SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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
-------------------------------------------------------
(Address of principal executive offices including zip code)
(215)443-3600
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
At May 13, 1998, 9,921,450 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 - March 31, 1998 and
December 31, 1997 3
Consolidated Unaudited Statements of Earnings - For the three
months ended March 31, 1998 and 1997 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the three months ended March 31, 1998 5
Consolidated Unaudited Statements of Cash Flows -
For the three months ended March 31, 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 13
Page 2
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities:
Available for sale, at fair value
(amortized cost 1998 $99,257; 1997 $89,185) $ 99,891 $ 89,979
Held to maturity, at amortized cost
(fair value 1998 $39,957; 1997 $47,034) 39,793 46,842
Equity securities, at fair value
(cost 1998 $25,577; 1997 $25,662) 28,182 27,380
Short-term investments, at cost, which approximates fair value 8,001 11,455
---------- ----------
Total Investments 175,867 175,656
Cash 5,772 2,163
Receivables:
Accrued investment income 2,144 1,973
Premiums receivable, net 13,197 12,414
Reinsurance recoverable 17,018 16,605
--------- ----------
Total receivables 32,359 30,992
Prepaid reinsurance premiums 2,926 3,065
Deferred policy acquisition costs 8,523 8,563
Capital leases 1,839 1,865
Deferred income tax 2,249 2,302
Income taxes recoverable -- 40
Other assets 560 511
============ ==========
Total assets $ 230,095 $ 225,157
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 86,195 $ 84,566
Unearned premiums 35,765 36,173
Accounts payable and accrued expenses 1,554 2,338
Capitalized lease obligations 1,888 1,920
Income taxes payable 1,285 --
Other liabilities 3,331 2,853
----------- ----------
Total liabilities 130,018 127,850
----------- ----------
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, 9,901,013 shares and
1997, 9,883,384 shares 99 99
Additional paid-in capital 68,409 68,221
Accumulated other comprehensive income 2,106 1,649
Retained earnings 29,934 27,849
-------- ---------
100,548 97,818
Unearned compensation from restricted stock awards (471) (511)
-------- ---------
Total stockholders' equity 100,077 97,307
--------- ---------
Total liabilities and stockholders' equity $ 230,095 $ 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 months ended March
31, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1998 1997
-------- -------
<S> <C> <C>
Revenues:
Premiums earned $ 23,035 $ 20,899
Net investment income 2,775 1,940
Net realized investment (losses) gains (34) 1
-------- -------
Total revenues 25,776 22,840
-------- -------
Losses and expenses:
Losses and loss adjustment expenses 14,291 13,217
Amortization of deferred policy acquisition costs 6,370 5,698
Other underwriting expenses 1,394 1,144
Interest expense 44 192
-------- -------
Total losses and expenses 22,099 20,251
-------- -------
Earnings before income tax 3,677 2,589
Income tax 1,097 839
-------- --------
Net earnings $ 2,580 $ 1,750
======== =========
Net earnings per share:
Basic $0.26 $0.26
Dilute $0.26 $0.26
Weighted average number of shares used in calculating per share data:
Basic 9,896 6,689
Diluted 10,009 6,780
Cash dividends per share
$0.05 $0.04
</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 three months ended March 31, 1998
(In thousands except share data )
<TABLE>
<CAPTION>
Unearned
Compensation
Accumulated From
Additional Other Restricted
Common Stock Paid-In Comprehensive Retained Stock
Shares Amount Capital Income Earnings Awards Total
--------- ------ ---------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
9,883,384 $ 99 $ 68,221 $ 1,649 $ 27,849 $ (511) $ 97,307
Balance at December 31, 1997 2,580 2,580
Net earnings
Other comprehensive income, net of tax:
Unrealized gains on investments, net of
reclassification adjustment 457 457
-------------
Comprehensive income 3,037
--------------
Issuance of common stock 17,629 188 188
Amortization of compensation expense
from restricted stock 40 40
Cash dividends paid (495) (495)
========= ====== ======== ============= ========== =========== =============
Balance at March 31, 1998 9,901,013 $ 99 $ 68,409 $ 2,106 $ 29,934 $ (471) $ 100,077
========= ====== ======== ============= ========== =========== =============
</TABLE>
See accompanying notes to unaudited financial statements.
Page 6
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended March 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 2,580 $ 1,750
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization and depreciation expense 120 85
Net realized investment losses (gains) 34 (1)
Deferred income tax (227) (55)
Net increase (decrease) in premiums, prepaid reinsurance premiums
and unearned premiums (1,052) 1,135
Net increase in unpaid losses and loss adjustment expenses
and reinsurance recoverable 1,216 3,114
(Increase) decrease in:
Accrued investment income (171) (171)
Deferred policy acquisition costs 39 (495)
Income tax recoverable 40 249
Other assets (80) 37
Increase (decrease) in:
Accounts payable and accrued expenses (784) (782)
Income taxes payable 1,285 645
Other liabilities 478 249
-------- ----------
Net cash provided by operating activities 3,478 5,760
-------- ----------
Cash flows from investing activities:
Purchases of equity securities (7,540) (316)
Purchases of fixed maturities available for sale (22,250) (8,000)
Purchases of fixed maturities held to maturity -- (3,028)
Proceeds from sales of equity securities 7,576 197
Proceeds from sales and maturities of fixed maturities available for sale 12,134 1,000
Proceeds from maturities and calls of fixed maturities held to maturity 7,096 1,085
Change in short-term investments 3,454 2,100
--------- ----------
Net cash provided (used) by investing activities 470 (6,962)
--------- ----------
Cash flows from financing activities:
Issuance of common stock 188 243
Principal payments on capital lease obligations (32) (27)
Dividends paid (495) (268)
---------- ----------
Net cash used by financing activities (339) (52)
---------- ----------
Increase (decrease) in cash 3,609 (1,254)
Cash, beginning of period 2,163 2,979
=========== ==========
Cash, end of period $ 5,772 $1,725
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 44 197
Supplemental non-cash disclosure:
Cost transfer from available for sale to held to maturity -- 8,002
</TABLE>
See accompanying notes to unaudited 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 31.2%
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
and $1.8 million for the three months ended March 31, 1998 and March 31, 1997,
respectively. Losses and loss adjustment expenses are net of amounts ceded to
reinsurers of $1.7 million and $1.8 million for the three months ended March 31,
1998 and March 31, 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 at March 31, 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>
Three months ended
March 31, 1998
------------------------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
----------------- ------------------- ---------------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holdings gains arising
during period $ 669 $ (234) $ 435
Add: reclassification adjustment for
losses realized in net income 34 (12) 22
================= =================== ================
Other comprehensive income $ 703 $ (246) $ 457
================= =================== ================
Three months ended
March 31, 1997
------------------------------------------------------------
Before Tax Tax Net of Tax
Amount Benefit Amount
----------------- ------------------- ---------------
Unrealized gains on securities:
Holdings losses arising
during period $ (805) $ 274 $ (531)
Less: reclassification adjustment for
gains realized in net income (1) -- (1)
Plus: accretion of net loss on fixed
maturities transferred to held to maturity 11 (4) 7
================= =================== ================
Other comprehensive (loss) income $ (795) $ 270 $ (525)
================= =================== ================
</TABLE>
Comprehensive income for the three months ended March 31, 1997 was $1,225,000
and included net income of $1,750,000 and other comprehensive loss, net of tax,
of $525,000.
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 numerator and denominators of
the basic and diluted earnings per share computations:
Three months ended March 31,
-----------------------------
1998 1997
------------- -----------
Basic EPS:
Net earnings $ 2,580 $ 1,750
------------ ----------
Weighted average common shares outstanding 9,896 6,689
------------- -----------
Basic EPS $ 0.26 $ 0.26
============ ===========
Diluted EPS:
Net Earnings $ 2,580 $ 1,750
------------ ----------
Weighted average common shares outstanding 9,896 6,689
Additional shares outstanding after the assumed
exercise of options by applying the treasury
stock method 113 91
------------- -----------
Total weighted average common shares outstanding 10,009 6,780
------------- -----------
Diluted EPS $ 0.26 $ 0.26
============= ===========
Page 9
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Gross written premiums increased 2.6% to $24.6 million for the three
months ended March 31, 1998 from $24.0 million for the three months ended March
31, 1997. The increase resulted from 19.9% growth in commercial lines gross
written premiums to $17.1 million, which was partially offset by a 22.9%
decrease in personal auto lines gross written premiums to $7.5 million. The
increase in commercial lines gross written premiums was primarily attributable
to increased volume. The decrease in personal auto lines 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 a second
agent's insurance automobile writing by one-half. Additionally, the Company's
non-standard automobile business grew by more than 100% during the comparable
quarter of 1997 because of new legislation in California which increased
mandatory coverage in that state.
The Company is currently planning to write new personal automobile
programs in the states of Arizona, North Dakota, Montana, Illinois and Hawaii by
the third quarter of 1998. If these new programs are not fully implemented by
the beginning of the third quarter of 1998 due to systems or regulatory delays,
it may impact the annual growth in automobile premiums and earnings for the
year.
The Company announced that effective May 1, 1998, for new and renewal
business, it will increase the commission paid to its agents on commercial
business from 20% to 22%. To date, the Company has not felt competitive pressure
on commercial premium growth, especially since the first quarter of 1998 showed
a 19.9% increase in commercial written premium over the same period in 1997. The
Company believes that by increasing its commercial commission rates at this
time, its commission structure will remain competitive.
Net written premiums increased 2.6% to $22.8 million for the three
months ended March 31, 1998 from $22.2 million for the three months ended March
31, 1997. During the same periods, net premiums earned increased 10.2% to $23.0
million from $20.9 million. Net premiums earned increased due to the increase in
gross written premiums over the past 12 months.
Net investment income increased 43.0% to $2.8 million for the three
months ended March 31, 1998 from $1.9 million for the three months ended March
31, 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.
Page 10
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
During the first quarter of 1998, the Company purchased approximately $12.7
million in tax free municipal securities as compared to $649,000 held during the
comparable period, March 31, 1997. The tax equivalent investment yield of the
fixed maturity portfolio for the three months ended March 31, 1998 was 6.53%,
compared to 6.79% for the three months ended March 31, 1997. Net realized
investment losses before taxes were $34,000 for the three months ended March 31,
1998, as compared to net realized investment gains before taxes of $1,000 for
the three months ended March 31, 1997.
Losses and loss adjustment expenses increased 8.1% to $14.3 million for
the three months ended March 31, 1998, from $13.2 million for the three months
ended March 31, 1997, primarily due to an increase in net premiums earned.
Amortization of deferred policy acquisition costs increased 11.8% to
$6.4 million for the three months ended March 31, 1998, from $5.7 million for
the three months ended March 31, 1997. The increase was attributable to an
increase in net premiums earned.
Other underwriting expenses increased 21.9% to $1.4 million for the
three months ended March 31, 1998 from $1.1 million for the three months ended
March 31, 1997.
The loss ratio decreased to 62.0% for the three months ended March 31,
1998, from 63.2% for the three months ended March 31, 1997. The decrease in the
loss ratio for the three months ended March 31, 1998 resulted primarily from a
decrease in the personal lines auto physical damage loss ratio to 64.5% from
96.8% a year earlier. The statutory expense ratio increased slightly to 32.8%
for the three months ended March 31, 1998, from 32.4% for the three months ended
March 31, 1997. The statutory combined ratio decreased to 94.8% for the three
months ended March 31, 1998, from 95.6% for the three months ended March 31,
1997.
As a result of the factors described above, the Company's net income
for the three months ended March 31, 1998 increased 47.4% to $2.6 million or
$0.26 per share (basic and diluted), from $1.8 million or $0.26 per share (basic
and diluted) for the three months ended March 31, 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.
Page 11
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Net cash provided by operating activities decreased 39.6% to $3.5
million for the three months ended March 31, 1998, from $5.8 million for the
three months ended March 31, 1997, primarily due to the reduction in personal
lines auto gross written premiums in 1998.
Net cash provided by investing activities was $470,000 for the three
months ended March 31, 1998, compared to net cash used by investing activities
of $7.0 million for the three months ended March 31, 1997.
Net cash used by financing activities was $339,000 for the three months
ended March 31, 1997, as compared to $52,000 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 March
31, 1998 was approximately 3.0 years.
The Company's fixed maturity portfolio of $139.7 million was 79.4% of
the total investment portfolio as of March 31, 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 $ 28.2 million or 16.0%
of total investments as of March 31, 1998.
As of March 31, 1998, the investment portfolio contained $38.6 million
or 22% of mortgage/asset-backed obligations. 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 March 31, 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.
Page 12
<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 -None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
Page 13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: May 13, 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 March 31, 1998
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000910110
<NAME>Penn-America Group, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1998
<PERIOD-START> jan-01-1998
<PERIOD-END> mar-31-1998
<DEBT-HELD-FOR-SALE> 99,891
<DEBT-CARRYING-VALUE> 39,793
<DEBT-MARKET-VALUE> 0
<EQUITIES> 28,182
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 175,867
<CASH> 5,772
<RECOVER-REINSURE> 17,018
<DEFERRED-ACQUISITION> 8,523
<TOTAL-ASSETS> 230,095
<POLICY-LOSSES> 86,195
<UNEARNED-PREMIUMS> 35,765
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 99,978
<TOTAL-LIABILITY-AND-EQUITY> 230,095
23,035
<INVESTMENT-INCOME> 2,775
<INVESTMENT-GAINS> (34)
<OTHER-INCOME> 0
<BENEFITS> 14,291
<UNDERWRITING-AMORTIZATION> 6,370
<UNDERWRITING-OTHER> 1,394
<INCOME-PRETAX> 3,677
<INCOME-TAX> 1,097
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,580
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
