SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
( x ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-----------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22316
---------------------
Penn-America Group, Inc.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
- ------------------------------ -----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 South York Road, Hatboro, Pennsylvania 19040
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(Address of principal executive offices, including zip code)
(215) 443-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
At August 7, 1998, 9,834,524 shares of the registrant's common stock, $.01 par
value, were outstanding.
Page 1
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Index
Page Number
Part I - Financial Information
Consolidated Unaudited Balance Sheets - June 30, 1998 and
December 31, 1997 3
Consolidated Unaudited Statements of Earnings - For the three
and six months ended June 30, 1998 and 1997 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the six months ended June 30, 1998 5
Consolidated Unaudited Statements of Cash Flows -
For the six months ended June 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - Other Information 15
Page 2
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- --------------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities:
Available for sale, at fair value
(amortized cost 1998 $112,879; 1997 $89,185) $ 113,826 $ 89,979
Held to maturity, at amortized cost
(fair value 1998 $36,109; 1997 $47,034) 35,831 46,842
Equity securities, at fair value
(cost 1998 $26,024; 1997 $25,662) 27,858 27,380
Short-term investments, at cost, which approximates fair value 2,072 11,455
---------------- --------------
Total Investments 179,587 175,656
Cash 5,954 2,163
Receivables:
Accrued investment income 2,182 1,973
Premiums receivable, net 11,916 12,414
Reinsurance recoverable 17,565 16,605
---------------- --------------
Total receivables 31,663 30,992
Prepaid reinsurance premiums 2,842 3,065
Deferred policy acquisition costs 8,644 8,563
Capital lease 2,100 1,865
Deferred income taxes 2,525 2,302
Income tax recoverable 306 40
Other assets 544 511
================ ==============
Total assets $ 234,165 $ 225,157
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 88,359 $ 84,566
Unearned premiums 35,844 36,173
Accounts payable and accrued expenses 739 2,338
Capitalized lease obligations 2,142 1,920
Other liabilities 4,790 2,853
---------------- --------------
Total liabilities 131,874 127,850
---------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares;
none issued -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding 1998, 9,921,524 shares and 1997, 9,883,384 99 99
Additional paid-in capital 68,854 68,221
Accumulated other comprehensive income 1,807 1,649
Retained earnings 31,963 27,849
---------------- --------------
102,723 97,818
Unearned compensation from restricted stock awards (432) (511)
---------------- --------------
Total stockholders' equity 102,291 97,307
---------------- --------------
Total liabilities and stockholders' equity $ 234,165 $ 225,157
================ ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
For the three and six months ended June 30, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $ 22,074 $ 23,034 $ 45,109 $ 43,933
Net investment income 2,749 1,985 5,524 3,925
Net realized investment gains 477 108 443 109
-------------- -------------- -------------- -------------
Total revenues 25,300 25,127 51,076 47,967
-------------- -------------- -------------- -------------
Losses and expenses:
Losses and loss adjustment expenses 13,855 14,390 28,146 27,607
Amortization of deferred policy acquisition costs 6,054 6,274 12,424 11,971
Other underwriting expenses 1,779 1,471 3,173 2,615
Interest expense 45 192 89 385
-------------- -------------- -------------- -------------
Total losses and expenses 21,733 22,327 43,832 42,578
-------------- -------------- -------------- -------------
Earnings before income tax 3,567 2,800 7,244 5,389
Income tax 1,042 781 2,139 1,620
============== ============== ============== =============
Net earnings $ 2,525 $ 2,019 $ 5,105 $ 3,769
============== ============== ============== =============
Net earnings per share
Basic
$0.25 $0.30 $0.52 $0.56
Diluted
$0.25 $0.30 $0.51 $0.55
Weighted average number of shares outstanding
Basic
9,910 6,748 9,900 6,719
Diluted
10,018 6,833 10,012 6,800
Cash dividends per share
$0.05 $0.04 $0.10 $0.08
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 4
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the six months ended June 30, 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
Unearned
Compensation
Accumulated From
Common Stock Additional Other Restricted
--------------- Paid-In Comprehensive Retained Stock
Shares Amount Capital Income Earnings Awards Total
--------- -------- --------- ------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 9,883,384 $ 99 $ 68,221 $ 1,649 $ 27,849 $ (511) $ 97,307
Net earnings 5,105 5,105
Other comprehensive income, net of tax:
Unrealized gains on investments, net of
reclassification adjustment 158 158
---------
Comprehensive income 5,263
---------
Issuance of common stock 38,140 633 633
Amortization of compensation expense
from restricted stock awards 79 79
Cash dividends paid (991) (991)
=========================================================================================
Balance at June 30, 1998 9,921,524 $ 99 $ 68,854 $ 1,807 $ 31,963 $ (432) $ 102,291
=========================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended June 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,105 $ 3,769
Adjustments to reconcile net earnings to net cash provided by
Operating activities:
Amortization and depreciation expense 296 163
Net realized investment gains (443) (109)
Deferred income tax (342) (150)
Net decrease in premiums receivable, prepaid reinsurance premiums
and unearned premiums 392 2,634
Net increase in unpaid losses and loss adjustment expenses
and reinsurance recoverable 2,833 6,047
(Increase) decrease in:
Accrued investment income (209) (230)
Deferred policy acquisition costs (81) (1,079)
Income tax recoverable (266) (55)
Other assets (99) 28
Increase (decrease) in:
Accounts payable and accrued expenses (1,599) (503)
Other liabilities 1,937 (149)
--------------- ---------------
Net cash provided by operating activities 7,524 10,366
--------------- ---------------
Cash flows from investing activities:
Purchases of equity securities (11,739) (874)
Purchases of fixed maturities available for sale (38,891) (15,988)
Purchases of fixed maturities held to maturity 0 (3,027)
Proceeds from sales of equity securities 11,790 943
Proceeds from sales and maturities of fixed maturities available for sale 15,080 3,000
Proceeds from maturities and calls of fixed maturities held to maturity 11,067 3,214
Change in short-term investments 9,383 3,352
--------------- ---------------
Net cash used by investing activities (3,310) (9,380)
--------------- ---------------
Cash flows from financing activities:
Issuance of common stock 633 990
Principal payments on capital lease obligations (65) (55)
Dividends paid (991) (539)
--------------- ---------------
Net cash (used) provided by financing activities (423) 396
--------------- ---------------
Increase in cash 3,791 1,382
Cash, beginning of period 2,163 2,979
=============== ===============
Cash, end of period $ 5,954 $ 4,361
=============== ===============
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 89 $ 404
Income tax 2,748 1,825
Supplemental non-cash disclosure:
Cost of securities transferred from available for sale to held to maturity -- $ 8,002
Capital lease obligation incurred 287 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Organization and Basis of Presentation
Penn-America Group, Inc. ("PAGI") is an insurance holding company whose
principal asset is the common stock of Penn-America Insurance Company
("Penn-America"). The "Company" refers to PAGI and Penn-America, as well as to
Penn-America's wholly-owned subsidiary, Penn-Star Insurance Company. Penn
Independent Corporation ("Penn Independent") currently owns approximately 31.1%
of the outstanding common stock of PAGI.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the financial statements and notes for the year ended
December 31, 1997. 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 the Company's financial position,
results of operations, and cash flows for the interim periods. The Company's
results of operations for interim periods are not necessarily indicative of the
results to be expected for the entire year.
Note 2 - Reinsurance
Premiums earned are net of amounts ceded to reinsurers of $1.9 million
for both the three months ended June 30, 1998 and June 30, 1997. Losses and loss
adjustment expenses are net of amounts ceded to reinsurers of $1.5 million and
$1.9 million for the three months ended June 30, 1998 and June 30, 1997,
respectively.
Premiums earned are net of amounts ceded to reinsurers of $3.8 million
and $3.7 million for the six months ended June 30, 1998 and June 30, 1997,
respectively. Losses and loss adjustment expenses are net of amounts ceded to
reinsurers of $3.2 million and $3.7 million for the six months ended June 30,
1998 and June 30, 1997, respectively.
Note 3 - Comprehensive Income
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income". This statement was implemented retroactively by the
Company in 1998. The statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. Accumulated other comprehensive income of the
Company consists solely of net unrealized gains on investment securities.
Page 7
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
The following are components of other comprehensive income (in thousands):
<TABLE>
<CAPTION>
Six months ended June 30, 1998
------------------------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
----------------- ------------------- ---------------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding gains arising
during period $ 684 $ (236) $ 448
Less: reclassification adjustment for
gains realized in net income (443) 153 (290)
================= == =================== === ===============
Other comprehensive income $ 241 $ (83) $ 158
================= == =================== === ===============
Six months ended June 30, 1997
------------------------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
----------------- ------------------- ---------------
Unrealized gains on investments:
Unrealized holding gains arising
during period $ 314 $ (107) $ 207
Less: reclassification adjustment for
gains realized in net income (109) 37 (72)
Plus: accretion of net loss on fixed
maturities transferred to held to maturity 29 (10) 19
================= == =================== === ================
Other comprehensive income $ 234 $ (80) $ 154
================= == =================== === ================
</TABLE>
Comprehensive income for the three and six months ended June 30, 1997 was
$2,698,000 and $3,923,000 and included net income of $2,019,000 and $3,769,000
and other comprehensive income, net of tax, of $679,000 and $154,000,
respectively.
Comprehensive income for the three months ended June 30, 1998 was $2,226,000 and
included net income of $2,525,000 and other comprehensive loss, net of tax, of
$299,000.
Page 8
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 4 - Basic and Diluted Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations (in thousands, except per
share data):
<TABLE>
Three months ended June 30, Six months ended June 30,
----------------------------------- -------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS:
Net Earnings $ 2,525 $ 2,019 $ 5,105 $ 3,769
-------------- -------------- --------------- ---------------
Weighted average common
shares outstanding 9,910 6,748 9,900 6,719
============== ============== =============== ===============
Basic EPS $ 0.25 $ 0.30 $ 0.52 $ 0.56
============== ============== =============== ===============
Diluted EPS:
Net Earnings $ 2,525 $ 2,019 $ 5,105 $ 3,769
-------------- -------------- --------------- ---------------
Weighted average common
shares outstanding 9,910 6,748 9,900 6,719
Additional shares outstanding
after the assumed exercise
of options by applying the
treasury stock method 108 85 112 81
-------------- -------------- --------------- ---------------
Total weighted average common
shares outstanding 10,018 6,833 10,012 6,800
============== ============== =============== ===============
Diluted EPS $ 0.25 $ 0.30 $ 0.51 $ 0.55
============== ============== =============== ===============
</TABLE>
Page 9
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended June 30, 1998 and 1997
Gross written premiums decreased 12.8% to $24.0 million for the three
months ended June 30, 1998, from $27.5 million for the three months ended June
30, 1997. The decrease resulted from a 40.4% decline in personal lines
automobile gross written premiums to $5.4 million which is partially offset by a
1.0% increase in commercial lines gross written premiums to $18.6 million. The
decrease in personal lines automobile gross written premium was due to actions
taken by the Company to improve profitability. Specifically, the Company
terminated its relationship with one agent and reduced two agents' personal
lines automobile writings by approximately 33.0%. Because of these agency
cutbacks, coupled with the slow start-up of new personal lines automobile
programs, direct personal lines automobile written premium for 1998 could be
approximately 30% less than 1997. Effective July 1, 1998, the Company filed and
received from the State of California a 14.2% rate reduction in its non-standard
automobile rates. This action was taken in order to remain competitive with the
new competition that has entered this marketplace at lower premium rates.
California automobile direct written premium represented $3.2 million of the
$5.4 million written by the Company for the three months ended June 30, 1998.
The Company began new personal automobile programs in the states of
Arizona, North Dakota and Montana in the second quarter of 1998, and is planning
to implement new programs in Illinois and Hawaii during the third quarter of
1998.
Net written premiums decreased 12.5% to $22.2 million for the three
months ended June 30, 1998, from $25.4 million for the three months ended June
30, 1997. During the same periods, net premiums earned decreased 4.2% to $22.1
million, from $23.0 million. Net premiums earned decreased due to the decline in
personal lines automobile gross written premiums in 1998.
Net investment income increased 38.5% to $2.7 million for the three
months ended June 30, 1998, from $2.0 million for the three months ended June
30, 1997. This increase resulted principally from growth in invested assets
funded primarily by the net proceeds from the Company's secondary stock offering
in July 1997, and from cash flows from operating activities.
During the second quarter of 1998, the Company purchased approximately
$13.6 million in tax free municipal securities as compared to $649,000 held
during the comparable period, June 30, 1997. The tax equivalent average
investment yield of the fixed maturity portfolio for the three months ended June
30, 1998 was 6.63%, compared to 6.86% for the three months ended June 30, 1997.
Net realized investment gains before taxes were $477,000 for the three months
ended June 30, 1998, as compared to net realized investment gains before taxes
of $108,000 for the three months ended June 30, 1997.
Page 10
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Losses and loss adjustment expenses decreased 3.7% to $13.9 million for
the three months ended June 30, 1998, from $14.4 million for the three months
ended June 30, 1997, primarily due to a decline in net premiums earned.
Amortization of deferred policy acquisition costs decreased 3.5% to
$6.1 million for the three months ended June 30, 1998, from $6.3 million for the
three months ended June 30, 1997. The decrease was attributable to a decrease in
net premiums earned.
Other underwriting expenses increased 21% to $1.8 million for the three
months ended June 30, 1998, from $1.5 million for the three months ended June
30, 1997. The increase is attributable to expenses related to new programs, and
other non-recurring expenses of the holding company.
The loss ratio increased to 62.8% for the three months ended June 30,
1998, from 62.5% for the three months ended June 30, 1997. The statutory expense
ratio increased to 34.1% for the three months ended June 30, 1998, from 31.9%
for the three months ended June 30, 1997. The principal causes for the increase
in the expense ratio were the 12.5% decline in net premiums written for the
quarter ended June 30, 1998 compared to the same quarter in 1997, an increase in
the commercial lines commission rate to 22% from 20% effective May 1, 1998, and
additional underwriting expenses related to the start-up of new programs. The
statutory combined ratio increased to 96.9% for the three months ended June 30,
1998 from 94.4% for the three months ended June 30, 1997.
As a result of the factors described above, the Company's net income
for the three months ended June 30, 1998 increased 25.1% to $2.5 million or
$0.25 per share (basic and diluted), from $2.0 million or $0.30 per share (basic
and diluted) for the three months ended June 30, 1997.
Six Months Ended June 30, 1998 and 1997
Gross written premiums decreased 5.6% to $48.6 million for the six
months ended June 30, 1998, from $51.5 million for the six months ended June 30,
1997. The decrease resulted from a 31.3% decline in personal lines automobile
gross written premiums to $12.9 million, which was partially offset by a 9.1%
increase in commercial lines gross written premiums to $35.7 million. The
decrease in personal lines automobile gross written premium was due to actions
taken by the Company to improve profitability. Specifically, the Company
terminated its relationship with one agent and reduced two agents' personal
lines automobile writings by approximately 27.0%. California personal lines
automobile direct written premium represented $7.6 million of the $12.9 million
written by the Company in the first six months of 1998.
Page 11
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Net written premiums decreased 5.5% to $45.0 million for the six months
ended June 30, 1998, from $47.6 million for the six months ended June 30, 1997.
During the same periods, net premiums earned increased 2.7% to $45.1 million
from $43.9 million. Net premiums earned increased despite the decline in direct
written premiums in 1998 due to the significant growth in direct written
premiums in the third and fourth quarters of 1997.
Net investment income increased 40.8% to $5.5 million for the six
months ended June 30, 1998, from $3.9 million for the six months ended June 30,
1997. This increase resulted principally from growth in invested assets funded
primarily by the net proceeds from the Company's secondary stock offering in
July 1997, and from the net cash provided by operating activities.
In 1998, the Company purchased approximately $26.3 million in tax free
municipal securities as compared to $649,000 held during the comparable period,
June 30, 1997. The tax equivalent average investment yield of the fixed maturity
portfolio for the six months ended June 30, 1998 was 6.59%, compared to 6.82%
for the six months ended June 30, 1997. Net realized investment gains before
taxes were $443,000 for the six months ended June 30, 1998, as compared to net
realized investment gains before taxes of $109,000 for the six months ended June
30, 1997.
Losses and loss adjustment expenses increased 2.0% to $28.1 million for
the six months ended June 30, 1998, from $27.6 million for the six months ended
June 30, 1997, primarily due to an increase in net premiums earned.
Amortization of deferred policy acquisition costs increased 3.8% to
$12.4 million for the six months ended June 30, 1998, from $12.0 million for the
six months ended June 30, 1997. The increase was attributable to an increase in
net premiums earned.
Other underwriting expenses increased 21.4% to $3.2 million for the six
months ended June 30, 1998, from $2.6 million for the six months ended June 30,
1997. The increase is attributable to expenses related to new programs, and
other non-recurring expenses of the holding company.
The loss ratio decreased to 62.4% for the six months ended June 30,
1998, from 62.8% for the six months ended June 30, 1997. The statutory expense
ratio increased to 33.4% for the six months ended June 30, 1998, from 32.2% for
the six months ended June 30, 1997. The statutory combined ratio increased to
95.8% for the six months ended June 30, 1998, from 95.0% for the six months
ended June 30, 1997.
Page 12
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
As a result of the factors described above, the Company's net income
for the six months ended June 30, 1998 increased 35.5% to $5.1 million or $0.52
per share (basic) and $0.51 per share (diluted), from $3.8 million or $0.56 per
share (basic) and $0.55 per share (diluted) for the six months ended June 30,
1997.
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. PAGI uses these funds to pay (i) operating expenses,
(ii) taxes and other payments and (iii) dividends to PAGI stockholders.
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, to purchase
investments and to make dividend and other payments to PAGI.
Net cash provided by operating activities decreased 27.4% to $7.5
million for the six months ended June 30, 1998, from $10.4 million for the six
months ended June 30, 1997, primarily due to the reduction in personal lines
automobile gross written premiums in 1998.
Net cash used by investing activities was $3.3 million for the six
months ended June 30, 1998, compared to $9.4 million for the six months ended
June 30, 1997.
Net cash used by financing activities was $423,000 for the six months
ended June 30, 1997, compared to net cash provided by financing activities of
$396,000 for the same period in 1997.
The Company believes that it has sufficient liquidity to meet its
anticipated insurance obligations and operating and capital expenditure needs.
The Company's investment strategy emphasizes quality, liquidity and
diversification, as well as total return. With respect to liquidity, the Company
considers liability durations, specifically related to loss reserves, when
determining desired investment maturities. In addition, maturities have been
staggered to produce cash flows for loss payments and reinvestment
opportunities. The average duration of the fixed maturity portfolio as of June
30, 1998 was approximately 3.44 years.
The Company's fixed maturity portfolio of $149.7 million was 83.3% of
the total investment portfolio as of June 30, 1998. Approximately 99% of these
securities were rated "A-" or better by Standard & Poor's or Moody's. Equities,
the majority of which consist of preferred stocks, were $ 27.9 million or 15.5%
of total investments as of June 30, 1998.
Page 13
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
As of June 30, 1998, the investment portfolio contained $36.7 million
of mortgage/asset-backed obligations which represents 20.4% of the total
investments as of June 30, 1998. All of these securities are "AAA" rated
securities issued by government, government-related agencies or publicly held
corporations, are publicly traded, and have market values obtained from an
independent pricing service. Changes in estimated cash flows due to changes in
prepayment assumptions from the original purchase assumptions are revised based
on current interest rates and the economic environment. The Company had no other
derivative financial instruments, real estate or mortgages in the investment
portfolio as of June 30, 1998.
The principal source of cash to use for the payment of dividends to
PAGI'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 dividends
from statutory surplus may require prior approval from the Pennsylvania
regulatory authorities. The maximum dividend that may be paid in 1998 by
Penn-America to PAGI without prior approval of regulatory authorities is
$9,531,000.
In June of 1998, the Board of Directors of the Company authorized a
stock buy-back program of up to 350,000 shares of the Company's stock. Through
August 7, 1998, the Company has repurchased 87,000 shares of its stock on the
open market and through block trades. The Company's funding source for this
program will be through ordinary dividends from its insurance subsidiary,
existing cash of the holding company, as well as draws from a its revolving line
of credit. On July 17, 1998, the Company signed a commitment letter with First
Union National Bank to obtain a revolving credit facility in the principle
amount of $25 million, which will be used for general corporate purposes,
such as the stock buy-back program.
The Company also announced that its Common Stock has been approved for
listing on the New York Stock Exchange (NYSE). The Company's shares began
trading on the NYSE on August 4, 1998 under the symbol "PNG."
The Company relies on its existing management information systems to
operate and monitor 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 those of 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
Page 14
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Company's systems used two-digit data fields which recognized dates using the
assumption that the first two digits are "19" (e.g. 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,
would have been affected adversely unless changes were made to these computer
systems. During 1997, the Company addressed this issue and implemented and
tested the revised lines of code in the applicable programs of the Company to be
year 2000 compliant.
Additionally, the Company is instituting company-wide a remediation
plan which specifically addresses the implementations of Y2K and our external
business relationships with various outside vendors and business relationships
such as with our general agents and their retailers. Each department of the
Company has been asked to identify key vendors, suppliers and agents with which
we have an interdependent, material business relationship. The Company will send
a survey to that vendor/supplier/agent to ask them to provide the current status
of their Y2K plan, whether they will be compliant, what plans they have in place
and the in the event they are not compliant, and if there are any business
implications to our Company if they are not compliant in time. Once the results
of the surveys have been reviewed, the Company will need to take whatever
necessary action to address any and all material non-compliant matters which may
affect the ongoing continued operations of the Company and will use its best
efforts to ensure it is complaint by the year 2000.
The Company believes that most of the necessary changes and most of the
expenses related to year 2000 have been expensed to date. The amount expensed in
1997 was not significant. Additional expenses may arise in the upcoming years,
but management believes that they would not be material.
New Accounting Standards
In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities", was issued
and established standards for accounting and reporting of derivative instruments
and hedging activities. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company is in the process of
determining the effect, if any, of this statement on its financial statements.
Page 15
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote by Security Holders -See Attached
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
On June 18, 1998, the Company filed with the Securities and
Exchange Commission a Form 8-K which reported that on June 18,
1998, the Company issued a press release reporting the anticipated
earnings for the second quarter of 1998 and for the 1998 fiscal
year and that the Company's Board of Directors had approved the
purchase by the Company of up to 350,000 shares of the Company's
common stock over the next 18 months.
Page 16
<PAGE>
PART II, ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The annual meeting of the Shareholders of Penn-America Group, Inc. was
held on May 20, 1998 (the "Annual Meeting" or "Meeting"), with the following
results:
The total number of shares represented at the Annual Meeting in person
or by proxy was 8,326,591 of the 9,898,013 shares of common stock outstanding
and entitled to vote at the meeting.
On the proposal to elect Irvin Saltzman, Jon S. Saltzman, James E.
Heerin, Jr., Robert A. Lear, Jami Saltzman-Levy, M. Moshe Porat, Charles Ellman,
Paul Simon and Thomas Spiro as Directors to serve until the 1999 Annual Meeting
and until their successors are duly elected and qualified, the nominees for
Director received the number of votes set forth opposite their respective names.
Number of Votes
For Withheld
Irvin Saltzman 8,323,841 2,750
Jon S. Saltzman 8,323,841 2,750
James E. Heerin, Jr. 8,323,841 2,750
Robert A. Lear 8,323,841 2,750
Jami Saltzman-Levy 8,323,841 2,750
M. Moshe Porat 8,323,841 2,750
Charles Ellman 8,323,841 2,750
Paul Simon 8,323,841 2,750
Thomas M. Spiro 8,323,841 2,750
There were no broker non-votes recorded. On the basis of the above
vote, Irvin Saltzman, Jon S. Saltzman, James E. Heerin, Jr., Robert A. Lear,
Jami Saltzman-Levy, M. Moshe Porat, Charles Ellman, Paul Simon and Thomas Spiro
were elected as Directors to serve until the 1999 Annual Meeting and until their
respective successors are duly elected and qualified.
Page 17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: August 7, 1998 By:/s/ Jon S. Saltzman
------------------------
Jon S. Saltzman
President and
Chief Executive Officer
By:/s/ Rosemary R. Ferrero
-------------------------
Rosemary R. Ferrero
Principal Finance and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Earnings at June 30, 1998
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000910110
<NAME>Penn-America Group, Inc.
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<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> dec-31-1998
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