantic Bank's Floating Prime Rate plus 1/4 percent."
All other terms and conditions of the 1993 Note shall remain in full force and
effect.
PENN INDEPENDENT FINANCIAL SERVICES, INC.
BY: /s/ Charles Conway DATE: 11/30/95
----------------------------
President
ATTEST:
BY: /s/ James E. Heerin, Jr.
----------------------------
Secretary
Exhibit 10.14(iii)
AGREEMENT OF REINSURANCE
NO. 8206
between
GENERAL REINSURANCE CORPORATION
a Delaware corporation
having its principal offices at
Financial Centre
695 East Main Street P.O. Box 10350
Stamford, Connecticut 06904-2350
(herein referred to as the "Reinsurer")
and
PENN-AMERICA INSURANCE COMPANY
420 South York Road
Hatboro, Pennsylvania 19040
(herein referred to as the "Company")
---------------------------------------------------------------------------
In consideration of the promises set forth in this Agreement, the parties agree
as follows:
Article I - SCOPE OF AGREEMENT
As a condition precedent to the Reinsurer's obligations under this
Agreement, the Company shall cede to the Reinsurer the business described in
this Agreement, and the Reinsurer shall accept such business as reinsurance from
the Company.
This Agreement is comprised of General Articles I through XII and the
Exhibit(s) listed below and each Exhibit which may be made a part of this
Agreement. The terms of the General Articles and of the Exhibit(s) shall
determine the rights and obligations of the parties. The terms of the General
Articles shall apply to each Exhibit unless specifically amended therein. In the
event of termination of all the Exhibits made a part of this Agreement, the
General Articles shall automatically terminate when the liability of the
Reinsurer under said Exhibits ceases.
EXHIBIT A - EXCESS OF LOSS REINSURANCE of Liability Business
<PAGE>
EXHIBIT B - EXCESS OF LOSS REINSURANCE of Property Business
Article II - PARTIES TO THE AGREEMENT
This Agreement is solely between the Company and the Reinsurer. When more
than one Company is named as a party to this Agreement, the first Company named
shall be the agent of the other companies as to all matters pertaining to this
Agreement. Performance of the obligations of each party under this Agreement
shall be rendered solely to the other party. However, if the Company becomes
insolvent, the liability of the Reinsurer shall be modified to the extent set
forth in the article entitled INSOLVENCY OF THE COMPANY. In no instance shall
any insured of the Company or any claimant against an insured of the Company
have any rights under this Agreement.
Article III - MANAGEMENT OF CLAIMS AND LOSSES
The Company shall investigate and settle or defend all claims and losses.
When requested by the Reinsurer, the Company shall permit the Reinsurer, at the
expense of the Reinsurer, to be associated with the Company in the defense or
control of any claim, loss, or legal proceeding which involves or is likely to
involve the Reinsurer. All payments of claims or losses by the Company within
the terms and limits of its policies which are within the limits set forth in
the applicable Exhibit shall be binding on the Reinsurer, subject to the terms
of this Agreement.
Article IV - RECOVERIES
The Company shall pay to or credit the Reinsurer with the Reinsurer's
portion of any recovery obtained from salvage, subrogation, or other insurance.
Adjustment expenses for recoveries shall be deducted from the amount recovered.
-2-
<PAGE>
The Reinsurer shall be subrogated to the rights of the Company to the
extent of its loss payments to the Company. The Company agrees to enforce its
rights of salvage, subrogation, and its rights against insurers or to assign
these rights to the Reinsurer.
If the reinsurance under an Exhibit is on a share basis, the recoveries
shall be apportioned between the parties in the same ratio as the amounts of
their liabilities bear to the loss. If the reinsurance under an Exhibit is on an
excess basis, recoveries shall be distributed to the parties in an order inverse
to that in which their liabilities accrued.
Article V - PREMIUM REPORTS AND REMITTANCES
All reinsurance premium reports required by the Exhibit(s) attached hereto
may be sent to:
ASD Treaty Accounting Department
General Reinsurance Corporation
Financial Centre
P.O. Box 10353
Stamford, CT 06904-2353
All reinsurance premiums and any other amounts due the Reinsurer may be
remitted to the following lockbox address:
General Reinsurance Corporation
P.O. Box 92555
Chicago, IL 60675-2555
Article VI - ERRORS AND OMISSIONS
The Reinsurer shall not be relieved of liability because of an error or
accidental omission of the Company in reporting any claim or loss or any
business reinsured under this Agreement, provided that the error or omission is
rectified promptly after discovery. The Reinsurer shall be obligated only for
the return of the premium paid for business reported but not reinsured under
this Agreement.
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<PAGE>
Article VII - SPECIAL ACCEPTANCES
Business not within the terms of this Agreement may be submitted to the
Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be
subject to all of the terms of this Agreement except as modified by the special
acceptance.
Article VIII - RESERVES AND TAXES
The Reinsurer shall maintain the required reserves as to the Reinsurer's
portion of unearned premium, claims, losses, and adjustment expense.
The Company shall be liable for all premium taxes on premium ceded to the
Reinsurer under this Agreement. If the Reinsurer is obligated to pay any premium
taxes on this premium, the Company shall reimburse the Reinsurer; however, the
Company shall not be required to pay taxes twice on the same premium.
Article IX - OFFSET
The Company or the Reinsurer may offset any balance, whether on account of
premium, commission, claims or losses, adjustment expense, salvage, or
otherwise, due from one party to the other under this Agreement or under any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer.
Article X - INSPECTION OF RECORDS
The Company shall allow the Reinsurer to inspect, at reasonable times, the
records of the Company relevant to the business reinsured under this Agreement,
including Company files concerning claims, losses, or legal proceedings which
involve or are likely to involve the Reinsurer.
Article XI - ARBITRATION
Any unresolved difference of opinion between the Reinsurer and the
Company shall be submitted to arbitration by three arbitrators. One arbitrator
shall be chosen by the Reinsurer,
-4-
<PAGE>
and one shall be chosen by the Company. The third arbitrator shall be chosen by
the other two arbitrators within ten (10) days after they have been appointed.
If the two arbitrators cannot agree upon a third arbitrator, each arbitrator
shall nominate three persons of whom the other shall reject two. The third
arbitrator shall then be chosen by drawing lots. If either party fails to choose
an arbitrator within thirty (30) days after receiving the written request of the
other party to do so, the latter shall choose both arbitrators, who shall choose
the third arbitrator. The arbitrators shall be impartial and shall be active or
retired persons whose principal occupation is or was as an officer of property
and casualty insurance or reinsurance companies.
The party requesting arbitration (the "Petitioner") shall submit its brief
to the arbitrators within thirty (30) days after notice of the selection of the
third arbitrator. Upon receipt of the Petitioner's brief, the other party (the
"Respondent") shall have thirty (30) days to file a reply brief. On receipt of
the Respondent's brief, the Petitioner shall have twenty (20) days to file a
rebuttal brief. Respondent shall have twenty (20) days from the receipt of
Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may
extend the time for filing of briefs at the request of either party.
The arbitrators are relieved from judicial formalities and, in addition to
considering the rules of law and the customs and practices of the insurance and
reinsurance business, shall make their award with a view to effecting the intent
of this Agreement. The decision of the majority shall be final and binding upon
the parties. The costs of arbitration, including the fees of the arbitrators,
shall be shared equally unless the arbitrators decide otherwise. The arbitration
shall be held at the times and places agreed upon by the arbitrators.
Article XII - INSOLVENCY OF THE COMPANY
In the event of the insolvency of the Company, the reinsurance proceeds
will be paid to the Company or the liquidator on the basis of the amount of the
claim allowed in the insolvency proceeding without diminution by reason of the
inability of the Company to pay all or part of the claim.
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<PAGE>
The Reinsurer shall be given written notice of the pendency of each claim
against the Company on the policy(ies) reinsured hereunder within a reasonable
time after such claim is filed in the insolvency proceedings. The Reinsurer
shall have the right to investigate each such claim and to interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any defenses
which it may deem available to the Company or its liquidator. The expense thus
incurred by the Reinsurer shall be chargeable, subject to court approval,
against the insolvent Company as part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate, this 7th day of May, 1996,
GENERAL REINSURANCE CORPORATION
/s/ Joan LaFrance
Vice President
Attest: /s/ Marc P. Dahling
and this 7th day of May, 1996.
PENN-AMERICA INSURANCE COMPANY
Attest: /s/ John DiBiasi /s/ Jon S. Saltzman
President
<PAGE>
EXHIBIT A
Attached to and made a part of
Agreement of Reinsurance No. 8206
EXCESS OF LOSS REINSURANCE
of
Liability Business
- --------------------------------------------------------------------------------
Section 1 - LIABILITY OF THE REINSURER
The Reinsurer shall pay to the Company, with respect to liability business
of the Company, the amount of net loss each occurrence in excess of the Company
Retention but not exceeding the Limit of Liability of the Reinsurer as set forth
in the Schedule of Reinsurance.
SCHEDULE OF REINSURANCE
- --------------------------------------------------------------------------------
Company
Class of Business Retention Limit of Liability of the Reinsurer
- --------------------------------------------------------------------------------
Liability Business $500,000 $2,500,000
- --------------------------------------------------------------------------------
Section 2 - COMBINATION COVER
If an occurrence takes place which involves the liability business
reinsured hereunder and one property risk reinsured under Exhibit B to this
Agreement in combination, the Reinsurer shall pay to the Company the amount of
net loss in excess of a Company Retention of $500,000 with respect to such
occurrence, but not exceeding a Limit of Liability of the Reinsurer of $200,000.
The Limit of Liability of the Reinsurer specified in this Section shall be in
addition to the Limits of Liability of the Reinsurer set forth in the sections
entitled LIABILITY OF THE REINSURER of this Exhibit and said Exhibit B.
Section 3 - LOSS IN EXCESS OF POLICY LIMITS
Notwithstanding the provisions of the article entitled MANAGEMENT OF
CLAIMS AND LOSSES, if a third party claimant is awarded an amount in excess of
the Company's
<PAGE>
policy limit and, as a result of the Company's failure to settle within the
policy limit or of the Company's alleged or actual negligence or bad faith in
rejecting an offer of settlement or in the preparation of the defense or in the
trial of any action against its insured or in the preparation or prosecution of
an appeal consequent upon such action, an action is taken by the insured or
assignee which could impose legal liability on the Company for an amount in
excess of the Company's policy limit, 100% of that portion of the award made to
the third party claimant which is in excess of the Company's policy limit shall
be added to the Company's net loss from the occurrence and the total shall be
allocated in accordance with the section entitled LIABILITY OF THE REINSURER.
However, this Section shall not apply where the loss has been incurred due
to the fraud or criminal conduct of a member of the Board of Directors, a
corporate officer of the Company, or any other employee of the Company, acting
individually or collectively or in collusion with any individual or corporation
or any other organization or party involved in the presentation, defense, or
settlement of any claim covered hereunder.
Any insurance or reinsurance, whether collectible or not, which indemnifies
or protects the Company against claims which are the subject matter of this
Section and any contribution, subrogation or recovery shall inure to the benefit
of the Reinsurer and shall be deducted to arrive at the amount of the Company's
net loss.
Section 4 - EXTRA CONTRACTUAL OBLIGATIONS
Notwithstanding the provisions of the article entitled MANAGEMENT OF CLAIMS
AND LOSSES, if the Company incurs an extra contractual obligation, 80% of the
extra contractual obligation shall be added to the Company's net loss from the
occurrence and the total shall be allocated in accordance with the section
entitled LIABILITY OF THE REINSURER.
For purposes of this Section, the term "extra contractual obligation" shall
mean a loss which the Company may be legally liable to pay, which is not covered
under any other provision of this Exhibit and which arises from the Company's
handling of any claim on the policies
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<PAGE>
reinsured hereunder which have limits of liability or amounts of insurance
greater than the Company Retention.
The date on which an extra contractual obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
occurrence.
This Section shall not apply where the extra contractual obligation has
been incurred due to the fraud or criminal conduct of a member of the Board of
Directors, a corporate officer of the Company, or any other employee of the
Company, acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the investigation,
defense or settlement of any claim covered hereunder.
Any insurance or reinsurance, whether collectible or not, which indemnifies
or protects the Company against claims which are the subject matter of this
Section and any contribution, subrogation, or recovery shall inure to the
benefit of the Reinsurer and shall be deducted to arrive at the amount of the
Company's net loss.
Section 5 - OTHER REINSURANCE
The obligations of the Company to reinsure business falling within the
scope of this Exhibit and of the Reinsurer to accept such reinsurance are
mandatory and no other reinsurance (either facultative or treaty) is permitted,
except as provided for below.
The Company may purchase facultative excess of loss reinsurance or
facultative share reinsurance within the liability of the Reinsurer, if, in the
underwriting judgment of the Company, the Reinsurer will be benefited thereby.
In no event, however, shall the amount required with respect to the Company
Retention be reduced.
Section 6 - COMPANY POLICY AMOUNTS
For the purpose of determining the Company Retention and the Limits of
Liability of the Reinsurer, the limits of liability of the Company with respect
to any one policy shall be deemed not to exceed:
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<PAGE>
(a) Personal Automobile Liability Minimum Statutory Limits
Combined Single Limit
(b) Uninsured and Underinsured Motorists Minimum Statutory Limits
Coverages
(c) Personal Injury Protection Coverage Statutory Limits
(d) Other Liability Combined Single Limit $1,000,000 each occurrence
(Including Non-Owned and Hired Autos)
(e) Section II Liability under Commercial $1,000,000 each occurrence
Multiple Peril
(f) Garage Liability $1,000,000 each occurrence
Section 7 - DEFINITIONS
(a) Liability Business
This term shall mean insurance classified as personal automobile
liability, personal automobile uninsured motorists, personal
automobile personal injury protection, other liability (including
hired and non-owned automobile liability), section II under commercial
multiple peril, and garage liability (not to include garage keepers
legal liability) and described in the manuals of the Insurance
Services Office, as respects insureds domiciled in the United States
of America, its territories and possessions, or in Canada.
(b) Company Retention
This term shall mean the amount the Company shall retain for its own
account; however, this requirement shall be satisfied if this amount
is retained by the Company or its affiliated companies under common
management or common ownership.
(c) Net Loss
This term shall mean all payments by the Company within the terms and
limits of its policies in settlement of claims or losses, payment of
benefits, or satisfaction of judgments or awards, including adjustment
expense, after deduction of subrogation and other recoveries and after
deduction of amounts due from all other reinsurance, whether
collectible or not. If the Company becomes insolvent, this definition
shall be modified to the
A-4
<PAGE>
extent set forth in the article entitled INSOLVENCY OF THE COMPANY.
(d) Adjustment Expense
This term shall mean expenditures by the Company within the terms of
its policies in the direct defense of claims and as allocated to an
individual claim or loss (other than for office expenses and for the
salaries and expenses of employees of the Company or of any subsidiary
or related or wholly owned company of the Company) made in connection
with the disposition of a claim, loss, or legal proceeding including
investigation, negotiation, and legal expenses, court costs;
prejudgment interest or delayed damages; and interest on any judgment
or award.
(e) Prejudgment Interest or Delayed Damages
This term shall mean interest or damages added to a settlement,
verdict, award, or judgment based on the amount of time prior to the
settlement, verdict, award, or judgment whether or not made part of
the settlement, verdict, award, or judgment.
(f) Occurrence
This term shall mean each accident or occurrence or series of
accidents or occurrences arising out of one event, whether involving
one or several of the Company's policies. All bodily injury or
property damage arising out of continuous or repeated exposure to
substantially the same general conditions shall be considered as
arising out of one occurrence. The date of occurrence shall be deemed
to be the following:
(1) As respects a loss involving one or more policies written on an
occurrence basis, the date on which bodily injury or property
damage occurs.
(2) As respects a loss involving one or more policies written on a
claims-made basis, the date when notice of claim is received and
recorded by the Company or the insured, whichever comes first,
and any related claims reported subsequent to such date shall be
included in such loss. However, if notice of claim is received
and recorded by the Company or the insured during an Extended
Reporting Period, the date of occurrence shall be deemed to be
the last day of the policy period.
(3) As respects a loss involving one or more policies written on an
occurrence basis and one or more policies written on a
claims-made basis, the date on which bodily injury or property
damage occurs, and any related claims reported subsequent to such
date
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<PAGE>
shall be included in such loss whether they are covered under
occurrence or claims-made policies.
(g) Subject Premium
This term shall mean the Company's premium for the business reinsured
under this Exhibit, other than the Company's premium for personal
automobile liability, personal automobile uninsured motorists,
personal automobile personal injury protection, after deduction of the
premium paid for reinsurance which inures to the benefit of this
Exhibit.
Section 8 - EXCLUSIONS This Exhibit does not apply to:
(a) Reinsurance assumed by the Company, excepting reinsurance of primary
business assumed from affiliated companies;
(b) Any loss or damage which is occasioned by war, invasion, hostilities,
acts of foreign enemies, civil war, rebellion, insurrection, military
or usurped power, or martial law, or confiscation by order of any
government or public authority, but not excluding loss or damage which
would be covered under a standard form of policy containing a standard
war exclusion clause;
(c) Any loss or liability accruing to the Company directly or indirectly
from any insurance written by or through any pool, association, or
syndicate, including pools, associations, or syndicates in which
membership by the Company is required under any statute or regulation;
(d) Any liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary in any insolvency fund. "Insolvency Fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund, or
other arrangement, howsoever denominated, established, or governed,
which provides for any assessment of, payment, or assumption by the
Company of part or all of any claim, debt, charge, fee, or other
obligation of an insurer, or its successors or assigns, which has been
declared by any competent authority to be insolvent, or which is
otherwise deemed unable to meet any claim, debt, charge, fee, or other
obligation in whole or in part;
(e) Nuclear Incident as provided in the Nuclear Incident Exclusion Clause
- Liability - Reinsurance, which is attached to and made a part of
this Exhibit;
(f) Policies written on a co-indemnity basis not controlled by the
Company;
A-6
<PAGE>
(g) Fidelity, surety, aviation, ocean marine, system performance, boiler
and machinery, political risk, kidnap, ransom and extortion, credit,
retroactive liability, financial guarantee and insolvency business, or
strike insurance;
(h) Policies written to apply in excess of a deductible or self insured
amount of more than $10,000 or policies written to apply specifically
in excess over underlying insurance;
(i) Pollution liability or environmental impairment liability with respect
to new and renewal policies written on and after January 1, 1986, but
this exclusion does not preclude liability for loss, damage, costs, or
expenses which are covered under Insurance Services Office wordings
promulgated on or after January 1, 1986. However, if the insured
elects to purchase any "buy back" or additional coverage options, such
options shall not be covered under this Exhibit even if such options
are provided by or covered under such Insurance Services Office
wordings;
(j) "Self-insurance" or "self-insured obligations", howsoever styled, of
the Company, its affiliates or subsidiaries, or any insurance wherein
the Company, its affiliates or subsidiaries, are named as the insured
party, either alone or jointly with some other party, notwithstanding
that no legal liability may arise in respect thereof by reason of the
fact that the Company, its affiliates or subsidiaries, may not be
obligated by law to pay a claim to itself, its affiliates or
subsidiaries;
(k) Policies written on a claims made basis where the retroactive date of
such policies precedes the effective date of the original insured's
first claims made policy;
(l) Liability arising out of the manufacturing, mining, transportation,
distribution, use, removal, encapsulation, or exposure to asbestos,
asbestos products, asbestos fibers, or asbestos dust;
(m) Policies covering liability of any original insured whose annual gross
sales, receipts, or revenues exceed $250,000,000;
(n) Automobile liability insurance, except for the following classes:
personal automobile liability, non owned and hired automobile
liability when written as part of a general liability policy, and
garage liability (however, garagekeepers legal liability is excluded);
(o) Automobile liability insurance relating to the ownership, maintenance,
or use of automobiles used in organized speed contests;
(p) Liability other than automobile insurance relating to risks involving:
A-7
<PAGE>
(1) Wrecking of buildings or structures, except when three stories or
less in height;
(2) Amusement parks, amusement devices, fairs, exhibitions,
carnivals, circuses, and zoos, except when written within the
guidelines of the Company's Special Events Program;
(3) Sports or other entertainment events with an expected capacity,
at any one time, of 10,000 or more people;
(4) Arenas, grandstands, stadiums, theatres, halls and any other
indoor venues with an expected capacity, at any one time, of
5,000 or more people;
(5) Blasting operations;
(6) Motion picture production;
(7) All mining or quarrying operations;
(8) Subway construction or tunnelling, other than sewer construction;
(9) Navigation, towing, construction, repair, conversion, cleaning,
work on, stevedoring, demolition, wrecking, uprighting, or
salvage of any commercial vessel, barge, dry dock, oil rig, and
any other commercial vessel;
(10) Offshore or subaqueous operations;
(11) Railroads, including street railways, except sidetrack
agreements;
(12) Aircraft, helicopters, airports, or flight operations;
(13) Governmental subdivisions, bodies, authorities, or agencies over
10,000 in population, except OL&T related exposures;
(14) Storage, production, marketing, handling, refinement,
distribution, or transmission of natural or artificial fuels,
except with respect to:
(i) Wholesale distribution of gasoline, kerosene, or fuel oils;
(ii) Storage of gasoline, kerosene, or fuel oils with a combined
total capacity of less than 75,000 gallons at any one
location; and,
A-8
<PAGE>
(iii) Retail sales of gasoline or diesel fuel or fuel oil;
(15) Manufacture, transportation, marketing, handling, storage, or use
of explosives (Note: An explosive substance is defined as any
substance manufactured for the express purpose of exploding as
differentiated from other commodities used industrially which are
fortuitously explosive such as gasoline, celluloid, fuel gases,
and dyestuffs), caps, primers, or detonators and other similar
materials, fireworks, ammunition, or ammonium nitrate;
(16) Gas, electric, and water utility companies;
(17) Shoring, underpinning, or moving of buildings or structures;
(18) Manufacture, marketing, blending, mixing, repackaging or
relabeling of agricultural and industrial chemicals;
(19) Steeple or chimney shaft work (other than residential chimney
sweep operations) and tower construction;
(20) Construction or maintenance of cofferdams;
(21) Malpractice or professional liability and/or errors and omissions
insurance including liability of any insurer or reinsurer for
alleged misconduct in the handling of claims or in any of its
dealings with policyholders, except for beauticians, barbers,
morticians, opticians, optometrists, hearing aid specialists
clergymen counseling, animal grooming, exercise studios, day care
centers and those classes mutually agreed upon in writing;
(22) Directors and officers, public officials, Security Exchange
Commission, and ERISA liability;
(23) Broadcasters, telecasters, and publishers liability;
(24) Liquor law liability other than the following: host liquor, and
liquor law liability when written in conjunction with the
Company's Restaurant Pak program;
(25) Products recall, products integrity, or products impairment
insurance;
(26) Products and completed operations as respects:
(i) The manufacture, sale, handling, or distribution of
aircraft, aerospacecraft, satellites, and missiles and parts
for or
A-9
<PAGE>
components of, aircraft, aerospacecraft, satellites, and
missiles;
(ii) The manufacture, blending, mixing, repackaging, relabeling,
or importing of ethical and non-ethical drugs, and
cosmetics;
(iii) The manufacture, or wholesale distribution of tobacco based
products;
(iv) The manufacture of all motorized vehicles, mobile equipment,
heavy equipment or machinery, home power tools, and oil
drilling equipment;
(v) The manufacture, blending, mixing, repackaging, or
relabeling of farm animal feed.
(27) Oil or gas pipelines, wells, or drilling operations;
(28) Ship building, ship repair yards, dry docks, and marinas;
(q) Homeowners Section II and comprehensive personal liability;
(r) Liability insurance afforded for watercraft; however, this exclusion
shall not apply to coverage afforded by ISO Commercial General
Liability Coverage Form CG 00 01 (Ed. 11/85) or as subsequently
amended.
If the Company provides insurance for an insured with respect to the
ownership, maintenance, or use of the vehicles listed in exclusion (o) and if
such ownership, maintenance, or use constitutes only a minor and incidental part
of the ownership, maintenance, or use of all vehicles of the insured, such
exclusion(s) shall not apply.
If the Company provides insurance for an insured with respect to any
premises, operations, products, or completed operations listed in exclusion (p)
items (1), (2), (5), (7), (14), (15), (17), (19), (26)(ii) and (26)(v), and (r)
above and if such premises, operations, products, or completed operations
constitute only a minor and incidental part of the total premises, operations,
products, or completed operations of the insured, such exclusion(s) shall not
apply.
If the Company is bound, without the knowledge of and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
business falling within the scope of exclusions (o), (p) items (1), (2), (5),
(7), (14), (15), (17), (19), (26)(ii) and (26)(v), and (r),
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<PAGE>
these exclusions be suspended with respect to such business until 30 days after
an underwriting supervisor of the Company acquires knowledge of such business.
Section 9 - REINSURANCE PREMIUM AND COMMISSION
As a condition precedent to the Reinsurer's obligations hereunder, the
Company shall pay to the Reinsurer:
(a) With respect to business in force at the effective time and date of
this Exhibit, 7.917% of the Company's subject unearned premium,
calculated on the monthly pro rata basis as of the effective time and
date of this Exhibit;
(b) With respect to business becoming effective at and after the effective
time and date of this Exhibit, 7.917% of the Company's subject written
premium.
The reinsurance premiums in (a) and (b) above are subject to a fixed
commission of 40%.
Section 10 - REPORTS AND REMITTANCES
(a) Reinsurance Premium
Within 45 days after the commencement of this Exhibit, the Company
shall render to the Reinsurer a report of the reinsurance premium with
respect to the business of the Company in force at the effective time
and date of this Exhibit, summarizing the reinsurance premium by line
of insurance, by term, and by month and year of expiration; and the
amount due the Reinsurer shall be remitted within 45 days after the
commencement of this Exhibit.
Within 45 days after the close of each calendar quarter, the Company
shall render to the Reinsurer a report of the reinsurance premium for
the quarter with respect to business of the Company written during the
quarter, summarizing the reinsurance premium by line of insurance; and
the amount due the Reinsurer shall be remitted within 45 days after
the close of the quarter.
Within 45 days after the close of each calendar quarter, the Company
shall also render to the Reinsurer a report of the reinsurance premium
unearned by line of insurance and the contribution for the quarter to
the
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<PAGE>
reinsurance premium in force by line of insurance, by term and by
month and year of expiration.
(b) Claims and Losses
The Company shall report promptly to the Reinsurer each claim or loss
for which the Company's estimated amount of net loss is 50% or more of
the amount of the Company Retention and shall also report all cases of
serious injury which, regardless of considerations of liability or
coverage, might involve this reinsurance, including but not limited to
the following:
(1) Cord injury - paraplegia, quadriplegia;
(2) Amputations - requiring a prosthesis;
(3) Brain damage affecting mentality or central nervous system - such
as permanent disorientation, behavior disorder, personality
change, seizures, motor deficit, inability to speak (aphasia),
hemiplegia or unconsciousness (comatose);
(4) Blindness;
(5) Burns - involving over 10% of body with third degree or 30% of
body with second degree;
(6) Multiple fractures - involving more than one member or non-union;
(7) Fracture of both heel bones (fractured bilateral os calcis);
(8) Nerve damage causing paralysis and loss of sensation in arm and
hand (brachial plexus nerve damage);
(9) Massive internal injuries affecting body organs;
(10) Injury to nerves at base of spinal canal (Cauda Equina) or any
other back injury resulting in incontinence of bowel and/or
bladder;
(11) Fatalities;
(12) Any other serious injury which, in the judgment of the Company,
might involve the Reinsurer.
The Company shall advise the Reinsurer of the estimated amount of net
loss in connection with each such claim or loss and of any subsequent
changes in such estimates.
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<PAGE>
Promptly upon receipt of a definitive statement of net loss from the
Company, but within no more than 25 days, the Reinsurer shall pay to
the Company the Reinsurer's portion of net loss. The Company shall
report to the Reinsurer any subsequent changes in the amount of net
loss, and the amount due either party shall be remitted promptly, but
within no more than 25 days.
(c) General
In addition to the reports required in (a) and (b) above, the Company
shall furnish such other information as may be required by the
Reinsurer for the completion of the Reinsurer's quarterly and annual
statements and internal records.
All reports shall be rendered on forms or in format acceptable to the
Company and the Reinsurer.
Section 11 - COMMENCEMENT AND TERMINATION
This Exhibit shall apply to new and renewal policies of the Company
becoming effective at and after 12:01 A.M., May 1, 1996, and to policies of the
Company in force at 12:01 A.M., May 1,1996, with respect to claims or losses
resulting from occurrences taking place at and after the aforesaid time and date
insured under coverages written on an occurrence basis and with respect to
claims received and recorded by the Company or the insured at and after the
aforesaid time and date under coverages written on a claims made basis. However,
this Exhibit shall not apply to claims received and recorded by the Company or
the insured during any extended reporting period in force at such time and date.
Either party may terminate this Exhibit by sending to the other, by
registered mail to its principal office, notice stating the time and date when,
not less than 90 days after the date of mailing of such notice, termination
shall be effective. As respects coverages written on an occurrence basis, the
Reinsurer shall not be liable for claims and losses resulting from occurrences
taking place at and after the effective time and date of termination. As
respects coverages written on a claims-made basis, the Reinsurer shall not be
liable for claims received and
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<PAGE>
recorded by the Company or the insured at and after the effective time and date
of termination, unless such claim is received and recorded by the Company or the
insured during an extended reporting period in force at the time and date of
termination.
The Reinsurer shall return to the Company the reinsurance premium unearned
calculated on the monthly pro rata basis as of the effective time and date of
termination, less the commission previously allowed thereon.
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<PAGE>
EXHIBIT B
Attached to and made a part of
Agreement of Reinsurance No. 8206
EXCESS OF LOSS REINSURANCE
of
Property Business
- -------------------------------------------------------------------------------
Section 1 - LIABILITY OF THE REINSURER
The Reinsurer shall pay to the Company, with respect to each risk of the
Company, the amount of net loss sustained by the Company in excess of the
Company Retention but not exceeding the Limits of Liability of the Reinsurer as
set forth in the Schedule of Reinsurance.
The Limit of Liability of the Reinsurer under this Exhibit shall not exceed
a total payment of net loss of $2,400,000 on all risks involved in one
occurrence.
SCHEDULE OF REINSURANCE
- -------------------------------------------------------------------------------
Class of Business Company Retention Limit of Liability of the Reinsurer
- -------------------------------------------------------------------------------
Property Business $200,000 $800,000
- -------------------------------------------------------------------------------
All insurance written under one or more policies of the Company against the
same peril on the same risk shall be combined, and the Company Retention and the
Limit of Liability of the Reinsurer shall be determined on the basis of the sum
of all insurance against the same peril and on the same risk which is in force
at the time of a claim or loss.
Section 2 - COMBINATION COVER
If an occurrence takes place which involves one property risk reinsured
under this Exhibit and the liability business reinsured under Exhibit A in
combination, the provisions of the section entitled COMBINATION COVER of said
Exhibit A shall apply.
<PAGE>
Section 3 - EXTRA CONTRACTUAL OBLIGATIONS
Notwithstanding the provisions of the article entitled MANAGEMENT OF CLAIMS
AND LOSSES, if the Company incurs an extra contractual obligation, 80% of the
extra contractual obligation shall be added to the Company's net loss from the
occurrence and the total shall be allocated in accordance with the section
entitled LIABILITY OF THE REINSURER.
For purposes of this Section, the term "extra contractual obligation" shall
mean a loss which the Company may be legally liable to pay, which is not covered
under any other provision of this Exhibit and which arises from the Company's
handling of any claim on the policies reinsured hereunder which have limits of
liability or amounts of insurance greater than the Company Retention.
The date on which an extra contractual obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
occurrence.
This Section shall not apply where the extra contractual obligation has
been incurred due to the fraud or criminal conduct of a member of the Board of
Directors, a corporate officer of the Company, or any other employee of the
Company, acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the investigation,
defense or settlement of any claim covered hereunder.
Any insurance or reinsurance, whether collectible or not, which indemnifies
or protects the Company against claims which are the subject matter of this
Section and any contribution, subrogation, or recovery shall inure to the
benefit of the Reinsurer and shall be deducted to arrive at the amount of the
Company's net loss.
Section 4 - OTHER REINSURANCE
The obligations of the Company to reinsure business falling within the
scope of this Exhibit and of the Reinsurer to accept such reinsurance are
mandatory and no other reinsurance (either facultative or treaty) is permitted,
except as provided for below.
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<PAGE>
When the amount of insurance written by the Company on an individual risk
exceeds $1,000,000, permission is granted the Company to purchase facultative
excess of loss or share reinsurance for the excess amount on such risk. If the
Company does not purchase either facultative excess of loss or share reinsurance
for the excess amount on such risk, the net loss for the purpose of computing
the Company Retention and the Limit of Liability of the Reinsurer shall be
reduced as if facultative share reinsurance had been in force at the time of the
loss for the excess amount on such risk.
The Company may also purchase facultative excess of loss reinsurance or
facultative share reinsurance within the liability of the Reinsurer, if, in the
underwriting judgment of the Company, the Reinsurer will be benefited thereby.
In no event, however, shall the amount required with respect to the Company
Retention be reduced.
Recoveries from catastrophe reinsurance shall be deemed not to reduce the
amount required with respect to the Company Retention.
Section 5 - DEFINITIONS
(a) Property Business
This term shall mean insurance which is classified in the NAIC form of
annual statement as fire, allied lines, inland marine, or commercial
multiple peril (property coverages), except those lines specifically
excluded in the section entitled EXCLUSIONS, on risks wherever located
in the United States of America, its territories and possessions, or
in Canada.
(b) Company Retention
This term shall mean the amount the Company shall retain for its own
account; however, this requirement shall be satisfied if this amount
is retained by the Company or its affiliated companies under common
management or common ownership.
(c) Net Loss
This term shall mean all payments by the Company within the terms and
limits of its policies in settlement of claims or losses, including
adjustment
B-3
<PAGE>
expense, after deduction of salvage and other recoveries and after
deduction of amounts due from all other reinsurance, except
catastrophe reinsurance, whether collectible or not. If the Company
becomes insolvent, this definition shall be modified to the extent set
forth in the article entitled INSOLVENCY OF THE COMPANY.
(d) Adjustment Expense
This term shall mean expenditures by the Company within the terms of
its policies in the direct defense of claims and as allocated to an
individual claim or loss (other than for office expenses and for the
salaries and expenses of employees of the Company or of any subsidiary
or related or wholly owned company of the Company) made in connection
with the disposition of a claim, loss, or legal proceeding including
investigation, negotiation, and legal expenses; court costs;
prejudgment interest or delayed damages; and interest on any judgment
or award.
(e) Prejudgment Interest or Delayed Damages
This term shall mean interest or damages added to a settlement,
verdict, award, or judgment based on the amount of time prior to the
settlement, verdict, award, or judgment whether or not made part of
the settlement, verdict, award, or judgment.
(f) Risk
The Company shall establish what constitutes one risk, provided:
(1) a building and its contents, including time element coverages,
shall never be considered more than one risk;
(2) when two or more buildings and their contents are situated at the
same general location, the Company shall identify on its records
at the time of acceptance by the Company those individual
buildings and their contents that are considered to constitute
each risk; if such identification is not made, each building and
its contents shall be considered to be a separate risk.
(g) Building
This term shall mean each structure that is considered by the local
fire insurance rating organization to be a separate building for rate
making purposes. With reference to structures not rated specifically
by the local fire insurance rating organization, the term building
shall mean each separately roofed structure enclosed within exterior
walls.
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<PAGE>
(h) Occurrence
This term shall mean each occurrence or series of occurrences arising
out of one event.
(i) Subject Premium
This term shall mean the Company's premium for the business reinsured
under this Exhibit, after deduction of the premium paid for
reinsurance which inures to the benefit of this Exhibit.
Section 6 - EXCLUSIONS
This Agreement does not apply to:
(a) Reinsurance assumed by the Company, excepting reinsurance of primary
business assumed from affiliated companies;
(b) Any loss or damage which is occasioned by war, invasion, hostilities,
acts of foreign enemies, civil war, rebellion, insurrection, military
or usurped power, or martial law, or confiscation by order of any
government or public authority, but not excluding loss or damage which
would be covered under a standard form of policy containing a standard
war exclusion clause;
(c) Any loss or liability accruing to the Company directly or indirectly
from any insurance written by or through any pool, association, or
syndicate, including pools, associations, or syndicates in which
membership by the Company is required under any statute or regulation;
(d) Any liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary in any insolvency fund. "Insolvency Fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund, or
other arrangement, howsoever denominated, established, or governed,
which provides for any assessment of, payment, or assumption by the
Company of part or all of any claim, debt, charge, fee, or other
obligation of an insurer, or its successors or assigns, which has been
declared by any competent authority to be insolvent, or which is
otherwise deemed unable to meet any claim, debt, charge, fee, or other
obligation in whole or in part;
(e) Nuclear Incident as provided in the Nuclear Incident Exclusion Clause
- Physical Damage - Reinsurance, which are attached to and made a part
of this Exhibit;
B-5
<PAGE>
(f) Policies written on a co-indemnity basis not controlled by the
Company;
(g) Fidelity, surety, aviation, ocean marine, system performance, boiler
and machinery, political risk, kidnap, ransom and extortion, credit,
retroactive liability, financial guarantee and insolvency business, or
strike insurance;
(h) Policies written to apply in excess of a deductible or self insured
amount of more than $10,000 or policies written to apply specifically
in excess over underlying insurance;
(i) Loss, damage costs, or expenses arising out of: the release,
discharge, dispersal, or escape of pollutants; the extraction,
removal, clean up, containment, monitoring, or detoxification of
pollutants; or, the removal, restoration, or replacement of polluted
land or water. However, this exclusion does not preclude liability for
loss, damage, costs, or expenses which are covered under Insurance
Services Office wordings promulgated on or after April 1, 1986.
Nevertheless, if the insured elects to purchase any "buy-back" or
additional coverage options, such options shall not be covered under
this Exhibit even if such options are provided by or covered under
such Insurance Services Office wordings;
(j) "Self-insurance" or "self-insured obligations", howsoever styled, of
the Company, its affiliates or subsidiaries, or any insurance wherein
the Company, its affiliates or subsidiaries, are named as the insured
party, either alone or jointly with some other party, notwithstanding
that no legal liability may arise in respect thereof by reason of the
fact that the Company, its affiliates or subsidiaries, may not be
obligated by law to pay a claim to itself, its affiliates or
subsidiaries;
(k) The following kinds of insurance and risks classified by the Company
as property business:
(1) The perils of flood, surface water, waves, tidal water or tidal
wave, overflow of streams, or other bodies of water or spray from
any of the foregoing, all whether driven by wind or not, when
written as such;
(2) The peril of earthquake, when written as such;
(3) Difference in conditions insurance or similar kinds of insurance,
howsoever styled;
(4) Insurance on growing or standing crops, or timber;
B-6
<PAGE>
(5) Mortgage impairment insurance and similar kinds of insurance,
howsoever styled;
(6) Risks having a total insurable value of more than $50,000,000;
(7) Any collection of fine arts with an insurable value of $5,000,000
or more;
(8) All bridges, tunnels, and dams;
(9) Mobile homes, when written on a personal lines policy;
(10) All offshore property risks;
(11) Railroad property;
(12) Automobile physical damage business;
(13) Inland marine business with respect to the following:
(i) Cargo insurance with respect to ocean, lake, or inland
waterway vessels;
(ii) Motor-truck cargo insurance written for common carriers
operating beyond a radius of 1,000 miles, or that require an
ICC, PUC or similar filing;
(iii) Commercial negative film insurance and cast and/or
non-appearance insurance;
(iv) Drilling and/or production rigs and all machinery and
equipment used in the exploration of natural fuels;
(v) Furriers' customers and garment contractors policies;
(vi) Insurance on livestock birds, or other animals under
so-called "mortality policies";
(vii) Jewelers' block policies and furriers' block policies;
(viii) Mining equipment while underground;
(ix) Radio and television broadcasting towers, exceeding 100 feet
in height;
B-7
<PAGE>
(x) Registered mail and armored car insurance;
(xi) Watercraft, other than watercraft insured under personal
property floaters, yacht, or outboard policies.
Section 7 - REINSURANCE PREMIUM AND COMMISSION
As a condition precedent to the Reinsurer's obligations hereunder, the
Company shall pay to the Reinsurer:
(a) With respect to business in force at the effective time and date of
this Exhibit, 10.833% of the Company's subject unearned premium,
calculated on the monthly pro rata basis as of the effective time and
date of this Exhibit; and
(b) With respect to business becoming effective at and after the effective
time and date of this Exhibit, 10.833% of the Company's subject
written premium.
The reinsurance premiums in (a) and (b) above shall be subject to a fixed
commission allowance of 40%.
Section 8 - REPORTS AND REMITTANCES
(a) Reinsurance Premium
Within 45 days after the commencement of this Exhibit, the Company
shall render to the Reinsurer a report of the reinsurance premium with
respect to the business of the Company in force at the effective time
and date of this Exhibit, summarizing the reinsurance premium by line
of insurance, by term, and by month and year of expiration; and the
amount due the Reinsurer shall be remitted within 45 days after the
commencement of this Exhibit.
Within 45 days after the close of each calendar quarter, the Company
shall render to the Reinsurer a report of the reinsurance premium for
the quarter with respect to business of the Company written during the
quarter, summarizing the reinsurance premium by line of insurance; and
the amount due the Reinsurer shall be remitted within 45 days after
the close of the quarter.
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<PAGE>
Within 45 days after the close of each calendar quarter, the Company
shall also render to the Reinsurer a report of the reinsurance premium
unearned by line of insurance and the contribution for the quarter to
the reinsurance premium in force by line of insurance, by term and by
month and year of expiration.
(b) Claims and Losses
The Company shall report promptly to the Reinsurer each claim or loss
which, in the Company's opinion, may involve the reinsurance afforded
by this Exhibit. The Company shall advise the Reinsurer of the
estimated amount of net loss in connection with each such claim or
loss and of any subsequent changes in such estimates.
Promptly upon receipt of a definitive statement of net loss from the
Company, but within no more than 25 days, the Reinsurer shall pay to
the Company the Reinsurer's portion of net loss. The Company shall
report to the Reinsurer any subsequent changes in the amount of net
loss, and the amount due either party shall be remitted promptly, but
within no more than 25 days.
(c) P.C.S. Catastrophe Bulletins
The Company shall furnish to the Reinsurer, upon request, the
following information with respect to each catastrophe set forth in
the Catastrophe Bulletins published by the Property Claim Services:
(1) The preliminary estimates of the amount recoverable from the
Reinsurer;
(2) The Reinsurer's portion of claims, losses, and adjustment
expenses paid less salvage recovered during each calendar
quarter;
(3) The Reinsurer's portion of reserves for claims, losses, and
adjustment expenses at the end of each calendar quarter.
(d) General
In addition to the reports required by (a), (b), and (c) above, the
Company shall furnish such other information as may be required by the
Reinsurer for the completion of the Reinsurer's quarterly and annual
statements and internal records.
B-9
<PAGE>
All reports shall be rendered on forms or in format acceptable to the
Company and the Reinsurer.
Section 9 - COMMENCEMENT AND TERMINATION
This Exhibit shall apply to new and renewal policies of the Company
becoming effective at and after 12:01 A.M., May 1, 1996, and to policies of the
Company in force at 12:01 A.M., May 1, 1996, with respect to losses resulting
from occurrences taking place at and after the aforesaid time and date.
Either party may terminate this Exhibit by sending to the other, by
registered mail to its principal office, notice stating the time and date when,
not less than 90 days after the date of mailing of such notice, termination
shall be effective. The Reinsurer shall not be liable for any claims or losses
resulting from occurrences taking place at and after the effective time and date
of termination.
The Reinsurer shall return to the Company the reinsurance premium unearned
calculated on the monthly pro rata basis as of the effective time and date of
termination, less the commission previously allowed thereon.
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<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - USA
(1) This Agreement does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this Agreement all
the original policies of the Company (new, renewal and placement) of the classes
specified in Clause (ii) of this paragraph (2) from the time specified in Clause
(iii) in this paragraph (2) shall be deemed to include the following provision
(specified as the Limited Exclusion Provision):
Limited Exclusion Provision*
(i) It is agreed that the policy does not apply under any liability
coverage, to injury, sickness, disease, death or destruction bodily
injury or property damage with respect to which an insured under the
policy is also an insured under a nuclear energy liability policy
issued by Nuclear Energy Liability Insurance Association, Mutual
Atomic Energy Liability Underwriters or Nuclear Insurance
Association of Canada, or would be an insured under any such policy
but for its termination upon exhaustion of its limit of liability.
(ii) Family Automobile Policies (liability only), Special Automobile
Policies (private passenger automobiles, liability only) Farmers
Comprehensive Personal Liability Policies (liability only),
Comprehensive Personal Liability Policies (liability only) or
policies of a similar nature; and the liability portion of
combination forms related to the four classes of policies stated
above, such as the Comprehensive Dwelling Policy and the applicable
types of Homeowners Policies.
(iii) The inception dates and thereafter of all original policies as
described in (ii) above, whether new, renewal or replacement, being
policies which either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above;
provided this paragraph (2) shall not be applicable to Family
Automobile Policies, Special Automobile Policies, or policies or
combination policies of a similar nature, issued by the Company on
New York risks, until 90 days following approval of the Limited
Exclusion Provision by the Governmental Authority having
jurisdiction thereof.
(3) Except for those classes of policies specified in Clause (ii) of
paragraph (2) and without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that for all purposes of this
Agreement the original liability policies of the Company (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability,
Elevator Liability, Owners or Contractors (including railroad)
Protective Liability, Manufacturers and Contractors Liability,
Product Liability, Professional and Malpractice Liability,
Storekeepers Liability, Garage Liability, Automobile Liability
(including Massachusetts Motor Vehicle or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause (v) of this paragraph (3), the following provision
(specified as the Broad Exclusion Provision):
Broad Exclusion Provision*
It is agreed that the policy does not apply:
(i) Under any Liability Coverage, to injury, sickness, disease, death or
destruction bodily injury or property damage:
(a) with respect to which an insured under the policy is also an
insured under a nuclear energy liability policy issued by
Nuclear Energy Liability Insurance Association, Mutual Atomic
Energy Liability Underwriters or Nuclear Insurance Association
of Canada, or would be an insured under any such policy but
for its termination upon exhaustion of its limit of liability;
or
(b) resulting from the hazardous properties of nuclear material
and with respect to which (1) any person or organization is
required to maintain financial protection pursuant to the
Atomic Energy Act of 1954, or any law amendatory thereof, or
(2) the insured is, or had this policy not been issued would
be, entitled to indemnity from the United States of America,
or any agency thereof, under any agreement entered into by the
United States of America, or any agency thereof, with any
person or organization.
(ii) Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to immediate medical or surgical relief
first aid to expenses incurred with respect to bodily injury,
sickness, disease or death bodily injury resulting from the
hazardous properties of nuclear material and arising out of the
operation of a nuclear facility by any person or organization.
(iii) Under any Liability Coverage, to injury, sickness, disease, death or
destruction bodily injury or property damage resulting from the
hazardous properties of nuclear material if
<PAGE>
(a) the nuclear material (1) is at any nuclear facility owned by,
or operated by or on behalf of, an insured or (2) has been
discharged or dispersed therefrom;
(b) the nuclear material is contained in spent fuel or waste at
any time possessed, handled, used, processed, stored,
transported, or disposed of by or on behalf of an insured; or
(c) the injury, sickness, disease, death or destruction bodily
injury or property damage arises out of the furnishing by an
insured of services, materials, parts or equipment in
connection with the planning, construction, maintenance,
operation or use of any nuclear facility, but if such facility
is located within the United States of America, its
territories, or possessions or Canada, this exclusion (c)
applies only to injury to or destruction of property at such
nuclear facility property damage to such nuclear facility and
any property thereat.
(iv) As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special
nuclear material or byproduct material; "source material", "special
nuclear material", and "byproduct material" have the meanings given
them in the Atomic Energy Act of 1954 or in any law amendatory
thereof; "spent fuel" means any fuel element or fuel component,
solid or liquid, which has been used or exposed to radiation in a
nuclear reactor; "waste" means any waste material (1) containing
byproduct material and (2) resulting from the operation by any
person or organization of any nuclear facility included within the
definition of nuclear facility under paragraph (a) or (b) thereof;
"nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating
the isotopes of uranium or plutonium, (2) processing or
utilizing spent fuel, or (3) handling, processing or packaging
waste,
(c) any equipment or devised used for the processing, fabricating
or alloying of special nuclear material if at any time the
total amount of such material in the custody of the insured at
the premises where such equipment or device is located
consists of or contains more than 25 grams of plutonium or
uranium 233 or any combination thereof, or more than 250 grams
of uranium 235,
(d) any structure, basin, excavation, premises or place prepared
or used for the storage or disposal of waste
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "nuclear reactor" means any apparatus designed or used
to sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
With respect to injury to or destruction or property the word
"injury" or "destruction" includes all forms of radioactive
contamination of property.
"Property damage" includes all forms of radioactive contamination of
property.
(v) The inception dates and thereafter of all original policies
affording coverages specified in this paragraph (3), whether new,
renewal or replacement, being policies which become effective on or
after 1st May, 1960, provided this paragraph (3) shall not be
applicable to
1. Garage and Automobile Policies issued by the Company on New
York risks, or
2. statutory liability insurance required under Chapter 90,
General Laws of Massachusetts, until 90 days following
approval of the Broad Exclusion Provision by the Governmental
Authority having jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Company in Canada and that with
respect to such policies this Clause shall be deemed to include the Nuclear
Energy Liability Exclusion Provisions adopted by the Canadian Underwriters'
Association or the Independent Insurance Conference of Canada.
*NOTE: The words underlined in the Limited Exclusion Provision and in
the Broad Exclusion Provision shall apply only in relation to original liability
policies which include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
Page 2 of 2
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - USA
(1) This Agreement does not cover any loss or liability accruing to the
Company directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause, this Agreement does not cover any loss or liability accruing to the
Company, directly or indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(i) Nuclear reactor power plants including all auxiliary property on the
site, or
(ii) Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
(iii) Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material", and
for reprocessing, salvaging, chemically separating, storing or
disposing of "spent" nuclear fuel or waste materials, or
(iv) Installations other than those listed in paragraph (2)(iii) above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
(3) Without in any way restricting the operations of paragraphs (1) and
(2) hereof, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate:
(a) where the Company does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January 1960
this sub-paragraph (b) shall only apply provided the said
radioactive contamination exclusion provision has been approved by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operations of paragraphs (1), (2),
and (3) hereof, this Agreement does not cover any loss or liability by
radioactive contamination accruing to the Company, directly or indirectly, and
whether as Insurer or Reinsurer, when such radioactive contamination is a named
hazard specifically insured against.
(5) It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Company to be the primary hazard.
(6) The term "special nuclear material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.
(7) The Company to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that:
(a) all policies issued by the Company on or before 31st December
1957 shall be free from the application of the other
provisions of this Clause until expiry date or 31st December
1960 whichever first occurs whereupon all the provisions of
this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by
the Company on or before 31st December 1958 shall be free from
the application of the other provisions of this Clause until
expiry date or 31st December 1960 whichever first occurs
whereupon all the provisions of this Clause shall apply.
Exhibit 10.15(i)
HCI AGREEMENT NO. 390
PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
(hereinafter referred to as "Agreement")
between
PENN-AMERICA INSURANCE COMPANY
Hatboro, Pennsylvania
(hereinafter referred to as the "Company")
and
The Subscribing Reinsurers executing
the Interests and Liabilities Agreements attached to this Agreement
(hereinafter collectively referred to as the "Reinsurers")
In consideration of the promises set forth in this Agreement, the parties agree
as follows:;
Article - SCOPE OF AGREEMENT
As a condition precedent to the Reinsurers' obligations under this
Agreement, the Company shall cede to the Reinsurers the property business
described in this Agreement, and the Reinsurers shall accept such business as
reinsurance from the Company.
This Agreement is comprised of Articles through XXII and the Exhibits
listed below. The terms of the Articles and of the Exhibits shall determine the
rights and obligations of the parties. The terms of the Articles shall apply to
each Exhibit unless specifically amended therein.
EXHIBIT A - FIRST EXCESS OF LOSS REINSURANCE (Catastrophe)
of
Property Business
EXHIBIT B - SECOND EXCESS OF LOSS REINSURANCE (Catastrophe)
of
Property Business
EXHIBIT C - THIRD EXCESS OF LOSS REINSURANCE (Catastrophe)
of
Property Business
EXHIBIT D - FOURTH EXCESS OF LOSS REINSURANCE (Catastrophe)
of
Property Business
HCI REFERENCE DMD/DME/DMF/DMG
<PAGE>
Article II - PARTIES TO THE AGREEMENT
This Agreement is solely between the Company and the Reinsurers. When
more than one Company is named as a party to this Agreement, the first Company
named shall be the agent of the other companies as to all matters pertaining to
this Agreement. Performance of the obligations of each party under this
Agreement shall be rendered solely to the other party. However, if the Company
becomes insolvent, the liability of the Reinsurers shall be modified to the
extent set forth in the article entitled INSOLVENCY OF THE COMPANY. In no
instance shall any insured of the Company or any claimant against an insured of
the Company have any rights under this Agreement.
Article III - TERM
This Agreement shall apply to loss occurrences which commence during
the period from January 1, 1996 to December 31, 1996 both dates inclusive, at
the place of the loss occurrence.
This Agreement shall not apply to loss occurrences which commence prior
to the effective date of this Agreement and continue during any part of the term
of this Agreement. However, this Agreement shall apply to loss occurrences which
commence during and continue beyond the term of this Agreement and in the
computation of the liability of the Reinsurers the entire ultimate net loss
resulting from each such loss occurrence shall be included, subject to the
limitations set forth in paragraph (f) of the article entitled DEFINITIONS.
Article IV - DEFINITIONS
(a) Property Business
This term shall mean insurance which is classified in the NAIC form of
annual statement as fire, allied lines, inland marine, commercial
multiple peril (property coverages), and personal automobile physical
damage (excluding collision), except those lines specifically excluded
in the article entitled EXCLUSIONS, on risks wherever located in the
United States of America, its territories and possessions.
(b) Company Retention
This term shall mean the amount the Company shall retain for its own
account; however, this requirement shall be satisfied if this amount
is retained by the Company or its affiliated companies under common
management or common ownership.
-2-
<PAGE>
(c) Ultimate Net Loss
This term shall mean all payments by the Company of claims and losses,
within the limits of liability or amounts of insurance of the policies
of the Company, and adjustment expense, after deduction of salvage and
after deduction of amounts due from all other reinsurance, whether
collectible or not. If the Company becomes insolvent, this definition
shall be modified to the extent set forth in the article entitled
INSOLVENCY OF THE COMPANY.
(d) Adjustment Expense
This term shall mean expenditures by the Company, other than for
office expenses and for the salaries and expenses of employees of the
Company or of any subsidiary or related or wholly owned company of the
Company, made in connection with the disposition of a claim, loss, or
legal proceeding including investigation, negotiation, and legal
expenses; court costs; prejudgment interest or delayed damages; and
interest on any judgment or award.
(e) Prejudgment Interest or Delayed Damages
This term shall mean interest or damages added to a settlement,
verdict, award, or judgment based on the amount of time prior to the
settlement, verdict, award, or judgment whether or not made part of
the settlement, verdict, award, or judgment.
(f) Loss Occurrence
This term shall mean the sum of all individual losses directly
occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs
within the area of one state of the United States and states
contiguous thereto and to one another. However, the duration and
extent of any one loss occurrence shall be limited to all individual
losses sustained by the Company occurring during any period of 168
consecutive hours arising out of and directly occasioned by the same
event, except that the term loss occurrence shall be further defined
as follows:
(1) As regards windstorm, hail, tornado, hurricane, cyclone,
including ensuing collapse and water damage, all individual
losses sustained by the Company occurring during any period of 72
consecutive hours arising out of and directly
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<PAGE>
occasioned by the same event. However, the event need not be
limited to one state or province or states or provinces
contiguous thereto;
(2) As regards riot, riot attending a strike, civil commotion,
vandalism and malicious mischief, all individual losses sustained
by the Company occurring during any period of 72 consecutive
hours within the area of one municipality or county and the
municipalities or counties contiguous thereto arising out of and
directly occasioned by the same event. The maximum duration of 72
consecutive hours may be extended in respect of individual losses
which occur beyond such 72 consecutive hours during the continued
occupation of an assured's premises by strikers, provided such
occupation commenced during the aforesaid period;
(3) As regards earthquake (the epicenter of which need not
necessarily be within the territorial confines referred to in the
opening paragraph of this definition) and fire following directly
occasioned by earthquake, only those individual fire losses which
commence during the period of 168 consecutive hours may be
included in the Company's loss occurrence:
(4) As regards freeze, only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting
of frozen pipes and tanks) may be included in the Company's loss
occurrence.
The Company may choose the date and time when any such period of
consecutive hours commences provided that it is not earlier than the
date and time of the occurrence of the first recorded individual loss
sustained by the Company arising out of that disaster, accident or
loss and provided that only one such period of 168 consecutive hours
(or, in the case of paragraph (1) and (2) above, 72 consecutive hours)
shall apply with respect to one event.
No individual losses occasioned by an event that would be covered by
72 hour clauses may be included in any loss occurrence claimed under
the 168 hours provision.
(g) Subject Net Written Premium
This term shall mean the direct premiums written by the Company
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<PAGE>
during the term of this Agreement on the business reinsured hereunder
after deduction of return premiums and after deduction of premiums
paid for reinsurance which inures to the benefit of the Reinsurers.
Article V - EXCLUSIONS
This Agreement shall not apply to:
(a) Reinsurance accepted by the Company other than:
(1) From its affiliates;
(2) Facultative reinsurance on a share basis of risks accepted individually
and not forming part of any agreement;
(3) Local agency reinsurance on a share basis accepted in the normal course
of business;
(b) Nuclear incident per the following clauses attached hereto:
(1) Nuclear Incident Exclusion Clause - Physical Damage
Reinsurance-U.S.A. NMA 1119;
(c) Any extra or non-contractual damages or legal fees and expense attendant to
the defense thereof, including but not limited to compensatory, exemplary
and punitive damages or fines or statutory penalties which are awarded
against the Company as a result of an act, omission, or course. of conduct
committed by or on behalf of the Company;
(d) Pools, Associations and Syndicates per the Pools, Associations and
Syndicates Exclusion Clause attached hereto;
(e) Any liability of the Company arising from its participation or membership
in any insolvency fund;
(f) Any loss or damage which is occasioned by war, including undeclared or
civil war; warlike action by a military force, including action in
hindering or defending against an actual or expected attack, by any
government, sovereign or other authority using military personnel or other
agents; or insurrection, rebellion, revolution, usurped power or action
taken by governmental authority in hindering or defending against any of
these; however,
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<PAGE>
this exclusion shall not apply to any policy which contains a standard
war exclusion;
(g) Risks written on a layered basis, whether primary or excess of loss, or
policies written with a deductible or franchise of more than $10,000;
however, this exclusion shall not apply to policies which provide a
percentage deductible of franchise in connection with windstorm;
(h) Insurance against earthquake, except when written in conjunction with fire
and otherwise eligible perils;
(i) Insurance on growing crops;
(j) Insurance against flood, surface water, waves, tidal waves, overflow of any
body of water, or their spray, all whether driven by wind or not except
when written in conjunction with fire and otherwise eligible perils;
(k) Business classified as fidelity;
(1) liability under coverage afforded for loss or damage resulting from failure
to account or pay for any goods or merchandise sold on credit, delivered
under deferred payment agreements, consigned for sale, or delivered under
any trust or floor plan agreements, except under standard accounts
receivable policies;
(m) Any loss or damage caused by or resulting from:
(1) Explosion of steam boilers, steam pipes, steam engines or steam
turbines owned by, leased by or operated under the control of the
insured;
(2) Artificially generated electric current, including electric arcing,
that disturbs electrical devices, appliances, or wires. This exclusion
shall not apply to ensuing loss by fire not otherwise excluded;
(3) Mechanical breakdown, including rupture or bursting caused by
centrifugal force;
(n) Mortgage impairment insurance and similar kinds of insurance, howsoever
styled, providing coverage to an insured with respect to its mortgagee
interest in property or its owner interest in foreclosed property;
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<PAGE>
(o) Difference in conditions insurance and similar kinds of insurance,
howsoever styled;
(p) Risks which have a total insurable value of more than $250,000,000;
however, this exclusion shall not apply if the Company writes 100% of the
risk;
(q) Any collection of fine arts with an insurable value of $5,000,000 or more;
(r) Mobile homes, when written on a personal lines policy; (s) Inland marine
business with respect to the following:
(1) All bridges and tunnels;
(2) Cargo insurance when written as such with respect to ocean, lake, or
inland waterways vessels;
(3) Faulty film, tape, processing and editing insurance and cast
insurance;
(4) Drilling rigs;
(5) Furriers' customers policies;
(6) Garment contractors policies;
(7) Insurance on livestock under so-called "mortality policies";
(8) Jewelers' block policies and furriers' block policies;
(9) Mining equipment while underground;
(10) Motor truck cargo insurance written for common carriers operating
beyond a radius of 1000 miles;
(11) Radio and television broadcasting towers, exceeding 100 feet in
height;
(12) Registered mail and armored car insurance;
(t) Watercraft;
(u) loss of, damage to, or failure of, or consequential loss resulting
therewith (including but not limited to earnings and extra expense)
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<PAGE>
of satellites, spacecraft, and launch vehicles, including cargo and freight
carried therein, in all phases of operation (including but not limited to
manufacturing, transit, pre-launch, launch, and in-orbit);
(v) Coverage afforded by ISO Pollutant Clean Up and Removal Additional
Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as
subsequently amended or by any similar endorsement affording such coverage;
(w) Pollutant clean up or removal, including time element coverage associated
therewith, under any commercial property policy or any inland marine policy
written by the Company which does not contain ISO Changes-Pollutants
Endorsement CP 01 86 (Ed. 4/86) or as subsequently amended; however, this
exclusion does not apply to any risk located in a jurisdiction which has
not approved the Insurance Services Office exclusion or where other
regulatory constraints prohibit the Company from attaching such
endorsement. If the Company elects to file an endorsement independent of
ISO, such endorsement will be deemed a suitable substitute provided the
Company has submitted the wording to the Reinsurers and received the
Reinsurers' prior approval.
(x) Any loss in respect of overhead transmission and distribution lines and
their supporting structures other than those on or within 1000 feet of the
insured premises; however, this exclusion shall not apply to public
utilities extension and/or suppliers extension and or contingent business
interruption coverages, provided that these are not part of a transmitters'
or distributors' policy.
Article VI - MANAGEMENT OF CLAIMS AND LOSSES
The Company shall investigate and settle or defend all claims and
losses. When requested by the Reinsurers, the Company shall permit the
Reinsurers, at the expense of the Reinsurers, to be associated with the Company
in the defense or control of any claim, loss, or legal proceeding which involves
or is likely to involve the Reinsurers. All payments of claims or losses by the
Company within the limits of its policies which are within the limits set forth
in the applicable Exhibit shall be binding on the Reinsurers, subject to the
terms of this Agreement.
Article VII - RECOVERIES
The Company shall pay to or credit the Reinsurers with the Reinsurers'
portion of any recovery obtained from salvage, subrogation, or other insurance.
Adjustment expenses for recoveries shall be deducted from the amount recovered.
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<PAGE>
The Reinsurers shall be subrogated to the rights of the Company to the
extent of their loss payments to the Company. The Company agrees to enforce its
rights of salvage, subrogation, and its rights against insurers or to assign
these rights to the Reinsurers. Recoveries shall be distributed to the parties
in an order inverse to that in which their liabilities accrued.
Article VIII - AUTOMATIC REINSTATEMENT
The Limit of Liability of the Reinsurers under each Exhibit of this
Agreement with respect to each loss occurrence shall be reduced by an amount
equal to the amount of liability paid by the Reinsurers, but that part of the
liability of the Reinsurers that is so reduced shall be automatically reinstated
from the commencement of the loss occurrence for which payment is made; however,
the Limit of Liability of the Reinsurers with respect to all loss occurrences
commencing during the term of this Agreement shall not exceed the amount set
forth in the section entitled LIABILITY OF THE REINSURERS of each Exhibit of
this Agreement. In consideration of this automatic reinstatement, the Company
shall pay to the Reinsurers for each amount reinstated an additional reinsurance
premium that shall be the product of the reinsurance premium set forth in the
section entitled REINSURANCE PREMIUM of each Exhibit of this Agreement,
multiplied by the amount of the reinstated Limit of Liability of the Reinsurers
divided by the total Limit of Liability of the Reinsurers for each loss
occurrence irrespective of the time of the commencement of the loss occurrence.
The Company shall pay such additional premium at the same time that the
Reinsurers make each payment of ultimate net loss. If the Company requests any
such payment of ultimate net loss before the actual reinsurance premium is
determined, the additional reinsurance premium shall be provisionally calculated
on 100% of the deposit reinsurance premium stipulated in each Exhibit of this
Agreement. Such additional reinsurance premium shall be recalculated and.
adjusted until both the reinsurance premium and the ultimate net loss are
finally determined.
Article IX - REPORTS AND REMITTANCES
(a) Claims and Losses
The Company shall report to the Reinsurers as soon as possible but
within 45 days of each loss occurrence, which in the Company's
opinion, may involve the reinsurance afforded by this Agreement. The
Company shall advise the Reinsurers of the estimated amount of
ultimate net loss in connection with each loss occurrence and of any
subsequent changes in such estimate.
As soon as possible but within 45 days after receipt of a definitive
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<PAGE>
statement of ultimate net loss from the Company, the Reinsurers shall
pay to the Company the Reinsurers' portion of ultimate net loss. Any
subsequent changes in the amount of ultimate net loss shall be
reported by the Company to the Reinsurers and the amount due either
party shall be remitted as soon as possible but within 45 days after
receipt of such report.
(b) P.C.S. Catastrophe Bulletins
The Company shall furnish to the Reinsurers, upon request, the following
information with respect to each catastrophe set forth in the Catastrophe
Bulletins published by the Property Claim Services:
(1) The preliminary estimate of the amount recoverable from the
Reinsurers;
(2) The Reinsurers' portion of claims, losses, and adjustment expense paid
less salvage recovered during each calendar quarter;
(3) The Reinsurers' portion of reserves for claims, losses, and adjustment
expense at the end of each calendar quarter.
(c) General
In addition to the reports required by (a) and (b) above and by the
Exhibits, the Company shall furnish such other information as may be
required by the Reinsurers for the completion of the Reinsurers' quarterly
and annual statements and internal records.
All reports shall be rendered on forms acceptable to the Company and the
Reinsurers.
Article X - CURRENCY
Wherever the sign "$" is used in this Agreement it shall mean United
States Dollars. Premiums due the Reinsurers and loss payments due the Company
shall be remitted in United States Dollars.
Article XI - REINSURANCE OVER THIS AGREEMENT
The Company shall advise the Reinsurers of any reinsurance of the
Company that would apply over and beyond the Limit of Liability of the
Reinsurers under Exhibit D of this Agreement.
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<PAGE>
Article XII - ERRORS AND OMISSIONS
The Reinsurers shall not be relieved of liability because of an error
or accidental omission of the Company in reporting any claim or loss or any
business reinsured under this Agreement, provided that the error or omission is
rectified promptly after discovery. The Reinsurers shall be obligated only for
the return of the premium paid for business reported but not reinsured under
this Agreement.
Article XIII - SPECIAL ACCEPTANCES
Business not within the terms of this Agreement may be submitted to
the Reinsurers for special acceptance and, if accepted by the Reinsurers, shall
be subject to all of the terms of this Agreement except as modified by the
special acceptance.
Article XIV - RESERVES AND TAXES
The Reinsurers shall maintain the required reserves as to the
Reinsurers' portion of unearned premium, if any, claims, losses, and adjustment
expense.
The Company shall be liable for all premium taxes on premium ceded to
the Reinsurers under this Agreement. If the Reinsurers are obligated to pay any
premium taxes on this premium, the Company shall reimburse the Reinsurers;
however, the Company shall not be required to pay taxes twice on the same
premium.
Article XV - OFFSET
The Company or the Reinsurers may offset any balance, whether on
account of premium, commission, claims or losses, adjustment expense, salvage,
or otherwise, due from one party to the other under this Agreement.
Article XVI - INSPECTION OF RECORDS
The Company shall allow the Reinsurers to inspect, at reasonable
times, the records of the Company relevant to the business reinsured under this
Agreement, including Company files concerning claims, losses, or legal
proceedings which involve or are likely to involve the Reinsurers.
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<PAGE>
Article XVII - ARBITRATION
Any unresolved difference of opinion between any of the Reinsurers and
the Company shall be submitted to arbitration by three arbitrators. If more than
one Reinsurer is involved in the same dispute, all such Reinsurers shall
constitute and act as one party for purposes of this Article and communications
shall be made by the Company to each of the Reinsurers constituting the one
party; provided, however, that nothing herein shall impair the rights of such
Reinsurers to assert several, rather than joint, defenses of claims, nor be
construed as changing the liability of the Reinsurers under the terms of this
Agreement from several to joint.
One arbitrator shall be chosen by the Reinsurer(s), and one shall be
chosen by the Company. The third arbitrator shall be chosen by the other two
arbitrators within ten (10) days after they have been appointed. If the two
arbitrators cannot agree upon a third arbitrator, each arbitrator shall nominate
three persons of whom the other shall reject two. The third arbitrator shall
then be chosen by drawing lots. If either party fails to choose an arbitrator
within thirty (30) days after receiving the written request of the other party
to do so, the latter shall choose both arbitrators, who shall choose the third
arbitrator. The arbitrators shall be impartial and shall be persons who are or
have been employed or engaged in a senior position in the insurance or
reinsurance business.
The party requesting arbitration (the "Petitioner") shall submit its
brief to the arbitrators within thirty (30) days after notice of the selection
of the third arbitrator. Upon receipt of the Petitioner's brief, the other party
(the "Respondent") shall have thirty (30) days to file a reply brief. On receipt
of the Respondent's brief, the Petitioner shall have twenty (20) days to file a
rebuttal brief. Respondent shall have twenty (20) days from the receipt of
Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may
extend the time for filing of briefs at the request of either party.
The arbitrators are relieved from judicial formalities and, in
addition to considering the rules of law and the customs and practices of the
insurance and reinsurance business, shall make their award with a view to
effecting the intent of this Agreement. The decision of the majority shall be
final and binding upon the parties. The costs of arbitration, including the fees
of the arbitrators, shall be shared equally unless the arbitrators decide
otherwise. The arbitration shall be held at the times and places agreed upon by
the arbitrators.
Article XVIII - INSOLVENCY OF THE COMPANY
In the event of the insolvency of the Company, the reinsurance
proceeds will be paid to the Company or the liquidator on the basis of the
amount of the claim allowed in the insolvency proceeding without diminution by
reason of the inability of the Company to pay all or part of the claim.
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The Reinsurers shall be given written notice of the pendency of each
claim against the Company on the policy(ies) reinsured hereunder within a
reasonable time after such claim is filed in the insolvency proceedings. The
Reinsurers shall have the right to investigate each such claim and to interpose,
at their own expense, in the proceeding where such claim is to be adjudicated,
any defenses which they may deem available to the Company or its liquidator. The
expense thus incurred by the Reinsurers shall be chargeable, subject to court
approval, against the insolvent Company as part of the expense of liquidation to
the extent of a proportionate share of the benefit which may accrue to the
Company solely as a result of the defense undertaken by the Reinsurers.
Article XIX - LOSS RESERVES (U.S. Dollar Reinsurance Letters of Credit)
(This Article applies only to those Reinsurers who cannot qualify for
credit in any State or any other governmental body having jurisdiction
over the Company's loss reserves.)
As regards all business coming within the scope of this Agreement, the
Company agrees that when it shall file with the Insurance Department or set up
on its books reserves for losses covered hereunder which it shall be required to
set up by law, it will forward to the Reinsurers a statement showing the
proportion of such loss reserves which is applicable to them. These reserves
will consist solely of known outstanding losses that have been reported to the
Reinsurers and allocated adjustment expense relating thereto. Each such
Reinsurer hereby agrees it will apply for and secure delivery to the Company of
a clean, unconditional, irrevocable Letter of Credit issued by a member bank of
the Federal Reserve System acceptable to the Company, in an amount equal to such
Reinsurer's proportion of said loss reserves or, at the option of such
Reinsurer, provide a cash advance in an amount equal to such Reinsurer's
proportion of said loss reserves. No reserves established in accordance with the
foregoing shall include or be applied towards security for losses incurred but
not reported.
The Company undertakes to use and apply any amounts which it may draw
upon such Irrevocable Letter of Credit pursuant to the terms of this Agreement,
if any, under which the Letter of Credit is held, and for the following purposes
only:
(a) To pay such Reinsurer's share or to reimburse the Company for such
Reinsurer's share of any ultimate net loss reinsured by this
Agreement.
(b) To make refund of any sum which is in excess of the actual amount
required to pay such Reinsurer's share of any ultimate net loss
reinsured by this Agreement.
The designated bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made only
upon the order of properly authorized representatives of the Company.
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Article XX - SERVICE OF SUIT
(This Article applies only to those Reinsurers who are domiciled
outside the United States of America and also to Reinsurers
unauthorized in the State of New York.)
In the event of the failure of the Reinsurers to whom this Article
applies, or any one of them, to pay any amount claimed to be due hereunder, such
Reinsurers, at the request of the Company, will submit to the jurisdiction of
any court of competent jurisdiction within the United States, and will comply
with all requirements necessary to give such court jurisdiction, and all matters
arising hereunder shall be determined in accordance with the law and practice of
such court.
Service of process in such suit may be made upon Messrs. Mendes and
Mount, 750 Seventh Avenue, New York, New York 10019-6829, and in any suit
instituted against any one of them upon this Agreement, the Reinsurers will
abide by the final decision of such court or any appellate court in the event of
an appeal.
The above named are authorized and directed to accept service of
process on behalf of the Reinsurers in any such suit and/or upon the request of
the Company to give a written undertaking to the Company that they will enter a
general appearance on behalf of Reinsurers or any one of them in the event such
a suit shall be instituted.
Further, pursuant to any statute of any state, territory, or district
of the United States which makes provisions therefor, the Reinsurers to whom
this Article applies hereby designate the Superintendent, Commissioner or
Director of Insurance or other officer specified for that purpose in the
statute, or his successor or successors in office, as their true and lawful
attorney upon whom may be served any lawful process in any action, suit, or
proceeding instituted by or on behalf of the Company or any beneficiary
hereunder arising out of this Agreement, and hereby designate the above named
Mendes and Mount as the firm to whom the said officer is authorized to mail such
process or a true copy thereof.
Article XXI - FEDERAL EXCISE TAX
(This Article applies only to those Reinsurers domiciled outside the
United States of America, excepting Reinsurers exempt from the Federal
Excise Tax.)
The Reinsurers have agreed to allow for the purpose of paying Federal
Excise Tax 1% of the premium payable hereon to the extent such premium is
subject to Federal Excise Tax.
In the event of any return of premium becoming due hereon the
Reinsurers will
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deduct from the amount of the return and the Company or its Agent should take
steps to recover the tax from the United States Government.
Article XXII - INTERMEDIARY
Herbert Clough Inc. is hereby recognized as the Intermediary
negotiating this Agreement for all business hereunder. All communications
(including but not limited to notices, statements, premiums, return premiums,
commissions, taxes, losses, loss adjustment expense, salvages, and loss
settlements) relating thereto shall be transmitted to the Company or the
Reinsurers through Herbert Clough Inc., Financial Centre, P.O. Box 10216,
Stamford, Connecticut 06904-2216. Payments by the Company to the Intermediary
shall be deemed to constitute payment to the Reinsurers. Payments by the
Reinsurers to the Intermediary shall be deemed only to constitute payment to the
Company to the extent that such payments are actually received by the Company.
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Effective: January 1, 1996
EXHIBIT A
Attached to and made a part of
HCI Agreement No. 390
Property Catastrophe Excess of Loss Reinsurance Agreement
FIRST EXCESS OF LOSS REINSURANCE (Catastrophe)
of
Property Business
Section 1 - LIABILITY OF THE REINSURERS
The Reinsurers shall pay to the Company, with respect to each loss
occurrence 95% of the amount of ultimate net loss in excess of the Company
Retention equal to the greater of:
(a) An amount equal to 5.5% of the Company's subject net written premium
for the term of this Agreement on the business reinsured hereunder; or
(b) $800,000.
but not exceeding the Limit of Liability of the Reinsurer of 95% of the next
$1,000,000 of ultimate net loss with respect to such loss occurrence nor 95% of
$2,000,000 with respect to all loss occurrences commencing during the term of
this Agreement.
A provisional Company Retention of $1,000,000 shall apply until the
actual Company Retention is determined on finalization of the Company's subject
net written premium for the term of this Agreement.
The Company shall retain net for its own account, with respect to each
loss occurrence, the remaining 5% of such ultimate net loss.
Section 2 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurers 0.90% of the Company's subject
net written premium during the term of the Agreement, subject to a minimum
reinsurance premium of $173,000 and a deposit reinsurance premium of $216,000.
Section 3 - REINSURANCE PREMIUM REPORTS AND REMITTANCES
The Company shall pay to the Reinsurers the deposit reinsurance premium
stipulated in the section entitled REINSURANCE PREMIUM in two equal installments
of $108,000 each on or before January 1, 1996 and July 1, 1996.
HCI REFERENCE DMD
<PAGE>
On or before the beginning of each calendar quarter, the Company shall
render to the Reinsurers a report of the portion, if any, of the minimum and
deposit reinsurance premium stipulated in the section entitled REINSURANCE
PREMIUM due for such quarter.
Within 60 days after the expiration of this Agreement, the Company
shall render to the Reinsurers a report of the Company's subject net written
premium during the term of the Agreement. The Company shall calculate the
reinsurance premium thereon, shall balance such amount against the deposit
reinsurance premium previously paid, and the amount due either party, subject to
the minimum reinsurance premium, shall be remitted within 60 days.
A-2
<PAGE>
Effective: January 1, 1996
EXHIBIT B
Attached to and made a part of
HCI Agreement No. 390
Property Catastrophe Excess of Loss Reinsurance Agreement
SECOND EXCESS OF LOSS REINSURANCE (Catastrophe)
of
Property Business
Section 1 - LIABILITY OF THE REINSURERS
The Reinsurers shall pay to the Company, with respect to each loss
occurrence 95% of the amount of ultimate net loss in excess of the sum of:
(a) The Company Retention equal to the greater of:
(1) An amount equal to 5.5% of the Company's subject net written
premium for the term of this Agreement on the business reinsured
hereunder; or
(2) $800,000; and
(b) The First Excess Cover of $1,000,000,
but not exceeding the Limit of Liability of the Reinsurer of 95% of the next
$3,000,000 of ultimate net loss with respect to such loss occurrence 95% of
$6,000,000 with respect to all loss occurrences commencing during the term of
this Agreement.
A provisional Company Retention of $1,000,000 shall apply until the
actual , Company Retention is determined on finalization of the Company's
subject net written premium for the term of this Agreement.
The Company shall retain net for its own account, with respect to
each loss occurrence, the remaining 5% of such ultimate net loss.
Section 2 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurers 1.200% of the Company's subject
net written premium during the term of the Agreement, subject to a minimum
reinsurance premium of $230,000 and a deposit reinsurance premium of $288,000.
HCI REFERENCE DME
<PAGE>
Section 3 - REINSURANCE PREMIUM REPORTS AND REMITTANCES
The Company shall pay to the Reinsurers the deposit reinsurance premium
stipulated in the section entitled REINSURANCE PREMIUM in two equal installments
of $144,000 each on or before January 1, 1996 and July 1, 1996.
On or before the beginning of each calendar quarter, the Company shall
render to the Reinsurers a report of the portion, if any, of the minimum and
deposit reinsurance premium stipulated in the section entitled REINSURANCE
PREMIUM due for such quarter.
Within 60 days after the expiration of this Agreement, the Company
shall render to the Reinsurers a report of the Company's subject net written
premium during the term of the Agreement. The Company shall calculate the
reinsurance premium thereon, shall balance such amount against the deposit
reinsurance premium previously paid, and the amount due either party, subject to
the minimum reinsurance premium, shall be remitted within 60 days.
B-2
HCI REFERENCE DME
<PAGE>
Effective: January 1, 1996
EXHIBIT C
Attached to and made a part of
HCI Agreement No. 390
Property Catastrophe Excess of Loss Reinsurance Agreement
THIRD EXCESS OF LOSS REINSURANCE (Catastrophe)
of
Property Business
Section 1 - LIABILITY OF THE REINSURERS
The Reinsurers shall pay to the Company, with respect to each loss
occurrence, 95% of the amount of ultimate net loss in excess of the sum of:
(a) The Company Retention equal to the greater of:
(1) An amount equal to 5.5% of the Company's subject net written
premium for the term of this Agreement on the business reinsured
hereunder; or
(2) $800,000; and
(b) The First Excess Cover of $1,000,000; and
(c) The Second Excess Cover of $3,000,000
but not exceeding the Limit of Liability of the Reinsurer of 95% of the next
$5,000,000 of ultimate net loss with respect to such loss occurrence nor 95% of
$10,000,000 with respect to all loss occurrences commencing during the term of
this Agreement.
A provisional Company Retention of $1,000,000 shall apply until the
actual Company Retention is determined on finalization of the Company's subject
net written premium for the term of this Agreement.
The Company shall retain net for its own account, with respect to each
loss occurrence the remaining 5% of such ultimate net loss.
Section 2 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurers 1.220% of the Company's subject
net written premium during the term of the Agreement, subject to a minimum
reinsurance premium of $234,000 and a deposit reinsurance premium of $293,000.
HCI REFERENCE DMF
<PAGE>
Section 3 - REINSURANCE PREMIUM REPORTS AND REMITTANCES
The Company shall pay to the Reinsurers the deposit reinsurance
premium stipulated in the section entitled REINSURANCE PREMIUM in two equal
installments of $146,500 each on or before January 1, 1996 and July 1, 1996.
On or before the beginning of each calendar quarter, the Company shall
render to the Reinsurers a report of the portion, if any, of the minimum and
deposit reinsurance premium stipulated in the section entitled REINSURANCE
PREMIUM due for such quarter.
Within 60 days after the expiration of this Agreement, the Company
shall render to the Reinsurers a report of the Company's subject net written
premium during the term of the Agreement. The Company shall calculate the
reinsurance premium thereon, shall balance such amount against the deposit
reinsurance premium previously paid, and the amount due either party, subject to
the minimum reinsurance premium, shall be remitted within 60 days.
C-2
HCI REFERENCE DMF
<PAGE>
Effective: January 1, 1996
EXHIBIT D
Attached to and made a part of
HCI Agreement No. 390
Property Catastrophe Excess of Loss Reinsurance Agreement
FOURTH EXCESS OF LOSS REINSURANCE (Catastrophe)
of
Property Business
Section 1 - LIABILITY OF THE REINSURERS
The Reinsurers shall pay to the Company, with respect to each loss
occurrence, 95% of the amount of ultimate net loss in excess of the sum of:
(a) The Company Retention equal to the greater of:
(1) An amount equal to 5.5% of the Company's subject net written
premium for the term of this Agreement on the business reinsured
hereunder; or
(2) $800,000; and
(b) The First Excess Cover of $1,000,000; and
(c) The Second Excess Cover of $3,000,000; and
(d) The Third Excess Cover of $5,000,000
but not exceeding the Limit of Liability of the Reinsurer of 95% of the next
$5,000,000 of ultimate net loss with respect to such loss occurrence nor 95% of
$10,000,000 with respect to all loss occurrences commencing during the term of
this Agreement.
A provisional Company Retention of $1,000,000 shall apply until the
actual Company Retention is determined on finalization of the Company's subject
net written premium for the term of this Agreement.
The Company shall retain net for its own account, with respect to each
loss occurrence, the remaining 5% of such ultimate net loss.
Section 2 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurers 0.868% of the Company's subject
net written premium during the term of the Agreement, subject to a minimum
reinsurance premium of $167,000 and a deposit reinsurance premium of $208,000.
HCI REFERENCE DMG
<PAGE>
Section 3 - REINSURANCE PREMIUM REPORTS AND REMITTANCES
The Company shall pay to the Reinsurers the deposit reinsurance
premium stipulated in the section entitled REINSURANCE PREMIUM in two equal
installments of $104,000 each on or before January 1, 1996 and July 1, 1996.
On or before the beginning of each calendar quarter, the Company shall
render to the Reinsurers a report of the portion, if any, of the minimum and
deposit reinsurance premium stipulated in the section entitled REINSURANCE
PREMIUM due for such quarter.
Within 60 days after the expiration of this Agreement, the Company
shall render to the Reinsurers a report of the Company's subject net written
premium during the term of the Agreement. The Company shall calculate the
reinsurance premium thereon, shall balance such amount against the deposit
reinsurance premium previously paid, and the amount due either party, subject to
the minimum reinsurance premium, shall be remitted within 60 days.
D-2
HCI REFERENCE DMG
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - USA
(1) This Agreement does not cover any loss or liability accruing to the
Company directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause, this Agreement does not cover any loss or liability accruing to the
Company, directly or indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(i) Nuclear reactor power plants including all auxiliary property on the
site, or
(ii) Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
(iii) Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material", and
for reprocessing, salvaging, chemically separating, storing or
disposing of "spent" nuclear fuel or waste materials, or
(iv) Installations other than those listed in paragraph (2) (iii) above
using substantial quantities of radioactive isotopes or other products
of nuclear fission.
(3) Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate:
(a) where the Company does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January 1960
this sub-paragraph (b) shall only apply provided the said radioactive
contamination exclusion provision has been approved by the
Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operations of paragraphs (1),(2) and
(3) hereof, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
(5) It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Company to be the primary hazard.
(6) The term "special nuclear material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.
(7) The Company to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: Without in any way restricting the operation of paragraph (1) hereof,
it is understood and agreed that:
(a) all policies issued by the Company on or before 31st December 1957
shall be free from the application of the other provisions of this
Clause until expiry date or 31st December 1960 whichever first occurs
whereupon all the provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the
Company on or before 31st December 1958 Shall be free from the
application of the other provisions of this Clause until expiry date
or 31st December 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.
<PAGE>
POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
SECTION A
Excluding:
(a) All Business derived directly or indirectly from any Pool, Association
or Syndicate which maintains its own reinsurance facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory) formed after March
1, 1968 for the purpose of insuring Property whether on a country wide
basis or in the respect of designated areas. This exclusion shall not
apply to so-called Automobile Insurance Plans or other pools formed to
provide coverage for Automobile Physical damage.
SECTION B
It is agreed that business written by the Company for the same perils, which is
known at the time to be insured by, or in excess of underlying amounts placed in
the following Pools, Associations or Syndicates, whether by way of insurance or
reinsurance, is excluded hereunder:
Industrial Risk Insurers; Associated Factory Mutuals; Improved Risk
Mutuals.
Any Pool, Association or Syndicate formed for the purpose of writing Oil,
Gas or Pertro-Chemical Plants and/or Oil or Gas Drilling Rigs.
United States Aircraft Insurance Group, Canadian Aircraft Insurance Group,
Associated Aviation Underwriters. American Aviation Underwriters.
Section B does not apply:
(a) Where the Total Insured value over all interests of the risk in
question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company is aware
that the key location is known at the time to be insured in any Pool,
Association or Syndicate named above, other than as provided for under
Section B (a).
-1-
<PAGE>
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad
Schedules) and Builders Risks on the classes of risks specified in
this subsection (d) only.
SECTION C
NEVERTHELESS the Reinsurers specifically agree that liability accruing to the
Company from its participation in residual market mechanisms including but not
limited to:
(1) The following so-called "Coastal Pools"
ALABAMA INSURANCE UNDERWRITING ASSOCIATION FLORIDA WINDSTORM
UNDERWRITING ASSOCIATION LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION NORTH CAROLINA
INSURANCE UNDERWRITING ASSOCIATION SOUTH CAROLINA WINDSTORM AND HAIL
UNDERWRITING ASSOCIATION TEXAS CATASTROPHE PROPERTY INSURANCE
ASSOCIATION
and
(2) All "Fair Plan" and "Rural Risk Plan" Business, including but not
limited to:
Florida Windstorm Underwriting Association (FWUA)
Florida Property and Casualty Joint Underwriting Association (FPCJUA)
Residential Property and Casualty Joint Underwriting
Association (RPCJUA)
for all perils otherwise protected hereunder shall not be excluded, except that
this reinsurance does not include any increase in such liability resulting from:
(i) The inability of any other participant in such Residual Market Mechanism
including but not limited to "Coastal Pool" and/or "Fair Plan" and/or
"Rural Risk Plan" to meet its liability.
(ii) Any claim against such Residual Market Mechanism including but not limited
to "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan" or any
participant therein, including the Company, whether by way of subrogation
or otherwise, brought by or on behalf of any insolvency fund.
-2-
<PAGE>
SECTION D
NOTWITHSTANDING Section C above, in respect of the FWUA, FPCJUA, and IRPCJUA,
where an assessment is made against the Company by the FWUA, the FPCJUA, the
RPCJUA, or any combination thereof, the maximum loss that the Company may
include in the Ultimate Net Loss in respect of any loss occurrence hereunder
shall nor exceed the lesser of:
1. The Company's assessment from the relevant entity (FWUA, FPCJUA and/or
RPCJUA) for the accounting year in which the loss occurrence commenced, or
2. The product of the following:
a) The Company's percentage participation in the relevant entity for the
accounting year in which the loss occurrence commenced, and
b) The relevant entity's total losses in such loss occurrence.
Any assessments for accounting years subsequent to that in which the
loss occurrence commenced may not be included in the Ultimate Net Loss
hereunder. Moreover, notwithstanding Section C above, in respect of the FWUA,
the FPCJUA and/or the RPCJUA, the Ultimate Net Loss hereunder shall not include
any monies expended to purchase or retire bonds as a consequence of being a
member of the FWUA, the FPCJUA and/or the RPCJUA. For the purposes of this
Agreement, the Company may not include in the Ultimate Net Loss any assessment
or any percentage assessment levied by the FWUA, the FPCJUA and/or the RPCJUA to
meet the obligations of any insolvent insurer member or other party, or to meet
any obligations arising from the deferment by the FWUA, FPCJUA and/or RPCJUA of
the collection of monies.
NOTES:Wherever used herein the terms:
"Company" shall be understood to mean "Reinsured", "Reassured" or
whatever other term is used in the attached reinsurance
document to designate the reinsured company or companies.
"Contract" shall be understood to mean "Agreement", "Policy" or
whatever other term is used to designate the attached
reinsurance document.
"Reinsurers" shall be understood to mean "Underwriters" or whatever other
term is used in the attached reinsurance document to
designate the reinsurer or reinsurers.
-3-
Exhibit 10.18
ENDORSEMENT NO. 4
(TERMINATION ENDORSEMENT)
to
MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT NO. 6404-09
between
PENN-AMERICA INSURANCE COMPANY
Hatboro, Pennsylvania
(hereinafter referred to as the "COMPANY")
and
NATIONAL REINSURANCE CORPORATION
Stamford, Connecticut
(hereinafter referred to as the "REINSURER")
<PAGE>
-2-
IT IS MUTUALLY AGREED that effective at 12:01 a.m., May 1, 1996, this Agreement
is terminated. The REINSURER shall not be liable for any losses occuring after
the effective time and date of termination, in consideration of which the
REINSURER shall return to the COMPANY the unearned premium, if any, less
applicable commission, as respects business the subject matter hereof, in force
at the time and date of termination.
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement No. 4 to be
executed in duplicate, in Hatboro, Pennsylvania, this 31st day of December,
1996.
PENN-AMERICA INSURANCE COMPANY
/s/ John DiBiasi
ATTEST: /s/ Sheila McNamee
And in Stamford, Connecticut, this 24th day of June, 1996.
NATIONAL REINSURANCE CORPORATION
/s/ Paul DeStefano
ATTEST: /s/ Diane E. DeSiano
Penn-America Group, Inc.
1996 Annual Report
Thinking locally. Acting locally.
<PAGE>
About Penn-America Group, Inc.
Contents
President's Message to Stockholders 1
Financial Review 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Consolidated Balance Sheets - December 31, 1996 and 1995 14
Consolidated Statements of Earnings - Years ended
December 31, 1996 , 1995 and 1994 15
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994 16
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994 17
Notes to Consolidated Financial Statements 18
Stockholders', Board of Directors and Management
Information Inside Back Cover
About Penn-America Group, Inc.
As social and business structures in the U.S. fragment, hundreds of
micro-markets for products and services are being created. We have built our
success by recognizing this fact of life. By thinking and acting locally, we
have built an effective system for serving insurance markets that change
town-by-town and day-by-day.
We have strong relationships with 48 entrepreneurial general agents who live and
work in the suburban and rural areas of the country that are most affected by
these changing insurance markets. They, in turn, have relationships with
thousands of retail insurance producers. Together, we serve the routine
insurance needs of other small business entrepreneurs and individuals who have
been shut out of "standard" insurance markets because much larger insurance
companies have failed to adapt to current realities.
The tens of thousands of small business owners and individuals we serve together
are the economic engine that is powering the transformation of the United States
economy: contractors, grocers, artisans, plumbers, carpenters, restaurateurs,
apartment and garage owners, home-based consultants and their neighbors. They
represent a fast-growing insurance market that will continue to grow as the
migration to suburban and rural America continues -- a return to simpler values,
made possible by technology.
Penn-America Group, Inc.(NASDAQ: PAGI) is the parent company of Penn-America
Insurance Company. The company develops and provides standard and non-standard
commercial property, general liability, commercial multi-peril and personal
automobile insurance products that meet the unique requirements of the suburban
and rural markets served by a small group of entrepreneurial general agents with
offices nationwide.
Penn-America had its initial public stock offering in October 1993. In every
quarter since that time it has produced GAAP underwriting profitability and
steady growth that are to be expected of a well-managed insurance business. In
January 1997, Penn-America announced a three-for-two stock split, in the form of
a 50% stock dividend, and its intention to maintain the current $.16 per share
annual dividend. These actions were taken to improve the company's liquidity and
reward long-time shareholders. As a result, outstanding share numbers and per
share values in this report have been restated. Located in Hatboro, PA, a small
town near Philadelphia, Penn-America is rated "A" (Excellent) by A.M. Best
Company.
<PAGE>
For, about and by our agents.
A letter from Jon S. Saltzman, President and CEO
No matter what your relationship with Penn-America is, you have a vital interest
in the fact that there are 90 of us here in Hatboro focused on a single
activity: making the lives of our agents easier and better. By "listening-in" to
our ongoing conversation with the agents we serve, anyone with an investment in
Penn-America will better understand and appreciate why Penn-America produces the
results it does, year-in and year-out.
This annual report, then, is for, about and by our agents, centered around our
two most important business strategies: Thinking locally. Acting locally.
Most insurance companies think and act as if there is one national market for
insurance products. In fact, because the huge insurance companies do think and
act nationally, they continually create opportunities for our local general
agents. A large insurer closes another local branch office because national
thinking demands "economies of scale." The need to feed bloated bureaucracies
leads to abandoning the "unprofitable" $2,000 annual policies that are our
agents' bread and butter. Big company products are designed to serve nation-wide
needs adequately but don't serve local needs well.
Our general agents live and work in secondary and tertiary markets -- small town
America, Main Street America, the suburban and rural places to which more and
more Americans are migrating, returning to the values of the 1950s, empowered by
the technology of the 1990s. As business, economic, and social conditions shift
where our agents live, they are positioned to take advantage of the new
opportunities created by our competitors' national thinking. Because we focus
sharply on the needs of our agents, we are organized to respond rapidly with
new, enhanced or modified insurance products suited to those local
opportunities.
1
<PAGE>
Our job is to listen.
We listen to our general agents, in scores of ways, every day. Through frequent
personal meetings, during seminars they all attend each year at seven locations
around the country, at Agents' Advisory Council meetings, from our offices, from
our homes and cars, by telephone, by E-mail, by "snail mail." By listening, we
stay focused on local conditions and needs. By listening, we build the systems
and products that are needed to turn local thinking into local actions that help
our agents' businesses to grow. That is our job.
The actions we take to support our agents day-to-day are not dramatic. They are
small, incremental, local:
o One agent mentioned a need to add "ordinance coverage" to our property
line, that would not only replace an insured's damaged building but also
upgrade its systems to meet current building codes as required in some
local areas. The policy change appeared in our agency manual within two
weeks;
o An agent in Colorado needed a special child day care program to meet the
request of a customer. Our marketing manager worked directly with the agent
and his customer to create a new program designed specifically for the
need;
o In North Carolina, our agent needed a program to insure a group care
program for those needing assistance with routine daily activities. While
he was conducting business out of the country, our chief underwriting
officer worked directly with the retail insurance producer. We delivered
the product in several weeks;
o Several agents told us, at our Advisory Council meeting, that they see a
trend toward adult day care programs, which have unique insurance needs.
Today, we offer the product;
o One of our agents sold his business to another well-known and established
entrepreneur. Nonetheless, one of our competitors canceled its contract
with the new owner. Within ten days, our chief underwriting officer was in
the new owner's office for several days, reviewing policies and procedures,
pre-underwriting policies dropped by our competitor and helping the new
owner to continue his business seamlessly.
2
<PAGE>
Listening turns local thinking into local actions.
[GRAPHIC OMITTED]
3
<PAGE>
"We've developed a personal relationship with the people at Penn-America,
which is how we like to do business -- with people we know and enjoy
personally as well as from a business standpoint."
"Penn-America is definitely the most responsive company we have in terms of
getting products out quickly. They're also the easiest company to work
with. They put a lot of faith in us, without second-guessing us. It's to
their advantage because we protect them in return. They've instituted new
programs and modified programs to suit our needs and they've done it with a
minimum of red tape and waiting time. In fact, in one case, we had the
revised manual pages by fax the very next day. In this business, you have
to act quickly or you lose the opportunity."
Patti Nunnally, CPCU, President
Royal Oak Underwriters
Richmond, VA
[GRAPHIC OMITTED - Photograph of Patti Nunnally]
"We've developed a personal relationship with the people at Penn-America,
which is how we like to do business -- with people we know and enjoy
personally as well as from a business standpoint. They were the first
company we ever had in our agency and they've stuck with us from the
beginning. Not only did they put us in business, they've given us the
products we needed to grow to be a $40 million agency. There's no doubt in
my mind we'll reach $100 million some day and we'll do it without the
problems associated with dealing with most insurance companies."
Charles Smith, Chairman & CEO
Eileen Smith, Vice Chairperson & Secretary
Carnegie General Insurance Agency
Thousand Oaks, CA
[GRAPHIC OMITTED - Photograph of Charles Smith & Eileen Smith]
4
<PAGE>
"The most important thing is the very close personal relationship our
underwriters have with the Penn-America underwriters and the speed with
which we get responses from them. We're very comfortable with their claims
handling and underwriting philosophies, too. We have a lot of trust from
them, they feel comfortable with what we do for them. And we feel the same
way about them."
Neil Rice, President
Joseph L. Rice, Ltd.
Boston, MA
[GRAPHIC OMITTED - Photograph of Neil Rice]
"Penn-America took a chance appointing our firm because we are much larger
than their typical producer -- we are close to $100 million in premium
volume, with more than 100 carriers represented. Penn-America was confident
that they would not be lost in the shuffle of our other carriers because
they have tremendous products to distribute, along with excellent people
for us to deal with. As it turns out, they were correct since our employees
rank the Penn-America people as #1 to deal with; and our customers, the
retail agents, rank their products as superior to other companies'
comparable products. This has been proven during the past few years: we
have more than quadrupled our original production commitment to
Penn-America. They are extremely easy to deal with and are just plain nice
people."
Jim Gresham, Chairman
Tony Gresham, Sr. Vice President
Gresham and Associates
Stockbridge, GA
[GRAPHIC OMITTED - Photograph of Jim Gresham & Tony Gresham, Sr.]
5
<PAGE>
Our day-to-day activities are simple; this is not a company to follow if you're
looking for dramatic change. But our straightforward focus on the satisfaction
and success of our general agents does produce dramatic results. For example:
In terms of premium volume, we rank as one of the top three companies in an
overwhelming majority of our agents' offices. Further, on a scale of 7, our
agents rank us at 6.5 compared to our competitors in terms of the overall
quality of service we provide;
For more than three-quarters of the people on the front lines of our agents'
operations -- their underwriting staffs -- Penn-America is the "most-preferred"
company with which they do business.
It is because we focus on the success of our agents that we, too, have grown and
prospered:
o We had statutory underwriting profit of $2.7 million for 1996;
o Total assets rose to $159 million in 1996 from $138 million in 1995;
o Gross written premiums grew 20% to $80.5 million in 1996 from $66.9 million
in 1995;
o Net written premiums, after reinsurance, increased 19.9% to $73.5 million
from $61.3 million in 1995;
o Net earned premiums were up 21% to $69.1 million in 1996 from $57.2 million
in 1995;
o Net earnings increased 16% to $7.0 million in 1996 from $6.0 million in
1995.
As we've grown, so has interest in Penn-America as a publicly-traded company. To
improve our liquidity and to reward long-term shareholders -- including all of
our agents and many of our employees -- we announced, in January 1997, a
three-for-two stock split in the form of a 50% stock dividend. We also said that
we do not intend to change our current $0.16 per share annual dividend,
effectively increasing our dividend by 50%. An investment in Penn-America is
increasingly attractive:
o Penn-America's statutory combined ratios continued to outperform the
insurance industry and our peers, showing 94.3% in 1996 versus 93% in 1995;
o The book value of a single share (adjusted for the stock split) of
Penn-America stock rose 16% during 1996, from $5.46 per share on December
31, 1995 to $6.34 on the same date in 1996;
o Net operating income per share (adjusted for the stock split) increased to
$0.96 per share in 1996, compared to $0.78 per share in 1995.
For too many insurance companies, a failure to make money by selling insurance
is masked by investment returns. We're in the insurance business so we believe
that we should first make a profit on the products we sell and invest wisely.
This is how we did it:
o In 1996, we produced a strong GAAP underwriting profit of $3.7 million, a
31% increase over last year's $2.8 million;
Financial Highlights
(Restated for three-for-two stock split in January, 1997)
[GRAPHIC OMITTED - BAR CHART OF NET EARNINGS PER SHARE FOR 1993-1996]
[GRAPHIC OMITTED - BAR CHART OF NET INVESTMENT INCOME FOR 1993-1996]
[GRAPHIC OMITTED - BAR CHART OF NET EARNED PREMIUMS FOR 1993-1996]
[GRAPHIC OMITTED - BAR CHART OF GROSS WRITTEN PREMIUMS FOR 1993-1996]
[GRAPHIC OMITTED - BAR CHART OF NET INCOME FOR 1993-1996]
(In thousands except per share and ratio data)
1996 1995
Total Assets $158,605 $137,763
Gross Written Premiums 80,496 66,953
Net Earned Premiums 69,081 57,228
Statutory Combined Loss and
Expense Ratios 94.3% 93.0%
Net Operating Income (1) 6,394 5,182
Net Earnings 6,993 6,026
Net Operating Income Per Share (1) $ 0.96 $ 0.78
Net Earnings Per Share $ 1.05 $ 0.91
Stockholders' Equity 42,337 36,250
(1) Net Operating income is net of tax and excludes after-tax realized
investment gains and losses.
6
<PAGE>
o Our total investment portfolio increased 18% to $112.6 million, compared to
$95.2 million last year. Income from these investments increased 32% to
$6.7 million, from $5.1 million in 1995;
o Net realized capital gains were, after tax, $598,000 or $0.09 per share;
o As of December 31, 1996, 99% of our fixed maturity securities (89% of the
total investment portfolio) were rated A- or better by Standard & Poor's.
We move forward in small steps, continuously improving what we do and
how we do it. Here are some of the steps we took forward during 1996:
o We shared our success with our shareholders -- including most of our
general agents and our employees -- by distributing a quarterly dividend of
$.03 per share, increased in February of 1996 from $.02 per share. In fact,
with the effect of the three-for-two stock split, our annual $0.16 dividend
per share will effectively increase our dividend 50% in 1997;
o In June, our rating of A (Excellent) was reaffirmed by A.M. Best Company,
the independent insurance rating firm;
o Our personal automobile insurance business expanded into a total of five
states: California, Washington, Nevada, Kentucky and South Dakota and now
represents about 28% of Penn-America Insurance Company's total premium
volume. In 1997, we expect to expand this business line. In October,
Penn-America filed with the Insurance Commissioner of the Commonwealth of
Pennsylvania to create a separate, wholly-owned subsidiary of Penn-America
Group, to be called Penn-Star Insurance Company. This will allow a focused
management vehicle for personal automobile and possibly other personal
insurance lines. Pending regulatory approval, Penn-Star will begin
operations during 1997;
o In May, we entered into a reinsurance agreement with General Reinsurance, a
subsidiary of General Re Corporation, the largest domestic professional
reinsurance entity, through which the company became the primary reinsurer
of Penn-America's property and casualty business;
o The number of agents who submit accounts current information to us
electronically doubled in 1996. Electronic submission reduces
reconciliation time by 75%. Similarly, the number of agents now issuing
policies electronically increased from 60% last year to a current 80%;
o We are addressing, well in advance of the year 2000, the problem that will
face all owners of large computer networks at that time: today's computers
were designed to recognize dates in the twentieth century only. During
1996, our technical staff developed a computer program that has analyzed
the library of more than 800 specialized software programs used in our
business. During 1997, they will be adjusting nearly 1 million lines of
computer code in the 81 programs affected so that our business will
continue without interruption at the dawn of the 21st century;
o We established a home in cyberspace at http://www.penn-america.com. Our new
site on the World Wide Web now provides easy access to a wealth of
information about Penn-America and is an important component in our
long-term technology plans.
Thinking and acting locally is at the core of Penn-America's mindset. We express
it where we live, too, through our employees' annual charitable giving -- in
1996, they provided the entire annual budget of the Hatboro Challenger Little
League for kids with special needs -- through the scholarship we provide each
year to a local high school business student, through making available scores of
our off-lease computers to our employees at minimal cost, through strong support
of our employees' professional development, through the quiet, personal support
we provide to help employees with special challenges to realize their potential.
Acting locally, where we live, where our agents live, allows us to thrive as a
company and, in turn contribute to the prosperity and well-being of everyone who
has an investment in Penn-America.
Because we think locally and act locally, I'm able to report that nothing has
changed dramatically at Penn-America during 1996. We're still in the business of
helping our agents' businesses to prosper. And they consistently return the
favor.
Sincerely,
/s/ John S. Saltzman
Jon S. Saltzman
President and Chief Executive Officer
7
<PAGE>
Financial Review
<TABLE>
<CAPTION>
Selected Five Year Financial Data
(in thousands, except per share data) At or for the Years ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating data
Revenues
Premiums earned $ 69,081 $ 57,228 $ 39,985 $ 25,961 $ 21,708
Net investment income 6,705 5,067 3,635 2,886 2,533
Net realized investment gains (losses) 906 1,279 (713) 753 1,012
--------- --------- --------- --------- ---------
Total revenues 76,692 63,574 42,907 29,600 25,253
--------- --------- --------- --------- ---------
Losses and expenses
Losses and loss adjustment expenses 43,292 35,835 24,855 16,411 13,865
Amortization of deferred policy
acquisition costs 17,785 14,237 9,381 6,146 4,845
Other expenses 5,233 4,595 3,681 3,420 3,301
--------- --------- --------- --------- ---------
Total expenses 66,310 54,667 37,917 25,977 22,011
--------- --------- --------- --------- ---------
Earnings before income tax 10,382 8,907 4,990 3,623 3,242
Income taxes 3,389 2,881 1,579 1,115 970
--------- --------- --------- --------- ---------
Net earnings $ 6,993 $ 6,026 $ 3,411 $ 2,508 $ 2,272
========= ========= ========= ========= =========
Per share data:(1)
(Adjusted for 3-for-2 split declared on January 29, 1997)
Operating earnings per share $ 0.96 $ 0.78 $ 0.59 -- --
Net earnings per share $ 1.05 $ 0.91 $ 0.51 -- --
Pro forma net earnings per share (2) -- -- -- $ .50 $ 0.49
Cash dividend (3) $ .11 $ .06 -- $ 1.13 $ 0.07
Weighted average shares used in calculating 6,663 6,645 6,645 4,997 4,652
per share data
Other data
Gross written premium $ 80,496 $ 66,953 $ 53,926 $ 35,521 $ 27,539
Net written premium 73,469 61,286 48,343 28,494 22,616
Combined ratio (GAAP basis) 94.7% 95.1% 94.6% 99.8% 101.1%
Balance sheet data
Assets
Investments and cash $ 115,550 $ 100,428 $ 72,896 $ 61,764 $ 47,360
Total assets 158,605 137,763 100,112 78,507 61,098
Liabilities and stockholders' equity
Unpaid losses and loss adjustment expenses $ 70,728 $ 60,139 $ 44,796 $ 33,314 $ 31,703
Unearned premiums 30,865 26,245 22,296 14,069 10,884
Notes payable and capitalized lease obligations 11,030 12,040 1,756 436 465
Total liabilities 116,268 101,513 71,742 51,127 44,555
Total stockholders' equity 42,337 36,250 28,366 27,380 16,543
Total stockholders' equity per share (1) 6.34 5.46 4.27 4.12 3.94
Statutory data
Policyholders' surplus of insurance subsidiary $ 41,665 $ 39,118 $ 25,677 $ 25,337 $ 14,045
Loss ratio 62.7% 62.6% 62.2% 63.2% 63.9%
Expense ratio 31.6 30.4 32.3 34.8 35.6
Combined ratio 94.3 93.0 94.5 98.0 99.5
Property-casualty industry combined ratio (4) 107.0 106.5 108.5 106.9 115.8
<FN>
(1) Data adjusted to reflect 3-for-2 stock split declared on January 29, 1997,
for shareholders of record on February 14, 1997.
(2) Pro forma net earnings per share have been included to reflect the economic
impact of the dollar amount of a dividend in excess of 1993 and 1992 net
earnings, assuming the dividend had been paid at January 1, 1992 with funds
obtained from sale of shares. Pro forma net earnings per share for 1993 are
based upon 4,997,156 shares which include 4,581,822 weighted average shares
outstanding and 415,334 shares assumed to be outstanding since January 1,
1992 at $6.00 per share.
(3) Reflects and extraordinary dividend of $5,000,000 paid to Penn Independent
Corporation prior to the Company's initial public offering in October 1993
(4) Source: Best Week, Property/Casualty Supplement, January 6, 1997 edition,
excluding dividends.
</FN>
</TABLE>
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company writes commercial property, general liability, commercial
multi-peril and personal automobile insurance on an admitted and non-admitted
basis as regulatory requirements permit. Premium levels in the markets that
Penn-America serves are generally higher due to unavailability of the larger
standard companies to service these relatively small dollar premiums that
average $1,600 a year. The Company focuses on smaller, Main Street businesses in
this higher rated market, such as restaurants, taverns, retail businesses,
contractors and similar classes, that may not have access to standard insurance
and where management believes the potential for loss is not excessive and can be
adequately quantified. The Company does not write unique or high risk policies
such as medical malpractice, environmental and aviation liability.
The Company currently markets its commercial insurance products nationally
through a select number of high quality general agents. The Company's general
agents have limited binding authority for the Company's products based on
comprehensive guidelines established by the Company. In 1996, approximately 85%
of the Company's policies were issued on a binding authority basis. The
remaining commercial business consists of larger or slightly more complex
policies issued on a submit basis from its agents. All personal automobile
policies are issued on a binding authority basis. The Company's general agency
network and its strong business experience and relationships provide the Company
with significant underwriting support and marketing expertise. In addition,
approximately 28% of the Company's gross written premium or $21.8 million, is
non-standard minimum limits liability personal automobile coverage which is
written in five states.
The Company's distribution strategy is to select and maintain a general agency
network with fewer and more productive general agents than its competitors. By
concentrating its resources on a limited number of general agents, approximately
50, the Company believes it enhances not only the volume and quality of business
generated by the general agents, but also the Company's ability to monitor the
agents' performance with respect to Company underwriting policies and
guidelines.
[GRAPHIC OMITTED - BAR CHART OF NET EARNED PREMIUMS BY LINE OF BUSINESS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, 1995 AND 1996]
[GRAPHIC OMITTED - PIE CHART OF GROSS WRITTEN PREMIUM DIVERSIFIED EXPOSURE
FOR THE YEAR ENDED DECEMBER 31, 1996 (IN MILLIONS)]
9
<PAGE>
In June, 1996 the Company received a rating of A (Excellent), financial size
category VI, by A.M. Best Company, Inc. ("Best") based upon recent operating
performance. According to Best, an A rating is assigned to those companies that,
in Best's opinion, after an extensive review of the company's financial
condition and operating performance, have demonstrated an excellent ability to
meet their respective policyholder and other contractual obligations when
compared to the norms of the property and casualty insurance industry. Best's
ratings are based upon factors relevant to policyholders and are not directed
toward the protection of investors. The Company believes that an A rating is an
important factor in marketing its products to its general agents.
The following is a brief description of the Company's various lines of
insurance:
Commercial General Liability: The Company's commercial general liability
insurance is written on an occurrence policy form (as opposed to a claims-made
policy form) and provides limits generally ranging from $25,000 to $3 million,
with the majority of such policies having limits of between $500,000 and $1
million. The Company's general liability policies pay defense and related
expenses in addition to per occurrence and aggregate policy limits. General
liability insureds include restaurants, bars and taverns, retail operations,
contractors and similar classes.
Commercial Property: The Company's commercial property lines provide limits
usually no higher than $4 million, with almost all of the policies being written
at limits less than $1 million. Properties insured include restaurants, bars and
taverns, retail operations, vacant buildings, and other similar classes.
Commercial Multi-Peril: The Company also writes the same commercial property and
general liability risks together as a "package" for its insureds, generally
referred to as "commercial multi-peril." The limits on these policies are the
same as if written on a monoline basis. Consistent with the current industry
trend, the Company has been writing more commercial multi-peril policies during
the last several years than individual property and liability policies. The
Company expects this trend to continue in light of the fact that a substantial
number of the Company's commercial insureds customarily require both liability
and property insurance coverage, together with the fact that recent revisions to
Insurance Services Office (ISO) forms make it easier and more efficient to write
such multi-peril policies.
In all of its commercial product lines the Company continuously is developing
specialized programs for certain industry segments to meet the needs of its
marketplace. Examples are programs for independent fitness centers, day care
operations, artisan contractors, low-hazard miscellaneous professional liability
coverages and special events. As a group, these programs are a significant
benefit to the Company's marketing efforts, although individually they do not
generate a material amount of the Company's gross written premiums.
Personal Automobile: The Company currently writes personal automobile policies
in the states of Washington, California, Kentucky, South Dakota and Nevada on a
non-standard basis. These risks typically do not qualify for preferred or
standard insurance because of a driver's age, driving record, vehicle type or
other factors. The personal automobile business is written at very low coverage
limits. The policies in force at December 31, 1996 provide physical damage
coverage of $35,000 or less, and the Company writes minimum state statutory
liability limits. The Company writes a majority of this coverage on a six month
basis in Washington, Kentucky and South Dakota. In California and Nevada, the
coverage is written predominately on a monthly policy basis.
Results of Operations
Year-ended December 31, 1996 Compared to Year-ended December 31, 1995
Gross written premiums increased 20.2% to $80.5 million in 1996, as compared to
$ 67.0 million in 1995. The 20.2% growth in gross written premiums in 1996
primarily was attributable to increased volume. The increase in volume is
attributable to an 18.4% increase in commercial multi-peril to $31.6 million and
a 63.3% increase in personal automobile to $21.8 million. 72% of the Company's
existing agents' offices had increased gross written premiums volume in 1996
over the previous year.
Net written premiums increased 19.9% to $73.5 million in 1996, as compared to
$61.3 million in 1995. The increase in net written premiums is due primarily to
the volume increase in both commercial multi-peril and personal automobile.
During 1996 property and casualty reinsurance retention limits remained
unchanged at $200,000 and $500,000 respectively.
Net earned premiums increased 20.7% to $69.1 million in 1996 as compared to
$57.2 million in 1995. This increase is attributable to the overall growth in
net written premiums.
Investments and cash increased 15% to $115.6 million. This growth in the
investment portfolio was fueled by approximately $17 million from net cash flows
from operations. Net investment income increased 32.3% to $6.7 million as
compared to $5.1 million in 1995. This increase resulted from the investment of
proceeds from a $10 million loan from PNC Bank in December of 1995 and a 13.6%
increase in cash flows from operations.
10
<PAGE>
Net realized investment gains after taxes for the year-ended December 31, 1996
were $598,000 or $0.09 per share compared to $844,000 or $0.13 per share for the
year-ended December 31, 1995. Gross realized gains after-tax were $985,000 and
consisted primarily of equity securities. Gross realized losses after-tax were
$387,000 and consisted primarily of fixed maturities available for sale.
Losses and loss adjustment expenses increased 21% to $43.3 million in 1996, as
compared to $35.8 million in 1995. This increase was consistent with the 21%
increase in earned premiums. The loss ratio increased slightly to 62.7% from
62.6% in 1995.
Amortization of deferred acquisition costs increased 25% to $17.8 million in
1996, as compared to $14.2 million in 1995. The increase can be attributed to:
premium growth, an increase in commercial lines contingent commission accrual
and increased volume in personal automobile lines, which have higher commission
rates than commercial lines.
Other underwriting expenses were unchanged at $4.4 million despite a 20.2
percent increase in gross written premiums. This is primarily attributed to more
significant growth in the personal auto lines than the commercial lines. The
majority of underwriting expenses related to personal auto lines is commission
expense which is reflected in the amortization of deferred acquisition costs.
Additionally, several cost savings were realized during 1996, including a
capital stock tax refund and a reduction in bad debt expense.
Net earnings increased 16% to $7.0 million or $1.05 per share in 1996 as
compared to $6.0 million or $0.91 per share in 1995.
Year ended December 31, 1995 Compared to Year ended December 31, 1994
Gross written premiums increased 24% in 1995 to $67.0 million, as compared to
$53.9 million in 1994. The 24% growth in gross written premiums in 1995
primarily was attributable to increased volume since rate increases were
negligible. The increase in volume was attributable to a 30% increase in
commercial multi-peril to $26.7 million as compared to 1994, a 20% increase in
other liability to $21.6 million and a 22.8% increase in personal automobile to
$13.4 million. 85% of the Company's existing agents' offices had increased gross
written premium volume in 1995 over the previous year.
Net written premiums increased 27% to $61.3 million in 1995, as compared to
$48.3 million in 1994. Net written premiums increased more dramatically than
gross written premium, principally due to an increase in both property and
casualty reinsurance retention limits as of January 1, 1995 from $175,000 to
$200,000, and $300,000 to $500,000 respectively.
[GRAPHIC OMITTED - BAR CHART COMPARING COMBINED RATIO FOR THE YEARS ENDED
DECEMBER 31, 1993, 1994, 1995 AND 1996 FOR PENN-AMERICA GROUP AND INDUSTRY]
[GRAPHIC OMITTED - PRE-TAX INCOME FOR THE YEARS ENDED DECEMBER 31, 1993, 1994,
1995 AND 1996]
[GRAPHIC OMITTED - BAR CHART OF NET OPERATING EARNINGS PER SHARE FOR THE YEARS
ENDED DECEMBER 31, 1994, 1995 AND 1996]
11
<PAGE>
Net earned premium increased 43% to $57.2 million as compared to $40.0 million,
which was attributable to the overall growth in net written premium.
Net investment income increased 39% to $5.1 million in 1995 as compared to $3.6
million in 1994. Investments and cash increased 38% to $100.4 million. This
growth in the investment portfolio was fueled by approximately $15 million from
cash flows from operations. The remaining increase in investment income was
attributed to a higher yield of 6.80% in 1995 versus 6.40% in 1994.
At December 31, 1995, the carrying value of Collateralized Mortgage Obligations
(CMOs) was $7.7 million compared to $8.1 million in 1994. These obligations were
all AAA rated government-issued securities. The decrease in the portfolio during
1995 was attributable to the sale of one such security and accelerated
prepayments during the course of the year on the remaining securities.
Net realized investment gains after taxes for the year-ended December 31, 1995
were $844,000 or $0.13 per share, as compared to $713,000 of losses or $0.08 per
share for the year-ended December 31, 1994. These realized gains principally
were due to the sale of equity securities within the portfolio. Management
believed that the values for these securities had been maximized and believed it
to be opportunistic to realize these gains.
Losses and loss adjustment expenses increased 44% to $35.8 million in 1995, as
compared to $24.9 million in 1994. This increase was consistent with the 43%
increase in earned premiums.
Amortization of deferred acquisition costs increased 52% to $14.2 million in
1995, as compared to $9.4 million in 1994. This increase can be attributed to
the 43% increase in earned premiums in 1995 and the affect of the decrease in
ceded commissions resulting from increased retention.
Net earnings increased 77% to $6.0 million or $0.91 per share in 1995, as
compared to $3.4 million or $0.51 per share in 1994. This increase was
attributable to the increase in earned premiums, the reduction in the statutory
combined ratio of 1.5 points, the $1.3 million in realized investment gains and
the improvement on the yield in the investment portfolio.
New Accounting Standard Statement No. 123, "Accounting for Stock-Based
Compensation"
At December 31, 1996, the Company had one stock-based compensation plan. The
Company applies APB Opinion No. 25 and related interpretations in accounting for
this plan. Accordingly, no compensation cost has been recognized for its fixed
stock option plan. Had compensation cost for the Company been determined
consistent with FASB Statement No. 123, the effect on the Company's net income
and earnings per share would have been immaterial.
Liquidity and Capital Resources
Liquidity is a measure of the Company's ability to generate sufficient cash to
meet cash obligations as they come due. Penn-America Group, Inc.'s (PAGI)
primary source of funds is the receipt of dividends from its insurance
subsidiary, Penn-America, which is subject to state laws and regulations which
restrict its ability to pay dividends.
During 1996, PAGI repaid $1,000,000 on the borrowed $10,000,000 of which
$9,000,000 was contributed as capital to Penn-America in 1995. This infusion of
capital afforded Penn-America the ability to increase its written premium volume
but at the same time maintain adequate statutory surplus. The ability of PAGI to
service this debt is contingent on the receipts of dividends from Penn-America.
The maximum amount of dividend that Penn-America can pay in 1997 is $6,262,000.
During 1996 and 1995, dividends of $3,258,000 and $1,300,000 were paid to PAGI.
Penn-America derives its funds principally from net written premiums, investment
income and proceeds from sales and maturities of portfolio investments. The
principal use of these funds is for payment of insured losses, loss adjustment
expenses, commissions, premium taxes, other operating expenses and income taxes.
The funds provided from operating activities generally are invested in
securities with maturities intended to provide adequate funds to pay claims
without forced sales of investments. Penn-America's reinsurance arrangements
also help to provide funds to pay claims.
The Company's investment policy seeks to maximize investment income consistent
with the overriding objective to maintain liquidity and remain risk-adverse. The
Company maintains a diversified portfolio of issuers and issues. At December 31,
1996 and 1995, the Company's portfolio consisted primarily of investments in
fixed maturities. Such investments represented 89% and 82% of total investments
at
12
<PAGE>
December 31, 1996 and 1995. The company has maintained an average duration of
2.8 years on its fixed maturity portfolio which provides appropriate matching on
anticipated future loss payments and serves to minimize interest risk in a
rising interest rate environment.
The remaining balance in the portfolio comprises equity securities of
approximately $12.0 million or 11% of total investments at December 31, 1996.
The Company maintains a consistent percentage of its total investments in
growth-oriented equity securities in order to provide for diversification and
capital appreciation. During 1996, the Company realized net after-tax gains from
the sale of appreciated equity securities in its portfolio of $598,000.
As of December 31, 1996, the investment portfolio contained $8.3 million or 7%
in collateralized mortgage obligations (CMOs) classified as "Available for
Sale". All of these CMOs are AAA rated government securities issued by federally
supported institutions, are publicly traded, and have market values obtained
from an external pricing service. Changes in estimated cash flows due to changes
in prepayment assumptions from the original purchase assumptions are revised
based on current interest rates and the economic environment. The Company had no
other derivative financial instruments, real estate or mortgages in the
investment portfolio as of December 31, 1996.
Impact of Inflation
Inflation can have a significant impact on property and casualty insurers
because premium rates are established before the amount of losses and loss
adjustment expenses are known. Penn-America attempts to anticipate increases
from inflation in establishing rates, subject to limitations imposed for
competitive pricing. The Company does not believe that inflation has had a
material impact on Penn-America to date.
Penn-America also considers inflation when estimating liabilities for losses and
loss adjustment expenses, particularly for claims having a long period between
occurrence and settlement. The liabilities for losses and loss adjustment
expenses are management's estimates of the ultimate net cost of underlying
claims and expenses and are not discounted for the time value of money. In times
of high inflation, the normally higher yields on investments may offset
partially potentially higher claims and expenses.
Risk-Based Capital
The National Association of Insurance Commissioners adopted risk-based capital
standards which property and casualty insurers had to meet beginning December
31,1994. In concept, risk-based capital is designed to measure the acceptable
amount of capital an insurer should have based on the inherent specific risks of
each insurer. Insurers failing to meet this benchmark capital level may be
subject to scrutiny by the insurer's domiciled insurance department. Based on
the currently adopted standards, Penn-America's capital and surplus is in excess
of the prescribed risk-based capital requirements for 1996, 1995 and 1994.
[GRAPHIC OMITTED - PIE CHART OF PORTFOLIO DISTRIBUTION AT DECEMBER 31, 1996]
[GRAPHIC OMITTED - PIE CHART OF FIXED MATURITY RATINGS BY STANDARD & POOR'S AT
DECEMBER 31, 1996]
13
<PAGE>
Consolidated Balance Sheets
(in thousands except per share data)
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Assets
Investments
Fixed Maturities
Available for sale, at fair value
(amortized cost 1996, $49,244
and 1995, $42,948) $ 48,954 $ 43,281
Held to maturity, at amortized cost,
(fair value 1996, $44,111
and 1995, $34,812) 44,227 34,276
Equity securities, at fair value
(cost 1996, $10,597 and 1995, $8,726) 12,390 10,667
Short-term investments, at cost, which
approximates fair value 7,000 7,000
--------- ---------
Total investments 112,571 95,224
Cash 2,979 5,204
Receivables
Accrued investment income 1,671 1,385
Premiums receivable, net 10,494 8,981
Reinsurance recoverable 15,719 13,952
Note receivable, affiliate 275 400
--------- ---------
Total receivables 28,159 24,718
Prepaid reinsurance premiums 2,668 2,438
Deferred policy acquisition costs 7,231 5,716
Capital leases 1,950 1,786
Income tax recoverable 249 529
Deferred income tax 2,211 1,947
Other assets 587 201
--------- ---------
Total assets $ 158,605 $ 137,763
========= =========
Liabilities and Stockholders' Equity
Liabilities
Unpaid losses and loss adjustment expenses $ 70,728 $ 60,139
Unearned premiums 30,865 26,245
Accounts payable and accrued expenses 1,773 1,842
Capitalized lease obligations 2,030 1,890
Notes payable
Affiliate -- 150
Bank 9,000 10,000
Other liabilities 1,872 1,247
--------- ---------
Total liabilities 116,268 101,513
--------- ---------
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 1996,
$6,676,131 shares and 1995,
4,430,000 (note 2) 67 44
Additional paid-in capital 21,844 21,608
Unrealized investment gains net 993 1,501
Retained earnings 19,533 13,251
--------- ---------
42,437 36,404
Unearned compensation from restricted stock awards (100) (154)
--------- ---------
Total stockholders' equity 42,337 36,250
--------- ---------
Total liabilities and stockholders' equity $ 158,605 $ 137,763
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
Consolidated Statements of Earnings
(in thousands except per share data)
<TABLE>
<CAPTION>
For the years ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Revenues
Premiums earned $ 69,081 $ 57,228 $ 39,985
Net investment income 6,705 5,067 3,635
Net realized investment gains (losses) 906 1,279 (713)
-------- -------- --------
Total revenues 76,692 63,574 42,907
-------- -------- --------
Losses and expenses
Losses and loss adjustment expenses 43,292 35,835 24,855
Amortization of deferred policy acquisition costs 17,785 14,237 9,381
Other underwriting expenses 4,349 4,356 3,600
Interest expense 884 239 81
-------- -------- --------
Total losses and expenses 66,310 54,667 37,917
-------- -------- --------
Earnings before income tax 10,382 8,907 4,990
Income tax 3,389 2,881 1,579
-------- -------- --------
Net earnings $ 6,993 $ 6,026 $ 3,411
======== ======== ========
Net earnings per share (note 2) $ 1.05 $ 0.91 $ 0.51
======== ======== ========
Weighted average number of shares used in calculating
per share data (note 2) 6,663 6,645 6,645
======== ======== ========
Cash dividends per share (note 2) $ 0.11 $ 0.06 --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized Unearned
Investment Compensation
Additional Gains From
Common Stock Paid-In (Losses), Retained Restricted
Shares Amount Capital Net Earnings Stock Awards Total
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at December 31, 1993 4,430,000 $ 44 $ 21,637 $ 1,749 $ 4,212 $ (262) $ 27,380
Cumulative effect of the
adoption of SFAS 115 27 27
Net earnings 3,411 3,411
Unrealized investment
(losses), net (2,477) (2,477)
Amortization of compensation
expense from restricted stock 54 54
Additional expenses related to
1993 public stock offering (29) (29)
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, at December 31, 1994 4,430,000 44 21,608 (701) 7,623 (208) 28,366
Net earnings 6,026 6,026
Cash dividends paid
($ 0.06) per share (398) (398)
Unrealized investment gains, net 2,202 2,202
Amortization of compensation
expense from restricted stock 54 54
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, at December 31, 1995 4,430,000 44 21,608 1,501 13,251 (154) 36,250
Retroactive effect of
3-for-2 stock split,
January 1997 (note 2) 2,225,377 22 (22)
Issuance of common stock 20,754 1 258 259
Net earnings 6,993 6,993
Cash dividends paid
($0.11) per share (711) (711)
Unrealized investment (losses), net (508) (508)
Amortization of compensation
expense from restricted stock 54 54
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, at December 31, 1996 6,676,131 $ 67 $ 21,844 $ 993 $ 19,533 $ (100) $ 42,337
========= ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(in thousands) For the years ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 6,993 $ 6,026 $ 3,411
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization expense 331 352 380
Net realized investment (gains) losses (906) (1,279) 713
Deferred income (benefit) tax (2) (497) 23
Net increase in premiums and note receivable, prepaid
reinsurance premiums and unearned premiums 3,001 619 4,798
Net increase in unpaid loss and loss adjustment expenses
and reinsurance recoverable 8,822 10,922 8,599
(Increase) decrease in:
Accrued investment income (286) (290) (372)
Deferred policy acquisition costs (1,515) (895) (2,440)
Income tax recoverable 281 (256) (45)
Other assets (454) (86) (92)
Increase (decrease) in:
Accounts payable and accrued expenses (68) (8) (169)
Other liabilities 624 199 105
-------- -------- --------
Net cash provided by operating activities 16,821 14,807 14,911
-------- -------- --------
Cash flows from investing activities
Purchases of equity securities (8,636) (4,627) (6,299)
Purchases of fixed maturities available for sale (21,611) (17,177) (24,713)
Purchases of fixed maturities held to maturity (24,084) (15,343) (21,012)
Proceeds from sales of equity securities 8,147 4,863 5,726
Proceeds from sales of fixed maturities available for sale 9,825 1,421 13,640
Proceeds from maturities of fixed maturities available for sale 5,000 11,877 7,641
Proceeds from maturities of fixed maturities held to maturity 14,008 2,222 8,632
Change in short-term investments -- (3,000) 1,746
Other 9 19 21
-------- -------- --------
Net cash used by investing activities (17,342) (19,745) (14,618)
-------- -------- --------
Cash flows from financing activities
Issuance of common stock (additional expenses in 1994) 259 -- (29)
Principal payments on note payable to bank (1,000) (1,000) 1,000
Proceeds from note payable -- 10,000 --
Principal payments on note payable, affiliate (150) (200) --
Principal payments on capital lease obligations (102) (73) (30)
Dividends paid (711) (398) --
-------- -------- --------
Net cash (used) provided by financing activities (1,704) 8,329 941
-------- -------- --------
Increase (decrease) in cash and cash equivalents (2,225) 3,391 1,234
Cash, beginning of period 5,204 1,813 579
-------- -------- --------
Cash, end of period $ 2,979 $ 5,204 $ 1,813
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for
Income tax $ 3,111 $ 3,634 $ 1,600
Interest 857 204 81
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
Penn-America Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation and Description of Business
Penn-America Group, Inc. (the "Company") is an insurance holding company. Penn
Independent Corporation ("Penn-independent") currently owns approximately 61.2%
of the outstanding common stock of the company. The accompanying financial
statements include the accounts of the company and its wholly-owned subsidiary,
Penn-America Insurance Company ("Penn-America"). All significant inter-company
accounts and transactions have been eliminated in consolidation. These financial
statements are prepared in conformity with generally accepted accounting
principles, which differ in some respects from those followed in reports to
insurance regulatory authorities.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Penn-America underwrites commercial property, general liability, commercial
multi-peril and personal automobile insurance, generally referred to as
"property and casualty" insurance, on an admitted and non-admitted basis as
regulatory requirements permit. Penn-America is licensed as an admitted insurer
in 22 states and is an approved non-admitted (excess and surplus lines) insurer
in 28 states and the District of Columbia. A significant portion of
Penn-America's gross written automobile premium was written by two agents in
1996, 1995 and 1994 who are located in the states of Washington, California and
Nevada. These agents accounted for 94% in 1996 and 100% in 1995 and 1994 of the
personal automobile gross written premium. During 1996, 1995 and 1994 one agent
in California accounted for 11%, 11% and 17% respectively, of commercial gross
written premium.
Investments
At the time of purchase of fixed maturity investments, management makes a
determination as to the investment classification ("Available for Sale" or "Held
to Maturity"). Factors taken into consideration by management in determining the
appropriate investment category are: maturity, yield, cash flow requirements,
and anticipated changes in interest rates. Fixed maturities classified as
"Available for Sale" are carried at fair value with unrealized investment gains
or losses net of deferred income tax credited or charged directly to
stockholders' equity as a separate component. "Held to Maturity" investments are
carried at amortized cost.
Investments in fixed maturity securities are adjusted for amortization of
premium and accretion of discounts to maturity date using the interest method.
Income is recognized on the accrual basis. Realized investment gains and losses
are recorded as income when the securities are sold on the specific
identification basis.
Amortized cost for mortgage-backed securities is calculated using the interest
method including anticipated prepayments at the date of purchase. Significant
changes in estimated cash flow from the original purchase assumptions are
accounted for using the composite method.
Equity securities are carried at fair value with the change in unrealized
investment gains or losses credited or charged directly to stockholders' equity,
net of applicable deferred income taxes. Short-term investments are carried at
cost, which approximates fair value.
Premiums and Other Receivables
Premiums are recognized as revenue ratably over the terms of the respective
policies. Unearned premiums are calculated on the semi-monthly pro rata basis.
Management has established an allowance for doubtful accounts of $522,000 and
$481,000 for 1996 and 1995, respectively, on premium receivables, which
allowance management believes is adequate to cover uncollectible account
balances.
Policy Acquisition Costs
Policy acquisition costs such as commissions, salaries, premium taxes and
certain other underwriting expenses, which vary with and are directly related to
the production of business, are deferred and amortized over the effective period
of the related insurance policies. The method followed in computing deferred
policy acquisition costs limits the amount of such deferred costs to their
estimated realizable value, which gives effect to the premium to be earned,
related investment income, losses and loss adjustment expenses and certain other
costs expected to be incurred as the premium is earned.
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses represents estimates of
the ultimate unpaid net cost of all losses incurred. Estimates of unpaid
reported losses and related allocated loss adjustment expenses are determined on
the basis of claims adjusters' evaluations of individual claims. Estimates of
losses and loss adjustment expenses arising from losses incurred but not yet
reported are based on selected historical and industry data. Such estimates are
not discounted and may be more or less than the amounts ultimately paid when the
claims are settled. These estimates are periodically reviewed and adjusted as
necessary; such adjustments are reflected in current operations.
18
<PAGE>
Fair Values of Financial Instruments
The Company uses the following methods or assumptions in estimating fair value
disclosures as reported in the balance sheet:
Investment Securities: Fair values are based on quoted market prices or on
quoted market prices of comparable instruments or values obtained from
independent pricing services.
Premium and Reinsurance Receivables and Payables: The carrying amounts reported
in the balance sheet for these instruments approximate their fair value.
Debt and Capitalized Lease: Fair value is based upon the present value of the
underlying cash flows discounted at the Company's incremental borrowing rate.
The carrying amounts reported in the balance sheet approximate fair value.
Options: Fair value was estimated on the grant date using the Black-Scholes
option pricing model. The model assumes the following: annual dividend rate of
1.20% and 1.50% for 1996 and 1995, respectively; and for both years: risk free
interest rates of 6.80%, expected lives of 2.5 years and volatility of 30%.
Reinsurance
In the ordinary course of business, the Company reinsures certain risks,
generally on an excess of loss basis with other insurance companies which
principally are rated A+ or higher by A.M. Best. Such reinsurance arrangements
serve to limit the Company's maximum loss. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liabilities arising from the
reinsured policies and incurred but not reported losses.
Capitalized Lease
The capitalized lease is carried at cost less accumulated amortization.
Amortization is calculated on the straight line basis over 20 years, which
represents the term of the mortgage on the office space which the Company rents
from a related party (See Note 3).
Income Tax
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that includes the
enactment date.
Note 2 - Earnings Per Share and Retroactive Adjustment for Stock Split
1996, 1995 and 1994 earnings per share are computed by dividing net earnings by
the weighted average number of common shares outstanding during the year. All
per share calculations and stock options disclosure presented have been adjusted
retroactively to reflect a three-for-two stock split declared in January, 1997.
The stock options described in Note 12 have no material dilutive effect on
earnings per common share amounts in any of the periods presented. Shares
outstanding at December 31, 1996 have been restated to reflect the stock split.
Note 3 - Transactions with Affiliates
Penn-America leases its home office facility from the controlling shareholder of
Penn Independent. The lease is accounted for as a capitalized lease. The amount
of property capitalized, $2,440,000 and $2,198,000 is presented net of
accumulated amortization of $490,000 and $412,000 as of December 31, 1996 and
1995, respectively. Amortization expense was $78,000, $51,000 and $31,000 for
1996, 1995, and 1994, respectively. Penn Independent and its subsidiaries also
lease a portion of the building in which Penn-America's home office facility is
located. Management believes that the lease terms are at market terms.
Penn Independent provides Penn-America with management and other services which
amounted to $342,000, $455,000, and $552,000, in 1996, 1995 and 1994
respectively. Such amounts are based on allocations of estimated costs.
All costs incurred by Penn Independent on behalf of Penn-America have been
allocated to Penn-America and are reflected in the financial statements.
Management believes that the methods used to allocate such costs are reasonable,
and that Penn-America's expenses on a stand-alone basis would not be materially
different.
Premiums written resulting from transactions with insurance agency affiliates of
Penn Independent approximated $3,880,000 in 1996, $3,621,000 in 1995 and
$3,182,000 in 1994. Commissions paid to such affiliates were $888,000 in 1996,
$775,000 in 1995 and $663,000 in 1994. Amounts receivable from affiliates
approximated $334,000 in 1996 and $516,000 in 1995.
The note receivable from affiliate is due from Penn Independent Financial
Services, Inc., a premium finance company and wholly-owned subsidiary of Penn
Independent. The note is due on October 31, 1997, bearing interest at prime,
plus one-quarter percent and is secured by a first lien on certain insurance
premium receivables of Penn Independent Financial Services, Inc. The outstanding
balances as of December 31, 1996 and 1995 are $275,000 and $400,000
respectively.
19
<PAGE>
Note 4 - Investments
The Company invests primarily in investment grade fixed maturities,
substantially all of which are rated "A" or higher by Standard & Poor's
Corporation. The cost, gross unrealized gains and losses and fair values of
investments are as follows:
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross
Unrealized Unrealized Fair
(in thousands) Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale
U.S. Treasury securities and
obligations of U.S.
government agencies $ 20,767 $ 90 $ (354) $ 20,503
Corporate securities 16,053 189 (75) 16,167
Mortgage-backed securities 8,376 96 (191) 8,281
Public utilities 4,048 0 (45) 4,003
-------- -------- -------- --------
Totals 49,244 375 (665) 48,954
-------- -------- -------- --------
Held to maturity
U.S. Treasury securities and
obligations of U.S.
government agencies 28,727 141 (183) 28,685
Corporate securities 9,294 54 (82) 9,266
Public utilities 6,056 10 (56) 6,010
Other securities 150 0 0 150
-------- -------- -------- --------
Totals 44,227 205 (321) 44,111
-------- -------- -------- --------
Total fixed maturity securities 93,471 580 (986) 93,065
-------- -------- -------- --------
Equity securities: 10,597 1,857 (64) 12,390
Short-term investments: 7,000 0 0 7,000
-------- -------- -------- --------
Total investments $111,068 $ 2,437 $ (1,050) $112,455
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Unrealized Unrealized Fair
(in thousands) Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale
U.S. Treasury securities and
obligations of U.S.
government agencies $19,903 $ 262 $ (49) $20,116
Corporate securities 13,051 405 (30) 13,426
Mortgage-backed securities 7,963 48 (329) 7,682
Public utilities 2,031 26 -- 2,057
------- ------- ------- -------
Totals 42,948 741 (408) 43,281
------- ------- ------- -------
Held to maturity
U.S. Treasury securities and
obligations of U.S.
government agencies 18,755 376 (38) 19,093
Corporate securities 10,322 212 (32) 10,502
Public utilities 5,049 20 (2) 5,067
Other securities 150 -- -- 150
------- ------- ------- -------
Totals 34,276 608 (72) 34,812
------- ------- ------- -------
Total fixed maturity securities 77,224 1,349 (480) 78,093
------- ------- ------- -------
Equity securities: 8,726 1,987 (46) 10,667
Short-term investments: 7,000 -- -- 7,000
------- ------- ------- -------
Total investments $92,950 $ 3,336 $ (526) $95,760
======= ======= ======= =======
<FN>
(1) Adjusted for amortization of fixed maturities.
</FN>
</TABLE>
Fixed maturities at December 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
(in thousands) Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 2,000 $ 2,004 $ 4,264 $ 4,270
Due after one year through
five years 13,282 13,378 23,626 23,734
Due after five years through
ten years 18,568 18,426 12,322 12,172
Due after ten years 7,018 6,865 4,015 3,935
Mortgage-backed securities 8,376 8,281 0 0
------- ------- ------- -------
Total $49,244 $48,954 $44,227 $44,111
======= ======= ======= =======
</TABLE>
A summary of net investment income is as follows:
Year ended December 31,
(in thousands) 1996 1995 1994
Interest on fixed maturities $ 6,108 $ 4,615 $ 3,294
Dividends on equity securities 691 533 564
Interest on short-term investments 380 291 139
Other 61 42 35
------- ------- -------
Total investment income 7,240 5,481 4,032
Less investment expense (535) (414) (397)
------- ------- -------
Net investment income $ 6,705 $ 5,067 $ 3,635
======= ======= =======
There are no investments in fixed maturity securities that have been
non-income-producing during 1996, 1995 or 1994. Realized pre-tax gains (losses)
on the sale of investments are as follows:
Year ended December 31,
(in thousands) 1996 1995 1994
Fixed maturities available for sale:
Gross realized gains $ 32 $ 13 $ 22
Gross realized losses (529) (276) (186)
------- ------- -------
Net (losses) (497) (263) (164)
------- ------- -------
Equity securities:
Gross realized gains 1,460 1,656 18
Gross realized losses (57) (114) (567)
------- ------- -------
Net gains (losses) 1,403 1,542 (549)
------- ------- -------
Total net realized investment
gains (losses) $ 906 $ 1,279 $ (713)
======= ======= =======
Income taxes on net realized investment gains (losses) were $308,000, $435,000
and ($242,000) for 1996, 1995, and 1994, respectively.
20
<PAGE>
The following is a summary of net unrealized appreciation (depreciation) on
investments included within stockholders' equity:
1996 1995
Balance, Beginning of year $ 1,501 $ (701)
------- -------
Change in unrealized
appreciation/(depreciation):
Fixed maturities (622) 2,882
Equity securities (148) 455
------- -------
(770) 3,337
Income tax effect (262) 1,135
------- -------
Net Change (508) 2,202
------- -------
Balance, end of year $ 993 $ 1,501
======= =======
The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 1996 and 1995, amounted to $4,409,000 and $4,415,000
respectively.
Note 5 - Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risks in various areas of exposure with
other insurance enterprises or reinsurers.
Reinsurance contracts do not relieve the Company of its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. Allowances have been established for amounts deemed
uncollectible. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies. At December 31,
1996, reinsurance recoverables and prepaid reinsurance premiums associated with
the two major reinsurers were: General Reinsurance Corporation, $9,053,000 and
National Reinsurance Corporation, $6,007,000.
Premiums written and earned consisted of the following:
Year ended December 31,
(in thousands) 1996 1995 1994
Premiums written
Direct $80,496 $66,953 $53,926
Ceded 7,027 5,667 5,583
------- ------- -------
Net of reinsurance $73,469 $61,286 $48,343
======= ======= =======
Premiums earned
Direct $75,876 $63,005 $45,698
Ceded 6,795 5,777 5,713
------- ------- -------
Net of reinsurance $69,081 $57,228 $39,985
======= ======= =======
Recoveries recognized under reinsurance contracts were as follows:
1996 $8,530,000
1995 $8,148,000
1994 $5,280,000
Note 6 - Capitalized Lease Obligations
Capitalized lease obligations of $2,030,000 and $1,890,000 at December 31, 1996
and 1995, respectively, represented lease obligations arising under the home
office facility lease (see Note 3). Interest is payable at 8.5% on the
outstanding principal balance. Capital lease and capital lease obligations on
the balance sheet increased $242,000 in 1996 and $1,551,000 in 1995 due to the
Company leasing additional office space and entering into a new five year lease.
This transaction was accounted for as a non-cash transaction. Future minimum
lease payments as of December 31, 1996 are as follows:
1997 $260
1998 260
1999 260
2000 260
2001 260
Thereafter 2,206
------
Total Minimum Obligations 3,506
------
Less Interest (1,476)
------
Total $ 2030
======
Note 7 - Unpaid Adjustment Expenses
Activity in liability for unpaid losses and loss adjustment expenses is
summarized as follows:
(in thousands) 1996 1995 1994
Balance as of January 1 $ 60,139 $ 44,796 $ 33,314
Less reinsurance recoverables 13,627 9,489 6,484
-------- -------- --------
Net Balance at January 1 46,512 35,307 26,830
-------- -------- --------
Incurred related to:
Current year 44,096 37,541 27,788
Prior years (804) (1,706) (2,933)
-------- -------- --------
Total Incurred 43,292 35,835 24,855
-------- -------- --------
Paid related to:
Current year 16,940 12,247 9,525
Prior years 17,208 12,383 6,853
-------- -------- --------
Total paid 34,148 24,630 16,378
-------- -------- --------
Net balance at December 31 55,656 46,512 35,307
Plus reinsurance recoverables 15,072 13,627 9,489
-------- -------- --------
Balance as of December 31 $ 70,728 $ 60,139 $ 44,796
======== ======== ========
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses decreased $804 thousand in
1996, $1.7 million in 1995 and $2.9 million in 1994 primarily due to generally
favorable experience in the automobile and commercial lines in 1996 and the
commercial lines of business in 1995 and 1994.
Note 8 - Income Tax
The components of income tax expense are as follows:
(in thousands) 1996 1995 1994
Current $ 3,391 $ 3,378 $ 1,556
Deferred (benefit) (2) (497) 23
------- ------- -------
Total $ 3,389 $ 2,881 $ 1,579
======= ======= =======
The actual income tax rate differed from the statutory income tax rate
applicable to income before income taxes as follows:
1996 1995 1994
Statutory income tax rate 34.0% 34.0% 34.0%
Tax-exempt interest and dividends
received deduction (1.4) (1.3) (2.1)
Other -- (0.4) (0.3)
---- ---- ----
32.6% 32.3% 31.6%
==== ==== ====
21
<PAGE>
The tax effects of temporary differences that result in a net deferred tax asset
as of December 31 are summarized as follows:
(in thousands) 1996 1995
Assets
Effect of discounting unpaid losses
and loss adjustment expenses $2,906 $2,600
Excess of tax over financial
reporting of earned premium 1,917 1,619
Other, net 383 482
------ ------
Total assets 5,206 $4,701
------ ------
Liabilities
Deferred policy acquisition costs,
deductible for tax 2,459 1,944
Unrealized investment gains 512 773
Other, net 24 37
------ ------
Total liabilities 2,995 2,754
------ ------
Net deferred tax asset $2,211 $1,947
====== ======
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax asset and, therefore, no such valuation
allowance has been established as of December 31, 1996 and 1995.
Note 9 - Debt
During December 1996, the Company repaid $1 million on the outstanding principal
of the $10 million borrowed in 1995. The loan is secured by the common stock of
Penn-America and matures on December 31, 2000. The interest rate is the LIBOR
rate plus a factor which can vary between 100 to 225 basis points and was 6.59%
and 7.05% at December 31, 1996 and 1995 respectively. Total interest expense on
the long-term borrowing for 1996 and 1995 was $721,000 and $26,000,
respectively. The terms of the agreement contain various covenants, including
the maintenance by Penn-America of certain net worth requirements and leverage
and liquidity ratios. None of these covenants negatively impact the Company's
liquidity or capital resources at this time. The outstanding balance at December
31, 1996 and 1995 is $9,000,000 and $10,000,000 respectively.
The principal repayment period is as follows:
1997 $1,000,000
1998 2,000,000
1999 3,000,000
2000 3,000,000
Note 10 - Stockholders' Equity
A source of cash to use for the payment of dividends to the Company's
stockholders is dividends from Penn-America. 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 a
dividend from statutory surplus may require prior approval of the Pennsylvania
and California regulatory authorities. The maximum dividend that may be paid by
Penn-America to the Company without prior approval of regulatory authorities in
1997 is $6,262,000.
The National Association of Insurance Commissioners has adopted risk-based
capital (RBC) requirements for property and casualty insurance companies. This
requirement may further impact the payment of dividends to the stockholders. At
December 31, 1996 and 1995, the Company's actual RBC exceeds minimum
requirements; therefore, there are no further restrictions on the payment of
dividends.
The following table reconciles surplus and net earnings of Penn-America as
determined in accordance with accounting practices prescribed or permitted by
the insurance regulatory authorities to stockholders' equity and net earnings of
the Company calculated in accordance with generally accepted accounting
principles (GAAP) as reported herein:
As of December 31,
(in thousands) 1996 1995 1994
Statutory surplus as regards
policyholders $ 41,665 $ 39,118 $ 25,677
Deferred policy acquisition costs 7,231 5,716 4,821
Deferred income tax 2,214 1,955 2,609
Unrealized investment gains (losses)
on fixed maturities available for sale (289) 334 (2,548)
Capital lease, net (80) (104) (127)
Provision for unauthorized reinsurance 57 49 48
Non-admitted assets 589 287 209
Other liabilities (95) (295) (395)
Provision for uncollectible accounts (622) (705) (611)
Holding company (8,333) (10,105) (1,317)
-------- -------- --------
GAAP stockholders' equity $ 42,337 $ 36,250 $ 28,366
======== ======== ========
As of December 31,
(in thousands) 1996 1995 1994
Statutory net income $ 6,262 5,364 645
Deferred acquisition costs 1,515 895 2,440
Deferred income tax (2) 476 (23)
Allowance for uncollectible accounts 84 (90) 733
Capital lease 24 23 --
Other, net 201 98 --
Holding company (1,091) (740) (384)
------- ------- -------
GAAP net earnings $ 6,993 $ 6,026 $ 3,411
======= ======= =======
Note 11 - Profit-Sharing Plans
Penn-America participates in a profit-sharing and 401-k plan with Penn
Independent covering qualified employees. Penn-America's contributions under the
401-k plan were $51,000, $28,000 and $21,000 for 1996, 1995, and 1994,
respectively. There were no profit-sharing distributions in 1996, 1995 and 1994.
Note 12 - Stock Incentive Plans
(Retroactively adjusted for three-for-two split declared on January 29, 1997)
Stock options: In August, 1993, the Company adopted a Stock Incentive Plan (the
"Plan"). The purpose of the Plan is to enable officers, key employees,
directors, consultants and advisors, and service providers of the Company and
its affiliates (as defined in the Plan), to participate in the Company's future
and to enable the Company to attract and retain these persons by offering them
proprietary interests in the Company. The Plan authorizes the issuance of up to
525,000 shares of Common stock pursuant to the exercise of stock options or the
award of restricted stock.
Options are exercisable according to the various terms under which they were
granted varying from one year after date of grant to 10 years. All options are
subject in general to earlier termination if the optionee leaves the employ of
the Company.
22
<PAGE>
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date consistent with FASB
Statement No. 123, the effect on the Company's net income and earnings per share
would have been immaterial. While the effect on net income for 1996 and 1995 was
immaterial for those years, this may not be representative of the effects on net
income for future years.
Information regarding the Company's stock option plan is summarized below:
1996 1995 1994
Shares (in 000's)
Outstanding at beginning of the year
(weighted average price of $5.86,
$5.89 and $6.00) in 1996, 1995 and
1994, respectively 383 353 330
Granted (at $8.83, $5.42 and
$4.33 per share) 30 30 23
Exercised (at $6.00 per share) (8)
Forfeited
----- ----- -----
Outstanding at end of year 405 383 353
(average price of $6.07, $5.86 ===== ===== =====
and 5.89 per share)
Options exercisable year-end 279 119 48
===== ===== =====
Weighted average fair value
of options granted during the year $3.07 $1.83 $1.71
===== ===== =====
The following summarizes stock options outstanding at December 31 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
12/31/96 Contactual Exercise 12/31/96 Exercise
Exercise Prices (in 000's) Life (Years) Price (in 000's) Price
<C> <C> <C> <C> <C> <C>
$4.33 22.5 3.4 $4.33 22.5 $4.33
5.42 30.0 4.4 5.42 30.0 5.42
6.00 322.5 9.6 6.00 226.5 6.00
8.83 30.0 5.4 8.83 -- 8.83
- ---------------------------------------- ------------------------------
$4.33 to $8.83 405.0 8.6 $6.07 279.0 $5.80
======================================== ==============================
</TABLE>
The Company also awarded at the initial public offering in October, 1993, to
certain employees 45,000 shares of restricted stock having an approximate value
of $270,000. Such shares are held by the Company and released to the grantees at
the rate of 20% per year provided that the grantee is still employed by the
Company or its affiliates. The Company charged $54,000 to compensation expense
relating to these awards for each of the years 1996, 1995 and 1994. During 1996,
1995 and 1994, 9,000 shares each year of the restricted stock were released to
the applicable employees as provided by the provisions of the grant.
Executive incentive compensation plan: During 1995, the Board of Directors of
the Company adopted an Executive incentive compensation plan which provides up
to 75,000 shares, over the life of the Plan, to be granted to key officers,
executives and employees of the Company and its subsidiary. During 1996, 7,229
shares were distributed in accordance with the Plan's provision for fiscal year
1995 and during 1997, 7,535 shares will be distributed for fiscal year-ended
1996.
The shares issued under this Plan are valued at the fair market value of the
stock at the close of business at the end of each fiscal year, and are issued in
the subsequent year, subject to the Board's approval and attainment of corporate
objectives.
Agents' contingent commission plan: During 1995, the agents' contingent
commission plan was modified to provide that at least one -third (1/3) of the
contingent commission award would be given in stock of the Company. Up to 75,000
shares of the Company's stock were authorized for issuance under this Plan.
Agents' stock awards for the 1995 year which were issued in May of 1996 amounted
to 16,403 shares. The awards for the 1996 year will not be determined until
March of 1997.
Note 13 - Commitments and Contingencies
The Company's insurance subsidiary is subject to routine legal proceedings in
connection with its property and casualty insurance business. Neither the
Company nor its subsidiary is involved in any pending or threatened legal or
administrative proceedings which management believes might have a material
adverse effect on the company's financial condition or results of operations.
The Company leases various computer equipment for use by its insurance
subsidiary. These leases have lease terms primarily expiring in less than a
three-year period. Rental expense for these operating leases were $485,000,
$382,000 and $246,000 for the years ended December 31, 1996, 1995 and 1994.
At December 31, 1996, the future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year were: 1997, $389,000 1998, $327,000, and 1999, $154,000.
Note 14 - Unaudited - Quarterly Results of Operations for 1996 and 1995
(Adjusted for retroactive effect of three-for-two stock split declared January
29, 1997)
(in thousands, except per share data)
<TABLE>
<CAPTION>
1996
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $17,244 $18,214 $19,757 $21,477 $76,692
Losses and expenses 15,118 15,886 17,040 18,266 66,310
Net earnings 1,429 1,572 1,830 2,162 6,993
Earnings per share .21 .24 .28 .32 1.05
1995
First Second Third Fourth Total
Revenues $14,821 $15,181 $16,711 $16,861 $63,574
Losses and expenses 13,108 13,228 13,997 14,334 54,667
Net earnings 1,156 1,307 1,868 1,695 6,026
Earnings per share .17 .20 .28 .26 .91
</TABLE>
23
<PAGE>
Independent Auditors' Report
The Board of DirectorsPenn-America Group, Inc.:
We have audited the accompanying consolidated balance sheets of Penn-America
Group, Inc. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Penn-America Group,
Inc. and Subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 29, 1997
24
<PAGE>
Stockholders', Board of Directors and Management Information
Annual Meeting
The Annual Stockholders' Meeting will be held in our home office on May 14, 1997
at 10:00 A.M.
Stockholder Relations, Form 10-K
The Company's Form 10-K has been filed with the Securities and Exchange
Commission. A copy of the Form 10-K and interim reports are available to
stockholders without charge from the Investor Relations Department at (215)
443-3656.
Corporate Headquarters
420 South York Road
Hatboro PA 19040-3949
(215) 443-3600
Investor Relations E-mail: [email protected]
Web page: www.penn-america.com
Market and Common Stock Information
The Company's common stock trades on the NASDAQ stock market under the symbol
"PAGI." As of January 31, 1997 there were 155 holders of record of the Company's
common stock (counting all shares held in nominee registration as one
stockholder.) The Company's common stock commenced trading on NASDAQ on October
28, 1993, following the Company's initial public offering of its common stock.
The high and low sales price of the common stock, as reported by the National
Association of Securities Dealers, were as follows:
(adjusted for the retroactive effect of three-for-two stock split declared
January 29,1997)
1996
Quarter High Low
First $10.33 $8.50
Second 11.16 8.92
Third 11.16 9.67
Fourth 11.16 10.75
1995
Quarter High Low
First $5.17 $4.33
Second 6.50 4.67
Third 7.67 6.33
Fourth 9.67 7.00
Auditors
KPMG Peat Marwick LLP
1600 Market Street
Philadelphia PA 19103
Consulting Actuary
Ronald T. Kuehn
Ernst & Young LLP
Two Commerce Square
STE 4000
2001 Market Street
Philadelphia PA 19103
Registrar and Transfer Agency
First City Transfer Company
111 Wood Avenue South
Suite 200
Iselin, New Jersey 08830
Stockholder Inquiries: (908) 205-4545
Corporate Communications Consultant
David Kirk, APR
127 Gateshead Way
Phoenixville PA 19460-1048
(610) 792-3329
Principal Officers Penn-America Group, Inc.
Jon S. Saltzman
President and Chief Executive Officer
Rosemary R. Ferrero, CPA
Vice President - Finance
Secretary and Treasurer
Principal Officers
Penn-America Insurance Company
Jon S. Saltzman
President and Chief Executive Officer
John M. DiBiasi, CPCU
Executive Vice President - Underwriting and Marketing
Rosemary R. Ferrero, CPA
Vice President - Secretary and Chief Financial Officer
J. Ransley Lennon
Vice President
Information Systems
Thomas J. Reed
Senior Vice President - Claims
Board of Directors
Penn-America Group, Inc.
Irvin Saltzman
Chairman of the Board of Directors
Jon S. Saltzman
President and Chief Executive Officer
Director
James E. Heerin, Jr.
Vice President and General Counsel
Penn Independent Corporation
Director
Robert A. Lear
President
Penn Independent Corporation
Director
David P. Cohen
President
Athena Capital Management
Director
M. Moshe Porat, Ph.D., CPCU
Dean
School of Business and Management
Temple University
Director
Jami Saltzman-Levy
Vice President - Human Resources
Penn Independent Corporation
Director
Lawrence J. Schoenberg
Private Investor
Director
Charles Ellman
Retired
Director
Design: Malish Design Ltd. Photography: Michael Ahearn, Illustration: Adam
Niklewicz, Barton Stabler/SIS
Exhibit 23
Independent Auditors' Consent and Report on Schedules
The Board of Directors
Penn-America Group, Inc.:
The audits referred to in our report dated January 29, 1997 included the related
financial statement schedules as of December 31, 1996 and for each of the years
in the three-year period ended December 31, 1996 included in the annual report
on Form 10-K. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth herein.
We consent to incorporation by reference in the registration statement (Nos.
333-00050 and 33-82728) on Form S-8 and registration statement (No. 333-00046)
on Form S-3 of Penn- America Group, Inc. of our report dated January 29, 1997
relating to the consolidated balance sheets of Penn-America Group as of December
31, 1996 and 1995, the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, and all related schedules which report appears
in the December 31, 1996 annual report on Form 10-K of Penn-America Group, Inc.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Earnings at December 31, 1996
(audited) 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 48,954
<DEBT-CARRYING-VALUE> 44,227
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,390
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 112,571
<CASH> 2,979
<RECOVER-REINSURE> 15,719
<DEFERRED-ACQUISITION> 7,231
<TOTAL-ASSETS> 158,605
<POLICY-LOSSES> 70,728
<UNEARNED-PREMIUMS> 30,865
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,000
0
0
<COMMON> 67
<OTHER-SE> 42,270
<TOTAL-LIABILITY-AND-EQUITY> 158,605
69,081
<INVESTMENT-INCOME> 6,705
<INVESTMENT-GAINS> 906
<OTHER-INCOME> 0
<BENEFITS> 43,292
<UNDERWRITING-AMORTIZATION> 17,785
<UNDERWRITING-OTHER> 4,349
<INCOME-PRETAX> 10,382
<INCOME-TAX> 3,389
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,993
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>In January 1997, Penn-America announced a 3 for 2 stock split, in the form of a
50% stock dividend. The above share data reflects the effect of the split.
</FN>
</TABLE>
