<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1997
REGISTRATION NO. 333-28989
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PENN-AMERICA GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 6331 23-2731409
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
420 SOUTH YORK ROAD
HATBORO, PENNSYLVANIA 19040
(215) 443-3600
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
JON S. SALTZMAN, PRESIDENT
420 SOUTH YORK ROAD
HATBORO, PENNSYLVANIA 19040
(215) 443-3600
(Address, including zip code and telephone number, including
area code, of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
MICHAEL B. POLLACK, ESQUIRE SARAH JONES BESHAR, ESQUIRE
REED SMITH SHAW & MCCLAY DAVIS POLK & WARDWELL
2500 ONE LIBERTY PLACE 450 LEXINGTON AVENUE
PHILADELPHIA, PENNSYLVANIA 19103 NEW YORK, NEW YORK 10017
(215) 851-8100 (212) 450-4000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, check the following box: [ ]
------------------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share..... 4,025,000 $14.81 $59,610,250 $18,064
===========================================================================================================
</TABLE>
(1) Includes up to 525,000 additional shares which the Underwriters have a right
to purchase from the Registrant to cover over-allotments, if any.
(2) Based on the average of the high and low prices for the Registrant's Common
Stock on the Nasdaq National Market on June 9, 1997 pursuant to Rule 457
under the Securities Act of 1933.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 20, 1997
PROSPECTUS
JULY , 1997
3,500,000 SHARES
[PENN-AMERICA GROUP INC. LOGO]
Penn-America Group, Inc.
COMMON STOCK
Of the 3,500,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), of Penn-America Group, Inc. (the "Company") offered hereby (the
"Offering"), 2,500,000 shares are being sold by the Company and 1,000,000 shares
are being sold by Penn Independent Corporation ("Penn Independent" or the
"Selling Stockholder"). See "Principal and Selling Stockholders." The Company
will not receive any proceeds from the sale of the Common Stock by the Selling
Stockholder.
The Common Stock is listed on the Nasdaq National Market under the symbol
"PAGI". The last reported sale price of the Common Stock on the Nasdaq National
Market on June 18, 1997 was $14.75 per share. See "Price Range of Common Stock
and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(3)
- -------------------------------------------------------------------------------------------------------
Per Share.............. $ $ $ $
Total(4)............... $ $ $ $
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting the Company's share of expenses, estimated at $173,000.
(3) Before deducting the Selling Stockholder's share of expenses, estimated at
$69,000.
(4) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
525,000 shares of Common Stock, at the Price to the Public, less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions, Proceeds to the Company and Proceeds
to the Selling Stockholder will be $ , $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock offered hereby are being offered by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters and subject to various prior conditions, including their
right to reject orders in whole or in part. It is expected that delivery of the
shares of Common Stock offered hereby will be made in New York, New York on or
about , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CONNING & COMPANY
PENNSYLVANIA MERCHANT GROUP LTD
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
------------------------
THE INSURANCE LAWS OF PENNSYLVANIA PROVIDE THAT NO PERSON MAY ACQUIRE
"CONTROL" OF A DOMESTIC INSURANCE COMPANY WITHOUT THE APPROVAL OF THE INSURANCE
COMMISSIONER OF SUCH STATE. A PERSON PURCHASING 10% OR MORE OF THE OUTSTANDING
SHARES OF COMMON STOCK OF THE COMPANY WILL BE PRESUMED TO HAVE ACQUIRED SUCH
CONTROL. THE INSURANCE LAWS OF PENNSYLVANIA ALSO PROVIDE THAT NO SUBSIDIARY OR
AFFILIATE OF ANY LENDING INSTITUTION, PUBLIC UTILITY, BANK HOLDING COMPANY, OR
SAVINGS AND LOAN HOLDING COMPANY MAY, DIRECTLY OR INDIRECTLY, BE LICENSED OR
ADMITTED AS AN INSURER IN PENNSYLVANIA. THE PENNSYLVANIA INSURANCE LAWS HAVE
DEFINED "AFFILIATE" AS A COMPANY OVER WHICH ANOTHER ENTITY HAS "DIRECT OR
INDIRECT OWNERSHIP OR CONTROL OF FIVE PER CENTUM OR MORE OF THE VOTING STOCK".
CONSEQUENTLY, WITHOUT THE APPROVAL OF THE INSURANCE COMMISSIONER OF
PENNSYLVANIA, NO LENDING INSTITUTION, PUBLIC UTILITY, BANK HOLDING COMPANY, OR
SAVINGS AND LOAN HOLDING COMPANY MAY, DIRECTLY OR INDIRECTLY, OWN MORE THAN FIVE
PERCENT (5%) OF THE VOTING STOCK OF THE COMPANY.
------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549, and at the following regional offices of the Commission: 7 World Trade
Center, Suite 1300, New York, NY 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661-2511. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, DC 20549, at prescribed rates. In
addition, such materials can also be obtained from the Commission's web site at
http://www.sec.gov. Copies of the above reports, proxy statements and other
information may also be inspected at the offices of the Nasdaq National Market,
9513 Key West Avenue, Rockville, MD 20850.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the securities offered hereby, reference is hereby
made to the Registration Statement and the exhibits and schedules filed
therewith, which may be obtained from the principal office of the Commission in
Washington, DC, upon payment of the fees prescribed by the Commission.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except where otherwise indicated, the "Company" refers to Penn-America Group,
Inc. ("PAGI") and its wholly-owned subsidiary, Penn-America Insurance Company
("Penn-America"), as well as Penn-America's wholly-owned subsidiary, Penn-Star
Insurance Company ("Penn-Star"). Penn-Star received its Certificate of Authority
from the Insurance Department of Pennsylvania on February 21, 1997 and commenced
operations on April 1, 1997. Terms defined in the "Glossary of Selected
Insurance Terms" are printed in boldface type the first time they appear in the
text of this Prospectus. All financial information contained in this Prospectus
is presented in accordance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
("GAAP"), unless specified as being in accordance with STATUTORY ACCOUNTING
PRACTICES ("SAP"). Except where otherwise indicated, all information contained
in this Prospectus assumes no exercise of the Underwriters' over-allotment
option.
All per share information in this Prospectus has been adjusted to reflect a
three-for-two split of the Company's Common Stock effected on March 7, 1997.
THE COMPANY
Penn-America Group, Inc. is a specialty property and casualty insurance
holding company which, through its subsidiaries, markets and underwrites
commercial property, general liability and multi-peril insurance for small
businesses located primarily in small towns and suburban and rural areas, and
NONSTANDARD personal automobile insurance. The Company provides commercial
property and casualty insurance on both an EXCESS AND SURPLUS LINES basis and an
ADMITTED basis, and personal automobile insurance on an admitted basis. The
Company markets its products through 52 high quality GENERAL AGENTS, who in turn
produce business through over 25,000 RETAIL INSURANCE BROKERS located throughout
the United States. The Company focuses on serving the insurance needs of small
or nonstandard markets which are generally characterized by small average policy
premiums and serviced by retail insurance brokers with limited access to larger,
standard lines insurers. The Company believes that these markets are generally
underserved by larger, standard lines insurers who often limit their
UNDERWRITING to policies above a certain minimum premium size or to certain risk
classes and who operate in large-scale markets in which they can achieve
economies of scale. The Company believes that its distribution network enables
it to effectively access these numerous small markets at a relatively low fixed
cost through the marketing, underwriting and administrative support of its
general agents, as well as the localized market knowledge and expertise of its
general agents and their retail insurance brokers.
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1992 to 1996, GROSS WRITTEN PREMIUMS
grew at a 30.8% compound annual rate from $27.5 million to $80.5 million, and
net operating earnings (excluding realized investment gains) grew at a 41.3%
compound annual rate from $1.6 million to $6.4 million. The Company has operated
at a SAP COMBINED RATIO under 100.0% in every year since 1992. The Company's
average SAP combined ratio from 1992 to 1996 was 95.9%, and the Company's
average return on average stockholders' equity during the same period was 15.0%.
The Company's distribution strategy is to maintain strong relationships
with fewer and higher quality general agents than its competitors. The Company
carefully selects a limited number of agents in each state based on their
experience and reputation and strives to preserve each agent's franchise value
within its marketing territory. The Company seeks to grow with these general
agents and develop strong, longstanding relationships by providing a high level
of service and support. From 1992 to 1996, the Company achieved 192.3%
cumulative growth in gross written premiums with a 36.8% increase in the number
of general agents from 38 to 52. The Company maintains low fixed costs by
underwriting the substantial majority of its policies on a BINDING AUTHORITY
basis. The Company closely monitors the quality of business it underwrites by
maintaining close relationships with a small number of general agents. The
Company provides its general agents with a comprehensive, regularly updated
underwriting manual which clearly outlines the Company's pricing and
underwriting guidelines. The Company does not write high risk policies (e.g.,
medical malpractice,
3
<PAGE> 5
environmental and aviation liability). The Company generally reviews new and
renewal commercial policies on a continuous basis and nonstandard personal
automobile policies on a quarterly basis to ensure that its underwriting
guidelines are being followed. In addition to standard commissions, the Company
provides strong incentives to its general agents to produce profitable business
through a contingent commission structure which is substantially tied to
underwriting profitability and through the issuance of shares of Common Stock in
lieu of cash for a portion of the contingent commissions.
Historically, the Company has underwritten the majority of its commercial
lines business on an excess and surplus lines basis. In recent years, the
Company has underwritten a greater proportion of its commercial lines business
on an admitted basis as it has identified profitable admitted markets which
remain underserved by larger standard insurers. Currently, the Company
underwrites all of its nonstandard personal automobile business on an admitted
basis. The Company expects to continue to expand its commercial lines business
by offering additional products and packages which enhance its current property
and liability coverages, by identifying profitable programs and books of
business and by selectively adding high quality general agents. Examples of such
additional products and programs include a commercial automobile product and
specialty programs, which may include miscellaneous professional liability
coverage. The Company currently writes nonstandard personal automobile policies
in five states. The Company has filed applications to write personal automobile
policies in two additional states and is considering expanding into several
other states.
The Company's commercial insureds consist primarily of small, "main street"
businesses, including restaurants, taverns, retailers and artisan contractors,
located principally in small towns and suburban and rural areas. In addition,
the Company has developed customized products and coverages for other small
commercial insureds such as day care facilities, fitness centers and special
events. The Company believes it has benefited from a general migration of small
businesses out of urban centers and into suburban and rural areas. Industry
consolidation, corporate downsizing and the increased use of communications
technology and personal computers, among other factors, have contributed to the
high growth in the number of small businesses in these areas. The Company's
nonstandard automobile insurance products are designed for insureds who do not
qualify for preferred or standard automobile insurance because of their payment
history, driving record, age, vehicle type or other underwriting criteria or
market conditions. Underwriting standards in the preferred and standard markets
have become more restrictive, thereby requiring more insureds to seek
nonstandard coverage and contributing to an increase in the size of the
nonstandard automobile market.
Penn-America was formed in 1975 by Irvin Saltzman, who began working in the
insurance industry in 1947 when he founded a general agency. Jon S. Saltzman,
Irvin Saltzman's son, is President and Chief Executive Officer of the Company
and has been employed by the Company since 1986. The Company completed an
initial public offering ("IPO") on October 28, 1993, at a price to the public of
$6.00 per share. Currently, the Saltzman family, substantially through their
ownership of Penn Independent, owns approximately 61.8% of the Company's Common
Stock. After the Offering, the Saltzman family will own approximately 34.4% of
the outstanding Common Stock of the Company (approximately 32.5% if the
Underwriters' over-allotment option is exercised).
4
<PAGE> 6
The following table sets forth the Company's gross written premiums by
specific product lines during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
----------------- ------------------ ------------------
GROSS PERCENT GROSS PERCENT GROSS PERCENT
WRITTEN OF WRITTEN OF WRITTEN OF
PREMIUMS TOTAL PREMIUMS TOTAL PREMIUMS TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial multi-peril.................. $31,551 39.2% $26,653 39.8% $20,556 38.1%
Commercial general liability............ 21,526 26.8 21,643 32.3 18,033 33.4
Commercial property..................... 5,555 6.9 5,288 7.9 4,449 8.3
Commercial automobile................... 98 0.1 38 0.1 -- --
------- ----- ------- ----- ------- -----
Total commercial lines........... 58,730 73.0 53,622 80.1 43,038 79.8
------- ----- ------- ----- ------- -----
Personal automobile liability........... 17,496 21.7 11,179 16.7 6,347 11.8
Personal automobile physical damage..... 4,270 5.3 2,152 3.2 4,541 8.4
------- ----- ------- ----- ------- -----
Total personal automobile
lines......................... 21,766 27.0 13,331 19.9 10,888 20.2
------- ----- ------- ----- ------- -----
Total gross written premiums..... $80,496 100.0% $66,953 100.0% $53,926 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
The following table sets forth the SAP UNDERWRITING RATIOS for Penn-America
and for the property and casualty insurance industry as a whole during the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
PENN-AMERICA SAP UNDERWRITING RATIOS:
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%
===== ===== ===== ===== =====
INSURANCE INDUSTRY SAP UNDERWRITING RATIOS:(1)
Loss ratio............................................ 78.6% 78.9% 81.0% 79.5% 88.1%
Expense ratio......................................... 26.2 26.1 26.0 26.1 26.3
Dividend ratio........................................ 1.1 1.4 1.3 1.2 1.2
----- ----- ----- ----- -----
Combined ratio........................................ 105.9% 106.4% 108.3% 106.8% 115.6%
===== ===== ===== ===== =====
</TABLE>
- ------------------------------
(1) Source: For 1996, BestWeek P/C Supplement, March 24, 1997 edition; for 1992
through 1995, Best's Aggregates & Averages--Property--Casualty.
Approximately 89.5% of the Company's investment portfolio as of March 31,
1997 consisted of investment-grade fixed income securities and short-term
investments. Approximately 98.9% of the Company's fixed income securities as of
March 31, 1997 were rated "A-" or better by Standard & Poor's Corporation
("Standard & Poor's") or the equivalent rating by Moody's Investment Service
("Moody's"). As of March 31, 1997, the Company's fixed maturity investments had
an average duration of 3.2 years. Publicly traded equity securities, the
majority of which consisted of preferred stocks, represented 10.4% of the
Company's investment portfolio as of March 31, 1997.
Since 1993 Penn-America has maintained an "A (Excellent)" rating from A.M.
Best Company, Inc. ("A.M. Best"), which rating was reaffirmed by A.M. Best on
May 27, 1997. A.M. Best's ratings are based upon factors of concern to
policyholders, including financial condition and solvency, and are not directed
to the protection of investors.
The Company employs approximately 97 people, all of whom are located at the
Company's headquarters at 420 South York Road, Hatboro, Pennsylvania 19040
(telephone: (215) 443-3600).
5
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..... 2,500,000 shares
Common Stock offered by the Selling
Stockholder........................... 1,000,000 shares
Common Stock to be outstanding after the
Offering.............................. 9,275,884 shares(1)(2)
Use of proceeds......................... The net proceeds to the Company from the Offering,
after deducting underwriting discounts and
commissions and estimated offering expenses, are
estimated to be approximately $34.4 million. The
Company expects to use the net proceeds from the
Offering (i) to repay $9.0 million of bank debt,
(ii) to increase the POLICYHOLDERS' SURPLUS of
Penn-America and Penn-Star in order to support
future growth and (iii) for general corporate
purposes. The Company will not receive any proceeds
from the sale of shares of Common Stock by the
Selling Stockholder.
Dividend policy......................... The Company intends to continue to pay quarterly
cash dividends of $0.04 per share of Common Stock
($0.16 annually), subject to declaration by the
Board of Directors and certain regulatory and other
constraints.
Nasdaq National Market symbol........... PAGI
</TABLE>
- ------------------------------
(1) Based on 6,775,884 shares outstanding on June 1, 1997. Excludes: (i) 360,000
shares issuable upon the exercise of outstanding options under the Company's
1993 Stock Incentive Plan, of which options for 252,000 shares were
exercisable; (ii) 93,000 shares available for issuance upon grant and
exercise of options under the Company's 1993 Stock Incentive Plan; (iii)
60,236 shares available for issuance under the Executive Incentive
Compensation Plan; and (iv) 30,851 shares available for issuance under the
Agent's Profit Sharing and Performance Awards Plan. See "Management--Company
Stock Incentive Plan", "Management--Executive Incentive Compensation Plan"
and Note 12 of Notes to Consolidated Financial Statements.
(2) Excludes up to 525,000 shares which may be sold by the Company upon exercise
of the Underwriters' over-allotment option. See "Underwriting."
6
<PAGE> 8
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated financial data as of March 31, 1997 and 1996 and
for each of the three-month periods ended March 31, 1997 and 1996 have been
derived from unaudited consolidated financial statements and include all
adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of such financial information for
those periods. The results of operations for the three months ended March 31,
1997 are not necessarily indicative of the results that may be expected for any
other interim period or for the full year. The summary consolidated financial
data as of December 31, 1996, 1995, 1994, 1993 and 1992 and for each of the
years in the five-year period ended December 31, 1996 have been derived from the
audited consolidated financial statements of the Company. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and related notes included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Premiums earned........... $ 20,899 $ 15,623 $ 69,081 $ 57,228 $ 39,985 $25,961 $21,708
Net investment income..... 1,940 1,598 6,705 5,067 3,635 2,886 2,533
Net realized investment
gains (losses)......... 1 23 906 1,279 (713) 753 1,012
------- ------- ------- ------- ------- ------- -------
Total revenues......... 22,840 17,244 76,692 63,574 42,907 29,600 25,253
Losses and expenses:
Losses and LAE............ 13,217 9,852 43,292 35,835 24,855 16,411 13,865
Amortization of DAC....... 5,698 3,988 17,785 14,237 9,381 6,146 4,845
Other underwriting
expenses............... 1,144 1,061 4,349 4,356 3,600 3,363 3,241
Interest expense.......... 192 217 884 239 81 57 60
------- ------- ------- ------- ------- ------- -------
Total losses and
expenses............. 20,251 15,118 66,310 54,667 37,917 25,977 22,011
Earnings before income
tax....................... 2,589 2,126 10,382 8,907 4,990 3,623 3,242
Income tax.................. 839 697 3,389 2,881 1,579 1,115 970
------- ------- ------- ------- ------- ------- -------
Net earnings........... $ 1,750 $ 1,429 $ 6,993 $ 6,026 $ 3,411 $ 2,508 $ 2,272
======= ======= ======= ======= ======= ======= =======
PER SHARE DATA:(1)
Net earnings(2)............. $ 0.26 $ 0.21 $ 1.05 $ 0.91 $ 0.51 $ 0.50 $ 0.49
Net operating earnings(3)... 0.26 0.21 0.96 0.78 0.59 -- --
Cash dividends(4)........... 0.04 0.03 0.11 0.06 -- 1.13 0.07
Weighted average shares..... 6,689 6,650 6,663 6,645 6,645 4,997 4,652
OTHER OPERATING DATA:
Gross written premiums...... $ 23,957 $ 18,047 $ 80,496 $ 66,953 $ 53,926 $35,521 $27,539
Net written premiums........ 22,199 16,387 73,469 61,286 48,343 28,494 22,616
Net operating earnings(3)... 1,749 1,414 6,395 5,182 3,882 2,011 1,604
Return on average
stockholders' equity(5)... 16.3% 15.7% 17.8% 18.7% 12.2% 11.4% 14.7%
GAAP data:
Loss ratio................ 63.2% 63.1% 62.7% 62.6% 62.2% 63.2% 63.9%
Expense ratio............. 32.7 32.3 32.0 32.5 32.4 36.6 37.2
------- ------- ------- ------- ------- ------- -------
Combined ratio............ 95.9% 95.4% 94.7% 95.1% 94.6% 99.8% 101.1%
======= ======= ======= ======= ======= ======= =======
STATUTORY DATA:
Policyholders' surplus...... $ 42,459 $ 39,705 $ 41,665 $ 39,118 $ 25,677 $25,337 $14,045
Loss ratio.................. 63.2% 63.1% 62.7% 62.6% 62.2% 63.2% 63.9%
Expense ratio............... 32.4 31.2 31.6 30.4 32.3 34.8 35.6
------- ------- ------- ------- ------- ------- -------
Combined ratio.............. 95.6% 94.3% 94.3% 93.0% 94.5% 98.0% 99.5%
======= ======= ======= ======= ======= ======= =======
Property and casualty
industry combined
ratio(6).................. -- -- 105.9% 106.4% 108.3% 106.8% 115.6%
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and investments........ $120,460 $103,068 $115,550 $100,428 $ 72,896 $61,764 $47,360
Total assets................ 164,378 141,122 158,605 137,763 100,112 78,507 61,098
Notes payable............... 9,000 10,100 9,000 10,150 1,350 350 --
Total stockholders'
equity.................... 43,550 36,774 42,337 36,250 28,366 27,380 16,543
Total stockholders' equity
per share(1).............. $ 6.49 $ 5.53 $ 6.34 $ 5.46 $ 4.27 $ 4.12 $ 3.94
</TABLE>
- ------------------------------
(1) Adjusted to reflect a three-for-two split of the Company's Common Stock
effected on March 7, 1997.
(2) Net earnings per share for 1993 and 1992 are pro forma 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 the 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) Excludes realized investment gains (losses), assuming a 34% marginal tax
rate.
(4) Cash dividends for 1993 reflect an extraordinary dividend of $5,000,000 paid
to Penn Independent prior to the Company's IPO in October 1993.
(5) For each three-month period, the return on average stockholders' equity is
calculated on an annualized basis. The annualized return on average
stockholders' equity for the three months ended March 31, 1997 is not
necessarily indicative of the results that may be expected for any other
interim period or for the full year.
(6) Source: For 1996, BestWeek P/C Supplement, March 24, 1997 edition; for 1992
through 1995, Best's Aggregates & Averages--Property--Casualty.
8
<PAGE> 10
RISK FACTORS
Except for the historical information contained in this Prospectus, matters
discussed herein may constitute "forward-looking statements" (within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act). Such
forward-looking information reflects the Company's current best estimates
regarding its future operations. The Company's actual results could differ
materially from those estimated in the forward-looking statements as a result of
several factors, including those discussed below and elsewhere in this
Prospectus.
A variety of factors may materially impact estimates of future operations.
Many of such factors are outside the Company's control and cannot be accurately
predicted. Important factors include, but are not limited to, general economic
conditions, interest rate levels, financial market performance, legislative
initiatives, the adequacy of LOSS RESERVES, price competition impacting premium
levels, relationships with and capacity of the Company's general agents and
changes in state insurance regulations.
In addition to the other information in this Prospectus, the following
factors and risks should be considered carefully by potential purchasers in
evaluating the Company, its business and the shares of Common Stock offered
hereby:
CERTAIN BUSINESS CONSIDERATIONS
Factors affecting the sectors of the insurance industry in which the
Company operates may subject the Company to significant fluctuations in
operating results. These factors include competition, catastrophe losses and
general economic conditions, including interest rate changes, as well as
legislative initiatives, the frequency of litigation, the size of judgments and
severe weather conditions. The nonstandard automobile insurance market is
influenced by many factors, including state insurance laws, market conditions
for standard automobile insurance and state assigned risk and residual market
plans. Additionally, an economic downturn in the states in which the Company
underwrites its personal automobile business could result in fewer new car sales
and less demand for automobile insurance. The impact of these factors can
dramatically affect demand for the Company's products, insurance capacity,
pricing and claims experience and, consequently, the Company's business, results
of operations or financial condition.
Historically, the financial performance of the property and casualty
insurance industry has tended to fluctuate in cyclical patterns of SOFT MARKETS
followed by HARD MARKETS. Although an individual insurance company's financial
performance is dependent on its own specific business characteristics, the
profitability of most property and casualty insurance companies tends to follow
this cyclical market pattern. At present, the property and casualty insurance
industry is experiencing a prolonged soft market, and the extension of current
market conditions could have an adverse affect on the Company's business,
results of operations or financial condition. There can be no assurance that a
hard market will emerge or, if it does emerge, that it will have a favorable
impact on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company has grown rapidly over the last few years. The Company believes
that a substantial portion of its future growth will depend on its ability,
among other things, (i) to increase its business from its existing general
agents, (ii) to expand its personal automobile business further in states where
it presently does business and into additional states and (iii) to expand its
commercial lines of business by offering additional products and programs. Such
future growth is contingent on various factors, including the availability of
adequate capital, the Company's ability to hire and train additional personnel,
regulatory requirements and rating agency considerations. There is no assurance
that the Company will be successful in expanding its business, that the existing
infrastructure will be able to support such additional expansion or that such
new business will be profitable. See "Business."
In recent years, the Company's nonstandard personal automobile business has
accounted for an increasing portion of its total business, and this trend may
continue in the future. In addition, the Company is considering expanding into
specialty programs and other commercial coverages. As the Company's mix of
9
<PAGE> 11
business changes, there can be no assurance that the Company will be able to
maintain its profit margins or other operating results.
ADEQUACY OF LOSS RESERVES
The Company is directly liable for loss and LOSS ADJUSTMENT EXPENSES
("LAE") under the terms of the insurance policies it underwrites. The Company
establishes loss reserves for the ultimate payment of all loss and loss
adjustment expenses incurred. These reserves are based on historical data and
estimates of future events and are imprecise. Although management believes that
the Company's established reserves for loss and loss adjustment expenses are
adequate and the Company annually obtains an opinion with respect to loss
reserves from an independent consulting actuary, ultimate loss and loss
adjustment expenses may vary from established reserves. Furthermore, factors
such as future inflation, claims settlement patterns, legislative activity and
litigation trends, all of which are difficult to predict, may have a substantial
impact on the Company's future loss experience. Accordingly, there can be no
assurance that the Company's reserves will be adequate to cover ultimate loss
development. If the Company's reserves should prove to be inadequate, the
Company will be required to increase reserves with a corresponding reduction in
the Company's net income in the period in which the deficiency is identified.
Future loss experience substantially in excess of established reserves could
have a material adverse effect on the Company's business, results of operations
or financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Reserves."
REGULATION
The Company is subject to regulation, primarily by Pennsylvania, its
domiciliary state, and to a lesser degree, the 22 other states in which it is an
ADMITTED INSURER. The regulations are generally designed to protect the
interests of insurance policyholders, as opposed to the interests of
stockholders. Such regulations relate to authorized lines of business, capital
and surplus requirements, rates and forms, investment parameters, underwriting
limitations, transactions with affiliates, dividend limitations, changes in
control and a variety of other financial and non-financial components of the
Company's business. The failure of the Company to comply with certain provisions
of applicable insurance laws and regulations could have a material adverse
effect on the Company's business, results of operations or financial condition.
See "Business--Regulation."
The NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (THE "NAIC") has
adopted a system of assessing the financial condition and stability of insurance
companies, known as "IRIS ratios," and a system to test the adequacy of
statutory capital, known as "risk-based capital," each of which applies to
Penn-America and Penn-Star. IRIS ratios consist of 11 ratios that are compiled
annually from each insurance company's statutory financial reports and then
compared against the NAIC-established "usual range" for each ratio. The
risk-based capital rules establish statutory capital requirements based on
levels of risk retained by an insurance company. Penn-America's adjusted capital
at December 31, 1996 was in excess of the applicable risk-based standards as
established by the NAIC. There is no assurance that Penn-America or Penn-Star
will be able to maintain the required capital levels or IRIS ratios. Failure to
maintain risk-based capital at the required levels, or IRIS ratios within the
NAIC's usual range, could adversely affect Penn-America's or Penn-Star's ability
to secure regulatory approvals as necessary or appropriate.
BINDING AUTHORITY
The Company underwrites the substantial majority of its commercial policies
on a binding authority basis (approximately 85% in 1996, which generated
approximately 80% of the Company's commercial lines gross written premiums). The
Company's personal automobile policies are written solely on a binding authority
basis. 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 that a general agent exceeds its authority by binding
the Company on a risk which does not comply with the Company's underwriting
guidelines, the Company is at risk for that policy until it receives the policy
and effects a cancellation. The Company generally requires general agents to
deliver all policies to the Company within 35 days of the date written. There
can be no assurance that the general agents will bind the Company within the
limits of the Company's
10
<PAGE> 12
underwriting guidelines or deliver policies to the Company in a timely manner.
As a result, the Company may be bound by a policy which does not comply with its
underwriting guidelines and until it can effect a cancellation, may incur loss
and loss adjustment expenses related to that policy.
RELIANCE ON CERTAIN GENERAL AGENTS
A significant portion of the Company's personal automobile gross written
premiums in 1996 was written by two agents who service the states of Washington,
California and Nevada. These agents accounted for $20.4 million (93.7%) of the
personal automobile gross written premiums in 1996. During 1996, another agent
in California accounted for $6.3 million (10.7%) of commercial gross written
premiums. The loss of any of these three general agencies, or the loss of the
ability to underwrite automobile insurance in California or Washington for any
reason, could have a material adverse effect on the Company's business, results
of operations or financial condition. No other agency accounted for more than
10% of the Company's commercial or personal automobile gross written premiums in
1996. See "Business--Marketing and Distribution" and "Business--Regulation."
COMPETITION; FINANCIAL RATINGS
The Company competes in the property and general liability insurance
business with numerous domestic and international insurers. Many 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 Company, and
the Company may compete with new entrants in the future. Competition is based on
many factors, including the perceived market strength of the insurer, pricing
and other terms and conditions, services provided, the speed of claims payment,
the reputation and experience of the insurer and ratings assigned by independent
rating organizations (such as A.M. Best). Ultimately, this competition, coupled
with the effects of the current prolonged soft market, could affect the
Company's ability to attract business at premium rates which are likely to
generate underwriting profits, and could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Business--Competition." Penn-America currently has an "A (Excellent)" rating
from A.M. Best. A downgrade of Penn-America's A.M. Best rating could have a
material adverse effect on the Company's business, results of operations or
financial condition. There can be no assurance that the Company will be able to
maintain Penn-America's A.M. Best rating.
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
PAGI is an insurance holding company. Dividends and other payments from
Penn-America are PAGI's primary source of funds to pay expenses, service debt
and pay dividends, if any. The payment of dividends by Penn-America to PAGI and
the payment of dividends by Penn-Star to Penn-America are subject to
restrictions set forth in the Pennsylvania insurance laws. In general, these
restrictions limit the aggregate amount of dividends or other distributions that
Penn-America or Penn-Star may declare or pay within any 12-month period without
the permission of the applicable regulatory authority (generally the greater of
statutory net income for the preceding calendar year or 10% of the statutory
surplus), and require that Penn-America's or Penn-Star's statutory surplus
following any such dividend or distribution be reasonable in relation to its
outstanding liabilities and adequate for its financial needs. The maximum amount
of dividends payable by Penn-America in 1997, without prior approval of the
Pennsylvania insurance regulators, is approximately $6.3 million. Penn-America
paid a dividend of approximately $3.3 million to PAGI in 1996. In addition, the
Company's term loan with PNC Bank (the "Term Loan") includes certain negative
covenants which could have the effect of restricting the Company's ability to
pay dividends. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations--Liquidity and Capital Resources."
The continued payment of dividends by the Company will be determined
regularly by the Board of Directors and will be based on general business
conditions, legal and regulatory restrictions regarding the payment of dividends
and other factors the Board of Directors considers relevant. The Company
currently intends to continue to pay a $0.16 annual dividend per share.
11
<PAGE> 13
CERTAIN RELATIONSHIPS WITH CONTROLLING STOCKHOLDER
Currently, Mr. Irvin Saltzman and his family and affiliates (the "Saltzman
family"), substantially through their ownership of Penn Independent, the
Company's controlling stockholder and the Selling Stockholder, beneficially own
approximately 61.8% of the Company's outstanding Common Stock. Upon completion
of the Offering, the Saltzman family will beneficially own approximately 34.4%
of the Company's outstanding Common Stock (approximately 32.5% if the
Underwriters' over-allotment option is exercised) and will continue to control
the Company. See "Principal and Selling Stockholders."
Mr. Irvin Saltzman, Chairman of Penn Independent, provides consulting
advice for Penn-America's investment portfolio, for which he was paid $64,000
for 1996. In addition, the Company receives services from other executives
(including Messrs. Heerin and Lear and Ms. Saltzman-Levy), staff and
administrative personnel of Penn Independent, including services in connection
with human resource administration and related services. Also, the Company is
charged a portion of the amounts paid by Penn Independent for services such as
insurance, telecommunications, professional fees, postage and office supplies.
In 1996, the Company reimbursed Penn Independent $261,000 for such services.
The Company's headquarters in Hatboro, Pennsylvania are occupied pursuant
to a lease effective June 30, 1995, between Irvin Saltzman, as landlord, and the
Company. The lease is for an initial term of five years and the Company has one
five-year renewal option thereafter. The current rent is $260,000 per year and
the Company is required to pay its pro rata share of all taxes, fees,
assessments and expenses on the entire office facility to the extent that they
exceed $224,000 annually in the aggregate. In the event the Company renews the
lease, the rent will be increased by 50% of the cumulative change in the
Philadelphia area consumer price index during the initial lease term. Management
believes that the amount paid by the Company under the lease represents fair
market value for rent.
The Delaware Valley Underwriting Agencies (the "DVUA Agencies"), which are
wholly-owned insurance agency subsidiaries of Penn Independent, produce business
for the Company. The DVUA Agencies generated approximately 4.8% of the Company's
gross written premiums in 1996. In addition, 4.8% of the DVUA Agencies' business
volume was produced for the Company. Gross written premiums and commissions paid
resulting from transactions with the DVUA Agencies were $3,880,000 and $888,000,
respectively, in 1996. Amounts receivable from the DVUA Agencies were $334,000
as of December 31, 1996.
The Company believes that the terms of the transactions described above are
at least as favorable to the Company as those obtainable from unaffiliated third
parties. See "Certain Relationships and Related Party Transactions" and Note 3
of Notes to Consolidated Financial Statements.
DEPENDENCE ON KEY PERSONNEL
The efforts and abilities of the Company's present management, particularly
that of Jon S. Saltzman, the Company's President and Chief Executive Officer,
are very important to the success of the Company. If the Company were to lose
the services of Jon S. Saltzman or John M. DiBiasi (Penn-America's Executive
Vice President--Underwriting and Marketing), or any of the other key management
personnel, there could be a material adverse effect on the Company's business,
results of operations or financial condition. The Company does not have
employment agreements with any employee, but it does maintain key personnel life
insurance policies on Jon S. Saltzman, John M. DiBiasi, Thomas J. Reed
(Penn-America's Senior Vice President--Claims) and Rosemary R. Ferrero (Vice
President--Finance, Chief Financial Officer, Treasurer and Secretary). See
"Management."
REINSURANCE
The Company currently purchases reinsurance, which allows it to write more
direct insurance and at greater limits than it otherwise could. The Company's
current treaty reinsurance is with General Reinsurance Corporation ("General
Re"). For catastrophe losses, the Company is covered by a consortium of insurers
led by General Re and Lloyds of London. There can be no assurance that
reinsurance will continue to be available to the Company to the same extent, and
at the same cost, as it has in the past. See "Business--Reinsurance."
12
<PAGE> 14
The maintenance of reinsurance does not legally discharge the Company from
its primary liability for the full amount of the risks it insures, although it
does make the REINSURER liable to the Company. Therefore, the Company is subject
to credit risk with respect to its reinsurers. The Company's reinsurance
recoverable is primarily with General Re. Although the Company's management
believes that its reinsurance is maintained with financially stable reinsurers
and that its reinsurance support is adequate to protect its interests, the
insolvency of General Re or any other reinsurer or their inability to make
payments under the terms of a reinsurance treaty could have a material adverse
effect on the Company's business, results of operations or financial condition.
The Company may choose in the future to re-evaluate the use of reinsurance to
increase, decrease or eliminate the amount of risk it CEDES to reinsurers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Reinsurance."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Common Stock in the public
market following this Offering, or the perception that such sales could occur,
could adversely affect the market price for the Common Stock. Immediately after
completion of this Offering, the Company will have 9,275,884 shares of Common
Stock outstanding, of which 5,997,649 shares will be freely tradeable without
restriction or further registration under the Securities Act, except those
shares acquired by affiliates of the Company. The remaining shares will be
"restricted securities" within the meaning of Rule 144 under the Securities Act.
As of June 1, 1997, 360,000 shares of Common Stock were issuable upon the
exercise of outstanding stock options (252,000 of which were currently
exercisable), which shares have been registered by the Company under the
Securities Act and are freely tradeable without restriction upon issuance. The
Company and certain of its current stockholders, including the Selling
Stockholder, holding an aggregate of 3,278,235 shares of Common Stock upon
completion of this Offering, have agreed not to offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, any Common Stock, or any
securities convertible into or exchangeable or exercisable for Common Stock,
until 180 days after the date of this Prospectus, without the prior consent of
Donaldson, Lufkin & Jenrette Securities Corporation, on behalf of the
Underwriters. Following the 180 day period, 3,273,733 of the restricted
securities will become immediately eligible for sale, subject to the manner of
sale, volume, notice and information requirements of Rule 144. In addition, the
Selling Stockholder, through its control of the Company, could cause the Company
to register its stock, in which case the Rule 144 volume and manner of sale
restrictions would not apply. See "Description of Capital Stock--Shares Eligible
for Future Sale."
ANTI-TAKEOVER AND ISSUANCE OF ADDITIONAL SHARES
The Company's Articles of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) the authority of the Board of
Directors to issue series of its preferred stock, $0.01 par value per share (the
"Preferred Stock"), with such voting rights and other powers as the Board of
Directors may determine and (ii) notice requirements in the Bylaws relating to
nominations to the Board of Directors and to the raising of business matters at
stockholders' meetings. For nominations or other business to be properly brought
before an annual meeting of stockholders by a stockholder, the Company's Bylaws
require such stockholder to deliver a notice to the Secretary, absent specified
circumstances, not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting. This could have the effect
of discouraging a prospective acquirer from making a tender offer or otherwise
attempting to obtain control of the Company.
Under applicable state insurance laws and regulations, no person may
acquire control of Penn-America or any corporation controlling Penn-America
unless such person has filed a statement containing specified information with
appropriate regulatory authorities and has obtained approval for such an
acquisition. Under applicable laws and regulations, any person acquiring,
directly or indirectly, or holding proxies with respect to, 10% or more of the
voting stock of any other person is presumed to have acquired "control of such
person." Accordingly, any purchase resulting in the purchaser owning 10% or more
of the outstanding Common Stock,
13
<PAGE> 15
in the Offering or otherwise, would require prior approval by applicable
regulatory authorities. Such prior approval requirement would also apply to an
acquisition of proxies to vote 10% or more of the outstanding Common Stock and,
therefore, could delay or prevent a stockholder from acquiring such proxies in a
proxy contest. No assurance can be given as to whether the Company would seek to
invoke these laws and regulations in the event of a contested solicitation of
proxies. See "Description of Capital Stock--Certain Corporate Anti-Takeover
Provisions."
USE OF PROCEEDS
The net proceeds from the sale of the 2,500,000 shares of Common Stock
offered hereby by the Company based on the last reported sale price of the
Common Stock on the Nasdaq National Market on June 18, 1997 of $14.75 per share
(after deduction of underwriting discounts and commissions and estimated
offering expenses) are estimated to be approximately $34.4 million.
Approximately $9.0 million of the net proceeds are expected to be used to repay
in full the indebtedness of the Company under the Term Loan. The remainder of
the net proceeds is expected to be used to increase the surplus of Penn-America
and Penn-Star in order to support future growth and for general corporate
purposes. The Company will not receive any proceeds from the sale of shares of
Common Stock by the Selling Stockholder.
Unless prepaid, the Term Loan is scheduled to mature as follows: $1.0
million on December 20, 1997, $2.0 million on December 20, 1998, $3.0 million on
December 20, 1999 and $3.0 million on December 20, 2000. The Term Loan is not
subject to a prepayment penalty and incurs interest at LIBOR plus a factor which
can vary between 100 and 225 basis points. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Liquidity and
Capital Resources" and Note 9 of Notes to Consolidated Financial Statements.
14
<PAGE> 16
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company completed an IPO on October 28, 1993, at a price to the public
of $6.00 per share. The following table sets forth the high and low closing
prices of the Common Stock on the Nasdaq National Market and the cash dividends
paid per share since the IPO for the periods indicated. The prices and dividends
paid have been adjusted to reflect the three-for-two split of the Company's
Common Stock effected on March 7, 1997.
<TABLE>
<CAPTION>
MARKET PRICE
-----------------------
PERIOD HIGH LOW DIVIDEND
<S> <C> <C> <C>
1993:
Fourth Quarter (from October 28)........................ $ 6 21/24 $ 4 53/64 $ --
1994:
First Quarter........................................... $ 5 43/64 $ 4 21/64 $ --
Second Quarter.......................................... 4 3/4 4 21/64 --
Third Quarter........................................... 5 21/64 4 27/64 --
Fourth Quarter.......................................... 5 11/64 4 21/64 --
1995:
First Quarter........................................... $ 5 11/64 $ 4 21/64 $ --
Second Quarter.......................................... 6 1/2 4 43/64 0.0200
Third Quarter........................................... 7 43/64 6 21/64 0.0200
Fourth Quarter.......................................... 9 43/64 7 0.0200
1996:
First Quarter........................................... $10 21/64 $ 7 43/64 $0.0267
Second Quarter.......................................... 11 11/64 8 1/2 0.0267
Third Quarter........................................... 11 11/64 9 1/2 0.0267
Fourth Quarter.......................................... 11 5/64 10 27/64 0.0267
1997:
First Quarter........................................... $14 1/2 $10 21/64 $0.0400
Second Quarter (through June 18)........................ 15 3/8 11 1/4 0.0400
</TABLE>
The Company intends to continue to pay quarterly cash dividends of $0.04
per share of Common Stock (a rate of $0.16 annually). The payment of dividends
is subject to the discretion of the Board of Directors and will depend upon
general business conditions, legal and contractual restrictions on payment of
dividends and other factors that the Board of Directors deems relevant.
As an insurance holding company, PAGI depends primarily on dividends and
other payments from Penn-America for the payment of cash dividends to
stockholders. The payment of dividends from Penn-America to PAGI and from
Penn-Star to Penn-America are restricted by insurance laws, and insurance
regulators have authority in certain circumstances to prohibit payments of
dividends and other amounts that would otherwise be permitted without regulatory
approval. In addition, certain covenants contained in the Company's Term Loan
could have the effect of restricting the payment of dividends. See "Risk
Factors--Holding Company Structure; Dividend Restrictions" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997 and as adjusted to give effect to the sale of
2,500,000 shares of Common Stock offered by the Company based on the last
reported sale price of the Common Stock on the Nasdaq National Market on June
18, 1997 of $14.75 per share and the application of the net proceeds as
described in "Use of Proceeds." The capitalization of the Company will not be
affected by the sale of Common Stock offered by the Selling Stockholder.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank................................................ $ 9,000 $ --
Stockholders' equity:
Preferred stock, $0.01 par value; authorized 2,000,000 shares;
none issued.................................................... -- --
Common stock, $0.01 par value; authorized 10,000,000 shares;
6,710,638 shares issued and outstanding (9,210,638 shares
issued and outstanding, as adjusted)(1)(2)..................... 67 92
Additional paid-in capital........................................ 22,087 56,459
Unrealized investment gains, net.................................. 511 511
Unrealized loss on fixed maturities transferred to held to
maturity....................................................... (43) (43)
Retained earnings................................................. 21,015 21,015
------- --------
43,637 78,034
Unearned compensation from restricted stock awards................ (87) (87)
------- --------
Total stockholders' equity..................................... 43,550 77,947
------- --------
Total capitalization...................................... $52,550 $ 77,947
======= ========
</TABLE>
- ------------------------------
(1) Based on 6,710,638 shares outstanding on March 31, 1997. Excludes: (i)
387,000 shares issuable upon the exercise of outstanding options under the
Company's 1993 Stock Incentive Plan, of which options for 289,500 shares
were exercisable; (ii) 93,000 shares available for issuance upon grant and
exercise of options under the Company's 1993 Stock Incentive Plan; (iii)
60,236 shares available for issuance under the Executive Incentive
Compensation Plan; and (iv) 58,597 shares available for issuance under the
Agent's Profit Sharing and Performance Awards Plan. See "Management--Company
Stock Incentive Plan", "Management--Executive Incentive Compensation Plan"
and Note 12 of Notes to Consolidated Financial Statements.
(2) Excludes up to 525,000 shares of Common Stock which may be sold by the
Company upon exercise of the Underwriters' over-allotment option. See
"Underwriting."
16
<PAGE> 18
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The selected consolidated financial data as of March 31, 1997 and 1996 and
for each of the three-month periods ended March 31, 1997 and 1996 have been
derived from unaudited consolidated financial statements and include all
adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of such financial information for
those periods. The results of operations for the three months ended March 31,
1997 are not necessarily indicative of the results that may be expected for any
other interim period or for the full year. The selected consolidated financial
data as of December 31, 1996, 1995, 1994, 1993 and 1992 and for each of the
years in the five-year period ended December 31, 1996 have been derived from the
audited consolidated financial statements of the Company. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and related notes included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Premiums earned........... $ 20,899 $ 15,623 $ 69,081 $ 57,228 $ 39,985 $25,961 $21,708
Net investment income..... 1,940 1,598 6,705 5,067 3,635 2,886 2,533
Net realized investment
gains (losses)......... 1 23 906 1,279 (713) 753 1,012
------- ------- ------- ------- ------- ------- -------
Total revenues......... 22,840 17,244 76,692 63,574 42,907 29,600 25,253
Losses and expenses:
Losses and LAE............ 13,217 9,852 43,292 35,835 24,855 16,411 13,865
Amortization of DAC....... 5,698 3,988 17,785 14,237 9,381 6,146 4,845
Other underwriting
expenses............... 1,144 1,061 4,349 4,356 3,600 3,363 3,241
Interest expense.......... 192 217 884 239 81 57 60
------- ------- ------- ------- ------- ------- -------
Total losses and
expenses............. 20,251 15,118 66,310 54,667 37,917 25,977 22,011
Earnings before income
tax....................... 2,589 2,126 10,382 8,907 4,990 3,623 3,242
Income tax.................. 839 697 3,389 2,881 1,579 1,115 970
------- ------- ------- ------- ------- ------- -------
Net earnings........... $ 1,750 $ 1,429 $ 6,993 $ 6,026 $ 3,411 $ 2,508 $ 2,272
======= ======= ======= ======= ======= ======= =======
PER SHARE DATA:(1)
Net earnings(2)............. $ 0.26 $ 0.21 $ 1.05 $ 0.91 $ 0.51 $ 0.50 $ 0.49
Net operating earnings(3)... 0.26 0.21 0.96 0.78 0.59 -- --
Cash dividends(4)........... 0.04 0.03 0.11 0.06 -- 1.13 0.07
Weighted average shares..... 6,689 6,650 6,663 6,645 6,645 4,997 4,652
OTHER OPERATING DATA:
Gross written premiums...... $ 23,957 $ 18,047 $ 80,496 $ 66,953 $ 53,926 $35,521 $27,539
Net written premiums........ 22,199 16,387 73,469 61,286 48,343 28,494 22,616
Net operating earnings(3)... 1,749 1,414 6,395 5,182 3,882 2,011 1,604
Return on average
stockholders' equity(5)... 16.3% 15.7% 17.8% 18.7% 12.2% 11.4% 14.7%
GAAP data:
Loss ratio................ 63.2% 63.1% 62.7% 62.6% 62.2% 63.2% 63.9%
Expense ratio............. 32.7 32.3 32.0 32.5 32.4 36.6 37.2
------- ------- ------- ------- ------- ------- -------
Combined ratio............ 95.9% 95.4% 94.7% 95.1% 94.6% 99.8% 101.1%
======= ======= ======= ======= ======= ======= =======
STATUTORY DATA:
Policyholders' surplus...... $ 42,459 $ 39,705 $ 41,665 $ 39,118 $ 25,677 $25,337 $14,045
Loss ratio.................. 63.2% 63.1% 62.7% 62.6% 62.2% 63.2% 63.9%
Expense ratio............... 32.4 31.2 31.6 30.4 32.3 34.8 35.6
------- ------- ------- ------- ------- ------- -------
Combined ratio.............. 95.6% 94.3% 94.3% 93.0% 94.5% 98.0% 99.5%
======= ======= ======= ======= ======= ======= =======
Property and casualty
industry combined
ratio(6).................. -- -- 105.9% 106.4% 108.3% 106.8% 115.6%
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and investments........ $120,460 $103,068 $115,550 $100,428 $ 72,896 $61,764 $47,360
Total assets................ 164,378 141,122 158,605 137,763 100,112 78,507 61,098
Notes payable............... 9,000 10,100 9,000 10,150 1,350 350 --
Total stockholders'
equity.................... 43,550 36,774 42,337 36,250 28,366 27,380 16,543
Total stockholders' equity
per share(1).............. $ 6.49 $ 5.53 $ 6.34 $ 5.46 $ 4.27 $ 4.12 $ 3.94
</TABLE>
- ------------------------------
(1) Adjusted to reflect a three-for-two split of the Company's Common Stock
effected on March 7, 1997.
(2) Net earnings per share for 1993 and 1992 are pro forma 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 the 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) Excludes realized investment gains (losses), assuming a 34% marginal tax
rate.
(4) Cash dividends for 1993 reflect an extraordinary dividend of $5,000,000 paid
to Penn Independent prior to the Company's IPO in October 1993.
(5) For each three-month period, the return on average stockholders' equity is
calculated on an annualized basis. The annualized return on stockholders'
average equity for the three months ended March 31, 1997 is not necessarily
indicative of the results that may be expected for any other interim period
or for the full year.
(6) Source: For 1996, BestWeek P/C Supplement, March 24, 1997 edition; for 1992
through 1995, Best's Aggregates & Averages--Property--Casualty.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes included
herein. All per share information, share amounts and stock options in this
Prospectus have been adjusted to reflect a three-for-two split of the Company's
Common Stock effected on March 7, 1997.
GENERAL
On February 21, 1997, the Insurance Department of Pennsylvania issued a
Certificate of Authority to Penn-Star, Penn-America's newly formed wholly-owned
insurance subsidiary. Penn-Star was granted authority to begin to transact
business as of April 1, 1997. Penn-Star will principally write the nonstandard
personal automobile business presently written directly by its parent,
Penn-America. The formation of a separate subsidiary for the personal automobile
line allows the Company to pursue personal lines business, which must be written
on an admitted basis, without restricting its ability to write commercial
coverages on a non-admitted basis. It also allows for focused management and
monitoring of the nonstandard personal automobile business, which represented
approximately 27.0% of the Company's gross written premiums in 1996.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on the Company's
business, results of operations or financial condition. Also, re-evaluations of
the Company's loss reserves could result in an increase or decrease in reserves
and a corresponding adjustment to earnings. Additionally, the insurance industry
is highly competitive. The Company competes with domestic and international
insurers, some of which have greater financial, marketing, management resources
and experience than the Company, and it may compete with new market entrants in
the future. Competition is based on many factors, including the perceived market
strength of the insurer, pricing and other terms and conditions, services
provided, the speed of claims payment, the reputation and experience of the
insurer, and ratings assigned by independent rating organizations (such as A.M.
Best). Penn-America's current rating from A.M. Best is "A (Excellent)". This
rating is based upon factors of concern to policyholders, including financial
condition and solvency, and is not directed to the protection of investors.
Penn-Star began operations on April 1, 1997 and has applied for, but has not yet
received, a rating from A.M. Best.
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1997 AND 1996
Gross written premiums increased 32.7% to $24.0 million for the first
quarter of 1997, as compared to $18.0 million for the same quarter in 1996. The
increase in gross written premiums was primarily attributable to increased
volume, in addition to some rate increases which occurred automatically because
some risks are exposure related. The increase in volume came primarily from a
103.8% increase in the personal automobile lines to $9.7 million, as compared to
$4.8 million for the same period in 1996. Commercial lines volume increased 7.3%
to $14.3 million.
NET WRITTEN PREMIUMS increased 35.5% to $22.2 million in the first quarter
of 1997 as compared to $16.4 million in the first quarter of 1996. Net PREMIUMS
EARNED increased 33.8% to $20.9 million, as compared to $15.6 million in 1996.
These increases are attributable to the overall growth in gross and net written
premiums.
Net investment income increased 21.4% to $1.9 million as compared to $1.6
million in 1996. The increase in investment income can be attributed to a 19.9%
increase in the investment portfolio to $118.7 million in 1997 as compared to
$99.1 million as of March 31, 1996. The increase in the investment portfolio was
funded by cash flow from operations.
Loss and loss adjustment expenses increased 34.2% to $13.2 million in the
first quarter of 1997 as compared to $9.9 million in 1996. The increase in loss
and loss adjustment expenses was fairly consistent with growth in net premiums
earned, as the LOSS RATIO was 63.2% and 63.1% for the periods ended March 31,
1997 and 1996, respectively. The Company's statutory combined ratio increased to
95.6%, as compared to 94.3% in
19
<PAGE> 21
1996. The 1.3 point increase is primarily attributed to growth in the personal
automobile lines premium volume. Commission rates for the personal automobile
lines are approximately five percentage points higher than the commercial lines
commission rates. The overall net commission rates were 24.7% and 23.2% for the
periods ended March 31, 1997 and 1996, respectively.
Amortization of DEFERRED POLICY ACQUISITION COSTS ("DAC") increased 42.9%
to $5.7 million in the first quarter of 1997, as compared to $4.0 million for
the same period in 1996. This increase is attributed to the growth in gross
premiums earned and the higher percentage of written premiums in the auto
business.
Net earnings increased 22.4% to $1.8 million in the first quarter of 1997
as compared to $1.4 million for the same period in 1996. This increase is
principally attributed to increased premiums earned and increased investment
return.
YEARS ENDED DECEMBER 31, 1996 AND 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 was primarily attributable to increased premium 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 premium 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 premiums earned 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 15.1% 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.
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.
Loss and loss adjustment expenses increased 20.8% to $43.3 million in 1996,
as compared to $35.8 million in 1995. This increase was consistent with the
20.7% increase in premiums earned. The loss ratio increased slightly to 62.7%
from 62.6% in 1995.
Amortization of deferred acquisition costs increased 24.9% to $17.8 million
in 1996, as compared to $14.2 million in 1995. The increase can be attributed
to: (i) premium growth; (ii) an increase in commercial lines contingent
commission accrual; and (iii) 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%
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 16.0% to $7.0 million, or $1.05 per share in 1996,
as compared to $6.0 million or $0.91 per share in 1995.
20
<PAGE> 22
YEARS ENDED DECEMBER 31, 1995 AND 1994
Gross written premiums increased 24.2% in 1995 to $67.0 million, as
compared to $53.9 million in 1994. The 24.2% 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 29.7% increase in
commercial multi-peril to $26.7 million as compared to 1994, a 20.0% increase in
other liability to $21.6 million and a 22.4% 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 26.8% to $61.3 million in 1995, as compared
to $48.3 million in 1994. Net written premiums increased more dramatically than
gross written premiums, 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. Net premiums earned increased
43.1% to $57.2 million, as compared to $40.0 million, which was attributable to
the overall growth in net written premiums.
Net investment income increased 39.4% to $5.1 million in 1995, as compared
to $3.6 million in 1994. Investments and cash increased 37.8% 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 6.8% in 1995 versus 6.4% 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.
Loss and loss adjustment expenses increased 44.2% to $35.8 million in 1995,
as compared to $24.9 million in 1994. This increase was consistent with the
43.1% increase in premiums earned.
Amortization of deferred acquisition costs increased 51.8% to $14.2 million
in 1995, as compared to $9.4 million in 1994. This increase can be attributed to
the 43.1% increase in premiums earned in 1995 and the effect of the decrease in
ceded commissions resulting from increased retention.
Net earnings increased 76.7% 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.
LIQUIDITY AND CAPITAL RESOURCES
PAGI is a holding company, the principal asset of which is the common stock
of Penn-America. PAGI's cash flows depend primarily on dividends and other
payments from Penn-America. Penn-America's sources of funds consist primarily of
premiums, investment income and proceeds from sales and redemptions of
investments. Funds are used by Penn-America principally to pay claims and
operating expenses and to purchase investments. In addition, Penn-America pays
dividends to PAGI. PAGI uses these funds to pay (i) interest and principal under
the Term Loan, (ii) operating expenses, (iii) taxes and other payments and (iv)
dividends to PAGI stockholders.
Net cash provided by operating activities was $5.8 million as compared to
$4.1 million for the three months ended March 31, 1997 and 1996, respectively.
This increase in cash provided by operations primarily reflects the increase in
net premiums written during the period. Net cash provided by operating
activities was $16.8 million, $14.8 million and $14.9 million for 1996, 1995 and
1994, respectively.
21
<PAGE> 23
Net cash used by investing activities was $7.0 million for the three months
ended March 31, 1997 as compared to $5.1 million for the first quarter of 1996.
This increase was primarily due to the higher amount of cash provided by
operating activities for the first quarter of 1997 which was used to purchase
securities.
Net cash used by financing activities was $52,000 in 1997, as compared to
$185,000 used for the same period in 1996. The decrease in the use of cash for
financing activities was primarily due to $268,000 cash dividend paid to
stockholders offset by $243,000 contribution to paid in capital through the
exercise of stock options by some of the Company's stockholders.
The Company believes that it has sufficient liquidity to meet its
anticipated insurance obligations, operating and capital expenditure needs. The
Company's investment strategy emphasizes quality, liquidity and diversification,
as well as total return. With respect to liquidity, the Company considers
liability durations, specifically loss reserves, when determining desired
investment maturities. In addition, maturities have been staggered to produce
cash flows for loss payments and reinvestment opportunities. Average investment
duration of the fixed maturity portfolio as of March 31, 1997 was approximately
3.2 years as compared to an expected loss reserve duration of 2.3 years.
The Company's fixed maturity portfolio consisted of $101.4 million or 85.5%
of the March 31, 1997 investment portfolio. Approximately 98.9% of these
securities are rated "A-" or better by Standard & Poor's or Moody's as of March
31, 1997. Short-term investments consisted of commercial paper of $4.9 million
or 4.1% of total investments as of March 31, 1997. The Company's equity
portfolio consisted of $12.4 million (the majority of which is preferred stock
investments) or 10.4% of total investments as of March 31, 1997. The Company
maintains a consistent percentage of its total investments in equity securities
in order to provide for diversification and capital appreciation.
As of March 31, 1997, the investment portfolio contained $8.3 million
(7.0%) in CMOs. All of these CMOs are AAA-rated securities issued by government
or government-related agencies, 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 March 31, 1997.
As of March 31, 1997, 46.3% of the fixed income portfolio was classified as
Available for Sale, which are reported at fair value, with the resulting
unrealized gains or losses included as a separate component of stockholders'
equity until realized. The remaining 53.7% was classified as Held to Maturity
which are reported at amortized cost. Due to a rise in interest rates during the
first quarter of 1997, the market value of the entire portfolio as of March 31,
1997 was 98.1% of amortized cost.
On December 20, 1995, the Company entered into the Term Loan, under which
it has a current outstanding balance of $9.0 million. Unless prepaid, the Term
Loan is scheduled to mature as follows: $1.0 million in 1997, $2.0 million in
1998, $3.0 million in 1999 and $3.0 million in 2000. The interest rate on the
Term Loan is LIBOR plus a factor which can vary between 100 and 225 basis
points. The Term Loan is secured by the common stock of Penn-America and
contains various covenants including the maintenance of certain net worth
requirements and leverage and liquidity ratios. During April 1997 the Company
signed a commitment letter to increase the Term Loan to $15.0 million. The
structure of the new credit facility will provide that the current $9.0 million
outstanding under the Term Loan be repaid in equal installments over a five-year
period and the new $6.0 million credit line be repaid over a three-year period
beginning after the second anniversary of the new facility. The terms of the new
agreement, including the interest rate, security and covenants, are expected to
be substantially similar to the terms of the existing Term Loan. See "Use of
Proceeds" and Note 9 of Notes to Consolidated Financial Statements.
The principal 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
regulatory authorities. The
22
<PAGE> 24
maximum dividend that may be paid by Penn-America to the Company without prior
approval of regulatory authorities in 1997 is $6,262,000.
IMPACT OF INFLATION
Inflation can have a significant impact on property and casualty insurers
because premium rates are established before the amount of loss and loss
adjustment expenses are known. The Company 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 the Company's business, results of operations or financial condition to date.
The Company also considers inflation when estimating liabilities for loss
and loss adjustment expenses, particularly for claims having a long period
between occurrence and settlement. The liabilities for loss 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 partially
offset higher claims and expenses.
NEW ACCOUNTING STANDARDS
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. If compensation cost for the Company were determined
consistently with FASB Statement No. 123, the effect on the Company's net
earnings and net earnings per share would have been immaterial.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share", which defines the computation, presentation, and
disclosure requirements for earnings per share ("EPS"). It requires dual
presentation of basic EPS and diluted EPS on the face of the income statement.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to reissue common stock were exercised or
converted into common stock. The statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and earlier application is not permitted. When adopted, all prior-period EPS
data presented will be restated.
OTHER
The NAIC adopted risk-based capital standards which property and casualty
insurers had to meet beginning December 31, 1994. Risk-based capital standards
are designed to measure the acceptable amount of capital an insurer should have
based on its specific risks. The insurance department of an insurer's domicile
may scrutinize or take control of an insurer that fails to meet benchmark
capital levels. Based on the currently adopted standards, Penn-America's capital
and surplus is in excess of the prescribed risk-based capital requirements for
1996.
The Company relies on its existing management information systems in
operating and monitoring all major aspects of the Company's business, including
underwriting, claims and various financial systems. Additionally, the Company
relies, to a lesser extent, on the information systems of its general agents and
indirectly the producing retail insurance brokers. Any disruption in the
operation of the management information systems of the Company, its general
agents or their retail insurance brokers, could have a material adverse effect
on the Company's business, results of operations or financial condition. Like
many computer systems, the Company's systems use two-digit data fields which
recognize dates using the assumption that the first two digits are "19" (i.e.
the number 97 is recognized as the year 1997). Therefore, the Company's date-
critical functions relating to the year 2000 and beyond, such as underwriting,
claims and financial systems, may be adversely affected unless changes are made
to these computer systems. The Company has addressed this issue and a third
party contractor is in the process of reviewing all lines of code in all
applicable programs of the Company in order to implement the required changes.
However, no assurance can be given that these issues will be resolved without
any future disruption or that the Company will not incur significant expense in
resolving these issues.
23
<PAGE> 25
BUSINESS
GENERAL
Penn-America Group, Inc. is a specialty property and casualty insurance
holding company which, through its subsidiaries, markets and underwrites
commercial property, general liability and multi-peril insurance for small
businesses located primarily in small towns and suburban and rural areas, and
NONSTANDARD personal automobile insurance. The Company provides commercial
property and casualty insurance on both an excess and surplus lines basis and an
admitted basis, and personal automobile insurance on an admitted basis. The
Company markets its products through 52 high quality general agents, who in turn
produce business through over 25,000 retail insurance brokers located throughout
the United States. The Company focuses on serving the insurance needs of small
or nonstandard markets which are generally characterized by small average policy
premiums and serviced by retail insurance brokers with limited access to larger,
standard lines insurers. The Company believes that these markets are generally
underserved by larger, standard lines insurers who often limit their
underwriting to policies above a certain minimum premium size or to certain risk
classes and who operate in large-scale markets in which they can achieve
economies of scale. The Company believes that its distribution network enables
it to effectively access these numerous small markets at a relatively low fixed
cost through the marketing, underwriting and administrative support of its
general agents, as well as the localized market knowledge and expertise of its
general agents and their retail insurance brokers.
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1992 to 1996, gross written premiums
grew at a 30.8% compound annual rate from $27.5 million to $80.5 million, and
net operating earnings (excluding realized investment gains) grew at a 41.3%
compound annual rate from $1.6 million to $6.4 million. The Company has operated
at a SAP combined ratio under 100.0% in every year since 1992. The Company's
average SAP combined ratio from 1992 to 1996 was 95.9%, and the Company's
average return on average stockholders' equity during the same period was 15.0%.
The Company's distribution strategy is to maintain strong relationships
with fewer and higher quality general agents than its competitors. The Company
carefully selects a limited number of agents in each state based on their
experience and reputation and strives to preserve each agent's franchise value
within its marketing territory. The Company seeks to grow with these general
agents and develop strong, longstanding relationships by providing a high level
of service and support. From 1992 to 1996, the Company achieved 192.3%
cumulative growth in gross written premiums with a 36.8% increase in the number
of general agents from 38 to 52. The Company maintains low fixed costs by
underwriting the substantial majority of its policies on a binding authority
basis. The Company closely monitors the quality of business it underwrites by
maintaining close relationships with a small number of general agents. The
Company provides its general agents with a comprehensive, regularly updated
underwriting manual which clearly outlines the Company's pricing and
underwriting guidelines. The Company does not write high risk policies (e.g.,
medical malpractice, environmental and aviation liability). The Company
generally reviews new and renewal commercial policies on a continuous basis and
nonstandard personal automobile policies on a quarterly basis to ensure that its
underwriting guidelines are being followed. In addition to standard commissions,
the Company provides strong incentives to its general agents to produce
profitable business through a contingent commission structure which is
substantially tied to underwriting profitability and through the issuance of
shares of Common Stock in lieu of cash for a portion of the contingent
commissions.
Historically, the Company has underwritten the majority of its commercial
lines business on an excess and surplus lines basis. In recent years, the
Company has underwritten a greater proportion of its commercial lines business
on an admitted basis as it has identified profitable admitted markets which
remain underserved by larger standard insurers. Currently, the Company
underwrites all of its nonstandard personal automobile business on an admitted
basis. The Company expects to continue to expand its commercial lines business
by offering additional products and packages which enhance its current property
and liability coverages, by identifying profitable programs and books of
business and by selectively adding high quality general agents. Examples of such
additional products and programs include a commercial automobile product and
specialty
24
<PAGE> 26
programs, which may include miscellaneous professional liability coverage. The
Company currently writes nonstandard personal automobile policies in five
states. The Company has filed applications to write personal automobile policies
in two additional states and is considering expanding into several other states.
The Company's commercial insureds consist primarily of small, "main street"
businesses, including restaurants, taverns, retailers and artisan contractors,
located principally in small towns and suburban and rural areas. In addition,
the Company has developed customized products and coverages for other small
commercial insureds such as day care facilities, fitness centers and special
events. The Company believes it has benefited from a general migration of small
businesses out of urban centers and into suburban and rural areas. Industry
consolidation, corporate downsizing and the increased use of communications
technology and personal computers, among other factors, have contributed to the
high growth in the number of small businesses in these areas. The Company's
nonstandard automobile insurance products are designed for insureds who do not
qualify for preferred or standard automobile insurance because of their payment
history, driving record, age, vehicle type or other underwriting criteria or
market conditions. Underwriting standards in the preferred and standard markets
have become more restrictive, thereby requiring more insureds to seek
nonstandard coverage and contributing to an increase in the size of the
nonstandard automobile market.
Penn-America was formed in 1975 by Irvin Saltzman, who began working in the
insurance industry in 1947 when he founded a general agency. Jon S. Saltzman,
Irvin Saltzman's son, is President and Chief Executive Officer of the Company
and has been employed by the Company since 1986. The Company completed an IPO on
October 28, 1993, at a price to the public of $6.00 per share. Currently, the
Saltzman family, substantially through their ownership of Penn Independent, owns
approximately 61.8% of the Company's Common Stock. After the Offering, the
Saltzman family will own approximately 34.4% of the outstanding Common Stock of
the Company (approximately 32.5% if the Underwriters' over-allotment option is
exercised).
INDUSTRY OVERVIEW
The Company operates as an admitted insurer in 23 states and as a
non-admitted insurer in 27 states and the District of Columbia. Insurance
companies generally are admitted (licensed) to transact business in each state
in which they operate and are subject to regulatory scrutiny. These carriers are
often referred to as standard carriers. Most states, however, provide a limited
exemption from licensing for insurers writing coverage generally not available
from standard carriers, thereby providing additional capacity during times of
limited capacity from standard carriers and allowing more competition in
geographical areas not adequately served by standard carriers. This market is
served by companies generally referred to as excess and surplus lines or
nonstandard carriers.
Much of the business insured in the excess and surplus lines market is
comprised of hard-to-place risks that do not fit the current underwriting
guidelines of the standard market due to their unique characteristics and needs.
In the event that a retail insurance broker cannot find coverage for unique or
hard-to-place risk with a company in the standard market, it will turn to the
excess and surplus lines market to place suitable insurance coverage. The retail
insurance broker contacts general agents, who in turn submit the risk to excess
and surplus lines companies for consideration. Because these companies are
non-admitted carriers, they are able to use unregulated policy forms and premium
rates, giving their underwriters more flexibility than the regulated admitted
carriers in writing these hard-to-place risks. In general, the coverage provided
by excess and surplus lines insurers is more restrictive and the premiums are
higher than the standard market's policies and rates. Furthermore, in the event
that an excess and surplus lines carrier becomes insolvent and is unable to pay
its claims in full, the insured cannot rely on a state guaranty fund for
protection, except in New Jersey.
The excess and surplus lines market has continued to grow during the 1990s.
Based on information provided by A.M. Best, from 1990 to 1995, the excess and
surplus lines market grew at a 6.4% compound annual rate from $6.8 billion of
annual DIRECT WRITTEN PREMIUMS to $9.2 billion. The Company believes that this
growth was due to the increased professionalism, underwriting expertise,
innovative products and large capacity that the excess and surplus lines
companies have been able to provide. In recent years, many large
25
<PAGE> 27
national and regional insurers have streamlined non-core lines of business.
Consequently, many peripheral lines have been abandoned and are now covered in
the excess and surplus lines market.
Specialty admitted carriers underwrite business on an admitted basis with a
substantial portion of their premiums produced through general agents. The
Company believes that this market segment has gained prominence due to
consumers' general preference for policies underwritten by admitted carriers.
Similar to excess and surplus lines carriers, specialty admitted companies
principally underwrite unique or hard-to-place coverage that is not typically
underwritten in the standard market. One of the underlying differences between
the specialty admitted carriers and those companies underwriting excess and
surplus lines is the need for the business to be placed with an admitted
company, thereby gaining the protection of the state guaranty fund system.
The nonstandard personal automobile insurance market provides coverages to
insureds who do not qualify for preferred or standard insurance because of their
payment history, driving record, age, vehicle type or other factors, including
market conditions for preferred and standard risks. Underwriting standards for
preferred and standard risks have become more restrictive, thereby requiring
more drivers to seek coverage in the nonstandard market. These factors have
contributed to an increase in the size of the nonstandard automobile market.
Based on information provided by A.M. Best, from 1990 to 1995, the nonstandard
personal automobile insurance market grew at an 11.9% compound annual rate from
$9.9 billion of annual direct written premiums to $17.4 billion, and from 12.4%
to 16.7%, respectively, of the total personal automobile insurance market.
The nonstandard automobile insurance market is influenced by many factors,
including state insurance laws, market conditions for preferred and standard
automobile insurance and state assigned risk and residual market plans. Premium
levels for nonstandard risks are generally higher than for preferred or standard
risks because nonstandard risks generally involve a potential for increased risk
exposure and higher claims experience. Loss exposure is limited by the fact that
nonstandard drivers typically purchase low liability limits, often at a state's
statutory minimum. The nonstandard automobile market is also characterized by
the insurer's ability to minimize its exposure to unprofitable business by
effecting timely changes in premium rates and policy terms in response to
changing loss and other experiences.
PRODUCTS
The following table sets forth an analysis of gross written premium by
specific product lines during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
----------------- ------------------ ------------------
GROSS PERCENT GROSS PERCENT GROSS PERCENT
WRITTEN OF WRITTEN OF WRITTEN OF
PREMIUMS TOTAL PREMIUMS TOTAL PREMIUMS TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial multi-peril.................. $31,551 39.2% $26,653 39.8% $20,556 38.1%
Commercial general liability............ 21,526 26.8 21,643 32.3 18,033 33.4
Commercial property..................... 5,555 6.9 5,288 7.9 4,449 8.3
Commercial automobile................... 98 0.1 38 0.1 -- --
------- ----- ------- ----- ------- -----
Total commercial lines........... 58,730 73.0 53,622 80.1 43,038 79.8
------- ----- ------- ----- ------- -----
Personal automobile liability........... 17,496 21.7 11,179 16.7 6,347 11.8
Personal automobile physical damage..... 4,270 5.3 2,152 3.2 4,541 8.4
------- ----- ------- ----- ------- -----
Total personal automobile
lines......................... 21,766 27.0 13,331 19.9 10,888 20.2
------- ----- ------- ----- ------- -----
Total gross written premiums..... $80,496 100.0% $66,953 100.0% $53,926 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
Commercial General Liability. Liability insurance generally protects against
legal liability for bodily injury and property damage. The Company's commercial
general liability insurance provides limits generally ranging from $25,000 to $3
million, with the majority of policies currently in force having limits of
between $500,000
26
<PAGE> 28
and $1 million. The average annual premium on policies currently in force is
approximately $1,200 and the typical 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, taverns, retailers, artisan contractors and similar classes.
Commercial Property. Property insurance generally protects an owner of real or
personal property against covered causes of loss to that 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
annual premium on policies currently in force is approximately $1,100 and the
typical standard deductible is $500. Properties insured include restaurants,
taverns, retail establishments, vacant buildings and other similar classes.
Commercial Multi-Peril. The Company also underwrites 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 annual premium on
policies currently in force is approximately $2,200 and the typical standard
deductible is $500, which applies separately for the property and general
liability coverage. The growth in the Company's commercial multi-peril policies
has outpaced the growth in separate property and liability policies over the
last several years. The Company expects this trend to continue since a
substantial number of the Company's commercial insureds customarily require both
liability and property insurance coverage.
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 typically written at minimum
statutory limits ranging from $15,000 to $25,000 per person and from $30,000 to
$50,000 per occurrence, depending on the state. The average annual premium is
approximately $1,300. The Company writes this coverage on a one-, three-, six-
or twelve-month policy basis in California, but primarily on a six-month basis
in all other states. The Company has filed applications to underwrite personal
automobile policies in two additional states and is considering expanding into
several other states.
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 from 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
national or regional sales forces. This enables the Company to focus its efforts
on reviewing the underwriting decisions of its agents and evaluating submission
business, rather than devoting greater resources to making routine underwriting
decisions. The Company actively competes for quality general agents to
distribute its products.
The Company selectively appoints general agents and grants authority on a
state-by-state basis so that each general agent only has authority in a state(s)
where they have marketing expertise. Prior to appointing a general agent, the
Company extensively reviews the candidate's financial condition, geographic
diversification 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 prospective 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.
27
<PAGE> 29
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 write coverages effectively and
consistently within the Company's comprehensive underwriting guidelines. The
agents are provided limited binding authority, based primarily on INSURANCE
SERVICES OFFICE ("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 its detailed agency manual to enable its agents
to select and price risks consistently. The Company's agency manual is regularly
updated to be responsive to changes in the marketplace. The Company devotes
substantial resources to the continuous monitoring and support of its general
agents.
The general agents are compensated on a commission basis, which is on
average 20.6% of the gross written premium for commercial business and 26.6% for
personal lines automobile business. A portion of this commission is passed on to
the retail insurance broker. In addition, the general agency contracts between
the Company and its general agents contain profit contingency inducements under
the Agents' Profit Sharing and Performance Award Program, which is designed to
reward general agents who meet the Company's loss ratio and premium volume
criteria. The Company also provides performance awards under this program to its
commercial agents for timely policy issuance, timely premium payments and
successful underwriting audits. Such contingent commissions and performance
awards accounted for 7.1% of the total commissions incurred by the Company in
1996. During 1995, the Agents' Profit Sharing and Performance Award Program was
modified to provide that at least one-third of the contingent commission awards
would be given in the form of Common Stock. The Company authorized 75,000 shares
of Common Stock for issuance under this program. Stock awards for 1996, which
were issued in May 1997, amounted to 27,746 shares, accounting for 51.4% of the
total contingent commissions paid for 1996. In May 1997, the Company began a new
program under which the Company will award $1,000 in the form of Common Stock to
each new general agent it appoints.
The following table sets forth the geographic distribution of the Company's
gross written premiums during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
GROSS WRITTEN PERCENT GROSS WRITTEN PERCENT GROSS WRITTEN PERCENT
PREMIUMS OF TOTAL PREMIUMS OF TOTAL PREMIUMS OF TOTAL
(DOLLARS 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
Southwest.............. 11,693 14.5 7,949 11.9 5,601 10.4
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
Midwest................ 4,685 5.8 2,977 4.4 1,911 3.5
Mountain............... 509 0.7 229 0.3 49 0.1
------- ----- ------- ----- ------- -----
Total............. $80,496 100.0% $66,953 100.0% $53,926 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
UNDERWRITING AND PRICING
In the commercial property and casualty market, the rates and terms of
coverage provided by property and casualty insurance carriers are frequently
based on ISO rates and forms. ISO makes available to its members advisory,
rating, statistical and actuarial services, policy language and related
services. ISO and its related organizations currently provide such services,
including rates and forms, to more than 1,500 property and casualty insurance
companies in the U.S. One of the important services that ISO provides is an
actuarial-based estimate of the "ideal" premium rate for risks in each of
approximately 1,250 risk classifications. These rates reflect an analysis of the
loss and loss adjustment expenses on claims reported to ISO. ISO statistics,
however, include only claims and policy information reported to ISO, and
therefore do not reflect all of the loss experience for each class. Also, the
historical results for a particular class may not be sufficient to provide
actuarially meaningful results.
28
<PAGE> 30
The Company primarily uses ISO statistics as a benchmark for risk selection
and pricing. Other carriers may or may not rely heavily on this information, and
several of the larger standard carriers have developed their own actuarial
databases. As a general rule, most standard carriers set rates lower than ISO
rates. However, the Company, because of its strategy of providing insurance to
underserved markets, typically charges 100% or higher of prescribed ISO rates.
All policies written by the Company are either generated by the general
agents pursuant to their binding authority or on a SUBMIT 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 solely on a binding
authority basis. The Company has established strict underwriting guidelines
within the terms of its agency manual which identify the risks that: (i) are
within the binding authority of the general agents; (ii) must be submitted to
the Company and (iii) risks which the Company would not insure on any basis. The
agency manual was prepared after extensive research, including input from its
reinsurers, and is regularly updated by the Company's underwriting staff.
Generally, the Company provides its general agents with pricing flexibility on a
per-policy basis, with the objective that in the aggregate, the weighted average
premium of all new and renewal commercial policies written by a general agent
are at approximately 110% of ISO rates. Most standard carriers typically price
at 60-80% of ISO rates, based on ISO data. 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 coverage 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.
The Company generally reviews all commercial policies as they are received
from general agents for completeness, accuracy, and compliance with the
Company's underwriting guidelines. Further, the Company conducts a detailed
audit of each of its general agents at least once a year. The audit involves
thoroughly reviewing between 50 and 100 policies to check for completeness,
accuracy, pricing, use of proper exclusions, verification of information, and
compliance with the Company's regulatory filings, as well as the general agent's
use of the Company's overall product lines.
The Company routinely reviews selected data for nonstandard personal
automobile policies as such data is received from general agents for
completeness, accuracy, and compliance with the Company's underwriting
guidelines. Generally, the Company conducts detailed on-site audits of its
general agents on a quarterly basis. These audits involve thoroughly reviewing
between 50 and 100 policies to verify proper classifications, ratings, accident
and violation surcharges, adherence to manual guidelines, use of proper
exclusions, verification of information relative to inspections and compliance
with the Company's regulatory filings.
The Company provides its general agents with written feedback based on the
results of its audits and monitors their timely responses to any issues
highlighted in such audits.
29
<PAGE> 31
The following table sets forth the SAP underwriting ratios for Penn-America
and for the property and casualty insurance industry as a whole during the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
PENN-AMERICA SAP UNDERWRITING RATIOS:
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%
===== ===== ===== ===== =====
INSURANCE INDUSTRY SAP UNDERWRITING RATIOS:(1)
Loss ratio............................................ 78.6% 78.9% 81.0% 79.5% 88.1%
Expense ratio......................................... 26.2 26.1 26.0 26.1 26.3
Dividend ratio........................................ 1.1 1.4 1.3 1.2 1.2
----- ----- ----- ----- -----
Combined ratio........................................ 105.9% 106.4% 108.3% 106.8% 115.6%
===== ===== ===== ===== =====
</TABLE>
- ------------------------------
(1) Source: For 1996, BestWeek P/C Supplement, March 24, 1997 edition; for 1992
through 1995, Best's Aggregates & Averages--Property--Casualty.
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 to provide a high level of service and
support to general agents, retail insurance brokers 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. Senior management reviews all claims over $25,000.
RESERVES
The Company is directly liable for loss and loss adjustment expense
payments under the terms of the 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 loss adjustment expenses include the estimated expenses of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment process.
All newly reported claims received with respect to personal automobile
policies are set up with an initial average reserve. The average reserves for
these claims are determined every quarter by dividing all of the closed claims
into the total amount paid during the three month period. If a claim is open
more than 90 days, that open case reserve is evaluated and the reserve is
adjusted upward or downward according to the facts and damages of that
particular claim.
In addition, management establishes reserves on an aggregate basis to
provide for INCURRED BUT NOT REPORTED LOSSES ("IBNR"). The Company's independent
actuarial consultant annually reviews the provision for IBNR and the reserves
taken as a whole. The Company does not discount its loss reserves.
30
<PAGE> 32
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,
the Company reviews historical data and considers 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 and may deviate substantially from prior
estimates.
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 loss and loss adjustment expenses for the periods
indicated:
<TABLE>
<CAPTION>
YEARS 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>
The Company has experienced adverse development of gross reserves of $3.7
million and $3.4 million in 1996 and 1995, respectively, and favorable
development of $518,000 in 1994, for prior years' insured events. The net
reserves had favorable development of $804,000, $1.7 million and $2.9 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,
which deficiency is ceded to the Company's reinsurers. The establishment of
reserves is an inherently subjective process and, therefore, the historical
gross or net redundancies or deficiencies are not indicative of the likelihood
or amount of future redundancies or deficiencies.
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 loss and loss
adjustment expenses at the balance sheet date for each of the indicated years.
These figures represent the estimated amount of unpaid loss 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 available about the frequency and severity of
claims.
31
<PAGE> 33
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for
unpaid losses
and LAE, as
stated........ $12,200 $18,618 $21,741 $25,391 $25,352 $25,681 $ 26,110 $ 26,830 $ 35,307 $ 46,512 $55,656
Net cumulative
paid as of(1)
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
Reserves
re-estimated
as of end of
year(2)
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
(de-
ficiency)..... $ (891) $ 686 $ 1,519 $ 708 $ 3,362 $ 3,955 $ 3,343 $ 2,272 $ 1,026 $ 804
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross liability for unpaid losses and LAE, 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 LAE, 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>
- ------------------------------
(1) "Net cumulative paid as of" reflects the amounts of paid losses and LAE
subsequent to the year in which the original reserves were established.
(2) "Reserves re-estimated as of" reflects 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 (1)
above, plus the amounts of unpaid losses and LAE re-evaluated at the end of
each succeeding year-end.
32
<PAGE> 34
REINSURANCE
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.
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
reviews the financial condition of each reinsurer annually. The Company's policy
is to use only reinsurers that have an A.M. Best rating of "A (Excellent)" or
better and that have at least $250 million in policyholder surplus.
The Company's current treaty reinsurance is with General Re, which is rated
"A++ (Superior)" by A.M. Best. Since January 1995, the Company has maintained
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.
The Company also maintains casualty contingent excess coverage with General Re,
which covers exposures such as punitive damages and other extra-contractual
obligations, losses in excess of policy limits (such as bad faith and errors and
omissions) and liability actions brought by two or more of the Company's
insureds against each other resulting from the same occurrence. See "Risk
Factors--Reinsurance."
The Company is currently covered for catastrophe losses by a consortium of
reinsurers led by General Re and Lloyds of London. Under the terms of the
agreement, the Company retains the first $1 million of losses and the consortium
reinsures 95.0% of the next $19 million, with the Company retaining 5.0% of each
of the layers within the $19 million.
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 reinsurer guidelines.
The following table reflects the amounts of gross and ceded written
premiums during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Gross written premiums........................ $80,496 $66,953 $53,926
Ceded written premiums........................ 7,027 5,667 5,583
</TABLE>
INVESTMENTS
The Company's investment policy seeks to maximize investment income
consistent with the overriding objective of maintaining liquidity and minimizing
risk. Approximately 89.5% of the Company's investment portfolio as of March 31,
1997 consisted of investment-grade fixed income securities and short-term
investments. Approximately 98.9% of the Company's fixed income securities as of
March 31, 1997 were rated "A-" or better by Standard & Poor's or an equivalent
rating by Moody's. As of March 31, 1997, the Company's fixed maturity
investments had an average duration of 3.2 years. Publicly traded equity
securities, the majority of which consisted of preferred stocks, represented
10.4% of the Company's investment portfolio as of March 31, 1997.
As of March 31, 1997, the Company's investment portfolio contained $8.3
million (7.0%) of CMOs. All of these CMOs are AAA-rated securities issued by
government and government-related agencies, are publicly traded, and have market
values obtained from an external pricing service. Changes in estimated cash
flows due
33
<PAGE> 35
to changes in prepayment assumptions from the original purchase assumptions are
revised based on current interest rates and the economic environment. Although
the Company is permitted to invest in other derivative financial instruments,
real estate mortgages and real estate, the Company does not participate in these
markets and does not have any such investments in its investment portfolio.
The Company's investment portfolio is under the direction of the Board of
Directors of Penn-America acting through its Investment Committee (consisting of
Irvin Saltzman, Chairman, Jon Saltzman and Robert Lear). 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. All investment
transactions must receive approval from the Chairman of the Investment Committee
prior to their initiation by the Company's outside investment advisors.
In April 1997, the Company retained General Reinsurance, New England Asset
Management ("NEAM"), to manage the fixed income portfolio. The Investment
Committee retains Carl Domino Associates, L.P. ("CDA"), a registered investment
advisor, to recommend purchases and sales for the equity portfolio.
The following table shows the classifications of the Company's investments
at March 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------------
FAIR CARRYING PERCENT OF
VALUE VALUE CARRYING VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Available for sale:
U.S. Treasury securities and obligations of U.S.
government agencies.............................. $ 25,097 $ 25,097 21.2%
Corporate securities............................... 17,913 17,913 15.1
Public utilities................................... 3,947 3,947 3.3
--------- -------- -----
Total available for sale...................... 46,957 46,957 39.6
--------- -------- -----
Held to maturity:
U.S. Treasury securities and obligations of U.S.
government agencies.............................. 28,377 28,722 24.2
Corporate securities............................... 11,154 11,299 9.5
Mortgage-backed securities......................... 7,832 8,261 7.0
Public utilities................................... 5,943 6,056 5.1
Other securities................................... 150 150 0.1
--------- -------- -----
Total held to maturity........................ 53,456 54,488 45.9
--------- -------- -----
Total fixed maturities........................ 100,413 101,445 85.5
--------- -------- -----
Equity investments:
Common stocks......................................... 4,143 4,143 3.5
Preferred stocks...................................... 8,247 8,247 6.9
--------- -------- -----
Total equity investments...................... 12,390 12,390 10.4
--------- -------- -----
Short-term investments.................................. 4,900 4,900 4.1
--------- -------- -----
Total investments............................. $ 117,703 $118,735 100.0%
========= ======== =====
</TABLE>
34
<PAGE> 36
The following table sets forth the composition of the Company's portfolio
of fixed maturity investments by rating as of March 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
AMORTIZED PERCENTAGE
COST OF TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
RATINGS:(1)
AAA (including U.S. government obligations).......................... $ 64,475 63.0%
AA................................................................... 2,999 2.9
AA-.................................................................. 5,302 5.2
A+................................................................... 8,048 7.9
A.................................................................... 12,332 12.0
A-................................................................... 8,039 7.9
BBB.................................................................. 998 1.0
Not rated............................................................ 150 0.1
--------- -----
Total........................................................... $ 102,343 100.0%
========= =====
</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 rating.
The following table sets forth the Company's investment results during the
periods indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEARS ENDED DECEMBER 31,
MARCH 31, ------------------------
1997 1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest on fixed maturities................................ $ 1,689 $6,108 $4,615 $3,294
Dividends on equity securities.............................. 205 691 533 564
Interest on short-term investments.......................... 117 380 291 139
Other....................................................... 5 61 42 35
------- ------ ------ ------
Total investment income..................................... 2,016 7,240 5,481 4,032
Investment expense.......................................... (76) (535) (414) (397)
------- ------ ------ ------
Net investment income.................................. $ 1,940 $6,705 $5,067 $3,635
======= ====== ====== ======
</TABLE>
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
general agents and in selling insurance products. Many 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 Company. In commercial lines, the
Company competes with excess and surplus lines and specialty admitted insurers
including Scottsdale Insurance Company (part of Nationwide Mutual Insurance
Company), Essex Insurance Company (Markel Corporation), Nautilus Insurance
Company (W.R. Berkley Corporation), Acceptance Insurance Company and Western
World Insurance Company. The Company competes in nonstandard personal automobile
lines with, among others, Viking Insurance Company (Guaranty National
Corporation), Financial Indemnity Company (Unitrin, Inc.), Essex Insurance
Company and Five Star Insurance Company. The Company also competes with 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 such cycles through tight expense control and superior customer
service and must continually identify
35
<PAGE> 37
profitable opportunities. Other competitive factors include ratings by A.M.
Best, pricing and admitted versus excess and surplus lines status in a given
state.
REGULATION
General. The Company is subject to regulation under the insurance statutes
and regulations, including insurance holding company statutes, of the various
states in which it does business. These statutes are generally designed to
protect the interests of insurance policyholders, as opposed to the interests of
stockholders, 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 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 23 states and is an
approved non-admitted (excess and surplus lines) insurer in the other 27 states
and the District of Columbia. All insurance is written through licensed agents
and brokers. In states in which the Company operates on a non-admitted basis,
general agents and their retail insurance brokers generally 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 Company.
Insurance Holding Company Laws. Pennsylvania, Penn-America's state of
domicile, has laws governing insurers and insurance holding companies. The
Pennsylvania 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 the statutes, a
person must generally obtain the Pennsylvania Insurance Department's approval to
acquire, directly or indirectly, 10% or more of the outstanding voting
securities of the PAGI, Penn-America or Penn-Star. 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 group 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 group.
Dividend Restrictions. As an insurance holding company, PAGI is primarily
dependent on dividends and other permitted payments from Penn-America to provide
cash for the payment of any cash dividends to its stockholders and repayment of
the Term Loan and related interest expense. The payment of dividends to PAGI by
Penn-America and to Penn-America by Penn-Star are subject to state regulations,
primarily the insurance laws of Pennsylvania. 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. The
maximum annual dividends payable by Penn-America without prior approval in 1997
is approximately $6.3 million. Penn-America paid a dividend of approximately
$3.3 million to PAGI in 1996. 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 and in New Jersey,
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
36
<PAGE> 38
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
except in New Jersey.
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. 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, particularly in personal lines, to
limit midterm cancellations by insurers and require advance notice of renewal
intentions. In addition, Congress is investigating possible avenues for federal
regulation of the insurance industry.
EMPLOYEES
The Company has approximately 97 employees. The Chairman of the Board of
Directors of the Company and certain Directors devote a portion of their time to
the management of Penn Independent, the Company's largest stockholder. The
Company is not a party to any collective bargaining agreements and believes that
its employee relations are good.
PROPERTIES
The Company leases approximately 22,000 square feet in an 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 approximately $260,000, which amount is considered by the Company to
be at fair market value.
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 material adverse effect
on the Company's business, results of operations or financial condition.
37
<PAGE> 39
MANAGEMENT
Set forth below is certain information concerning PAGI's Directors and
officers and certain other officers of Penn-America and Penn-Star:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Irvin Saltzman............................. 74 Chairman, Board of Directors
Jon S. Saltzman............................ 39 President and Chief Executive Officer and
Director
Charles Ellman............................. 68 Director
James E. Heerin, Jr........................ 60 Director
Robert A. Lear............................. 52 Director
M. Moshe Porat............................. 50 Director
Jami Saltzman-Levy......................... 41 Director
Paul Simon................................. 68 Director
Thomas M. Spiro............................ 41 Director
Rosemary R. Ferrero........................ 41 Vice President--Finance, Chief Financial
Officer, Treasurer and Secretary
John M. DiBiasi............................ 42 Director and Executive Vice President--
Underwriting and Marketing of
Penn-America and Penn-Star
Thomas J. Reed............................. 52 Director and Senior Vice President--Claims
of Penn-America and Penn-Star
</TABLE>
Mr. Irvin Saltzman is the founder of Penn-America and of Penn Independent,
and for more than six years was the Chief Executive Officer and Chairman of the
boards of directors of both corporations. Mr. Saltzman has been Chairman of the
Board of Directors of the Company since its formation in July 1993. Mr. Saltzman
has been active in the insurance industry since 1947. See "Principal and Selling
Stockholders" and "Certain Relationships and Related Party Transactions."
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, and was Vice
President, Marketing of Penn-America from January 1986 until June 1988. Mr.
Saltzman is Mr. Irvin Saltzman's son.
Mr. Charles Ellman, who is now retired, has been a Director of PAGI since
1993 and was a Director of Penn-America from May 1976 until May 1995. Prior to
September 1994, Mr. Ellman was also Vice Chairman of the Board of Directors and
a Director of Penn Independent.
Mr. James E. Heerin, Jr. has been a Director of PAGI since 1993 and Vice
President of Penn Independent for more than six years. He was General Counsel
and Secretary of PAGI from its formation in July 1993 until his resignation from
those positions in March 1995. Mr. Heerin served as Vice President, Secretary
and General Counsel of Penn-America from May 1987 to March 1994 and Secretary of
Penn-America from May 1993 to March 1994. Prior to joining Penn Independent, Mr.
Heerin was Vice President and Assistant General Counsel of Pitcairn, Inc.
Mr. Robert A. Lear has been a Director of PAGI since 1993 and President of
Penn Independent since September 1996 and previously served as Executive Vice
President--Finance and Chief Financial Officer of Penn Independent for more than
seven years. Mr. Lear was Vice President--Finance and Chief Financial Officer of
PAGI from its formation in July 1993 until his resignation from those positions
in March 1995. Prior to joining Penn Independent, Mr. Lear had over 15 years of
public accounting experience, specializing in the insurance industry. Mr. Lear
is a certified public accountant.
Dr. M. Moshe Porat has been a Director of PAGI since 1993 and the Dean of
the School of Business and Management at Temple University since August 1996.
Prior to that date, he was the Joseph E. Boettner
38
<PAGE> 40
Professor and Chairman of the Risk Management, Insurance and Actuarial Science
Department at the School of Business and Management at Temple University for
eight years. Prior to joining Temple University, Dr. Porat was the Deputy
General Manager of IHUD Insurance Agencies Ltd., an international insurance
brokerage firm.
Ms. Jami Saltzman-Levy has been a Director of PAGI since 1993 and Vice
President--Human Resources of Penn Independent for more than ten years and
previously worked in various positions within Penn Independent. Ms.
Saltzman-Levy is Mr. Irvin Saltzman's daughter.
Mr. Paul Simon, a Director of PAGI since May 1997, is a Professor and
Director of the Public Policy Institute at Southern Illinois University. Mr.
Simon founded the institute in 1997 shortly after retiring from the United
States Senate after twelve years of service as Illinois's senior Democratic
Senator. His distinguished political career includes 14 years in the Illinois
House and Senate and a term as Lieutenant Governor of the State, the first in
the state's history to be elected with a governor from another party. He built a
chain of 13 newspapers in the southern and central parts of Illinois, which he
sold in 1966 to devote himself full-time to public service and writing. Mr.
Simon is the recipient of 44 honorary degrees and has written 16 books. He is
currently a Director of the Chicago Mercantile Exchange as well as a Director of
a number of foundations.
Mr. Thomas M. Spiro, a Director of PAGI since May 1997, is the Managing
General Partner of TMS Capital Partners, L.P. ("TMS"), a private investment
partnership which he founded in July 1992. He is also a Director and President
of Spiro Capital Management, Inc. ("SCMI"), a private investment corporation
which he founded in June 1992, and which is the successor to Spiro Capital
Management ("SCM"), an investment company which he founded in January 1991. Both
TMS and SCMI employ (and SCM employed) a research-oriented investment strategy
focused primarily on small capitalization public corporations. From January 1987
to December 1990, Mr. Spiro was Senior Vice President of Gollust, Tierney &
Oliver, Inc., a private corporation which managed several investment
partnerships.
Ms. Rosemary R. Ferrero has been Vice President--Finance, Chief Financial
Officer, Treasurer and Secretary of PAGI since May 1995. She has been Vice
President and Chief Financial Officer of Penn-America since May 1994. From 1977
until joining Penn-America in 1994, Ms. Ferrero was a Senior Financial Services
Manager at Coopers & Lybrand, LLP.
Mr. John M. DiBiasi has been Executive Vice President--Underwriting and
Marketing since May 1994 and Vice President--Underwriting and Marketing of
Penn-America since January 1989. From January 1988 until January 1989 he was
Manager--Marketing Research and Product Development of Penn-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 ISO from 1977 to 1983.
Mr. Thomas J. Reed has been Senior Vice President--Claims of Penn-America
since May 1995 and Vice President of Claims since 1987. Prior to joining
Penn-America, Mr. Reed was the claims manager for the Philadelphia office of the
Hartford Group.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
Pursuant to the provisions of the Pennsylvania Business Corporation Law,
the Bylaws of the Company provide that a Director shall not be personally liable
for monetary damages for any action taken, unless the Director breaches or fails
to perform a duty of his office and such breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. This limitation
does not apply to criminal liability or liability for the payment of taxes. The
Company believes that this provision assists it in securing and retaining the
services of Directors who are not employees of the Company. The Company's Bylaws
also provide for indemnification of the Company's Directors and officers to the
fullest extent permitted by Pennsylvania law.
39
<PAGE> 41
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned during each of the last three years by the Company's Chief Executive
Officer and by the four other most highly compensated executive officers ("named
executive officers") during 1996. All share numbers and stock prices have been
adjusted to reflect a three-for-two split of the Company's Common Stock effected
on March 7, 1997.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(3) COMPENSATION(4)
<S> <C> <C> <C> <C>
Irvin Saltzman(2)................................. 1996 $ 64,000 $ 0 $ 831
Chairman 1995 176,000 0 1,508
1994 164,623 0 1,502
Jon S. Saltzman................................... 1996 230,000 80,500 1,800
President and Chief Executive Officer 1995 208,846 84,125 1,752
1994 173,962 27,500 1,346
John M. DiBiasi................................... 1996 156,000 45,000 2,375
Executive Vice President--Underwriting and 1995 148,308 40,000 2,135
Marketing, Penn-America 1994 122,539 14,300 1,635
Rosemary R. Ferrero............................... 1996 126,000 30,000 1,950
Vice President--Finance, Chief Financial 1995 122,539 20,000 900
Officer, Treasurer and Secretary 1994 75,923 7,150 0
Thomas J. Reed.................................... 1996 116,000 27,500 1,931
Senior Vice President--Claims, Penn-America 1995 112,154 28,800 1,394
1994 102,154 11,000 1,072
</TABLE>
- ------------------------------
(1) Excludes certain perquisites and other amounts which, for any executive
officer, did not exceed in the aggregate the lesser of $50,000 or 10% of the
total annual salary and bonus for such executive officer.
(2) Mr. Irvin Saltzman divides his time between Penn Independent and each of its
subsidiaries, including the Company. Mr. Saltzman's compensation is paid
directly by Penn Independent, with each subsidiary paying for the portion of
his salary and benefits attributable to the time spent for each such
subsidiary. The compensation set forth in this table is the amount paid to
Penn Independent for Mr. Saltzman's services rendered on behalf of the
Company.
(3) Messrs. DiBiasi and Reed and Ms. Ferrero received part of their 1996 bonus
in cash and the balance in 2,093, 1,395 and 1,280 shares, respectively, of
the Company's Common Stock, valued at the average of the bid and ask price
of the Common Stock on December 31, 1996.
(4) Represents employer contributions to the Company's 401(k) Savings Plan.
OPTION/SAR GRANTS
No individual grants of stock options were made during fiscal 1996 to the
Company's Chief Executive Officer or the named executive officers. The Company
does not currently have (and has not previously had) any plan pursuant to which
any stock appreciation rights ("SARs") may be granted.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTIONS/SAR VALUE TABLE
The following table sets forth information relating to options exercised
during 1996 by the Company's Chief Executive Officer and the named executive
officers, and the number and value of options held on December 31, 1996 by such
individuals:
40
<PAGE> 42
AGGREGATED OPTION EXERCISES IN 1996
AND OPTION VALUES AS OF DECEMBER 31, 1996
(ADJUSTED FOR THE THREE-FOR-TWO STOCK SPLIT)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DEC. 31, 1996 DEC. 31, 1996(2)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Irvin Saltzman............ 0 $0 45,000 30,000 $ 213,750 $ 142,500
Jon S. Saltzman........... 0 0 27,000 18,000 128,250 85,500
John M. DiBiasi........... 0 0 13,500 9,000 64,125 42,750
Rosemary R. Ferrero....... 0 0 0 0 0 0
Thomas J. Reed............ 0 0 9,900 6,600 47,025 31,350
</TABLE>
- ------------------------------
(1) No stock options were exercised during fiscal 1996 by the named executive
officers.
(2) Total value of unexercised options is based upon the difference between the
last sales price of the Company's Common Stock on the Nasdaq National Market
as of December 31, 1996 and the exercise price of the options, multiplied by
the number of option shares.
COMPANY STOCK INCENTIVE PLAN
In August 1993, the Company adopted the 1993 Stock Incentive Plan. The plan
was amended and restated in April 1994. The purpose of the plan is to enable
officers, directors, key employees, 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 is administered by the Compensation Committee of the Board. The plan
authorized the issuance of up to 525,000 shares of Common Stock pursuant to the
exercise of stock options or the award of the restricted stock. As of June 1,
1997, options to purchase 432,000 shares had been awarded.
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
this 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 provisions for 1995, and during 1997, 7,535 shares
were distributed for 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 year,
and are issued in the subsequent year, subject to the Board's approval and
attainment of corporate objectives.
BOARD OF DIRECTORS COMPENSATION
Directors of the Company who are employees of the Company or its subsidiary
are not compensated for serving as Directors. Commencing May 14, 1997, the
non-employee Directors of the Company will receive a retainer at the rate of
$15,000 and a committee fee of $5,000 annually. Additionally, non-employee
Directors are granted 3,000 options at the beginning of the yearly term to vest
one year from grant date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during fiscal 1996 were Messrs.
Porat, Ellman, and Lawrence J. Schoenberg, all non-employee Directors of PAGI.
Mr. Schoenberg was replaced on the Compensation Committee by Mr. Simon as of May
14, 1997. No member of the Compensation Committee has a relationship that would
constitute an interlocking relationship with executive officers or directors of
another entity.
41
<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 31, 1997, and as adjusted to
reflect the sale of the Common Stock offered hereby, by: (i) each person known
by the Company to own beneficially more than 5% of the outstanding shares of
Common Stock; (ii) each Director of the Company; (iii) the Company's Chief
Executive Officer; and (iv) all executive officers and Directors as a group.
Except as noted, all persons listed below have sole voting and investment power
with respect to their shares of Common Stock, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE AFTER THE
OFFERING(1)(2) OFFERING(1)(2)
----------------------- SHARES BEING ---------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Penn Independent Corporation........ 4,087,500 60.3% 1,000,000 3,087,500 33.3%
420 South York Road
Hatboro, PA 19040
Irvin Saltzman...................... 4,132,500(3) 61.0 1,000,000 3,132,500 33.8
420 South York Road
Hatboro, PA 19040
Jon S. Saltzman..................... 4,142,250(4) 61.1 1,000,000 3,142,250 33.9
Jami Saltzman-Levy.................. 4,088,400(5)(6) 60.3 1,000,000 3,088,400 33.3
Eric Anthony Saltzman............... 4,087,500(7) 60.3 1,000,000 3,087,500 33.3
Robert A. Lear...................... 35,400 * 0 35,400 *
Rosemary R. Ferrero................. 2,676 * 0 2,676 *
James E. Heerin, Jr................. 13,650 * 0 13,650 *
John M. DiBiasi..................... 26,264(8) * 0 26,264 *
Thomas J. Reed...................... 16,293(9) * 0 16,293 *
M. Moshe Porat...................... 22,500(10) * 0 22,500 *
Charles Ellman...................... 120,000(11) 1.8 0 120,000 1.3
Thomas M. Spiro..................... 3,000 * 0 3,000 *
Paul Simon.......................... 1,500(12) * 0 1,500 *
--------- ---- --------- --------- ----
All executive officers and
directors......................... 4,429,433 65.4% 1,000,000 3,429,433 37.0%
========= ==== ========= ========= ====
</TABLE>
- ------------------------------
* Less than 1%
(1) Includes shares of restricted stock awarded to certain officers of the
Company under the Company's 1993 Stock Incentive Plan (as amended and
restated) which have not yet vested, over which such persons maintain
voting power, as follows: 7,200 shares for Mr. Jon Saltzman, 4,800 shares
for Mr. Lear, 1,500 shares for Mr. Heerin, 3,000 shares for Mr. DiBiasi and
1,500 shares for Mr. Reed.
(2) Includes shares subject to exercisable options as follows: 45,000 for Mr.
Irvin Saltzman, 27,000 for Mr. Jon Saltzman, 23,400 for Mr. Lear, 9,900 for
Mr. Heerin, 13,500 for Mr. DiBiasi, 9,900 for Mr. Reed, 15,000 for Dr.
Porat and 7,500 for Mr. Ellman.
(3) Of these shares, 4,087,500 are owned of record by Penn Independent. Mr.
Irvin Saltzman, Chairman of the Board of Directors, owns 49.9% of the
outstanding voting securities of Penn Independent.
(4) Of these shares, 4,087,500 are owned of record by Penn Independent. Mr. Jon
S. Saltzman, collectively with Ms. Jami Saltzman-Levy and Mr. Eric Anthony
Saltzman, serves as trustee of five trusts that own a total of 48.2% of the
outstanding voting securities of Penn Independent. Additionally, Mr. Jon
Saltzman serves individually as trustee of two trusts that collectively own
0.3% of the outstanding voting securities of Penn Independent. Mr. Jon
Saltzman also owns 0.1% of the outstanding voting securities of Penn
Independent in his own name.
(5) Of these shares, 4,087,500 are owned of record by Penn Independent. Ms.
Jami Saltzman-Levy, collectively with Mr. Jon S. Saltzman and Mr. Eric
Anthony Saltzman, serves as trustee of five trusts that own a total of
48.2% of the outstanding voting securities of Penn Independent.
Additionally, Ms. Jami Saltzman-Levy serves individually as trustee of six
trusts that collectively own 1.0% of the outstanding voting securities of
Penn Independent. Ms. Jami Saltzman-Levy also owns 0.1% of the outstanding
voting securities of Penn Independent in her own name.
(6) 900 of such shares are owned jointly with her spouse.
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<PAGE> 44
(7) These shares are owned of record by Penn Independent. Mr. Eric Anthony
Saltzman, collectively with Ms. Jami Saltzman-Levy and Mr. Jon S. Saltzman,
serves as trustee of five trusts that own a total of 48.2% of the
outstanding voting securities of Penn Independent. Mr. Eric Anthony
Saltzman also owns 0.1% of the outstanding voting securities of Penn
Independent in his own name.
(8) 12,706 of such shares are owned jointly with his spouse.
(9) 2,643 of such shares are owned jointly with his spouse.
(10) 7,500 of such shares are owned jointly with his spouse.
(11) Excludes 150 shares held by Mr. Ellman's daughter, to which Mr. Ellman
disclaims beneficial ownership.
(12) All shares are owned jointly with his spouse.
43
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
As of June 12, 1997, the authorized capital stock of the Company increased
from 10,000,000 to 20,000,000 shares of Common Stock. The Company has authorized
2,000,000 shares of Preferred Stock, as described below. No shares of Preferred
Stock are outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to vote of stockholders and do not have cumulative voting
rights. Accordingly, a holder of a majority of the outstanding shares of Common
Stock entitled to vote in any election of Directors may elect all the Directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor. Upon the liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to receive ratably the
net assets of the Company available for distribution after the payment of all
debts and other liabilities of the Company, subject to prior and superior rights
of the Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares offered hereby when issued and paid for will be, fully
paid and nonassessable.
PREFERRED STOCK
No shares of Preferred Stock have been issued and the Company does not
presently contemplate the issuance of such shares. The Board of Directors is
empowered by the Company's Articles of Incorporation to designate and issue from
time to time one or more classes or series of Preferred Stock without any action
of the stockholders. The Board of Directors may fix and determine the relative
rights, preferences and limitations of each class or series so authorized.
The issuance of, or the ability to issue, the Preferred Stock could
adversely affect the voting power and other rights of the holders of the Common
Stock or could have the effect of decreasing the market price of the Common
Stock or of discouraging or making difficult any attempt by a person or group to
obtain control of the Company, including any attempt involving a bid for the
Common Stock at a premium over the then market price.
CERTAIN CORPORATE ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) the authority of the Board of
Directors to issue series of Preferred Stock with such voting rights and other
powers as the Board of Directors may determine and (ii) notice requirements in
the Bylaws relating to nominations to the Board of Directors and to the raising
of business matters at stockholders' meetings. For nominations or other business
to be properly brought before an annual meeting of stockholders by a
stockholder, the Company's Bylaws require such stockholder to deliver a notice
to the Secretary, absent specified circumstances, not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting.
In addition, the Pennsylvania Business Corporation Law of 1988, as amended
(the "BCL"), provides that directors may, in discharging their duties, consider
the interests of a number of different constituencies, including stockholders,
employees, suppliers, customers, creditors and the community in which the
Company is located. Directors are not required to consider the interests of the
stockholders to a greater degree than other constituencies' interests. The BCL
expressly provides that directors do not violate their fiduciary duties solely
by relying on poison pills or the anti-takeover provisions of the BCL.
The BCL also contains several other anti-takeover provisions identified
below that will not be applicable to the Company because the BCL allows
corporations to elect, and the Company has elected, not to be subject to these
anti-takeover provisions. They are (i) the "controlled transactions" provisions,
which permit
44
<PAGE> 46
stockholders in certain change of control transactions to demand payment from a
new 20% stockholder of the fair market value of the demanding stockholders'
shares, (ii) the "business combination" provisions, which prohibit, subject to
certain exceptions, a business combination with a stockholder or group of
stockholders beneficially owning more than 20% of the voting power of a public
corporation, for a 5-year period following the date on which the holder obtains
the 20% ownership, (iii) the "control shares" provision, which limits the voting
power of stockholders acquiring more than 20%, 33% and/or 50% of a corporation's
voting securities, and (iv) the "disgorgement" provision, which permits a
corporation to recover profits resulting from a sale of shares by a stockholder,
under certain circumstances, after the stockholder has acquired or expressed an
intent to acquire at least 20% of the corporation's voting shares. The Company,
by making the above election, has opted not to take advantage of certain
provisions which are intended to limit the possibility of a takeover of the
Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 9,275,884 shares of
Common Stock outstanding (excluding shares of Common Stock reserved for issuance
under the Company's 1993 Stock Incentive Plan). Of these shares, 5,997,649
shares of Common Stock (plus any additional shares sold upon the Underwriters'
exercise of their over-allotment option) will be freely transferable without
restriction or further registration under the Securities Act, except that any
shares purchased by an existing "affiliate" of the Company, as that term is
defined by the Securities Act, will be subject to certain of the resale
limitations of Rule 144 adopted under the Securities Act. The remaining
3,278,235 shares of Common Stock will be eligible for sale in the public market,
subject to Rule 144 and the lock-up agreement described below. Through its
control of the Company, Penn Independent could cause the Company to register its
Common Stock for sale. See "Risk Factors--Shares Eligible For Future Sale."
In general, under Rule 144 as currently in effect, beginning 90 days after
this Offering, any person (or persons whose shares are aggregated) who has had
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of the Common Stock (approximately 92,750 shares
immediately after this Offering) or the average weekly trading volume of the
Company's Common Stock in the over-the-counter market during the four calendar
weeks preceding the date on which notice of the sale if filed with the
Commission. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and availability of current public information
about the Company. Any person (or persons whose shares are aggregated) who is
not deemed to have been an affiliate of the Company at any time during the three
months preceding a sale, and who has beneficially owned shares, within the
context of Rule 144, for at least two years, is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information or notice requirements.
The Company, Penn Independent and all of the Company's officers and
Directors have agreed not to offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of any of the shares of Common Stock owned by
them without the prior written consent of the Donaldson, Lufkin & Jenrette
Securities Corporation, on behalf of the Underwriters. This restriction will
apply to all of the shares owned by them for 180 days after the date of this
Prospectus.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
City Transfer Company.
45
<PAGE> 47
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a list of transactions between the Company and Penn
Independent, the controlling stockholder and Selling Stockholder, or the
Company's directors, executive officers or affiliates. The Company believes that
the terms of the transactions described in this section are at least as
favorable to the Company as those obtainable from unaffiliated third parties.
See Note 3 of Notes to Consolidated Financial Statements.
HEADQUARTERS LEASE
The Company's headquarters in Hatboro, Pennsylvania are occupied pursuant
to a lease effective June 30, 1995, between Mr. Irvin Saltzman, Chairman of the
Board of Directors, as landlord, and the Company. The lease is for an initial
term of five years and the Company has one five-year renewal option thereafter.
The current rent is approximately $260,000 per year and the Company is required
to pay its pro rata share of all taxes, fees, assessments and expenses on the
entire office facility to the extent that they exceed $224,000 in the aggregate.
In the event of renewal, the rent will be increased by 50% of the cumulative
change in the Philadelphia area consumer price index during the initial lease
term. Management believes that the amount being paid by the Company under the
lease represents a fair market value annual rental charge.
AFFILIATED INSURANCE ENTITIES
The DVUA Agencies, wholly-owned insurance agency subsidiaries of Penn
Independent, write business with the Company. The DVUA Agencies generated
approximately 4.8% of the Company's gross written premiums in 1996. In addition,
4.8% of the DVUA Agencies' business volume was produced for the Company. Gross
written premiums and commissions paid resulting from transactions with the DVUA
Agencies were $3,880,000 and $888,000, respectively, in 1996. Amounts receivable
from the DVUA Agencies were $334,000 as of December 31, 1996. The Company
believes that its arrangements with the DVUA Agencies are on terms no less
favorable to the Company than they would otherwise be if the DVUA Agencies were
unaffiliated third parties.
From time to time, the Company has loaned money to Penn Independent
Financial Services, Inc., a wholly-owned premium financing subsidiary of Penn
Independent. The principal balance of these loans as of December 31, 1996 was
$275,000, and the balance was paid entirely on April 28, 1997.
AGREEMENTS WITH PENN INDEPENDENT CORPORATION
Mr. Saltzman is Chairman of Penn Independent, and provides consulting
advice for Penn-America's investment portfolio, for which he was paid $64,000
for 1996. In addition, the Company receives services from other executives
(including Messrs. Heerin and Lear and Ms. Saltzman-Levy), staff and
administrative personnel of Penn Independent, including services in connection
with human resource administration and related services. Also, the Company is
charged a portion of the amounts paid by Penn Independent for services such as
insurance, telecommunications, professional fees, postage and office supplies.
For 1996, the Company reimbursed Penn Independent approximately $261,000 for
such services.
CARL DOMINO ASSOCIATES, L.P.
Penn-America retains CDA, a registered investment advisor, to recommend
purchases and sales of securities. Penn Independent and Mr. James E. Heerin,
Jr., a Director of the Company, each own a 5% limited partnership interest in
CDA. CDA managed certain fixed maturity and equity security investments of
Penn-America for an annual fee of 0.208%. For 1996, the annual fee paid by
Penn-America to CDA was $207,550. Effective April 1997, CDA only manages the
Company's equity portfolio for an annual fee of 0.45%.
46
<PAGE> 48
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated , 1997 (the "Underwriting Agreement"), the Underwriters named
below, for whom Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
Conning & Company and Pennsylvania Merchant Group Ltd ("PMG") are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company and the Selling Stockholder the respective number of shares of
Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..................
Conning & Company....................................................
Pennsylvania Merchant Group Ltd .....................................
---------
Total...................................................... 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all the shares of Common Stock offered hereby (other than those covered by
the over-allotment option described below) if any such shares of Common Stock
are taken.
The Company and Selling Stockholder have been advised by the
Representatives that the Underwriters propose initially to offer the shares of
Common Stock, in part, directly to the public at the price set forth on the
cover page of this Prospectus and, in part, to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the initial offering of the Common
Stock, the offering price and other selling terms may be changed by the
Representatives.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time in
whole or in part, up to 525,000 additional shares of Common Stock at the public
offering price, less the underwriting discounts and commissions, all as set
forth on the cover page of this Prospectus. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the Offering. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock to be purchased by such Underwriter shown in the above
table bears to the total number of shares of Common Stock shown in the above
table.
Each of the Company and the Selling Stockholder has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover such syndicate
short position or to stabilize the price of the Common Stock.
47
<PAGE> 49
These activities may stabilize or maintain the market price of the Common Stock
above independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
Common Stock during a specified two month prior period, or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the Common Stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
Each of the Company, its executive officers and Directors and certain
stockholders of the Company (including the Selling Stockholder) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise) for a period of 180 days after the date of this Prospectus
without the prior written consent of DLJ. In addition, during such 180 day
period without DLJ's prior written consent, the Company has also agreed not to
file any registration statement with respect to, and each of its executive
officers and Directors and certain stockholders of the Company (including the
Selling Stockholder) has agreed not to make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
PMG acted as a managing underwriter in the Company's IPO.
CERTAIN LEGAL MATTERS
Reed Smith Shaw & McClay, Philadelphia, Pennsylvania, will render an
opinion that the shares of Common Stock offered by the Company and the Selling
Stockholder, when sold in accordance with the plan of distribution described
herein, will be legally issued, fully paid and non-assessable. Davis Polk &
Wardwell is acting as counsel for the Underwriters in connection with certain
legal matters relating to the issuance of the Common Stock offered hereby.
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, included herein and elsewhere in the registration
statement, have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
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<PAGE> 50
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms used in this Prospectus have the meanings set forth
below:
ADMITTED INSURER........... An insurer that has received a license or
certificate of authority from a state regulatory
authority to transact an insurance business in
that state.
BINDING AUTHORITY.......... The authority given to an agent to bind an
insurance company to an insurance policy within
prescribed parameters.
CASE RESERVE............... The estimated liability of an insurer as to a
particular claim, at a given point in time, with
respect to losses that have been incurred and
reported to the insurer.
CEDE....................... To transfer to an insurer or reinsurer all or a
part of the insurance written by an insurance
entity.
COMBINED RATIO............. A combination of the loss ratio and the expense
ratio, expressed as a percentage, determined in
accordance with either statutory accounting
practices or generally accepted accounting
principles.
DEFERRED POLICY ACQUISITION
COSTS (DAC).............. The costs that vary with and are primarily related
to the acquisition of new and renewal insurance
policies including commissions and certain other
underwriting expenses. These costs are
capitalized and charged to expense in proportion
to premium revenue earned.
DIRECT WRITTEN PREMIUMS.... Gross written premiums less premiums assumed from
other insurers.
DIVIDEND RATIO............. The ratio of "dividends to policyholders" to net
premiums earned, expressed as a percentage.
EXCESS AND SURPLUS LINES... Lines of insurance which are generally unavailable
from admitted insurers and which, consequently,
are placed by surplus lines agents or brokers
with insurers that are not admitted in the
subject jurisdiction.
EXPENSE RATIO.............. Under SAP, the ratio of underwriting expenses to
net written premiums. On a GAAP basis, the ratio
of underwriting expenses (excluding interest
expense) to net premiums earned.
FACULTATIVE REINSURANCE.... The separately negotiated reinsurance of all or a
portion of the coverage provided by a single
policy, for individual risks not covered by a
reinsurance treaty or amounts in excess of limits
on risks covered by reinsurance treaties.
GENERAL AGENT.............. Agents (also known as wholesale agents) used by
excess and surplus lines and specialty admitted
insurance carriers to write their insurance
products. The general agents' clients are retail
insurance brokers who deal directly with the
insureds.
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(GAAP)................... Accounting practices and principles, as defined
principally by the American Institute of
Certified Public Accountants, the Financial
Accounting Standards Board, and the Commission.
GAAP is the method of accounting typically used
by the Company for reporting to persons or
entities other than insurance regulatory
authorities.
49
<PAGE> 51
GROSS WRITTEN PREMIUMS..... The total of premiums received or to be received
for insurance written by an insurer during a
specific period of time without any reduction for
reinsurance ceded.
HARD MARKET................ The portion of the market cycle of the property and
casualty insurance industry characterized by
constricted industry capital and underwriting
capacity, increasing premium rates and,
typically, enhanced underwriting performance.
INCURRED BUT NOT REPORTED
LOSSES (IBNR)............ The estimated liability of an insurer, at a given
point in time, with respect to losses that have
been incurred but not yet reported to the
insurer, and for potential future developments on
reported claims.
INSURANCE SERVICES OFFICE
(ISO).................... An association of property and casualty insurance
companies providing rating, statistical,
actuarial and policy form services for most
classes of property and casualty business.
LOSS ADJUSTMENT EXPENSES
(LAE).................... The expenses of investigating and settling claims,
including legal fees, outside adjustment expenses
and other general expenses of administering the
claims adjustment process.
LOSS RATIO................. For SAP and GAAP, net losses and loss adjustment
expenses incurred, divided by net premiums
earned, expressed as a percentage.
LOSS RESERVES.............. The estimated liability of an insurer, at a given
point in time, with respect to unpaid incurred
losses, including losses which are incurred but
not yet reported (IBNR) and related loss
adjustment expenses.
LOSSES INCURRED............ The total of all policy losses sustained by an
insurance company during a period, whether paid
or unpaid. Incurred losses include a provision
for claims that have occurred but have not yet
been reported to the insurer.
NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
(NAIC)................... A voluntary organization of state insurance
officials that promulgates model laws regulating
the insurance industry, values securities owned
by insurers, develops and modifies insurer
financial reporting statements and insurer
performance criteria and performs other services
with respect to the insurance industry.
NET WRITTEN PREMIUMS....... The gross premiums written during a specific period
of time, less the portion of such premiums ceded
to (reinsured by) other insurers.
NONSTANDARD................ Risks that generally have been found unacceptable
by standard lines insurers for various
underwriting reasons.
POLICYHOLDERS' (OR
STATUTORY) SURPLUS....... Total admitted assets less total liabilities, as
determined in accordance with statutory
accounting practices.
PREMIUMS EARNED............ The amount of net written premiums allocable to the
expired period of an insurance policy or
policies.
PREMIUMS TO SURPLUS
RATIO.................... Ratio of the most recent twelve months' statutory
net premiums written divided by the statutory
policyholders' surplus at the end of the period.
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<PAGE> 52
RETAIL INSURANCE BROKERS... Clients of general agent who deal directly with the
insureds.
REINSURERS................. Insurers (known as the reinsurer or assuming
company) who agree to indemnify another insurer
(known as the reinsured or ceding company)
against all or part of a loss which the latter
may incur under a policy or policies it has
issued.
SOFT MARKET................ The portion of the market cycle of the property and
casualty insurance industry characterized by
heightened premium rate competition among
insurers, increased underwriting capacity and,
typically, depressed underwriting performance.
STATUTORY ACCOUNTING
PRACTICES (SAP).......... Those accounting principles and practices which
provide the framework for the preparation of
financial statements, and the recording of
transactions, in accordance with the rules and
procedures adopted by regulatory authorities,
generally emphasizing solvency considerations
rather than a going concern concept of
accounting. The principal differences between SAP
and generally accepted accounting principles
(GAAP) are as follows: (a) under SAP, certain
assets (non-admitted assets) are eliminated from
the balance sheet; (b) under SAP, policy
acquisition costs are expensed upon policy
inception, while under GAAP they are deferred and
amortized over the term of the policies; (c)
under SAP, no provision is made for deferred
income taxes; and (d) under SAP, certain reserves
are recognized which are not recognized under
GAAP.
SUBMIT BASIS............... Preliminary application or other request from a
general agent for insurance coverage not meeting
binding authority upon which an insurance company
underwriter can either issue or decline to issue
a premium quote, or upon which a request for
additional information may be made.
UNDERWRITING............... The process whereby an underwriter reviews
applications submitted for insurance coverage and
determines whether it will provide all or part of
the coverage being requested, and the price of
such premiums. Underwriting also includes an
ongoing review of existing policies and their
pricing.
UNDERWRITING RATIOS........ The loss ratio, expense ratio, dividend ratio (if
applicable) and combined ratio.
51
<PAGE> 53
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 54
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Unaudited Balance Sheets at March 31, 1997 and December 31, 1996......... F-2
Consolidated Unaudited Statements of Earnings for the three months ended March 31,
1997 and 1996....................................................................... F-3
Consolidated Unaudited Statements of Stockholders' Equity for the three months ended
March 31, 1997...................................................................... F-4
Consolidated Unaudited Statements of Cash Flows for the three months ended March 31,
1997 and 1996....................................................................... F-5
Notes to Consolidated Unaudited Financial Statements.................................. F-6
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report.......................................................... F-7
Consolidated Balance Sheets at December 31, 1996 and 1995............................. F-8
Consolidated Statements of Earnings for the years ended December 31, 1996, 1995 and
1994................................................................................ F-9
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994....................................................................... F-10
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................................ F-11
Notes to Consolidated Financial Statements............................................ F-12
</TABLE>
F-1
<PAGE> 55
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH
31, DECEMBER 31,
1997 1996
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities:
Available for sale, at fair value (amortized cost 1997, $47,855;
1996, $49,244)................................................. $ 46,957 $ 48,954
Held to maturity, at amortized cost (fair value 1997, $53,457;
1996, $44,111)................................................. 54,488 44,227
Equity securities, at fair value (cost 1997, $10,717; 1996,
$10,597)........................................................ 12,390 12,390
Short term investments, at cost, which approximate fair value...... 4,900 7,000
-------- --------
Total investments.......................................... 118,735 112,571
Cash................................................................. 1,725 2,979
Receivables:
Accrued investment income.......................................... 1,842 1,671
Premiums receivable, net........................................... 10,859 10,494
Reinsurance recoverable............................................ 15,817 15,719
Note receivable, affiliate......................................... 75 275
-------- --------
Total receivables.......................................... 28,593 28,159
Prepaid reinsurance premiums......................................... 2,632 2,668
Deferred policy acquisition costs.................................... 7,726 7,231
Capital leases....................................................... 1,929 1,950
Deferred income tax.................................................. 2,515 2,211
Income tax recoverable............................................... -- 249
Other assets......................................................... 523 587
-------- --------
Total assets............................................... $164,378 $158,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses......................... $ 73,940 $ 70,728
Unearned premiums.................................................. 32,128 30,865
Accounts payable and accrued expenses.............................. 991 1,773
Capitalized lease obligations...................................... 2,003 2,030
Income tax payable................................................. 645 --
Notes payable, bank................................................ 9,000 9,000
Other liabilities.................................................. 2,121 1,872
-------- --------
Total liabilities.......................................... 120,828 116,268
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares; none
issued.......................................................... -- --
Common stock, $.01 par value; authorized 10,000,000 shares; issued
and outstanding 1997, 6,710,638 shares and 1996, 6,676,131
shares.......................................................... 67 67
Additional paid-in capital......................................... 22,087 21,844
Unrealized investment gains, net of tax............................ 511 993
Unrealized loss on fixed maturities transferred to held to
maturity........................................................ (43) --
Retained earnings.................................................. 21,015 19,533
-------- --------
43,637 42,437
Unearned compensation from restricted stock awards................. (87) (100)
-------- --------
Total stockholders' equity................................. 43,550 42,337
-------- --------
Total liabilities and stockholders' equity................. $164,378 $158,605
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-2
<PAGE> 56
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Premiums earned...................................................... $20,899 $15,623
Net investment income................................................ 1,940 1,598
Net realized investment gains........................................ 1 23
------- -------
Total revenues............................................... 22,840 17,244
------- -------
Losses and expenses:
Losses and loss adjustment expenses.................................. 13,217 9,852
Amortization of deferred policy acquisition costs.................... 5,698 3,988
Other underwriting expenses.......................................... 1,144 1,061
Interest expense..................................................... 192 217
------- -------
Total losses and expenses.................................... 20,251 15,118
------- -------
Earnings before income tax............................................. 2,589 2,126
Income tax............................................................. 839 697
------- -------
Net earnings........................................................... $ 1,750 $ 1,429
======= =======
Net earnings per share (note 1)........................................ $ 0.26 $ 0.21
======= =======
Weighted average number of shares outstanding.......................... 6,689 6,650
Cash dividends per share (note 1)...................................... $ 0.04 $ 0.03
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-3
<PAGE> 57
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------------------------------------------------------------
UNREALIZED
LOSS ON UNEARNED
TRANSFER OF COMPENSATION
UNREALIZED FIXED FROM
COMMON STOCK ADDITIONAL INVESTMENT MATURITIES RESTRICTED
------------------ PAID-IN GAINS TO HELD TO RETAINED STOCK
SHARES AMOUNT CAPITAL (LOSSES), NET MATURITY EARNINGS AWARDS TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996.................... 6,676,131 $ 67 $ 21,844 $ 993 $ 0 $ 19,533 $ (100) $42,337
Net earnings.............. 1,750 1,750
Issuance of common
stock................... 34,507 243 243
Amortization of unearned
compensation from
restricted stock
awards.................. 13 13
Unrealized investment
losses, net............. (532) (532)
Unrealized loss on fixed
maturities transferred
to held to maturity..... 50 (50) 0
Accretion of net loss on
fixed maturities
transferred to held to
maturity................ 7 7
Cash dividends paid....... (268) (268)
--------- ---- -------- ----- ----- -------- ------ -------
Balance at March 31,
1997.................... 6,710,638 $ 67 $ 22,087 $ 511 $ (43) $ 21,015 $ (87) $43,550
========= ==== ======== ===== ===== ======== ====== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-4
<PAGE> 58
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net earnings.......................................................... $ 1,750 $ 1,429
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization and depreciation expense.............................. 85 71
Net realized investment gains...................................... (1) (23)
Deferred income tax................................................ (55) (93)
Net decrease in premiums and notes receivable, prepaid reinsurance
premiums and unearned premiums.................................... 1,135 454
Net increase in unpaid losses and loss adjustment expense and
reinsurance recoverable........................................... 3,114 1,912
Decrease (increase) in:
Accrued investment income.......................................... (171) (89)
Deferred policy acquisition costs.................................. (495) (238)
Income tax recoverable............................................. 249 529
Other assets....................................................... 37 (183)
Increase (decrease) in:
Accounts payable and accrued expenses.............................. (782) (406)
Income tax payable................................................. 645 500
Other liabilities.................................................. 249 204
------- --------
Net cash provided by operating activities..................... 5,760 4,067
------- --------
Cash flows from investing activities:
Purchases of equity securities........................................ (316) (1,926)
Purchases of fixed maturities available for sale...................... (8,000) (11,033)
Purchases of fixed maturities held to maturity........................ (3,028) (11,064)
Proceeds from sales of equity securities.............................. 197 1,266
Proceeds from sales and maturities of fixed maturities available for
sale............................................................... 1,000 10,181
Proceeds from maturities of fixed maturities held to maturity......... 1,085 2,004
Change in short-term investments...................................... 2,100 5,500
------- --------
Net cash used by investing activities......................... (6,962) (5,072)
------- --------
Cash flows from financing activities:
Issuance of common stock.............................................. 243 66
Principal payment on note payable, affiliate.......................... -- (50)
Dividends paid........................................................ (268) (177)
Principal payments on capital lease obligations....................... (27) (24)
------- --------
Net cash used by financing activities......................... (52) (185)
------- --------
Decrease in cash........................................................ (1,254) (1,190)
Cash, beginning of period............................................... 2,979 5,204
------- --------
Cash, end of period..................................................... $ 1,725 $ 4,014
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income tax refund.................................................. $ -- $ (240)
Interest........................................................... 197 189
Supplemental non-cash disclosure:
Cost of securities transferred from available for sale to held to
maturity........................................................... 8,002 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-5
<PAGE> 59
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
Penn-America Group, Inc. (the "Company") is an insurance holding company.
Penn Independent Corporation currently owns approximately 61.2% of the
outstanding common stock of the Company.
The accompanying unaudited consolidated financial statements should be read
in conjunction with the financial statements and notes for the year ended
December 31, 1996. In the opinion of management, the financial information
reflects all adjustments (consisting only of normal recurring adjustments) which
are necessary for a fair presentation of financial position, results of
operations, and cash flows for the interim periods. The results of operations
for interim periods are not necessarily indicative of the results to be expected
for the entire year.
On January 29, 1997, the Company declared a three-for-two split for all
stockholders of record on February 14, 1997. All earnings and dividend per share
data disclosed herein has been retroactively adjusted to reflect this split.
NOTE 2 -- REINSURANCE
Premiums earned are net of amounts ceded to reinsurers of $1.8 and $1.6
million for the three-month periods ended March 31, 1997 and 1996, respectively.
Losses and loss adjustment expenses are net of amounts ceded to insurers of $1.8
and $2.5 million for the three months ended March 31, 1997 and 1996,
respectively.
F-6
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Penn-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.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 29, 1997
F-7
<PAGE> 61
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<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.
F-8
<PAGE> 62
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
<S> <C> <C> <C>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<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 $ 0.00
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 63
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED UNEARNED
INVESTMENT COMPENSATION
COMMON STOCK ADDITIONAL GAINS FROM
------------------ 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.
F-10
<PAGE> 64
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
(IN THOUSANDS)
<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................................ (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.
F-11
<PAGE> 65
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
F-12
<PAGE> 66
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and such adjustments are reflected in current operations.
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+ (Excellent)" 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.
F-13
<PAGE> 67
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-14
<PAGE> 68
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
COST(1) GAINS LOSSES VALUE
(IN THOUSANDS)
<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 -- (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 -- -- 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 -- -- 7,000
-------- ------ ------- --------
Total investments........................ $111,068 $2,437 $(1,050) $112,455
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST(1) GAINS LOSSES VALUE
(IN THOUSANDS)
<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
-------- ------ ------- --------
</TABLE>
F-15
<PAGE> 69
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST(1) GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======== ====== ===== ========
</TABLE>
- ------------------------
(1) Adjusted for amortization of fixed maturities.
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
COST VALUE COST VALUE
(IN THOUSANDS)
<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 -- --
------- ------- ------- -------
Total.................................... $49,244 $48,954 $44,227 $44,111
======= ======= ======= =======
</TABLE>
A summary of net investment income is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
F-16
<PAGE> 70
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There are no investments in fixed maturity securities that were
non-income-producing during 1996, 1995 or 1994. Realized pre-tax gains (losses)
on the sale of investments are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
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)
====== ====== =====
</TABLE>
Income taxes (benefits) on net realized investment gains or losses were
$308,000, $435,000 and ($242,000) for 1996, 1995, and 1994, respectively.
The following is a summary of net unrealized appreciation (depreciation) on
investments included within stockholders' equity:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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
====== ======
</TABLE>
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.
F-17
<PAGE> 71
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Premiums written and earned consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
Recoveries recognized under reinsurance contracts were as follows:
<TABLE>
<S> <C>
1996............................................. $8,530,000
1995............................................. 8,148,000
1994............................................. 5,280,000
</TABLE>
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:
<TABLE>
<S> <C>
1997............................................... $ 260
1998............................................... 260
1999............................................... 260
2000............................................... 260
2001............................................... 260
Thereafter......................................... 2,206
-------
Total minimum obligations.......................... 3,506
Less interest...................................... (1,476)
-------
Total.................................... $ 2,030
=======
</TABLE>
F-18
<PAGE> 72
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses decreased $804,000 in 1996,
$1,706,000 in 1995 and $2,933,000 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:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Current.......................................... $3,391 $3,378 $1,556
Deferred (benefit)............................... (2) (497) 23
------ ------ ------
Total.................................. $3,389 $2,881 $1,579
====== ====== ======
</TABLE>
The actual income tax rate differed from the statutory income tax rate
applicable to income before income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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)
------ ------ ------
Total.................................. 32.6% 32.3% 31.6%
====== ====== ======
</TABLE>
F-19
<PAGE> 73
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that result in a net deferred tax
asset as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS)
<S> <C> <C>
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
====== ======
</TABLE>
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 was $9,000,000 and $10,000,000, respectively.
The principal repayment schedule is as follows:
<TABLE>
<S> <C>
1997........................................... $1,000,000
1998........................................... 2,000,000
1999........................................... 3,000,000
2000........................................... 3,000,000
</TABLE>
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
F-20
<PAGE> 74
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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.
F-21
<PAGE> 75
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
<TABLE>
<CAPTION>
1996 1995 1994
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at beginning of the year (weighted
average prices 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 (weighted average prices
of $6.07, $5.86 and $5.89 per share).............. 405 383 353
===== ===== =====
Options exercisable year-end........................ 279 119 48
===== ===== =====
Weighted average fair value of options granted
during the year................................... $3.07 $1.83 $1.71
===== ===== =====
</TABLE>
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 CONTRACTUAL EXERCISE 12/31/96 EXERCISE
EXERCISE PRICES (IN THOUSANDS) LIFE (YEARS) PRICE (IN THOUSANDS) PRICE
<S> <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
F-22
<PAGE> 76
PENN-AMERICA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 this 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 provisions 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 1996 amounted to
16,403 shares. The awards for the 1996 year will not be determined until March
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)
<TABLE>
<CAPTION>
1996
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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............................... 0.21 0.24 0.28 0.32 1.05
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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............................... 0.17 0.20 0.28 0.26 0.91
</TABLE>
F-23
<PAGE> 77
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO AY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 14
Price Range of Common Stock
and Dividends....................... 15
Capitalization........................ 16
Selected Consolidated Historical
Financial Data...................... 17
Management's Discussion and Analysis
of Financial Condition and Results
of
Operations.......................... 19
Business.............................. 24
Management............................ 38
Principal and Selling Stockholders.... 42
Description of Capital Stock.......... 44
Certain Relationships and Related
Party Transactions.................. 46
Underwriting.......................... 47
Certain Legal Matters................. 48
Experts............................... 48
Glossary of Selected Insurance
Terms............................... 49
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
================================================================================
================================================================================
3,500,000 SHARES
[PENN-AMERICAN GROUP, INC. LOGO]
Penn-America Group, Inc.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CONNING & COMPANY
PENNSYLVANIA MERCHANT GROUP LTD
July , 1997
================================================================================
<PAGE> 78
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth the expenses in connection with the issuance and
distribution of the securities offered hereby, all of which are payable by the
Registrant:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 18,064
NASD filing fee................................................... 6,462
NASDAQ National Market listing fee................................ 17,500
Printing and engraving expenses................................... 65,000
Blue Sky fees..................................................... 5,000
Legal fees and expenses........................................... 50,000
Accountant's fees and expenses.................................... 30,000
Miscellaneous..................................................... 50,000
--------
Total................................................... $242,026
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 1741 through 1750 of Subchapter C, Chapter 17, of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for
mandatory and discretionary indemnification of a corporation's directors,
officers and other personnel, and related matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors and officers under certain prescribed circumstances
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with an action or
proceeding, whether civil, criminal, administrative or investigative (other than
derivative actions), to which any of them is a party or is threatened to be made
a party by reason of being a representative, director or officer of the
corporation or serving at the request of the corporation as a representative of
another corporation, partnership, joint venture, trust or other enterprise, if
such person acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the corporation and, with
respect to any criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful.
Section 1742 permits indemnification in derivative actions if the
appropriate standard of conduct is met, except in respect of any claim, issue or
matter as to which the person has been adjudged to be liable to the corporation
unless and only to the extent that the proper court determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonable entitled to indemnity for the
expenses that the court deems proper.
Under Section 1743, indemnification is mandatory to the extent that the
officer or director has been successful on the merits or otherwise in defense of
any action or proceeding referred to in Section 1741 or 1742.
Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that the representative met the
applicable standard of conduct, and such determination will be made by (i) the
board of directors by a majority vote of a quorum of directors not parties to
the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable
and a majority of disinterested directors so directs, by independent legal
counsel; or (iii) by the shareholders.
Section 1745 provides that expenses incurred by an officer, director,
employee or agent in defending a civil or criminal action or proceeding may be
paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation.
II-1
<PAGE> 79
Section 1746 provides generally that, except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter 17C of the
BCL, shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding that office.
Section 1747 also grants a corporation the power to purchase and maintain
insurance on behalf of any director or officer against any liability incurred by
such person in his or her capacity as director or officer, whether or not the
corporation would have the power to indemnify him or her against the liability
under Subchapter 17C of BCL.
Sections 1748 and 1749 extend the indemnification and advancement of
expenses provisions contained in Subchapter 17C of the BCL to successor
corporations in fundamental changes and to representatives serving as
fiduciaries of employee benefit plans.
Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter 17C of the BCL, shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs and personal representative of such person.
Article VII of the Registrant's Bylaws, which is filed as Exhibit 3.2 to
this Registration Statement, provides in general that the Registrant shall
indemnify its officers and directors to the fullest extent permitted by law.
The Underwriting Agreement filed as Exhibit 1 to this Registration
Statement provides for the indemnification by the Underwriter of directors and
officers of the Registrant against certain liabilities. In addition, the
Registrant has obtained directors and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
II-2
<PAGE> 80
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Registrant.(1)
3.2 Bylaws of the Registrant.(1)
5 Form of Opinion of Reed Smith Shaw & McClay.**
10.2 Agency Agreement between Penn-America Insurance Company ("Penn-America") and
Carnegie General Agency.(1)
10.3 1993 Casualty Excess of Loss Reinsurance Agreement with National Reinsurance
Corporation.(1)
10.3(i) Endorsement Nos. 4 through 6 (Termination Endorsement) to Casualty Excess of Loss
Reinsurance Agreement with National Reinsurance Corporation.(2)
10.4 1993 Underlying Homeowners and Dwelling Fire Property Per Risk Excess of Loss
Reinsurance (Run-off Business) Agreement with National Reinsurance Corporation.(1)
10.5 1993 Property Per Risk Excess of Loss (Commercial) Reinsurance Agreement with
Employers Reinsurance Corporation.(1)
10.5(i) Endorsement No. 3 to Property Per Risk of Excess Loss (Commercial) Reinsurance
Agreement with Employers Reinsurance Corporation.(3)
10.6 1993 Property Catastrophe Excess Reinsurance Agreement with Employers Reinsurance
Corporation.(1)
10.6(i) Endorsement No. 6 to Property Catastrophe Excess Reinsurance Agreement with
Employers Reinsurance Corporation.(3)
10.6(ii) Stipulation of Termination of Property Catastrophe Excess Reinsurance Agreement
with Employers Reinsurance Corporation effective January 1, 1995.(3)
10.7 Agreement dated August 20, 1993 between Penn Independent Corporation ("Penn
Independent") and the Registrant regarding the reimbursement of certain employment
costs.(4)
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.(5)
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.(2)
10.8 Agreement dated August 20, 1993 between Penn Independent and the Registrant
regarding the sharing of certain operating costs.(4)
10.9 Restated Investment Advisory Agreement effective July 1, 1990 between Penn America
and Carl Domino Associates, L.P.(1)
10.10 1993 Stock Incentive Plan.(6)
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended and restated April
4, 1994.(7)
10.11(ii) Lease effective June 30, 1995 between Registrant and Irvin Saltzman.(5)
10.12 Demand Promissory Note dated January 12, 1993 from Penn Independent Financial
Services, Inc. to Penn-America.(4)
10.13 Promissory Note dated December 29, 1993 from the Registrant to Penn
Independent.(5)
</TABLE>
II-3
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
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.(2)
10.14 1995 Multiple Line Excess of Loss (Casualty and Property) Reinsurance Agreement
with National Reinsurance Corporation.(5)
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss Reinsurance Agreement with
National Reinsurance Corporation, effective as of January 1, 1995.(5)
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss Reinsurance Agreement with
National Reinsurance Corporation, effective as of January 1, 1995.(5)
10.14(iii) 1996 Property & Liability Reinsurance Agreement with General Reinsurance
Corporation effective May 1, 1996.(2)
10.15 1995 Property Catastrophe Excess of Loss Reinsurance Agreement with the
subscribing Reinsurers.(3)
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance Agreement with the
subscribing Reinsurers.(2)
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive Compensation Plan.(8)
10.17 Penn-America Insurance Company's Profit Sharing and Performance Award Plan.(9)
10.18 Stipulation of Termination of Property and Liability Reinsurance Agreement with
National Reinsurance Corporation effective April 30, 1996.(2)
10.19 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.).(5)
10.20 Agency Agreement between Penn-America and Kenneth I. Tobey, Inc.
10.21 Agency Agreement between Penn-America and Bliss & Glennon, Inc.
21 As of December 31, 1996, the Registrant's only subsidiary is Penn-America
Insurance Company, a Pennsylvania Corporation.
23.1 Consent of Reed Smith Shaw & McClay (included in Exhibit 5).**
23.2 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney (included as part of signature page).**
</TABLE>
- ---------------
(1) As filed with the Registrant's Registration Statement on Form S-1 on August
2, 1993 (File No. 33-66892).
(2) As filed with the Registrant's Annual Report on Form 10-K for the period
ended December 31, 1996.
(3) As filed with the Registrant's Annual Report on Form 10-K for the period
ended December 31, 1994.
(4) As filed with Amendment No. 1 to Registrant's Registration Statement on Form
S-1 on August 26, 1993 (File No. 33-66892).
(5) As filed with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
(6) As filed with Amendment No. 4 to Registrant's Registration Statement on Form
S-1 on September 29, 1993 (File No. 33-66892).
(7) As filed with Registrant's Registration Statement on Form S-8 on August 11,
1994 (33-82728).
(8) As filed with Registrant's Registration Statement on Form S-8 on January 4,
1996 (333-00050).
(9) As filed with Registrant's Registration Statement on Form S-8 on January 4,
1996 (333-00046).
** As filed with Registrant's Registration Statement on Form S-1 on June 11,
1997 (333-28989).
(b) Financial Statement Schedules
Schedule I -- Summary of Investments -- Other than Investments in Related
Parties
II-4
<PAGE> 82
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
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudications of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Philadelphia and the Commonwealth of
Pennsylvania on the 19th day of June, 1997.
PENN-AMERICA GROUP, INC.
By: /s/ JON S. SALTZMAN
----------------------------------
Jon S. Saltzman,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities indicated on June 19, 1997.
<TABLE>
<C> <S>
/s/ JON S. SALTZMAN President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
Jon S. Saltzman
* Chairman of the Board of Directors
- ---------------------------------------------
Irvin Saltzman
* Director
- ---------------------------------------------
Robert A. Lear
Director
- ---------------------------------------------
James E. Heerin, Jr.
* Director
- ---------------------------------------------
Jami Saltzman-Levy
Director
- ---------------------------------------------
M. Moshe Porat
* Director
- ---------------------------------------------
Thomas M. Spiro
* Director
- ---------------------------------------------
Paul Simon
</TABLE>
II-6
<PAGE> 84
<TABLE>
<C> <S>
* Director
- ---------------------------------------------
Charles Ellman
* Vice President--Finance, Chief Financial
- --------------------------------------------- Officer, Treasurer and Secretary (Principal
Rosemary R. Ferrero Financial and Accounting Officer)
*By /s/ JON S. SALTZMAN
- ---------------------------------------------
Jon S. Saltzman
as Attorney-in-Fact
</TABLE>
II-7
<PAGE> 85
PENN-AMERICA GROUP, INC.
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED
PARTIES
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------
AMORTIZED AMOUNT SHOWN ON
COST FAIR VALUE BALANCE SHEET
(IN THOUSANDS)
<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>
S-1
<PAGE> 86
PENN-AMERICA GROUP, INC.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(SHARE AND PER SHARE DATA RESTATED FOR 3-FOR-2 STOCK SPLIT IN JANUARY, 1997)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
(IN THOUSANDS
EXCEPT SHARE AND
PER SHARE DATA)
<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>
S-2
<PAGE> 87
PENN-AMERICA GROUP, INC.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF EARNINGS
(PER SHARE DATA RESTATED FOR 3-FOR-2 STOCK SPLIT EFFECTED ON MARCH 7, 1997)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<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>
S-3
<PAGE> 88
PENN-AMERICA GROUP, INC.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
(IN THOUSANDS)
<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................................... 292 (55) 11
Cash, beginning of period..................................... 77 132 121
------- ------- -------
Cash, end of period........................................... $ 369 $ 77 $ 132
======= ======= =======
</TABLE>
S-4
<PAGE> 89
PENN-AMERICA GROUP, INC.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1996, 1995, 1994
<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
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net of
reinsurance:
Years 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:
Years 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>
S-5
<PAGE> 90
PENN-AMERICA GROUP, INC.
SCHEDULE IV -- REINSURANCE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
OTHER OTHER ASSUMED
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
(IN THOUSANDS)
<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>
S-6
<PAGE> 91
PENN-AMERICA GROUP, INC.
SCHEDULE VI -- SUPPLEMENTAL INSURANCE INFORMATION CONCERNING
PROPERTY AND CASUALTY SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
LOSS AND LOSS
ADJUSTMENT
EXPENSES
(BENEFITS)
LIABILITY FOR DISCOUNT INCURRED
UNPAID LOSSES IF ANY, RELATED TO PAID LOSSES
AND LOSS DEDUCTED ------------------ AND LOSS
ADJUSTMENT FROM CURRENT PRIOR ADJUSTMENT
EXPENSES RESERVES YEAR YEAR EXPENSES
(IN THOUSANDS)
<S> <C> <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>
S-7
<PAGE> 1
Exhibit 1
3,500,000 Shares
PENN-AMERICA GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
July , 1997
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CONNING & COMPANY
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Penn-America Group, Inc. a Pennsylvania corporation (the "COMPANY"),
proposes to issue and sell to the several underwriters named in Schedule I
hereto (the "UNDERWRITERS"), and Penn Independent Corporation, a Pennsylvania
corporation, (the"SELLING STOCKHOLDER") proposes to sell to the several
Underwriters, an aggregate of 3,500,000 shares of the Common Stock, per value
$0.01 per share of the Company (the "FIRM SHARES"), of which 2,500,000 shares
are to be issued and sold by the Company and 1,000,000 shares are to be sold by
the Selling Stockholder. The Company also proposes to issue and sell to the
several Underwriters not more than 525,000 additional shares of its Common
Stock, per value $0.01 per share (the "ADDITIONAL SHARES") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the
<PAGE> 2
Additional Shares are hereinafter referred to collectively as the "SHARES". The
shares of common stock of the Company to be outstanding after giving effect to
the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK".
The Company and the Selling Stockholder are hereinafter sometimes collectively
referred to as the "SELLERS."
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS." If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"RULE 462(B) REGISTRATION STATEMENT"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
2,500,000 Firm Shares, (ii) the Selling Stockholder agrees to sell 1,000,000
Firm Shares , and (iii) each Underwriter agrees, severally and not jointly, to
purchase from each Seller at a price per Share of $______ (the "PURCHASE PRICE")
the number of Firm Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Firm Shares to be sold by such Seller as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedules I hereto bears to the total
number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 525,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice
2
<PAGE> 3
thereof to the Company within 30 days after the date of this Agreement. You
shall give any such notice on behalf of the Underwriters and such notice shall
specify the aggregate number of Additional Shares to be purchased pursuant to
such exercise and the date for payment and delivery thereof, which date shall be
a business day (i) no earlier than two business days after such notice has been
given (and, in any event, no earlier than the Closing Date (as hereinafter
defined)), and (ii) no later than ten business days after such notice has been
given. If any Additional Shares are to be purchased, each Underwriter, severally
and not jointly, agrees to purchase from the Company the number of Additional
Shares (subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plans and (ii) the Company may
issue shares of Common Stock upon the exercise of an option outstanding on the
date hereof. The Company also agrees not to file any registration statement with
respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock for a period of 180 days after the
date of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. In addition, the Selling Stockholder agrees
that, for a period of 180 days after the date of the Prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, it
will not make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock. The Company shall, prior to or
concurrently with the execution of this Agreement, deliver an agreement executed
by (i) the Selling Stockholder, (ii) each of the directors and officers of the
Company and (iii) each stockholder listed on Annex I hereto to the effect that
such person will not, during the period commencing on the date such person signs
such agreement and ending 180 days after the date of the
3
<PAGE> 4
Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette
Corporation, (A) engage in any of the transactions described in the first
sentence of this paragraph or (B) make any demand for, or exercise any right
with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable, and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at 9:00 A.M., New York City time, on
July , 1997 (the "CLOSING DATE") at such place as you shall designate. The
Closing Date and the location of delivery of and payment for the Firm Shares may
be varied by agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at such place as you shall
designate at 9:00 A.M., New York City time, on the date specified in the
applicable exercise notice given by you pursuant to Section 2 (an "OPTION
CLOSING DATE"). Any such Option Closing Date and the location of delivery of and
payment for such Additional Shares may be varied by agreement between you and
the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection not
later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be.
Certificates in definitive form evidencing the Shares shall be delivered to you
on the Closing Date or the applicable Option Closing Date, as the case may be,
with any transfer taxes thereon duly paid by the respective Sellers, for the
respective accounts of the several Underwriters, against payment to the Sellers
of the Purchase Price therefor by wire transfer of Federal or other funds
immediately available in New York City.
SECTION 5. Agreements of the Company and the Selling Stockholder. The
Company and the Selling Stockholder agree with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
4
<PAGE> 5
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish you, without charge, three signed copies of the
Registration Statement as first filed with the Commission and of each amendment
to it, including all exhibits, and to furnish to you and each Underwriter
designated by you such number of conformed copies of the Registration Statement
as so filed and of each amendment to it, without exhibits, as you may reasonably
request.
(c) To prepare the Prospectus in a form approved by you and to file the
Prospectus in such form with the Commission within the applicable period
specified in Rule 424(b) under the Act; not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and to prepare and file with the
Commission, promptly upon your reasonable request, any amendment to the
Registration Statement or amendment or supplement to the Prospectus which may be
necessary or advisable in connection with the distribution of the Shares by you,
and to use its best efforts to cause any such amendment to the Registration
Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
5
<PAGE> 6
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with law, and to furnish to each Underwriter and to
such dealers as you shall specify, such number of copies thereof as such
Underwriter or dealers may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such qualification in effect so long as required
for distribution of the Shares and to file such consents to service of process
or other documents as may be necessary in order to effect such registration or
qualification.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending
September 30, 1998 that shall satisfy the provisions of Section 11(a) of the
Act, and to advise you in writing when such statement has been so made
available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and the Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees or expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the
6
<PAGE> 7
Prospectus and all amendments and supplements to any of the foregoing prior to
or during the period specified in Section 5(d), including the mailing and
delivering of copies thereof to the Underwriters and dealers in the quantities
specified herein, (ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) all costs of printing or producing this Agreement
and any other agreements or documents in connection with the offering, purchase,
sale or delivery of the Shares, (iv) all expenses in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the offering
of the Shares by the National Association of Securities Dealers, Inc., (vi) all
costs and expenses incident to the listing of the Shares on the Nasdaq National
Market, (vii) the cost of printing certificates representing the Shares, (viii)
the costs and charges of any transfer agent, registrar and/or depositary, and
(ix) and all other costs and expenses incident to the performance of the
obligations of the Company and the Selling Stockholder hereunder for which
provision is not otherwise made in this Section. The provisions of this Section
shall not supercede or otherwise affect any agreement that the Company and the
Selling Stockholder may otherwise have for allocation of such expenses among
themselves.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market (or the New York Stock Exchange, if applicable) for a period of
three years after the date of this Agreement.
(k) To use the proceeds from the sale of the Shares in the manner
described in the prospectus under the caption "Use of Proceeds."
(l) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(m) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
7
<PAGE> 8
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not
8
<PAGE> 9
misleading, except that the representations and warranties set forth in this
paragraph do not apply to statements or omissions in any preliminary prospectus
based upon information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(d) Each of the Company and its directly-held insurance company
subsidiary, Penn-America Insurance Company ("PENN-AMERICA"), has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the State of Pennsylvania and has the corporate power and authority to
carry on its business as described in the Prospectus and to own, lease and
operate its properties, and each is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition, surplus
or results of operations of the Company and the Subsidiaries (as defined below),
taken as a whole (a "MATERIAL ADVERSE EFFECT").
(e) The only direct subsidiary of the Company is Penn-America. The only
direct Subsidiary of Penn-America is Penn-Star Insurance Company ("PENN-STAR"
and, collectively with Penn-America, the "SUBSIDIARIES").
(f) Penn-Star has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Pennsylvania and has
the corporate power and authority to carry on its business as described in the
Prospectus and to own, lease and operate the properties, and except as described
in the Prospectus is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
Material Adverse Effect.
(g) Each of the Company and the Subsidiaries is duly licensed,
authorized or admitted as an insurer in each jurisdiction where it is required
to be so licensed or admitted to conduct business as described in the
Prospectus, except where the failure to be so licensed or admitted would not
have a Material Adverse Effect.
(h) Each of the Company and the Subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits of and
from, and has made all declarations and filings with, all insurance authorities,
commissions or other insurance regulatory bodies and all other governmental
authorities, all self-regulatory organizations and all courts and other
tribunals, necessary to own, lease, license and use its respective properties
and assets and to conduct its respective business as described in the
Prospectus, except for where the failure to
9
<PAGE> 10
have such consents, authorizations, approvals, orders, certificates and permits,
or to make such declarations or filings, would not have a Material Adverse
Effect; all of such consents, authorizations, approvals, orders, licences,
certificates and permits are in full force and effect, except for where the
failure to be in full force and effect would not have a Material Adverse Effect;
except as described in the Prospectus, such consents, authorizations, approvals,
order, licences, certificates or permits contain no restrictions that are
materially burdensome to the Company or any of the Subsidiaries, and none of the
Company or the Subsidiaries has received any notification from any insurance
authority, commission or other insurance regulatory body or agency or any other
governmental authority or self-regulatory organization in the United States or
elsewhere to the effect that any additional consent, authorization, approval,
order, license, certificate or permit from such authority, commission, body or
organization is needed to be obtained by any of the Company or the Subsidiaries,
or that such authority, commission, body or organization is considering
limiting, suspending or revoking any such consent, authorization, approval,
order, license, certificate or permit.
(i) Each of the Company or the Subsidiaries is in compliance with the
insurance laws and regulations of other jurisdictions which are applicable to
the Company or the Subsidiaries, as the case may be, except where the failure to
comply would not have a Material Adverse Effect; and none of the Company or the
Subsidiaries has received any notification from any insurance authority,
commission or other insurance regulatory body or agency in the United States or
elsewhere to the effect that the Company or the Subsidiaries is not in
compliance with an insurance law or regulation;
(j) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of the Subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of the Subsidiaries, except as otherwise disclosed in the Registration
Statement.
(k) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholder) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(l) All of the outstanding shares of capital stock of the Subsidiaries
have been duly authorized and validly issued and are fully paid and
non-assessable, and
10
<PAGE> 11
are owned directly, in the case of Penn-America, and indirectly, in the case of
Penn-Star, by the Company, free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature except, with respect to the stock
of Penn-America, for the lien of PNC Bank, as Agent (the "AGENT"), pursuant to
the Stock Pledge Agreement (the "STOCK PLEDGE AGREEMENT") dated as of December
20, 1995 between the Company and the Agent entered into in connection with that
certain Credit Agreement (the "CREDIT AGREEMENT") dated as of December 20, 1995
among the Company, the Banks signatory thereto and the Agent.
(m) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(n) Neither the Company nor any of the Subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and the Subsidiaries, taken as a whole, to which the Company or any
of the Subsidiaries is a party or by which the Company or any of the
Subsidiaries or their respective property is bound.
(o) The execution, delivery and performance of this Agreement by the
Company, compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency including, without limitation, any
insurance regulatory body or agency (except such as may be required under the
securities or Blue Sky laws of the various states and the approval of the
Commissioner of the Pennsylvania Insurance Department), and will not conflict
with or constitute a breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any of the Subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and the Subsidiaries, taken as a whole, to which the
Company or any of the Subsidiaries is a party or by which the Company or any of
the Subsidiaries or their respective property is bound, or violate or conflict
with any applicable law or any rule, regulation, judgment, order or decree of
any court or any governmental body or agency including, without limitation, any
insurance regulatory body or agency having jurisdiction over the Company, any of
the Subsidiaries or their respective property.
(p) Except as otherwise disclosed in the Prospectus, there are no legal
or governmental proceedings pending or threatened to which the Company or any of
the Subsidiaries is or could be a party or to which any of their respective
property is or could be subject that are required to be described in the
Registration
11
<PAGE> 12
Statement or the Prospectus and are not so described; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required.
(q) Neither the Company nor any of the Subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or the rules
and regulations promulgated thereunder, except for such violations which, singly
or in the aggregate, would not have a Material Adverse Effect.
(r) Each of the Company and the Subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
("permits") of, and has made all filings with and notices to, all governmental
or regulatory authorities and self-regulatory organizations and all courts and
other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business except where the failure to
have any such permit or to make any such filing or notice would not, singly or
in the aggregate, have a Material Adverse Effect. Each such permit is valid and
in full force and effect and each of the Company and its Subsidiaries is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such permits or results in or, after notice or lapse of time
or both, would result in any other impairment of the rights of the holder of any
such permit; and such permits contain no restrictions that are burdensome to the
Company or any of the Subsidiaries; except where such failure to be valid and in
full force and effect or to be in compliance, the occurrence of any such event
or the presence of any such restriction would not, singly or in the aggregate,
have a Material Adverse Effect.
(s) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) which would, singly
or in the aggregate, have a Material Adverse Effect.
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(t) This Agreement has been duly authorized, executed and delivered by
the Company.
(u) KPMG Peat Marwick are independent public accountants with respect
to the Company and the Subsidiaries as required by the Act.
(v) The consolidated financial statements, together with related
schedules and notes forming part of the Registration Statement and the
Prospectus (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and the Subsidiaries on the basis stated in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) is, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company.
(w) The statutory financial statements of Penn-America and Penn-Star
required or permitted to be prepared in accordance with the insurance laws of
any of the states in which such subsidiaries operate and the rules and
regulations of the applicable insurance regulatory agency or department of such
states, from which certain ratios and other statistical data contained in the
Registration Statement and the Prospectus have been derived, have for each
relevant period been prepared in conformity with the requirements and present
fairly the information purported to be shown.
(x) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(y) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(z) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not
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occurred any material adverse change or any development involving a prospective
material adverse change in the condition, financial or otherwise, or the
earnings, surplus, business, management or operations of the Company and the
Subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of the Subsidiaries
, and (iii) neither the Company nor any of the Subsidiaries has incurred any
material liability or obligation, direct or contingent.
(aa) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
(bb) All tax returns required to be filed by the Company or any of the
Subsidiaries in any jurisdiction have been filed, other than those filings being
contested in good faith, and all material taxes, including withholding taxes,
penalties and interest, assessments, fees and other charges due or claimed to be
due from such entities have been paid, other than those being contested in good
faith and for which adequate reserves have been provided or those currently
payable without penalty or interest.
(cc) All reinsurance treaties and arrangements to which the Company or
any of the Subsidiaries is a party are in full force and effect and neither the
Company nor any of the Subsidiaries is in violation of, or in default in the
performance, observance or fulfillment of, any obligation, agreement, covenant
or condition contained therein, except where any such violation or default would
not have a Material Adverse Effect; neither the Company nor any of the
Subsidiaries has received any notice from any of the other parties to such
treaties, contracts or agreements that such other party intends not to perform
in any material respect such treaty, contract or agreement, and the Company and
the Subsidiaries have no reason to believe that any of the other parties to such
treaties or arrangements will be unable to perform such treaty or arrangement,
except where any such non-performance would not have a Material Adverse Effect.
(dd) Except as otherwise set forth in the Prospectus or such as are not
material to the business, prospects, financial condition or results of operation
of the Company and the Subsidiaries, taken as a whole, the Company and each of
the Subsidiaries has good and marketable title, free and clear of all liens,
claims, encumbrances and restrictions except liens for taxes not yet due and
payable, to all property and assets described in the Registration Statement as
being owned by it. All leases to which the Company or any of the Subsidiaries is
a party are valid and binding and no default has occurred or is continuing
thereunder, which might result in any material adverse change in the business,
prospects, financial condition or results of operation of the Company and the
Subsidiaries taken as a whole, and the
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<PAGE> 15
Company and the Subsidiaries enjoy peaceful and undisturbed possession under all
such leases to which any of them is a party as lessee with such exceptions as do
not materially interfere with the use made by the Company or such Subsidiary.
(ee) Except as disclosed in the Registration Statement, no insurance
regulatory agency or body has issued any order or decree impairing, restricting
or prohibiting a payment of dividends by any of the Subsidiaries or the
continuation of the business of any of the Subsidiaries as presently conducted.
(ff) No relationship, direct or indirect, exists between or among the
Company or any of the Subsidiaries on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of the Subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(gg) The Company and the Subsidiaries own or possess, or can acquire on
reasonable terms, all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("intellectual property") currently employed by
them in connection with the business now operated by them except where the
failure to own or possess or otherwise be able to acquire such intellectual
property would not, singly or in the aggregate, have a Material Adverse Effect
and neither the Company nor any of the Subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to any
of such intellectual property which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a Material Adverse
Effect.
(hh) The Company and each of the Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of the Subsidiaries has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
at a cost that would not have a Material Adverse Effect.
(ii) The Company has not taken, and will not take, directly or
indirectly, any action designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares pursuant to the
distribution contemplated by this Agreement, and other than as permitted by the
Act, the Company has not distributed and will not distribute any prospectus or
other offering material in connection with the offering and sale of the Shares.
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<PAGE> 16
(jj) To the best of the Company's and the Selling Stockholder's
knowledge, neither A.M. Best Company, Inc. nor Standard & Poor's Corporation has
pending, or has threatened, as applicable: (i) any downgrading in the rating of
Penn-America or (ii) any public announcement that its ratings of Penn-America
are under surveillance or review.
SECTION 7. Representations and Warranties of the Selling Stockholder.
The Selling Stockholder represents and warrants to each Underwriter that:
(a) The Selling Stockholder has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State of
Pennsylvania and has the corporate power and authority to carry on its business
as it is currently being conducted and to own, lease and operate its properties.
(b) The Selling Stockholder is the lawful owner of the Shares to be
sold by the Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
(c) The Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorization and approval
required by law, to enter into this Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by the Selling Stockholder in the manner provided
herein and therein.
(d) This Agreement has been duly authorized, executed and delivered by
or on behalf of the Selling Stockholder.
(e) Upon delivery of and payment for the Shares to be sold by the
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(f) The Selling Stockholder has not taken, and will not take, directly
or indirectly, any action designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares pursuant to the
distribution contemplated by this Agreement, and other than as permitted by the
Act, the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Shares.
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<PAGE> 17
(g) The execution, delivery and performance of this Agreement by the
Selling Stockholder, compliance by the Selling Stockholder with all the
provisions hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency including, without
limitation, any insurance regulatory body or agency (except such as may be
required under the securities or Blue Sky laws of the various states) and will
not conflict with or constitute a breach of any of the terms or provisions of,
or a default under, the organizational documents of the Selling Stockholder, or
any indenture, loan agreement, mortgage, lease or other agreement or instrument
to which the Selling Stockholder is a party or by which the Selling Stockholder
or any property of the Selling Stockholder is bound, or violate or conflict with
any applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency including, without limitation, any
insurance regulatory body or agency having jurisdiction over the Selling
Stockholder or any property of the Selling Stockholder.
(h) The Selling Stockholder is not and, after giving effect to the sale
of the Shares and the application of the proceeds thereof, will not be, an
"investment company" as such term is defined in the Investment Company Act of
1940, as amended.
(i) The Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(j) At any time during the period described in Section 5(d), if there
is any change in the information referred to in Section 7(i), such Selling
Stockholder will immediately notify you of such change.
SECTION 8. Indemnification. (a) The Sellers, jointly and severally,
agree to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), from and against any and all losses,
claims, damages, liabilities and judgments (including, without limitation, any
legal or other expenses incurred in connection with defending or investigating
any matter, including any action, that could give rise to any such losses,
claims, damages, liabilities or
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<PAGE> 18
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein. Notwithstanding the foregoing, the
liability of the Selling Stockholder pursuant to this Section 8(a) shall be
limited to an amount equal to the total proceeds (before deducting expenses)
received by the Selling Stockholder from the Underwriters for the sale of the
Shares sold by the Selling Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person controlling the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, the Selling Stockholder
and any person controlling the Selling Stockholder within the meaning of Section
15 of the Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Sellers to such Underwriter but only with reference
to information relating to such Underwriter furnished in writing to the Company
by such Underwriter through you expressly for use in the Registration Statement
(or any amendment thereto), the Prospectus (or any amendment or supplement
thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the
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indemnifying party, (ii) the indemnifying party shall have failed to assume the
defense of such action or employ counsel reasonably satisfactory to the
indemnified party or (iii) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the indemnifying
party, and the indemnified party shall have been advised by such counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the indemnified party). In any such case, the indemnifying party
shall not, in connection with any one action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for (i) the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all Underwriters, their officers and directors and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act, and (ii) the fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement, the Selling
Stockholder, and all persons, if any, who control the Company or the Selling
Stockholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters, their officers and directors and such
control persons of any Underwriters, such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such
separate firm for the Company, such directors and officers of the Company, the
Selling Stockholder and control persons of the Company or the Selling
Stockholder, such firm shall be designated in writing by the Company. The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with its written consent or
(ii) effected without its written consent if the settlement is entered into more
than ten business days after the indemnifying party shall have received a
request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action,
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and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Sellers, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Sellers or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of
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any damages which such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(d) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) As of the closing date, there shall not have occurred any
downgrading, nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not indicate the
direction of the possible change, in the rating of Penn-America by A.M. Best
Company, Inc. or Standard & Poor's Corporation.
(d) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Jon S. Saltzman and Rosemary R. Ferrero, in their
capacities as the President and Chief Executive Officer and Vice President and
Chief Financial Officer of the Company, respectively, confirming the matters set
forth in Sections 9(a), 9(b) and 9(c).
(e) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall
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not have occurred any change or any development involving a prospective change
in the condition, financial or otherwise, or the earnings, surplus, business,
management or operations of the Company and the Subsidiaries, taken as a whole,
(ii) there shall not have been any change or any development involving a
prospective change in the capital stock or in the long-term debt of the Company
or any of the Subsidiaries and (iii) neither the Company nor any of the
Subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(e)(i),
9(e)(ii) or 9(e)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(f) All the representations and warranties of the Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received a certificate to such effect, dated the Closing Date, from the
Selling Stockholder.
(g) You shall have received on the Closing Date opinions (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Reed Smith
Shaw & McClay, counsel for the Company to the effect set forth in Exhibits A and
A-1.
(h) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Garland P. Pezzuolo, General Counsel for the Company, to the effect set forth
in Exhibit B.
(i) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriter), dated the Closing Date,
of Reed Smith Shaw & McClay, counsel for the Selling Stockholder, to the effect
set forth in Exhibit C.
(j) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Davis Polk & Wardwell counsel for the Underwriters to the
effect set forth in Exhibit D.
(k) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from KPMG Peat Marwick, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
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(l) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(m) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(n) [the Credit Agreement shall have been entered into and be in full
force and effect.]
(o) All consents, authorizations, approvals, orders, certificates and
permits of and from all insurance authorities, commissions or other insurance
regulatory bodies or agencies necessary for the execution, delivery and
performance of this Agreement by the Company, compliance by the Company with all
provisions hereof and the consummation of the transactions contemplated hereby
have been obtained and are in full force and effect.
(p) The Company and the Selling Stockholder shall not have failed at or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Stockholder, as the case may be, at or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time prior to the Closing Date
by you by written notice to the Sellers if any of the following has occurred:
(i) any outbreak or escalation of hostilities or other national or international
calamity or crisis or change in economic conditions or in the financial markets
of the United States or elsewhere that, in your judgment, is material and
adverse and, in your judgment, makes it impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus, (ii) the suspension
or material limitation of trading in securities or other instruments on or by,
as the case may be, any of the New York Stock Exchange, the American Stock
Exchange, the Chicago Board of
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Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or
the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and the
Subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase on such date; provided that in no event shall the number of Firm Shares
or Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you,
the Company and the Selling Stockholder for purchase of such Firm Shares are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholder. In any such case which does not result in termination of
this Agreement, either you or the Sellers shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and
24
<PAGE> 25
the Prospectus or any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
SECTION 11. Agreements of the Selling Stockholder. The Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by the Selling Stockholder
to the Underwriters.
(b) To do and perform all things to be done and performed by the
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by the
Selling Stockholder pursuant to this Agreement.
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to
Penn-America Group, Inc., 420 South York Road, Hatboro, Pennsylvania, 19040,
Attention: Rosemary R. Ferrero, (ii) if to the Selling Stockholder, to Penn
Independent Corporation, 420 South York Road, Hatboro, Pennsylvania 19040,
Attention: Jon S. Saltzman and (iii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholder and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, the Selling Stockholder or any person controlling the Selling
Stockholder, (ii) acceptance of
25
<PAGE> 26
the Shares and payment for them hereunder and (iii) termination of this
Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) reasonably incurred by them. Notwithstanding
any termination of this Agreement, the Sellers shall be liable for all expenses
which they have agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees and
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Stockholder, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
26
<PAGE> 27
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholder and the several Underwriters.
Very truly yours,
PENN-AMERICA GROUP, INC.
By:
------------------------------------------
Name:
Title:
PENN INDEPENDENT
CORPORATION
By:
------------------------------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CONNING & COMPANY
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
--------------------------------
Name:
Title:
27
<PAGE> 28
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation
Conning & Company
Pennsylvania Merchant Group Ltd.
-----------------
Total
</TABLE>
<PAGE> 29
Annex I
[Insert name of stockholder of the Company who will be required to sign lock
ups]
<PAGE> 30
Exhibit A
Opinion of Reed Smith Shaw & McClay,
Counsel for the Company
The opinion of Reed Smith Shaw & McClay, counsel for the Company, to be
delivered pursuant to Section 9(g) of the Agreement shall be to the effect that:
(i) each of the Company and the Subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the State of Pennsylvania and has the corporate power
and authority to carry on its business as described in the Prospectus
and to own, lease and operate its properties;
(ii) each of the Company and Penn-America is duly qualified
and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a Material
Adverse Effect;
(iii) Penn-Star is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires qualification, except where the failure to be so
qualified would not have a Material Adverse Effect;
(iv) all the outstanding shares of capital stock of the
Company (including the Shares to be sold by the Selling Stockholder)
have been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar rights;
(v) the Shares to be issued and sold by the Company hereunder
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will be validly issued, fully paid and non-assessable, and the issuance
of such Shares will not be subject to any preemptive or similar rights;
(vi) all of the outstanding shares of capital stock of the
Subsidiaries have been duly authorized and validly issued and are fully
paid and non-assessable, and are owned directly, in the case of
Penn-America, and indirectly, in the case of Penn-Star, by the Company,
free and clear of
<PAGE> 31
any security interest, claim, lien, encumbrance or adverse interest of
any nature [except, with respect to Penn-America, for the lien of the
Stock Pledge Agreement];
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(ix) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before or contemplated by the
Commission;
(x) the statements under the captions ["Risk Factors --
Agreements with Penn Independent," "Risk Factors -- Holding Company
Structure; Dividend Restrictions," "Risk Factors -- Anti-Takeover and
Issuance of Additional Shares," "Certain Relationships and Related
Party Transactions," "Shares Eligible for Future Sale,"] "Description
of Capital Stock" and "Underwriting" in the Prospectus and Item 15 of
Part II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
(xi) neither the Company nor any of the Subsidiaries is in
violation of its respective charter or by-laws and, to the best of such
counsel's knowledge after due inquiry, neither the Company nor any of
the Subsidiaries is in default in the performance of any obligation,
agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is
material to the Company and the Subsidiaries, taken as a whole, to
which the Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries or their respective property is
bound;
(xii) the execution, delivery and performance of this
Agreement by the Company, compliance by the Company with all the
provisions hereof and the consummation of the transactions contemplated
hereby will not require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency including, without limitation, any insurance regulatory body or
agency (except such as may be required under the securities or Blue Sky
laws or the insurance
2
<PAGE> 32
securities laws and regulations of the various states) and will not
conflict with or constitute a breach of any of the terms or provisions
of, or a default under, the charter or by-laws of the Company or any of
the Subsidiaries or any indenture, loan agreement, mortgage, lease or
other agreement or instrument that is material to the Company and the
Subsidiaries, taken as a whole, to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the
Subsidiaries or their respective property is bound, or violate or
conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency
including, without limitation, any insurance regulatory body or agency
having jurisdiction over the Company, any of the Subsidiaries or their
respective property;
(xiii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which the
Company or any of the Subsidiaries is or could be a party or to which
any of their respective property is or could be subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described, or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not so described or filed as
required;
(xiv) to best of such counsel's knowledge after due inquiry,
each of the Company and the Subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals
("permits"), excluding insurance permits, of, and has made all filings
with and notices to, all governmental or regulatory authorities and
self-regulatory organizations and all courts and other tribunals, as
are necessary to own, lease, license and operate its respective
properties and to conduct its business except where the failure to have
any such permit or to make any such filing or notice would not, singly
or in the aggregate, have a Material Adverse Effect. Each such permit
is valid and in full force and effect and each of the Company and its
Subsidiaries is in compliance with all the terms and conditions thereof
and with the rules and regulations of the authorities and governing
bodies having jurisdiction with respect thereto; and no event has
occurred (including, without limitation, the receipt of any notice from
any authority or governing body) which allows or, after notice or lapse
of time or both, would allow, revocation, suspension or termination of
any such permits or results in or, after notice or lapse of time or
both, would result in any other impairment of the rights of the holder
of any such permit; and such permits contain no restrictions that are
burdensome to the Company or any of the Subsidiaries; except where such
3
<PAGE> 33
failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any
such restriction would not, singly or in the aggregate, have a Material
Adverse Effect;
(xv) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xvi) to the best of such counsel's knowledge after due
inquiry, there are no contracts, agreements or understandings between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with respect
to any securities of the Company or to require the Company to include
such securities with the Shares registered pursuant to the Registration
Statement; and
(xvii) (A) the Registration Statement and the Prospectus and
any supplement or amendment thereto (except for the financial
statements and other financial data included therein as to which no
opinion need be expressed) comply as to form with the Act, (B) such
counsel has no reason to believe that at the time the Registration
Statement became effective or on the date of this Agreement, the
Registration Statement and the prospectus included therein (except for
the financial statements and other financial data as to which such
counsel need not express any belief) contained any untrue statement of
a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) such counsel has no reason to believe that the
Prospectus, as amended or supplemented, if applicable (except for the
financial statements and other financial data, as aforesaid) contains
any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
The opinion of Reed Smith Shaw & McClay described above shall be
rendered to you at the request of the Company and shall so state therein. The
opinion of Reed Smith Shaw & McClay is limited to Pennsylvania law.
In giving such opinions with respect to the matters covered by Clause
(xvii), Reed Smith Shaw & McClay may state that their opinion and belief are
based upon their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion
4
<PAGE> 34
of the contents thereof, but is without independent check or verification except
as specified.
5
<PAGE> 35
Exhibit A-1
Opinion of Reed Smith Shaw & McClay,
Counsel for the Company
The opinion of Reed Smith Shaw & McClay, counsel for the Company, to be
delivered pursuant to Section 9(h) of this Agreement shall be to the effect
that:
(i) each of the Company and the Subsidiaries is duly licensed,
authorized or admitted as an insurer in Pennsylvania where it is required to be
so licensed or admitted to conduct business as described in the Prospectus,
except where the failure to be so licensed or admitted would not have a Material
Adverse Effect.
(ii) each of the Company and the Subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits of and
from, and has made all declarations and filings with, all Pennsylvania insurance
authorities, commissions or other insurance regulatory bodies and all other
governmental authorities, all self-regulatory organizations and all courts and
other tribunals, necessary to own, lease, license and use its respective
properties and assets and to conduct its respective business as described in the
Prospectus, except for where the failure to have such consents, authorizations,
approvals, orders, certificates and permits, or to make such declarations or
filings, would not have a Material Adverse Effect; all of such consents,
authorizations, approvals, orders, licences, certificates and permits are in
full force and effect, except for where the failure to be in full force and
effect would not have a Material Adverse Effect; except as described in the
Prospectus, such consents, authorizations, approvals, order, licences,
certificates or permits contain no restrictions that are materially burdensome
to the Company or any of the Subsidiaries, and none of the Company or the
Subsidiaries has received any notification from any Pennsylvania insurance
authority, commission or other insurance regulatory body or agency or any other
governmental authority or self-regulatory organization in the United States or
elsewhere to the effect that any additional consent, authorization, approval,
order, license, certificate or permit from such authority, commission, body or
organization is needed to be obtained by any of the Company or the Subsidiaries,
or that such authority, commission, body or organization is considering
limiting, suspending or revoking any such consent, authorization, approval,
order, license, certificate or permit.
(iii) each of the Company or the Subsidiaries is in compliance with the
insurance laws and regulations of Pennsylvania which are applicable to the
Company or the Subsidiaries, as the case may be, except where the failure to
<PAGE> 36
comply would not have a Material Adverse Effect; and none of the Company or the
Subsidiaries has received any notification from any insurance authority,
commission or other insurance regulatory body or agency in the United States or
elsewhere to the effect that the Company or the Subsidiaries is not in
compliance with an insurance law or regulation;
(iv) the statements under the captions "Risk Factors -- Regulation,"
"Risk Factors -- Holding Company Structure; Dividend Restrictions" and "Business
- -Regulation," in the Prospectus insofar as such statements constitute a summary
of the legal matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal matters, documents
and proceedings; and
(v) the execution, delivery and performance of this Agreement by the
Company, compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency including, without limitation, any
insurance regulatory body or agency (except such as may be required under the
securities or Blue Sky laws of the various states) except such as have been
obtained or made and will not conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the charter or by-laws of the
Company or any of the Subsidiaries or any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company and the
Subsidiaries, taken as a whole, to which the Company or any of the Subsidiaries
is a party or by which the Company or any of the Subsidiaries or their
respective property is bound, or violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any governmental
body or agency including, without limitation, any insurance regulatory body or
agency having jurisdiction over the Company, any of the Subsidiaries or their
respective property.
The opinion of Reed Smith Shaw & McClay described above shall be
rendered to you at the request of the Company and shall so state therein.
2
<PAGE> 37
Exhibit B
Opinion of Garland P. Pezzuolo,
General Counsel for the Company
The opinion of Garland P. Pezzuolo, counsel for the Company, to be
delivered pursuant to Section 9(h) of this Agreement shall be to the effect
that:
(i) each of the Company and the Subsidiaries is duly licensed,
authorized or admitted as an insurer in each jurisdiction where it is required
to be so licensed or admitted to conduct business as described in the
Prospectus, except where the failure to be so licensed or admitted would not
have a Material Adverse Effect.
(ii) each of the Company and the Subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits of and
from, and has made all declarations and filings with, all insurance authorities,
commissions or other insurance regulatory bodies and all other governmental
authorities, all self-regulatory organizations and all courts and other
tribunals, necessary to own, lease, license and use its respective properties
and assets and to conduct its respective business as described in the
Prospectus, except for where the failure to have such consents, authorizations,
approvals, orders, certificates and permits, or to make such declarations or
filings, would not have a Material Adverse Effect; all of such consents,
authorizations, approvals, orders, licences, certificates and permits are in
full force and effect, except for where the failure to be in full force and
effect would not have a Material Adverse Effect; except as described in the
Prospectus, such consents, authorizations, approvals, order, licences,
certificates or permits contain no restrictions that are materially burdensome
to the Company or any of the Subsidiaries, and none of the Company or the
Subsidiaries has received any notification from any insurance authority,
commission or other insurance regulatory body or agency or any other
governmental authority or self-regulatory organization in the United States or
elsewhere to the effect that any additional consent, authorization, approval,
order, license, certificate or permit from such authority, commission, body or
organization is needed to be obtained by any of the Company or the Subsidiaries,
or that such authority, commission, body or organization is considering
limiting, suspending or revoking any such consent, authorization, approval,
order, license, certificate or permit.
(iii) each of the Company or the Subsidiaries is in compliance with the
insurance laws and regulations of other jurisdictions which are applicable to
the Company or the Subsidiaries, as the case may be, except where the failure to
comply would not have a Material Adverse Effect; and none of the Company or
<PAGE> 38
the Subsidiaries has received any notification from any insurance authority,
commission or other insurance regulatory body or agency in the United States or
elsewhere to the effect that the Company or the Subsidiaries is not in
compliance with an insurance law or regulation;
(iv) the statements under the captions "Risk Factors -- Regulation,"
"Risk Factors -- Holding Company Structure; Dividend Restrictions" and "Business
- -Regulation," in the Prospectus insofar as such statements constitute a summary
of the legal matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal matters, documents
and proceedings; and
(v) the execution, delivery and performance of this Agreement by the
Company, compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency including, without limitation, any
insurance regulatory body or agency (except such as may be required under the
securities or Blue Sky laws of the various states) except such as have been
obtained or made and will not conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the charter or by-laws of the
Company or any of the Subsidiaries or any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company and the
Subsidiaries, taken as a whole, to which the Company or any of the Subsidiaries
is a party or by which the Company or any of the Subsidiaries or their
respective property is bound, or violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any governmental
body or agency including, without limitation, any insurance regulatory body or
agency having jurisdiction over the Company, any of the Subsidiaries or their
respective property.
The opinion of Garland P. Pezzuolo described above shall be rendered to
you at the request of the Company and shall so state therein.
2
<PAGE> 39
Exhibit C
Opinion of Reed Smith Shaw & McClay
Counsel for the Selling Stockholder
The opinion of Reed Smith Shaw & McClay, counsel for the Selling
Stockholder, to be delivered pursuant to Section 9(i) of this Agreement shall be
to the effect that:
(i) the Selling Stockholder has been duly incorporated, is
validly existing as a corporation in good standing under the laws of
the State of Pennsylvania and has the corporate power and authority to
carry on its business as it is currently being conducted and to own,
lease and operate its properties;
(ii) this Agreement has been duly authorized, executed and
delivered by the Selling Stockholder;
(iii) the Selling Stockholder is the lawful owner of the
Shares to be sold by the Selling Stockholder pursuant to this Agreement
and has good and clear title to such Shares, free of all restrictions
on transfer, liens, encumbrances, security interests, equities and
claims whatsoever;
(iv) the Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and to sell, assign, transfer and deliver the
Shares to be sold by the Selling Stockholder in the manner provided
herein and therein;
(v) upon delivery of and payment for the Shares to be sold by
the Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever;
(vi) the execution, delivery and performance of this Agreement
by the Selling Stockholder and the compliance by the Selling
Stockholder with all the provisions hereof and the consummation of the
transactions contemplated hereby will not require any consent,
approval, authorization or other order of, or qualification with, any
court or governmental body or agency including, without limitation, any
insurance regulatory body or agency (except such as may be required
under the securities or Blue Sky
<PAGE> 40
laws of the various states) and will not conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of the Selling Stockholder, or any indenture,
loan agreement, mortgage, lease or other agreement or instrument to
which the Selling Stockholder is a party or by which the property of
the Selling Stockholder is bound, or violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of
any court or any governmental body or agency including, without
limitation, any insurance regulatory body or agency having jurisdiction
over the Selling Stockholder or the property of the Selling
Stockholder; and
(vii) the Selling Stockholder is not and, after giving effect
to the sale of the Shares and the application of the proceeds thereof,
will not be, on "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(viii) the statements under the captions ["Risk Factors --
Certain Relationships with Controlling Stockholder", "Certain
Relationships and Related Party Transactions" and "Principal and
Selling Stockholders"], insofar as such statements relate to Penn
Independent or its affiliates constitute a summary of the legal
matters, documents or proceedings referred to therein, fully present
the information called for with respect to such legal matters,
documents and proceedings.
The opinion of Reed Smith Shaw & McClay described above shall be
rendered to you at the request of the Selling Stockholder and shall so state
therein.
2
<PAGE> 41
Exhibit D
Opinion of Davis Polk & Wardwell,
Counsel for the Underwriters
The opinion of Davis Polk & Wardwell, counsel for the Underwriters, to
be delivered pursuant to Section 9(j) of this Agreement shall be to the effect
that:
(i) the Shares to be issued and sold by the Company hereunder have been
duly authorized and, when issued and delivered to the Underwriters against
payment therefor as provided by this Agreement, will be validly issued, fully
paid and non-assessable, and the issuance of such Shares will not be subject to
any preemptive or similar rights;
(ii) this Agreement has been duly authorized, executed and delivered by
the Company;
(iii) the statements under the captions "Description of Capital Stock"
and "Underwriting" in the Prospectus, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal matters,
documents and proceedings;
(iv) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and other
financial data included therein as to which no opinion need be expressed) comply
as to form with the Act, (B) such counsel has no reason to believe that at the
time the Registration Statement became effective or on the date of this
Agreement, the Registration Statement and the prospectus included therein
(except for the financial statements and other financial data as to which such
counsel need not express any belief) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading and (C) such counsel
has no reason to believe that the Prospectus, as amended or supplemented, if
applicable (except for the financial statements and other financial data, as
aforesaid) contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
<PAGE> 42
In giving such opinions with respect to the matters covered by clause
(iv) above, Davis Polk & Wardwell may state that their opinion and belief are
based upon their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification except as specified. In rendering the above opinions, Davis Polk &
Wardwell may rely as to matters involving the application of the laws of the
State of Pennsylvania upon the opinion of Reed Smith Shaw & McClay delivered
pursuant to Section 9(g) of this Agreement.
2
<PAGE> 1
[PENN-AMERICA LOGO]
Exhibit 10.20
PERSONAL LINES
GENERAL AGENCY AGREEMENT
THIS AGREEMENT, made May 30, 1997 between KENNETH I. TOBEY, INC. at
2201 6th Avenue, Suite 1500, Seattle, WA 98121 ("General Agent") and
PENN-AMERICA INSURANCE COMPANY, 420 South York Road, Hatboro, PA 19040
("Company").
1. GENERAL PROVISIONS: The relationship between Company and General
Agent is one of independent contract based upon mutual trust, understanding,
accountability and responsibility. The parties agree to comply with all
applicable licensing and regulatory rules, and to conduct themselves in a
professional, business-like and ethical manner at all times. This agreement
supersedes any and all prior or contemporaneous agreements, representations, and
understandings, written and oral, on these subjects. The undersigned signators
hereby warrant that they have full power and authority to execute this Agreement
on behalf of the respective parties thereto.
2. AUTHORITY OF GENERAL AGENT: The General Agent is granted
non-exclusive authority to write private passenger automobile business in
Washington as specified in Schedule A, "Underwriting Requirements and
Authority".
3. COMPENSATION: General Agent will earn commissions and, if
applicable, profit sharing on insurance written under this Agreement as set
forth in Schedule B, "Commissions, Policy Fees and Contingent Profit
Commission." General Agent will not collect any service, policy or other type of
fee unless the Company has given written approval of the fee and the fee does
not violate any statute, regulation or other for of directive. See Schedule B
for the schedule of fees.
4. PREMIUMS: General Agent shall collect premiums due on all business
written for Company, and shall be responsible for the timely payment of all
premiums written by General Agent's subproducers and brokers submitting business
through General Agent. All premiums must be received by Company no later than 45
days after the premium due date, and General Agent will not collect any fee or
other compensation related to the business written without the Company's prior
written approval. The Company may offset any balance relating to premiums,
commissions or otherwise, due to General Agent under this Agreement or any other
agreement (regardless of the effective date) entered into between the Company
and General Agent, against any balance due or to become due to the Company from
General Agent or any other agreement between them.
5. RECORDS AND REPORTS: General Agent will comply with the Company's
rules and procedures relating to the maintenance and reporting of policy and
related records, data and other file activity. All of General Agent's records
which relate in any way to the Company's business are subject to the Company's
inspection. This inspection may occur during regular business hours without
prior notice. The company may copy all such records or make extracts.
6. INDEMNIFICATION: Company shall indemnify, hold harmless and defend
General Agent, and General Agent shall indemnify and hold harmless Company, for
any loss, damage, judgment cost, claim or expense of any kind, including but not
limited to, attorneys' fees, which either may incur or become liable due to the
other's acts or omissions relating to or arising out of this Agreement. The
Company's obligation to indemnify General Agent shall be conditioned on Company
receiving prompt notification of any suit or claim against General Agent and
being afforded the opportunity to make such investigation, settlement or defense
as Company deems prudent.
<PAGE> 2
7. ARBITRATION: Any controversy or claim arising out of or related to
this Agreement or its breach shall be settled by binding arbitration in Hatboro,
Pennsylvania. One Arbiter shall be chosen by Company, the other by General Agent
and these Arbiters shall then choose an Umpire. The Arbiters and the Umpire
shall be active or retired disinterested executive officers of property and
casualty companies or insurance agencies. If either party fails to choose an
Arbiter within thirty days following a written request from the other, the other
may choose both Arbiters. If the Arbiters fail to agree on an Umpire, the Umpire
shall be selected in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, which Rules shall generally
govern the conduct of the arbitration except as specifically modified by this
Agreement. The decision of a majority of the three shall be final and shall be
based on the customs and usages of the business and in a spirit of equity rather
than of technicalities or legal requirements. The written decision of the
Arbiters and the Umpire shall be delivered to Company and General Agent within
thirty days after all matters have been submitted for decision. Each party shall
pay the expenses of its own Arbiter and one-half of the expenses of the Umpire,
except that, in the event both Arbiters have been selected by one party, then
each party shall pay one-half of the expenses of the two Arbiters. Judgment on
the award rendered in the arbitration may be entered in any court having
jurisdiction thereof.
8. PROMPT NOTIFICATION TO COMPANY: General Agent shall forward promptly
to the Company any correspondence from any regulatory agency or governmental
authority. The General Agent shall notify the Company immediately of all
administrative proceedings, lawsuits and threats of lawsuits that involve or may
involve General Agent or the Company as they relate to business written pursuant
to this Agreement or as they relate to General Agent's capacity to act as an
agent of the Company.
9. ERRORS AND OMISSIONS: General Agent shall maintain errors and
omissions insurance and fidelity bonds providing coverage for matters arising
out of or relating to all aspects of General Agent's business.
10. USE OF COMPANY NAME: The name of the Company shall not appear in
any advertising or marketing materials used and distributed by General Agent
unless the Company has given prior written approval.
11. SUPPLIES: All supplies furnished by the Company to General Agent
(including but not limited to policy forms, endorsements, certificates,
applications and claims drafts) shall remain the Company's property. General
Agent shall account for and/or return all supplies upon demand.
12. ASSIGNMENT: General Agent may not assign any rights or obligations
under this Agreement without Company's prior written consent.
13. TERMINATION: This Agreement may be terminated in one of four ways:
(i) By either party on ninety (90) days advance written notice to the other;
(ii) By either party on written notice for any breach of the Agreement that has
not been cured within thirty (30) days after receipt of written notice thereof;
(iii) Automatically if the General Agent's insurance license is suspended or
terminated in any jurisdiction; (iv) On the effective date of the sale or
transfer of General Agent's business, or substantially all of the business'
assets, from General Agent's present ownership without the Company's prior
written consent. In the event of termination, all gross premiums written
hereunder shall become immediately due and payable to Company. No charges shall
be made by General Agent for services in settlement of its account or in winding
up the business of the Company.
<PAGE> 3
14. SEVERABILITY: If any portion of this Agreement or its application
to any circumstance is judged void or unenforceable, the remaining provisions
shall not be affected and shall be enforced to the fullest extent permitted by
law.
IN WITNESS WHEREOF, and intending to be bound, Company and General
Agent have executed this Agreement effective May 30, 1997.
PENN-AMERICA INSURANCE COMPANY KENNETH I. TOBEY, INC.
BY: /s/ John M. DiBiasi BY: /s/ Harold L. Anderson
------------------------------ -----------------------------
John M. DiBiasi, CPCU Harold L. Anderson
Executive Vice President President
**********************************************
PERSONAL GUARANTEE: If General Agent is a corporation or a limited liability
company, the shareholder(s) or member(s), as the case may be, signing below
agree to guarantee the payment of all sums due Company under this Agreement and
any successors hereto.
/s/ Harold L. Anderson
- ----------------------------------------
Harold L. Anderson
<PAGE> 4
SCHEDULE A
UNDERWRITING REQUIREMENTS AND AUTHORITY
1. General Agent is authorized to bind, issue and/or cancel private
passenger automobile insurance coverage on behalf of Company and to
have general supervision of the underwriting of this coverage. Company
may cancel or reduce the amount of coverage on any risk it considers to
be unsatisfactory.
2. General Agent shall adhere to all underwriting requirements, guidelines
and manuals approved by Company for its private passenger automobile
program, as published and updated from time to time, and General Agent
shall not bind any risk that does not satisfy these criteria.
3. Company reserves the right to limit or suspend the binding authority
and/or premium volume written by General Agent in the event the
Company, in its sole discretion, determines that the loss ratios,
premium volume, policy term mix or other factors may adversely affect
the Company's continued compliance with regulatory, rating or financial
requirements.
4. All local and producing brokers utilized by General Agent shall be
deemed brokers of General Agent for all purposes other than licensing
requirements. General Agent shall be responsible and indemnify Company
for any liability resulting from their acts or failures to act as set
forth in Section 6 of the Agreement.
<PAGE> 5
SCHEDULE B
COMMISSION, FEES, AND CONTINGENT PROFIT COMMISSION
1. COMMISSION:
The Company shall pay the General Agent the following commission on all
business written pursuant to this Agreement as compensation for its
services as General Agent.
<TABLE>
<CAPTION>
LINES OF BUSINESS COMMISSION
----------------- ----------
<S> <C>
Private Passenger Auto Twenty-six Percent
Liability and Physical Damage Package (26%)
</TABLE>
2. SCHEDULE OF FEES:
All Fees 26% to the General Agent
The Company will be responsible for applicable taxes on all billing and
policy fees reported to the Company.
3. CONTINGENT PROFIT COMMISSION (EFFECTIVE JANUARY 1, 1997)
The Company will also pay a contingent profit commission as described
below ("Contingent Profit Commission"). Payment of the contingent
profit commission will be made in shares of stock of the Company's
parent, Penn-America Group, Inc. ("PAGI") ("PAGI Stock" or "Stock")
and, unless the General Agent elects otherwise, cash, in accordance
with the provisions below.
PAYMENTS TO YOU UNDER THE PLAN
A. Allocation of Contingent Profit Commission between stock and
cash:
1) 33 1/3% of your Contingent Profit Commission will be
distributed in shares of PAGI stock, rounded to the
nearest even share.
2) For the purposes of the calculation, the PAGI stock
will be valued as of the median between the bid and
asked price for stock as of March 31 Contingent
Profit Commission calculation date. If the stock
markets are closed on that date, the valuation will
be on the same basis as of the nearest business day.
3) You may, at your option, exercisable by written
notice to the Company received by us on or before
March 15, take either 50%, 75%, or 100% of your
Contingent Profit Commission in shares of PAGI stock.
B. Payment Due Date:
1) Your Contingent Profit Commission will be distributed
to you by June 1.
2) Shares of stock distributed to you will be delivered
free of all commissions and transaction costs.
<PAGE> 6
C. Your Contingent Profit Commission will be subject to income
tax in accordance with the applicable IRS laws and
regulations. Stock distributed to you under the Plan may not
be sold until after August 1 of the same year and will be
legended accordingly.
TERMINATION
A. If your General Agency Agreement is terminated by either
party, the program also terminates, with the final calculation
and pro-rata payment made at June 1 of the following year.
B. The plan may be terminated or amended by us at any time
without cause, but existing obligations will be honored.
C. Contingent Profit Commission Upon Termination. Upon
termination of this Addendum for any reason:
1) before the end of a full calendar year, its terms and
conditions shall apply to all prior calendar years in
which it was in effect, without proration and without
allowance for the portion of the year in which this
Addendum was terminated; and
2) The General Agency's right to Contingent Profit
Commission shall cease on December 31 of the year
preceding the year in which termination is effective,
notwithstanding the continuance in force and effect
of any unexpired policies or binders after such
calendar year.
3) In the event of termination of the General Agency
Agreement by either party, this Addendum shall
terminate simultaneously and the General Agency shall
not be eligible for Contingent Profit Commission in
the termination or succeeding years.
D. If the GENERAL AGENCY AGREEMENT is terminated in accordance
with any of the terms of PARAGRAPH 13, no further calculations
shall be made, nor Contingent Profit Commission paid.
GENERAL
A. This Contingent Profit Commission Program constitutes the
entire and exclusive agreement between Company and General
Agency on the subject of Contingent Profit Commissions, and
representations, and understandings, written and oral, on
these subjects. The undersigned signators hereby warrant that
they have full power and authority to execute this Addendum on
behalf of the respective parties thereto.
<PAGE> 7
EXAMPLE NO. 1
PRIVATE PASSENGER AUTOMOBILE LIABILITY
Private Passenger Automobile Liability for Policy Year 1997
Minimum Eligibility $1,000,000 (includes all fees)
<TABLE>
<CAPTION>
Per Year
1997 Profit Calculation: Pay out
Policy (Subtract commission and fees from earned premium; Value (-1/2
Year Company Agency multiply by difference between Company Desired Loss of -1/2
Valued Class of Desired Actual Ratio and Agency Actual Loss Ratio; divide by half expected
As Of Business Loss Ratio Loss Ratio to establish Agency portion) profit
- ----- -------- ---------- ---------- ---------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C>
3/31/99 * Private Passenger 55% 45% Earned Premium = $10,000,000 - $2,600,000 $185,000
Auto Liability (commission paid and policy fees) = $7,400,000 x
and Physical 10% = $740,000 / 2 = $370,000 / 2
Damage
3/31/00 * Private Passenger 60% 55% Earned Premium = $10,000,000 - $2,600,000 $ 92,500
Auto Liability (commission paid and policy fees) = $7,400,000 x
and Physical 5%= $370,000 / 2 = $185,000 /2
Damage
<CAPTION>
* Note: In any year, any actual loss ratio below 40% will be calculated as if
it were 40%.
Total 2-year Value of Private Passenger Auto Pay Out for Policy Year 1997: $277,500
</TABLE>
<PAGE> 1
[PENN-AMERICA LOGO]
Exhibit 10.21
GENERAL AGENCY AGREEMENT
THIS AGREEMENT, made July 1, 1996, between BLISS & GLENNON INC.
("Agent") and PENN-AMERICA INSURANCE COMPANY, 420 South York Road, Hatboro,
Pennsylvania, 19040 ("Company").
1. GENERAL PROVISIONS: The relationship between Company and Agent is
one of independent contract based upon mutual trust, understanding,
accountability and responsibility. The parties agree to comply with all
applicable licensing and regulatory rules, and to conduct themselves in a
professional, business-like and ethical manner at all times. This agreement
supersedes any and all prior or contemporaneous agreements, representations, and
understandings, written and oral, on these subjects. The undersigned signatories
hereby warrant that they have full power and authority to execute this Agreement
on behalf of the respective parties thereto.
2. AGENCY MANUAL: Agent agrees to abide by the provisions of Company's
Agency Manual, as published and updated from time to time (the "Manual").
3. AUTHORITY OF AGENT: Agent is granted non-exclusive binding authority
for the Company in California as specified in the Manual. This binding authority
cannot be delegated.
4. COMPENSATION: Agent will earn commissions and, if applicable, profit
sharing on insurance written under this Agreement as set forth in the "Agency
Performance Award/Profit Sharing Addendum."
5. INDEMNIFICATION: Company shall indemnify, hold harmless and defend
Agent, and Agent shall indemnify and hold harmless Company, from any loss,
damage, judgment cost, claim or expense of any kind, including but not limited
to, attorneys' fees, which either may incur or become liable due to the other's
acts of omissions related to or arising out of this Agreement. Company's
obligation to indemnify Agent shall be conditioned as Company receiving prompt
notification of any suit or claim against Agent and being afforded the
opportunity to make such investigation, settlement or defense as Company deems
prudent.
6. ARBITRATION: Any controversy or claim arising out of or related to
this Agreement or its breach shall be settled by binding arbitration in Hatboro,
Pennsylvania. One Arbiter shall be chosen by Company, the other by Agent and
these Arbiters shall then choose an Umpire. The Arbiters and the Umpire shall be
active or retired disinterested executive officers of property and casualty
companies or insurance agencies. If either party fails to choose an Arbiter
within thirty days following a written request from the other, the other may
choose both Arbiters. If the Arbiters fail to agree on an Umpire the Umpire
shall be selected in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, which Rules shall generally
govern the conduct of the arbitration except as specifically modified by this
Agreement. The decision of a majority of the three shall be final, and shall be
based on the customs and usages of the business and in a spirit of equity rather
than of technicalities or legal requirements. The written decision of the
Arbiters and the Umpire shall be delivered to Company and Agent within thirty
days after all matters have been submitted for decision. Each party shall pay
the expenses of its own Arbiter and one half the expenses of the Umpire, except
that, in the event both Arbiters have been selected by one party,
<PAGE> 2
then each party shall pay one half of the expenses of the two Arbiters. Judgment
on the award rendered in the arbitration may be entered in any court having
jurisdiction thereof.
7. ASSIGNMENT: Agent may not assign any rights or obligations under
this Agreement without Company's prior written consent.
8. SEVERABILITY: If any portion of this Agreement or its application to
any circumstance is judged void or unenforceable, the remaining provisions shall
not be affected, and shall be enforced to the fullest extent permitted by law.
9. TERMINATION: This Agreement may be terminated in one of four ways:
(i) By either party on ninety (90) days advance written notice to the other.
(ii) By either party on written notice for any breach of the Agreement that has
not been cured within thirty (30) days after receipt of written notice thereof.
(iii) Automatically if the Agent's insurance license is suspended or terminated
in any jurisdiction. (iv) On the effective date of the sale or transfer of
Agent's business, or substantially all of the business' assets, from Agent's
present ownership without the Company's prior written consent.
IN WITNESS WHEREOF, and intending to be bound, Company and Agent have
executed this Agreement effective July 1, 1996.
PENN-AMERICA INSURANCE COMPANY BLISS & GLENNON INC.
BY: /s/ John M. DiBiasi BY: /s/ Robert Abramson
---------------------------- --------------------------
John M. DiBiasi, CPCU Robert Abramson, CPCU
Executive Vice President President
**********************************************
PERSONAL GUARANTEE: If Agent is a corporation or limited liability company, the
shareholder(s) or member(s), as the case may be, signing below agree to
guarantee the payment of all sums due Company under this Agreement and any
successors hereto.
By /s/ Robert Abramson
-----------------------------------
Robert Abramson, CPCU
<PAGE> 3
[PENN-AMERICA LOGO]
ADDENDUM NO. ONE
AGENT'S CONTRACT ADDENDUM
THIS ADDENDUM by and between PENN-AMERICA INSURANCE COMPANY (hereinafter
referred to as "Company") and BLISS & GLENNON INC., hereinafter referred to as
"Agent") shall, upon execution by the Company, become a part of the Agent's
Agreement, between Company and Agent, dated July 1, 1996.
It is understood and agreed by the Company and Agent that the Agreement is
amended as follows:
Add branch office at 12396 World Trade Drive,Suite 205, San Diego, CA 92128
Agency Code No. 2224
IN WITNESS WHEREOF, the parties intending to be legally bound execute this
Addendum as follows:
IN WITNESS WHEREOF, and intending to be bound, Company and Agent have executed
this Agreement effective October 14, 1996.
PENN-AMERICA INSURANCE COMPANY BLISS & GLENNON INC.
BY: /s/ John M. DiBiasi BY: /s/ Robert Abramson
----------------------------- ------------------------------
John M. DiBiasi, CPCU Robert Abramson, CPCU
Executive Vice President President
<PAGE> 4
[PENN-AMERICA LOGO]
AGENCY PERFORMANCE AWARD /
PROFIT SHARING ADDENDUM
THIS ADDENDUM, effective January 1, 1996 forms part of the agreement between
PENN-AMERICA INSURANCE COMPANY (hereinafter referred to as "Company" or
"Penn-America") and BLISS & GLENNON INC. (hereinafter referred to as "Agent"),
dated September 1, 1991.
I. INTRODUCTION
A. This two-part plan is designed to reward you for the manner in
which you conduct your business with Penn-America and for your
favorable underwriting results. Part "A" is a Performance
Award and Part "B" is a policy-year loss ratio based Profit
Sharing plan.
B. Payments of your Agency Performance Award and Profit Sharing
("Agency Bonus") under this Addendum will be made in shares of
stock of the Company's parent, Penn-America Group, Inc.
("PAGI") ("PAGI Stock" or "Stock") and, unless you elect
otherwise, cash, in accordance with the provisions of Section
IV below.
II. HOW YOUR AGENCY QUALIFIES FOR THE PLAN
A. Part "A" -- (Performance Award) Eligibility
1) Your Agency Bonus will be paid on a 12-month basis,
with criteria evaluated from January 1 forward.
Agency appointments will be subject to pro-ration,
rounded to whole months, during the year appointed.
All calendar year determinations will be made as of
December 31st.
2) To initially qualify you must have written at least
$500,000 total calendar year premium according to
Penn-America's books.
3) To remain eligible in succeeding calendar years, you
must write at least 90 percent of the previous years'
total written premium, subject to the $500,000 total
premium minimum. This 90 percent requirement is
waived in any year you write in excess of $1 million
in premium.
4) You must maintain E&O coverage in conformity with the
Company's standards for such coverage.
5) You agree that the Company's records are final.
<PAGE> 5
[PENN-AMERICA LOGO]
B. Part "B" -- (Profit Sharing) Eligibility
1) The same as 1) through 5) in Part "A" except that
there is a two-year waiting period for eligibility
owing to loss development.
2) If you satisfy all above requirements, you are
eligible for your first payment by June 1 of the
second year following the year of initial
eligibility.
III. THE PLAN
A. Part "A" -- Performance Award
This is based on a calendar year evaluation:
<TABLE>
<CAPTION>
Criteria Standards to be Met Value of
-------- ------------------- --------
Agency
------
Bonus
-----
<S> <C> <C> <C>
1) Policy Issuance At least 90% of policies are received by Penn-America no $1,000
later than 35 days after effective date with no policies
received later than 60 days after the effective date. Our
binder procedures must be followed.
2) Inspection At least 75% of inspections are received by Penn-America $ 500
Timeliness no later than 50 days after the policy effective date,
with no inspections received
later than 75 days after the
policy effective date. Our
policy inspection guidelines
must be followed.
3) Premium Audit At least 90% of responses to Penn-America's premium audit $ 500
Responsiveness letters are received by the Company no later then 65 days
after the date of the letter,
with no responses received
later then 75 days after the
date of the letter.
4) Statement a) All statement payments received by due date (based $ 1,000
Payment upon your statement per Agency Contract with no
unauthorized credits taken). If the due date
falls on a weekend or holiday, the next working
day will be considered due date. Wire transfers
received by due date will be acceptable if there
is a mailing problem.
b) Agent sends Account Current in acceptable $ 500
electronic format. One-time
Payment
</TABLE>
Page 2
<PAGE> 6
[PENN-AMERICA LOGO]
<TABLE>
<CAPTION>
Criteria Standards to be Met Value of
-------- ------------------- --------
Agency
------
Bonus
-----
<S> <C> <C> <C>
5) Production Increase Over 25% increase in written premium vs. prior calendar $2,000
Over Prior Calendar year.
Year
THE CALCULATION OF WRITTEN
PREMIUM FOR EACH YEAR WILL BE
DONE ON MARCH 31 OF THE
FOLLOWING YEAR.
6) Penn-America Audit Audits conducted by Penn-America rated as "Acceptable." $ 500
of Agency
(Internal at Penn-America or at
Agent's office; if no audit is
conducted, there is no award.)
Penn-America will inform Agency
principals after audit
completion and will follow-up
with details concerning: file
documentation; completeness of
applications; risk selection;
pricing; completeness and
timeliness of inspections and
follow-ups; amount of policies
generating additional premiums
and size of additional
premiums; amount of policies
placed in direct collection;
late policy binders; other
relevant underwriting data.
</TABLE>
B. Part "B" -- Profit Sharing
1) This is based on a policy year evaluation.
General Liability Business will be evaluated at the
end of the second, third, and fourth years after the
close of the policy year in question. At the end of
each such year, you will receive one-third (1/3) of
the amount of the profit sharing payment for that
year based on the profit calculation formula. There
will be a separate calculation each year of which you
will receive one-third (1/3). This way, your profit
participation traces the loss development of your
business.
- General Liability Business is defined as
monoline liability, garage liability and
Section II of commercial multi peril,
including professional classes and Increased
General Liability Limits.
Page 3
<PAGE> 7
[PENN-AMERICA LOGO]
Property Business will be evaluated at the end of the
second and third years after the policy year, at the
end of each of which you will receive one-half (1/2)
of the profit sharing payment for that year.
- Property Business is defined as monoline
fire and allied lines, inland marine, and
Section I (fire and allied lines) of
commercial multi peril.
Eligible Lines of Business shall mean all lines of
insurance business and types of risks that Agent is
authorized to write, produce, bind, or solicit for or
on behalf of the Company, as defined in the Agency
Manuals and not otherwise excluded.
2) Your loss ratio is calculated on a policy-year basis,
earned to incurred. Incurred losses are indemnity
paid, reserves, and loss adjustment expenses.
3) Your profit sharing will be calculated for each
policy year as of March 31; if you qualify, you will
be paid by June 1.
4) The profit calculation is simple: Earned policy year
premium minus commission paid times positive
difference between the Company's Desired Loss Ratio
and your Agency's actual loss ratio equals profit.
One-half of that amount is the value of the profit
sharing portion of your Agency Bonus. Penn-America
reserves the right to review and change the Company's
Desired Loss Ratios from time to time at its sole
discretion.
5) Because the policy-year formula is used, there is no
need for loss carry forwards or stop losses -- each
year stands alone.
6) The current annual "Company's Desired Loss Ratios"
are:
<TABLE>
<CAPTION>
Class of Business Pay Out Year Loss Ratio
----------------- ------------ ----------
<S> <C> <C> <C>
CMP and Garage Liability 1st Year 25.00%
Monoline General Liability 1st Year 17.50%
CMP and Garage Liability 2nd Year 35.00%
Monoline General Liability 2nd Year 22.50%
CMP and Garage Liability 3rd Year 45.00%
Monoline General Liability 3rd Year 35.00%
Property Business 1st Year 50.00%
Property Business 2nd Year 55.00%
</TABLE>
Page 4
<PAGE> 8
[PENN-AMERICA LOGO]
GENERAL LIABILITY EXAMPLE:
General Liability for Policy Year 1996 - General Liability Written Premium
Volume $800,000
(CMP Liability Written Premium = $300,000)
(Monoline Liability Written Premium = $500,000)
<TABLE>
<CAPTION>
Profit Calculation:
(Subtract commission paid from earned Per Year
1996 premium; multiply by difference between Pay Out Value
Policy Year Class Company Agency Company Desired Loss Ratio and Agency (1/3 of 1/2) of
Valued Of Desired Actual Actual Loss Ratio; divide by half to expected
As Of Business Loss Ratio Loss Ratio establish value of Agency portion) profit
- ----- -------- ---------- ---------- ---------------------------------- ------
<S> <C> <C> <C> <C> <C>
3/31/98* CMP and Garage 25% 15% Earned Premium = $300,000 $4,000
Liability -$60,000 commission paid
$240,000 x 10% = $24,000
$24,000 / 2 = $12,000
Monoline General 17.5% 10% Earned Premium = $500,000 $5,000
Liability -$100,000 commission paid $400,000 x
7.5% = $30,000 $30,000 / 2 = $15,000
<CAPTION>
*Note: First Year Liability loss ratio below 10% will be evaluated as if 10%.
<S> <C> <C> <C> <C> <C>
CMP and Garage 35% 20% Earned Premium = $300,000 $6,000
Liability -$60,000 commission paid
3/31/99* $240,000 x 15% = $36,000
$36,000 / 2 = $18,000
Monoline General 22.5% 17% Earned Premium = $500,000 $3,666
Liability -$100,000 commission paid $400,000 x
5.5% = $22,000
$22,000 / 2 = $11,000
<CAPTION>
*Note: Second Year Liability loss ratio below 15% will be evaluated as if 15%.
<S> <C> <C> <C> <C> <C>
3/31/2000* CMP and Garage 45% 30% Earned Premium = $300,000 $6,000
Liability -$60,000 commission paid $240,000 x 15%
= $36,000
$36,000 / 2 = $18,000
Monoline General 35% 27.5% Earned Premium = $500,000 $5,000
Liability -$100,000 commission paid $400,000 x
7.5% = $30,000
$30,000 / 2 = $15,000
*Note: Third Year Liability loss ratio below 25% will be evaluated as if 25%.
Total 3-year Value of General Liability Pay Out for Policy Year 1996: $29,666
=======
</TABLE>
Page 5
<PAGE> 9
[PENN-AMERICA LOGO]
PROPERTY EXAMPLE:
Property for Policy Year 1996 - Property Written Premium Volume $700,000
<TABLE>
<CAPTION>
Profit Calculation:
(Subtract commission paid from earned premium; multiply by Per Year
1996 Company Agency difference between Company Desired Loss Ratio and Agency Pay Out Value
Valued Desired Actual Actual Loss Ratio; divide by half to establish value of (1/2 of 1/2) of
As Of Loss Ratio Loss Ratio Agency portion) expected profit
- ----- ---------- ---------- ---------------------------------------------------------- ---------------
<S> <C> <C> <C> <C>
3/31/98* 50% 40% Earned Premium = $700,000 $14,000
-$140,000 commission paid
$560,000 x 10% = $56,000
$56,000 / 2 = $28,000
3/31/99* 55% 45% Earned Premium = $700,000 $14,000
-$140,000 commission paid
$560,000 x 10% = $56,000
$56,000 / 2 = $28,000
<CAPTION>
*Note: First and Second Year Agency Property loss ratio below 40% will be evaluated as if 40%
Total 2-year Value of Property Pay Out for Policy Year 1996: $28,000
=======
VALUE OF TOTAL PROPERTY AND GENERAL LIABILITY PAY OUT FOR POLICY YEAR 1996: $57,666
=======
</TABLE>
The above examples only reflect calculations and payments on the 1996
policy year. It is possible that you may be paid on more than one
policy-year statement in a given year as calculations for subsequent
policy-year statements are made assuming you maintain eligibility each
year.
Example: In 2000 you could be paid profit sharing payments based upon
property experience from policy years 1997 and 1998 and general
liability experience of policy years 1996, 1997, and 1998.
IV. PAYMENTS TO YOU UNDER THE PLAN
A. Allocation of Agency Bonus between stock and cash:
1) 33 1/3% of your Agency Bonus will be distributed in
shares of PAGI Stock, rounded up to the nearest even
share.
2) For purposes of the calculation the PAGI Stock will
be valued as of the median between the bid and asked
price for the Stock as of the March 31 profit sharing
calculation date. If the stock markets are closed on
that date, the valuation will be made on the same
basis as of the nearest previous business day.
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<PAGE> 10
[PENN-AMERICA LOGO]
3) You may, at your option, exercisable by written
notice to the Company received by us on or before
March 15, take either 50%, 75%, or 100% of your
Agency Bonus in shares of PAGI stock.
4) Notwithstanding the above, if the value of your
Agency Bonus is less than $2,500, payment of the
Agency Bonus will be made entirely in cash.
B. Payment due date:
1) Your Agency Bonus will be distributed to you by June
1.
2) Shares of stock distributed to you will be delivered
free of all commissions and transaction costs.
C. Your Agency Bonus will be subject to income tax in accordance
with applicable IRS laws and regulations. Stock distributed to
you under the Plan may not be sold until after August 1 of the
same year, and will be legended accordingly.
V. TERMINATION
A. If your Agency Agreement is terminated by either party, the
program also terminates, with the final calculation and
pro-rata payment made at June 1 of the following year.
B. The plan may be terminated or amended by us at any time
without cause, but existing obligations will be honored.
C. Profit Sharing Upon Termination. Upon termination of this
Addendum for any reason:
1) Before the end of a full calendar year, its terms and
conditions shall apply to all prior calendar years in
which this Addendum was in effect, without proration
and without allowance for the portion of the year in
which this Addendum was terminated; and
2) The Agency's right to Profit Sharing shall cease on
December 31 of the year preceding the year in which
termination is effective, notwithstanding the
continuance in force and effect of any unexpired
policies or binders after such calendar year.
3) In the event of termination of the General Agency
Agreement by either party, this Addendum shall
terminate simultaneously and the Agency shall not be
eligible for Profit Sharing in the termination or
succeeding years.
D. If the AGENCY AGREEMENT is terminated by us because of a
breach of its terms by you and/or in accordance with any of
the terms of paragraphs 10(iii) or (iv), there shall be no
further calculations made, nor award/profit sharing payments
made.
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<PAGE> 11
[PENN-AMERICA LOGO]
VI. GENERAL
A. This Performance Award/Profit Sharing Program constitutes the
entire and exclusive agreement between Company and Agency on
the subjects of performance awards and profit sharing
(contingent commissions), and supersedes any and all prior or
contemporaneous agreements, representations, and
understandings, written and oral, on these subjects. The
undersigned signators hereby warrant that they have full power
and authority to execute this Addendum on behalf of the
respective parties thereto.
IN WITNESS WHEREOF, this Addendum has been executed in duplicate by the parties
hereto.
DATE: June 14, 1996
PENN-AMERICA INSURANCE COMPANY BLISS & GLENNON INC.
BY: /s/ John M. DiBiasi BY: /s/ Robert Abramson
--------------------------- ------------------------------
John M. DiBiasi, CPCU Robert Abramson, CPCU
Executive Vice President President
Page 8
<PAGE> 1
EXHIBIT 23.2
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
registration statement. 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 therein.
We consent the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
June 19, 1997
