SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________________to_______________
Commission file number 022316
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PENN-AMERICA GROUP, INC.
------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
- ---------------------------- ------------------------------
(State or other jurisdiction o (I.R.S. Employer Identification Number
incorporation or organization)
420 S. York Road
Hatboro, Pennsylvania 19040
- ------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 443-3600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 24,1998, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $66,695,525. As of March
24,1998 there were 9,901,013 shares of the Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's annual report to stockholders for the fiscal
year-ended December 31, 1997 are incorporated by reference in Parts I, II and IV
of this report.
Part III - Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 1998 Annual Meeting of Shareholders, to be filed not later
than 120 days after the close of the Registrant's fiscal year.
<PAGE>
PENN-AMERICA GROUP, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1997
Page
PART I
ITEM 1. BUSINESS.............................................................. 3
ITEM 2. PROPERTIES............................................................17
ITEM 3. LEGAL PROCEEDINGS.....................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS......................................................18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.......................................19
ITEM 6. SELECTED FINANCIAL DATA...............................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE............................................................19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT...........................................................20
ITEM 11. EXECUTIVE COMPENSATION...............................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.....................................21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K..................................................22
page 2
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General
Penn-America Group, Inc. 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 55 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 1993 to 1997, gross written premiums
grew at a 31.0% compound annual rate, from $35.5 million to $104.7 million, and
net operating earnings (excluding realized investment gains) grew at a 44.6%
compound annual rate, from $2.0 million to $8.8 million. The Company has
operated at a statutory combined ratio under 100.0% in every year since 1992.
The Company's average SAP combined ratio from 1992 to 1997 was 95.0%, and the
Company's average return on average stockholders' equity during the same period
was 14.8%.
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 1993 to 1997, the Company achieved 194.7%
cumulative growth in gross written premiums with a 44.7% increase in the number
of general agents from 38 to 55. 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.
Page 3
<PAGE>
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 under-served 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 three 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 Corporation, owns approximately 31.2% of the
Company's Common Stock.
(b) Financial Information About Industry Segments
The Company is of the opinion that all of its operations are within one
industry segment and that no information as to industry segments is required
pursuant to Statement of Financial Accounting Standards No. 14 or Regulation
S-X.
Page 4
<PAGE>
(c) Lines of Business
The following table sets forth an analysis of gross earned premium by
specific product lines during the periods indicated:
<TABLE>
<CAPTION>
Year ended
---------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------- --------- ---------- ----------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial multi-peril $ 35,687 35.9% $ 29,345 38.7% $ 23,781 37.7%
Liability 23,486 23.6 21,418 28.2 20,431 32.4
Auto liability 29,310 29.5 15,772 20.8 11,524 18.3
Property 5,502 5.6 5,556 7.3 4,957 7.9
Auto physical damage 5,400 5.4 3,785 5.0 2,312 3.7
--------- ------- ------- -------- --------- ------
Total gross earned premium $ 99,385 100% $ 75,876 100% $ 63,005 100.0%
=========== ========= ========== =========== ========== ========
</TABLE>
o Commercial General Liability. The Company's commercial general liability
insurance is written on an occurrence policy form (as opposed to a
claims--made policy form) and provides limits generally ranging from
$25,000 to $3 million, with the majority of such policies having limits
of between $500,000 and $1 million. The Company's general liability
policies pay defense and related expenses in addition to per occurrence and
aggregate policy limits. General liability insureds include restaurants,
bars and taverns, retail operations, garage liability, contractors and
similar classes.
o Commercial Property. The Company's commercial property lines provide limits
usually no higher than $4 million, with almost all of the policies being
written at limits less than $1 million. Properties insured include
restaurants, bars and taverns, retail operations, vacant buildings and
other similar classes.
o Commercial Multi-Peril. The Company also writes the same commercial
property and general liability risks together as a "package" for its
insureds, generally referred to as "commercial multi-peril." The limits on
these policies are the same as if written on a monoline basis. Consistent
with the current industry trend, the Company has been writing more
commercial multi-peril policies over the last several years than individual
property and liability policies. The Company expects this trend to continue
in light of the fact that a substantial number of the Company's commercial
insureds customarily require both liability and property insurance
coverage, together with the revisions to Insurance Services Office ("ISO")
forms which make it easier and more efficient to write such multi-peril
policies.
o Business Automobile and Commercial Umbrella. In late 1997, the Company
added both business automobile and commercial umbrella coverages to enhance
its commercial multi-peril ("package") writings. The types of risks and
insureds targeted are similar to those already written, such as,
restaurants, bars and taverns, retail operations, artisan contractors and
similar classes. The business automobile insurance (cars and light trucks)
can be written up to $1 million liability limits. Commercial umbrella
insurance can be written for limits up to $5 million with significant
reinsurance support from General Reinsurance. For commercial umbrella,
Penn-America must write the primary $1 million liability limit. The Company
expects that the addition of these coverages in 1998 will further expand
package writings and help increase renewal retention of existing policies.
In all of its commercial product lines, the Company is continuously
developing specialized programs for certain industry segments
Page 5
<PAGE>
to meet the needs of these market-places. For example, the Company has
developed programs for independent fitness centers, day care operations,
artisan contractors, low-hazard miscellaneous professional liability
coverages and special events. As a group, these programs are a significant
benefit to the Company's marketing efforts, although individually they do
not generate a material amount of the Company's gross written premiums.
Non-Standard Personal Automobile. The Company currently writes non-standard
personal automobile policies in the states of Washington, California,
Alabama, South Dakota and Nevada. These risks typically do not qualify for
preferred or standard insurance because of a driver's age, driving record,
vehicle type or other factors. The personal automobile business is written
at very low coverage limits. The Company writes a majority of this coverage
on a six-month basis in Washington, Alabama and South Dakota. In California
and Nevada, the coverage is written predominantly on a monthly policy
basis.
(d) Marketing and Distribution
The Company currently markets its insurance products through a select
number of high quality general agents. The Company believes that it benefits
significantly 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.
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 21.4% of the gross written premium for commercial business and 27.4% for
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<PAGE>
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 5.5% of the total commissions paid by the Company in 1997.
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 contingent stock award for 1997 will be
issued in May 1998.
The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995
--------------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent
(in thousand) (in thousands) (in thousand)
<S> <C> <C> <C> <C> <C> <C>
Pacific 26,126 25.0% $ 29,435 36.6% $ 24,823 37.2%
South 16,236 15.5 15,677 19.5 12,519 18.7
Mid-Atlantic 9,876 9.4 10,665 13.2 10,607 15.8
New England 7,514 7.2 7,832 9.7 7,849 11.7
Southwest 18,625 17.8 11,693 14.5 7,949 11.9
Midwest 12,198 11.7 4,685 5.8 2,977 4.4
Mountain 14,119 13.4 509 0.7 229 0.3
========= ======== ========== ======= ======= =======
104,694 100.0% $ 80,496 100.0% $ 66,953 100.0%
========== ========= ========== ========= ======= =======
</TABLE>
(e) 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.
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
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rates. However, the Company, because of its strategy of providing insurance to
underserved markets, typically charges 100% of prescribed ISO rates or more.
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 1997, approximately 93%
of the commercial policies written by the Company were on a binding authority
basis, generating approximately 82% 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 commercial 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) the Company would not insure on any basis
The agency manual was prepared after extensive research, including input from
its commercial 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 commercial 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 when it 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 commercial 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
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<PAGE>
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.
(f) Claims Management and Administration
The Company's approach to claims management is designed to investigate
reported incidents at the earliest juncture, to select, manage and supervise all
legal and adjustment aspects thereof and 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.
(g) 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. 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.
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<PAGE>
The following table sets forth a reconciliation of beginning and ending
reserves as shown on the Company's financial statements (on a GAAP basis gross
of reinsurance) for unpaid losses and loss adjustment expenses for the periods
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996 1995
----------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Reserves for unpaid losses and loss adjustment expenses,
at beginning of year 70,728 $ 60,139 $ 44,796
----------- ---------- ----------
Incurred losses and loss adjustment expenses:
Provision for insured events of the current year 61,916 48,076 40,606
Increase (decrease) in provision for insured
events of prior years 916 3,744 3,377
---------- ----------- ----------
Total incurred losses and loss adjustment expenses 62,832 51,820 43,983
--------- ----------- ----------
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year 21,408 17,931 13,054
Losses and loss adjustment expenses attributable
to insured events of prior years 27,586 23,300 15,586
--------- ---------- ---------
Total payments 48,994 41,231 28,640
--------- ---------- ---------
Reserves for unpaid losses and loss adjustment expenses,
at end of year $ 84,566 $ 70,728 $ 60,139
========== ========== ===========
</TABLE>
The Company has experienced adverse development of gross reserves of
$916,000, $3.7 million and $3.4 million in 1997, 1996 and 1995, respectively,
for prior years' insured events. The net reserves had unfavorable development of
$341,000 for 1997 and favorable development of $804,000 and $1.7 million in 1996
and 1995, 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 unfavorable development on
the net reserves in 1997 was primarily due to the personal auto line. 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 1997, 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.
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<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid losses and $18,618 $21,741 $25,391 $25,352 $25,681 $26,110 $26,830 $35,307 $46,512 $55,656 $68,863
loss adjustment expenses,
as stated
a. Net cumulative paid as of
1 year later $4,641 $4,911 $8,655 $6,929 $6,605 $7,381 $6,852 $12,383 $17,208 $23,660
2 years later 6,995 10,743 13,361 11,610 10,988 11,127 13,127 20,617 29,612
3 years later 11,728 14,132 16,952 14,667 13,325 15,546 18,656 27,266
4 years later 14,127 15,823 19,050 16,341 16,417 19,253 22,254
5 years later 15,209 17,074 20,359 18,363 19,283 21,503
6 years later 16,023 17,405 21,866 20,214 20,872
7 years later 16,219 18,303 23,383 21,470
8 years later 16,636 19,248 24,476
9 years later 17,157 20,133
10 years later 17,788
b. Reserves re-estimated as
of end of year
1 year later $18,483 $21,036 $25,128 $23,468 $23,228 $24,478 $23,897 $33,601 $45,708 $55,997
2 years later 18,054 21,396 24,329 22,658 22,383 21,945 23,489 34,281 47,225
3 years later 18,370 20,570 23,923 22,252 20,471 22,032 24,558 36,453
4 years later 17,739 20,206 23,615 21,465 20,819 22,767 26,335
5 years later 17,552 19,822 23,639 21,469 21,726 23,935
6 years later 17,342 19,499 24,021 21,990 22,550
7 years later 17,488 19,621 24,683 22,609
8 years later 17,432 20,222 25,379
9 years later 17,932 20,829
10 years later 18,374
Net cumulative redundancy $244 $912 $12 $2,743 $3,131 $2,175 $495 ($1,146) ($713) ($341)
(deficiency)
Gross liability for unpaid
losses and loss adjustment
expenses, as stated $31,703 $33,314 $44,796 $60,139 $70,728 $84,566
Reinsurance recoverable 5,593 6,484 9,489 13,627 15,072 15,703
Net liability for unpaid losses
and loss adjustment
expenses, as stated $26,110 $26,830 $35,307 $46,512 $55,656 $68,863
Gross liability re-estimated -
1 year later $30,609 $32,796 $48,173 $63,884 $71,644
Reinsurance recoverable
Net Liability re-estimated 6,131 8,899 14,572 18,176 15,647
1 year later $24,478 $23,897 $33,601 $45,708 $55,997
------- ------- ------- ------ ------- -------- ------- ------- ------- -------- -------
Gross liability re-estimated
- 2 years later $30,390 $36,243 $53,009 $66,405
Reinsurance recoverable
re-estimated 8,445 12,754 18,728 19,180
Net liability re-estimated
- 2 years later $21,945 $23,489 $34,281 47,225
------- ------- ------- ------ ------- -------- ------- ------- -------- ------- ------
Gross liability re-estimated
- 3 years later $33,992 $41,600 $56,042
Reinsurance recoverable
re-estimated 11,960 17,042 19,589
Net liability re-estimated
- 3 years later $22,032 $24,558 36,453
-------- ------- ------- ------ ------- -------- ------- ------- -------- ------- ------
Gross liability re-estimated
- 4 years later $38,165 $43,824
Reinsurance recoverable
re-estimated 15,398 17,489
Net liability re-estimated
- 4 years later $22,767 $26,335
-------- ------- ------- ------ ------- -------- ------- ------- -------- ------- -----
Gross liability re-estimate
- 5 years later $39,956
Reinsurance recoverable
re-estimated 16,021
Net liability re-estimated
-5 years later $23,935
-------- ------- ------- ------ ------- -------- ------- ------- -------- ------- -----
Gross cumulative deficiency ($8,253) ($10,510) ($11,246) ($6,266) ($916)
</TABLE>
a. Net cumulative paid "as of" equals the amounts of paid losses and loss
adjustment expenses subsequent to the year in which the original reserves
were established.
b. Reserves re-estimated "as of" equals the amounts of unpaid losses and loss
adjustment expenses which the company would have originally established
based on experience as of the end of each succeeding year. These amounts
were calculated as the sum of the cumulative paid amounts described
described in (a.) above plus the amounts of unpaid losses and loss
adjustment expenses reevaluated at the end of each succeeding year end.
Page 11
<PAGE>
The cumulative redundancy or deficiency represents the aggregate change in
the reserve estimates over all prior years. It should be emphasized that the
table presents a run-off of balance sheet reserves rather than accident or
policy year loss development. Therefore, each amount in the table includes the
effects of changes in reserves for all prior years.
The following table sets forth ratios for the Company and the industry
prepared in accordance with statutory accounting practices ("SAP") prescribed or
permitted by state insurance authorities. The statutory combined ratio, which
reflects underwriting results but not investment income, is a traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio is the sum of (i) the ratio of incurred losses and loss adjustment
expenses to net earned premium ("loss ratio"); and (ii) the ratio of expenses
incurred for commissions, premium taxes, administrative and other underwriting
expenses to net written premium ("expense ratio").
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ---------- ------------
The Company:
SAP Basis
Loss and loss adjustment expense ratio 63.0% 62.7% 62.6%
Expense ratio 32.3 31.6 30.4
=========== ========== ============
Combined ratio 95.3% 94.3% 93.0%
=========== ========== ============
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ---------- ------------
Property and casualty insurance industry (1):
SAP Basis
Loss and loss adjustment expense ratio 73.4% 78.6% 78.9%
Expense ratio 26.6 26.2 26.1
Dividend ratio 1.1 1.1 1.4
=========== ========== ============
Combined ratio 101.1% 105.9% 106.4%
=========== ========== ============
(1) Source: Industry Estimate for the first nine months of 1997, Best Week,
P/C Supplement, December 29, 1997 edition, including dividend ratios. 1996
and 1995, Best Aggregates & Averages - P/C.
(h) 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
Page 12
<PAGE>
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.
Effective January 1, 1998, the Company increased its retention for property
insurance to $300,000 from $200,000 per risk. The retention for casualty risk
for 1998 remained the same. 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.
The Company is covered for catastrophe losses by a consortium of reinsurers
for 1998 such as General Re and Lloyds of London and other "A" rated or
better reinsurers. Under the terms of the agreement, the Company retains the
first $2 million of losses and the consortium reinsures 95.0% of the next $23
million, with the Company retaining 5.0% of each of the layers within the $21
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 amount of premiums written and ceded under
reinsurance treaties:
Year ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Gross written premiums $ 104,694 $ 80,496 $ 66,953
Ceded written premiums 8,133 7,027 5,667
(i) Investments
The Company's investment policy seeks to maximize investment income consistent
with the overriding objective of maintaining liquidity and minimizing risk.
Approximately 84.4% of the Company's investment portfolio as of December 31,
1997 consisted of investment-grade fixed income securities and short-term
investments. Approximately 98.5% of the Company's fixed income securities as of
December 31, 1997 were rated "A-" or better by Standard & Poor's or an
equivalent rating by Moody's. As of December 31, 1997, the Company's fixed
maturity investments had an average duration of 3.01 years. Publicly traded
equity securities, the majority of which consisted of preferred stocks,
represented 15.6% of the Company's investment portfolio as of December 31, 1997.
As of December 31, 1997, the Company's investment portfolio contained $38.4
million (21.8%) of mortgage-backed and asset-backed securities. All of these
securities 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
Page 13
<PAGE>
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 Re, 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
December 31, 1997:
<TABLE>
<CAPTION>
Amount
reflected
Fair on balance Percent of
value sheet total
-------------- ---------------- -------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities:
Available for sale
U.S. Treasury securities and obligations of
U.S. government agencies $ 22,831 $ 22,831 13.0%
Corporate securities 30,537 30,537 17.4
Mortgage-backed securities 11,792 11,792 6.7
Other structured securities 18,694 18,694 10.6
Public utilities 6,125 6,125 3.5
---------- -------- --------
Total available for sale 89,979 89,979 51.2
---------- -------- --------
Held to maturity
U.S. Treasury securities and obligations of
U.S. government agencies 21,535 21,466 12.2
Corporate securities 11,326 11,284 6.4
Mortgage-backed securities 7,965 7,901 4.5
Public utilities 6,058 6,041 3.5
Other securities 150 150 0.1
--------- -------- -------
Total held to maturity 47,034 46,842 26.7
--------- --------- -------
Total fixed maturities 137,013 136,821 77.9
--------- --------- -------
Equity investments:
Common stock 6,435 6,435 3.7
Preferred stock 20,945 20,945 11.9
------- --------- ------
Total equity investments 27,380 27,380 15.6
-------- --------- -------
Short-term investments 11,455 11,455 6.5
========= ========= =======
Total investments $ 175,848 $ 175,656 100.0%
========= ========= =======
</TABLE>
Page 14
<PAGE>
The following table sets forth the composition of the Company's portfolio of
fixed maturity investments by rating at December 31, 1997:
<TABLE>
<CAPTION>
Amortized Percentage Cumulative
Cost of portfolio percentage
-----------------------------------------------
(in thousands)
Ratings (1)
- ------------------------------------------
<S> <C> <C> <C>
AAA (including U.S. government obligations) $ 83,449 61.3% 61.3%
AA 14,765 10.9 72.2
A 35,810 26.3 98.5
BBB 2,003 1.5 100.0
-----------------------------------------------
Total $ 136,027 100.0% 100.0%
===============================================
</TABLE>
(1) Ratings are assigned primarily by Standard & Poor's with the remaining
ratings assigned by Moody's and converted to the equivalent Standard &
Poor's ratings.
The following table sets forth investment results of the Company for each of
the years in the three years ended December 31, 1997:
1997 1996 1995
(in thousands)
Interest on fixed maturities $ 7,506 $ 6,108 $ 4,615
Dividends on equity securities 1,123 691 533
Interest on short-term
investments and cash 852 380 291
Other 42 61 42
-------------------------------------------
Total investment income 9,523 7,240 5,481
Investment expense (305) (535) (414)
-------------------------------------------
Net investment income 9,218 $ 6,705 $ 5,067
===========================================
(j) Competition
The property and casualty insurance industry is highly competitive and
includes several thousand insurers, ranging from large companies offering a wide
variety of products worldwide to smaller, specialized companies in a single
state or region and offering in some cases only a single product. The Company
competes with a significant number of these insurers in attracting quality
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 (Orion Capital), Financial
Indemnity Company (Unitrin, Inc.), Essex Insurance Company and Five Star
Insurance Company.
Page 15
<PAGE>
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
profitable opportunities. Other competitive factors include ratings by A.M.
Best, pricing and admitted versus excess and surplus lines status in a given
state.
(k) 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.
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.
Penn-America is licensed as an admitted insurer in 27 states and is an
approved non-admitted (excess and surplus lines) insurer in the other 23 states
and the District of Columbia as of December 31, 1997. 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 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.
Page 16
<PAGE>
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. 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 1998 is approximately $9.5 million. Penn-America paid
a dividend of approximately $1.6 million to PAGI in 1997. 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 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.
(l) Employees
The Company has approximately 105 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.
ITEM 2. 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.
Page 17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to routine legal proceedings in the normal course of
operating its insurance business. The Company is not involved in any legal
proceedings which reasonably could be expected to have a material adverse effect
on the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1997 to a vote of
holders of the Company's Common Stock.
Page 18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The "Market for Common Stock and Related Security Holder Matters" section on
page 28 of the Company's annual report to stockholders for the year ended
December 31, 1997, which is included as Exhibit (13) to this Form 10-K Report,
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Data" section on page 8 of the
Company's Annual Report to stockholders for the year ended December 31, 1997,
which is included as Exhibit (13) to this Form 10-K Report, is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Results of Operations and
Financial Condition" section on pages 9 to 15 of the Company's Annual Report to
stockholders for the year ended December 31, 1997, which is included as Exhibit
(13) to this Form 10-K Report, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements on pages 16 to 27 of the Company's
Annual Report to stockholders for the year ended December 31, 1997, which is
included as Exhibit (13) to this Form 10-K Report, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
Page 19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Director's information will be contained in the Company's definitive
Proxy Statement with respect to the Company's 1998 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is hereby incorporated
by reference thereto.
Executive Officers of the Registrant as of March 10, 1998 are as follows:
Irvin Saltzman 75 Chairman of the Board of Directors of PAGI
and Penn-America
Jon S. Saltzman 40 President and Chief Executive Officer of PAGI
and Penn-America, and Director
Rosemary R. Ferrero, CPA 42 Vice President - Finance, Secretary and
Treasurer of PAGI, Vice President, Secretary
and Chief Financial Officer of Penn-America
John M. DiBiasi, CPCU 43 Executive Vice President, Underwriting and
Marketing of Penn-America
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.
Ms. Rosemary R. Ferrero has been Vice President-Finance, Chief Financial
Officer, Treasurer of PAGI since May 1995 and Secretary since February 1997. 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
Page 20
<PAGE>
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.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1998 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1998 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1998 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Page 21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following consolidated financial statements, financial statement
schedules and exhibits are filed as part of this report:
1. Consolidated Financial Statements
Page*
------
Consolidated Balance Sheets at December 31, 1997 and 1996 16
Consolidated Statements of Earnings for the years ended
December 31, 1997, 1996, and 1995 17
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 18
1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995 19
Notes to Consolidated Financial Statements 20-26
Independent Auditors' Report 27
The following consolidated financial statement schedules for the years 1997,
1996 and 1995 are submitted herewith:
2. Financial Statement Schedules
Schedule I. Summary of Investments - Other Than Investments in Related Parties
Schedule II. Condensed Financial Information of Parent Company
Schedule III. Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI. Supplemental Insurance Information Concerning Property and Casualty
Subsidiaries Independent Auditors' Consent and Report on Schedules (filed as
Exhibit 23).
All other schedules are omitted because they are not
applicable or the required information is included in the financial statements
or notes thereto.
* Refers to the respective page of Penn-America Group's 1997 Annual Report to
Stockholders attached as Exhibit(13). The Consolidated Financial Statements and
Independent Auditors' Report on pages 16 to 27 are incorporated herein by
reference. With the exception of the portions of such Annual Report specifically
incorporated by reference in this Item and Items 5,6,7 and 8, such Annual Report
shall not be deemed filed as part of this Form 10-K or otherwise subject to the
liabilities of Section 18 of the the Securities and Exchange Act of 1934.
Page 22
<PAGE>
3. Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No.33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1
(No. 33-66892) filed with the Securities and Exchange Commission
on August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance Company
("Penn-America")and Carnegie General Agency. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998.
10.3 1993 Casualty Excess of Loss Reinsurance Agreement with
National Reinsurance Corporation. Incorporated by reference
to Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.3(i) Endorsement Nos.4 through 6 (Termination Endorsement) to Casualty
Excess of Loss Reinsurance Agreement with National Reinsurance
Corporation. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
the Securities and Exchange Commission.
10.4 1993 Underlying Homeowners and Dwelling Fire Property Per Risk
Excess of Loss Reinsurance (Run-off Business) Agreement with
National Reinsurance Corporation. Incorporated by referenc e to
Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial) Reinsurance
Agreement with Employers Reinsurance Corporation. Incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (No.33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
10.5(i) Endorsement No.3 to Property Per Risk of Excess Loss (Commercial)
Reinsurance Agreement with Employers Reinsurance Corporation.
Filed with the Registrant's Report on Form 10-K for the period
ending December 31, 1994 which has been filed with the Securities
and Exchange Commission.
Page 23
<PAGE>
Exhibit No. Description
10.6 1993 Property Catastrophe Excess Reinsurance Agreement with
Employers Reinsurance Corporation. Incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.6(i) Endorsement No. 6 to Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation. Filed with
the Registrant's Report on Form 10-K for the period ending
December 31, 1994 which has been filed with the Securities and
Exchange Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance Corporation
effective January 1, 1995. Filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1994 which has been
filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993 between Penn Independent
Corporation ("Penn Independent") and the Registrant regarding the
reimbursement of certain employment costs. Incorporated by
reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20,1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs. Filed with Registrant's Report on Form
10-K for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996, to August 20,
1993 Agreement between Penn Independent and Registrant regarding
the sharing of certain operating costs. Filed with Registrant's
Report on Form 10-K for the period ended December 31, 1996, which
has been filed with the SEC.
10.7(iii) Amendment dated March 1, 1997 to August 20, 1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs.
Page 24
<PAGE>
Exhibit No. Description
10.9 Restated Investment Advisory Agreement effective July 1, 1990
between Penn-America and Carl Domino Associates, L.P.
Incorporated by reference to Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 2, 1993.
10.9(i) Amended Investment Advisory Agreement effective September 1, 1997
between and among Penn-America, its subsidiary, Penn-Star and
Carl Domino Associates, L.P.
10.9(ii) Agreement dated April 15, 1997, between and among General Re,
New England Asset Management, Inc., Penn-America, and its
subsidiary, Penn-Star.
* 10.10 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.10 to Amendment No. 4 to the Registrant's Registration
Statement Form S-1 (No. 33-66892) filed with the Securities and
Exchange Commission on September 29, 1993.
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended
and restated April 4, 1994. Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (No.
33-82728) filed with the Securities and Exchange Commission
on August 11, 1994.
10.11(ii) Lease effective June 30, 1995 between Registrant and Irvin
Saltzman. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.12 Demand Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America.
Incorporated by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the Registrant to
Penn Independent. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.13(i) Amendment No.1 dated November 30, 1995, to Demand Promissory Note
dated January 12, 1993 from Penn Independent Financial Services,
Inc. to Penn-America. Filed with the Registrant's Report on Form
10-K for the period ended December 31, 1996 which has been filed
with the Securities and Exchange Commission.
10.14 1995 Multiple Line Excess of Loss (Casualty and Property)
Reinsurance Agreement with National Reinsurance Corporation.
Filed with Registrant's Report on Form 10-K for the period
ended December 31, 1995 which has been filed with the Securities
and Exchange Commission.
* Constitutes a compensatory plan arrangementrequired to be filed as an exhibit
to form.
Page 25
<PAGE>
Exhibit No. Description
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as
of January 1, 1995. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed with
the Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with General Re
Corporation effective May 1, 1996. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996 which
has been filed with the Securities and Exchange Commission.
10.15 1995 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1994 which
has been filed with the Securities and Exchange Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996 which
has been filed with the Securities and Exchange Commission.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive Compensation
Plan, incorporated as Part I to Registrant's Registration
Statement on Form S-8 (No. 333-00050) filed with the Securities
and Exchange Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and Profit Sharing
Plan, incorporated as Exhibit 4 to Registrant's Registration
Statement on Form S-3 (No. 333-00046) filed with the Securities
and Exchange Commission on January 4, 1996.
10.18 Stipulation of Termination of Property and Liability Reinsurance
Agreement with National Reinsurance Corporation effective May 1,
1996. Filed with the Registrant's Report on Form 10-K for the
period ended December 31, 1996 which has been file with the
Securities and Exchange Commission.
13. 1997 Annual Report to Shareholders.
21. As of December 31, 1997, the Registrant's only subsidiary is
Penn-America Insurance Company, a Pennsylvania Corporation.
23. Independent Auditor's Consent and Report on Schedules.
Page 26
<PAGE>
Exhibit No. Description
28.1 Loan and Security Agreement, Term Note and Stock Pledge Agreement
dated December 20, 1995 between Registrant and PNC Bank
(successor to Midlantic Bank, N.A). Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1995 which
has been filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
Page 27
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule I - Summary of Investments - Other than Investments in Related Parties
(in thousands)
<TABLE>
<CAPTION>
December 31, 1997
Amortized Amount shown on
Cost Fair Value Balance Sheet
<S> <C> <C> <C>
Fixed maturities:
Available for sale
U.S. treasury securities and obligations of
U.S. government agencies $ 22,730 $ 22,831 $ 22,831
Corporate securities 30,053 30,537 30,537
Mortgage-backed securities 11,751 11,792 11,792
Other structured securities 18,602 18,694 18,694
Public utilities 6,049 6,125 6,125
---------- --------- ----------
Total available for sale 89,185 89,979 89,979
---------- --------- ----------
Held to maturity
U.S. treasury securities and obligations of
U.S. government agencies $ 21,466 $ 21,535 $ 21,466
Corporate securities 11,284 11,326 11,284
Mortgage-backed securities 7,901 7,965 7,901
Public utilities 6,041 6,058 6,041
Other securities 150 150 150
--------- --------- ---------
Total held to maturity 46,842 47,034 46,842
--------- --------- ---------
Total fixed maturities 136,027 137,013 136,821
--------- --------- ---------
Equity investments:
Common stocks 4,902 6,434 6,434
Preferred stocks 20,760 20,946 20,946
--------- -------- --------
Total equity investments 25,662 27,380 27,380
--------- --------- --------
Short term investments: 11,455 11,455 11,455
-------- --------- -------
Total investments $ 173,144 $ 175,848 $ 175,656
========== ========== ==========
</TABLE>
Page 28
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash $ 1,516 $ 369
Investment in subsidiary, equity method 95,390 50,669
Other assets 594 514
========= =========
Total assets $ 97,500 $ 51,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 193 $ 215
Note payable, bank --- 9,000
---------- ---------
Total liabilities 193 9,215
---------- ---------
Stockholders' equity:
Preferred stock, $ .01 par value; authorized 2,000,000 shares;
none issued
Common stock, $.01 par value; authorized 20,000,000 shares
in 1997 and 10,000,000 shares in 1996; issued and
outstanding 1997; 9,883,384 and 1996; 6,676,131 shares,
respectively 99 67
Additional paid-in capital 68,221 21,844
Unrealized investment gains, net 1,649 993
Retained earnings 27,849 19,533
------------ ----------
97,818 42,437
Unearned compensation from restricted stock awards (511) (100)
------------ -----------
Total stockholders' equity 97,307 42,337
------------ -----------
Total liabilities and stockholders' equity $ 97,500 $ 51,522
=========== ===========
</TABLE>
Page 29
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Statements of Earnings
(in thousands except per share data)
(per share data adjusted for the adoption of FASB 128
and restated for 3-for-2 stock split in January,1997)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
----------- ---------- --------------
<S> <C> <C> <C>
Dividend income $ 1,555 $ 3,258 $ 1,300
Other 122 10 ---
Operating expenses (1,636) (1,653) (1,121)
Income tax benefit 539 552 380
----------- ----------- ------------
Income before equity in undistributed
net income of subsidiary 580 2,167 559
Equity in undistributed net earnings
of subsidiary 9,065 4,826 5,467
----------- ----------- ------------
Net earnings $ 9,645 $ 6,993 $ 6,026
=========== =========== ============
Net earnings per share
Basic $ 1.19 $ 1.05 $ 0.91
Diluted $ 1.17 $ 1.04 $ 0.91
Weighted average number of shares used
in calculating per share data
Basic 8,126 6,663 6,645
Diluted 8,228 6,743 6,655
Cash dividends per share $ 0.16 $ 0.11 $ 0.06
=========== =========== ============
</TABLE>
Page 30
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule II - Condensed Financial Information of Parent Company
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 9,645 $6,993 $ 6,026
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed net earnings of subsidiary (9,065) (4,826) (5,467)
Increase (decrease) in :
Accounts payable and accrued expenses (22) (54) 30
Other, net (200) (352) (129)
Amortization 221 133 83
-------- ------- -------
Net cash provided by operating activities 579 1,894 543
-------- ------- -------
Cash flows from financing activities:
Repayment of note payable, bank (9,000) (1,000) (1,000)
Proceeds of note payable, bank --- --- 10,000
Issuance of common stock (net of expense) 45,897 259 ---
Repayment of note payable, affiliate --- (150) (200)
Equity contributions to subsidiary (35,000) --- (9,000)
Dividends paid (1,329) (711) (398)
-------- -------- ---------
Net cash provided (used) by financing activities 568 (1,602) (598)
-------- -------- ---------
Increase (decrease) in cash 1,147 292 (55)
Cash, beginning of period 369 77 132
========= ========= =========
Cash, end of period $ 1,516 $ 369 $ 77
========= ========= =========
</TABLE>
Page 31
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule III - Supplementary Insurance Information
Years Ended December 31, 1997, 1996, 1995
(in thousands)
<TABLE>
<CAPTION>
Liability Amortization
for Unpaid of
Deferred Losses and Losses Deferred
Policy Loss Net and Loss Policy Other
Acquisition Adjustment Unearned Earned Investment Adjustment Acquisition Underwriting Premiums
Costs Expenses Premiums Premiums Income Expenses Costs Expenses Written
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended:
December 31, 1997 $8,563 $84,566 $36,173 $91,649 $9,218 $57,728 $24,984 $5,840 $96,561
December 31, 1996 7,231 70,728 30,865 69,081 6,705 43,292 17,785 4,349 73,469
December 31, 1995 5,716 60,139 26,245 57,228 5,067 35,835 14,237 4,356 61,286
</TABLE>
Page 32
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule IV - Reinsurance
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Other from Other Assumed to Net
Gross Amount Companies Companies Net Amount
<S> <C> <C> <C> <C> <C>
1997
Premiums
Property and
liability insurance $ 104,694 $ 8,133 --- $ 96,561 0
============== ============== ============= ============= ===============
Total
Premiums $ 104,694 $ 8,133 --- $ 96,561 0
============== ============== ============= ============= ===============
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
============== ============== ============= ============= ===============
</TABLE>
Page 33
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule VI - Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Liability Loss and Loss
for Unpaid Discount Adjustment Expenses
Losses and if Any, (Benefits) Incurred Paid Losses
Loss Deducted Related to and Loss
Adjustment from Current Prior Adjustment
Expenses Reserves Year Year Expenses
<S> <C> <C> <C> <C>
Year Ended
December 31, 1997 $ 84,566 $ 57,387 $ 341 $ 44,521
December 31, 1996 70,728 44,096 (804) 34,148
December 31, 1995 60,139 37,541 (1,706) 24,630
</TABLE>
Page 34
<PAGE>
PENN-AMERICA GROUP, INC.
Exhibit II-- Statement re:
Computation of Per Share Earnings
Years ended December 31, 1997, 1996, 1995
(in thousands except per share data)
(per share data adjusted for the adoption of FASB 128
and restated for 3 for 2 stock split in January, 1997)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Basic EPS:
Net earnings $ 9,645 $ 6,993 $ 6,026
----------- ----------- ------------
Weighted average common shares outstanding 8,126 6,663 6,645
============= ============= =============
Basic EPS $1.19 $1.05 $0.91
============= ============= =============
Diluted EPS:
Net Earnings $ 9,645 $ 6,993 $ 6,026
---------- ---------- -----------
Weighted average common shares outstanding 8,126 6,663 6,645
Additional shares outstanding after the
assumed exercise of options by applying
the treasury stock method 102 80 10
------------- ------------- -------------
Total 8,228 6,743 6,655
============= ============= =============
Diluted EPS $ 1.17 $ 1.04 $ 0.91
============= ============= =============
</TABLE>
Page 35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: March , 1998 By: /s/ Jon S. Saltzman
Jon S. Saltzman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
/s/ Irvin Saltzman Chairman of the Board of Directors March , 1998
Irvin Saltzman and Director
/s/ Jon S. Saltzman President, Chief Executive Officer and March , 1998
Jon S. Saltzman Director (Principal Executive Officer)
/s/ James E. Heerin, Jr. Director March , 1998
James E. Heerin, Jr.
/s/ Robert A. Lear Director March , 1998
Robert A. Lear
/s/ Rosemary R. Ferrero Vice President-Finance, Secretary and March , 1998
Rosemary R. Ferrero Treasurer (Principal Financial and
Accounting Officer)
/s/ Paul Simon Director March , 1998
Paul Simon
/s/ Charles Ellman Director March , 1998
Charles Ellman
/s/ M. Moshe Porat Director March , 1998
M. Moshe Porat
/s/ Jami Saltzman-Levy Director March , 1998
Jami Saltzman-Levy
/s/ Thomas Spiro Director March , 1998
Thomas Spiro
Page 36
<PAGE>
3. Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No.33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1
(No. 33-66892) filed with the Securities and Exchange Commission
on August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance Company
("Penn-America")and Carnegie General Agency. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998.
10.3 1993 Casualty Excess of Loss Reinsurance Agreement with
National Reinsurance Corporation. Incorporated by reference
to Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.3(i) Endorsement Nos.4 through 6 (Termination Endorsement) to Casualty
Excess of Loss Reinsurance Agreement with National Reinsurance
Corporation. Filed with the Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.4 1993 Underlying Homeowners and Dwelling Fire Property Per Risk
Excess of Loss Reinsurance (Run-off Business) Agreement with
National Reinsurance Corporation. Incorporated by referenc e to
Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial) Reinsurance
Agreement with Employers Reinsurance Corporation. Incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (No.33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
10.5(i) Endorsement No.3 to Property Per Risk of Excess Loss (Commercial)
Reinsurance Agreement with Employers Reinsurance Corporation.
Filed with the Registrant's Report on Form 10-K for the period
ending December 31, 1994 which has been filed with the Securities
and Exchange Commission.
Page 37
<PAGE>
Exhibit No. Description
10.6 1993 Property Catastrophe Excess Reinsurance Agreement with
Employers Reinsurance Corporation. Incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.6(i) Endorsement No. 6 to Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation. Filed with
the Registrant's Report on Form 10-K for the period ending
December 31, 1994 which has been filed with the Securities and
Exchange Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance Corporation
effective January 1, 1995. Filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1994 which has been
filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993 between Penn Independent
Corporation ("Penn Independent") and the Registrant regarding the
reimbursement of certain employment costs. Incorporated by
reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20,1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs. Filed with Registrant's Report on Form
10-K for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996, to August 20,
1993 Agreement between Penn Independent and Registrant regarding
the sharing of certain operating costs. Filed with Registrant's
Report on Form 10-K for the period ended December 31, 1996, which
has been filed with the SEC.
10.7(iii) Amendment dated March 1, 1997 to August 20, 1993 Agreement
between Penn Independent and Registrant regarding the sharing of
certain operating costs.
Page 38
<PAGE>
Exhibit No. Description
10.9 Restated Investment Advisory Agreement effective July 1, 1990
between Penn-America and Carl Domino Associates, L.P.
Incorporated by reference to Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 2, 1993.
10.9(i) Amended Investment Advisory Agreement effective September 1, 1997
between and among Penn-America, its subsidiary, Penn-Star and
Carl Domino Associates, L.P.
10.9(ii) Agreement dated April 15, 1997, between and among General Re,
New England Asset Management, Inc., Penn-America, and its
subsidiary, Penn-Star.
* 10.10 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.10 to Amendment No. 4 to the Registrant's Registration
Statement Form S-1 (No. 33-66892) filed with the Securities and
Exchange Commission on September 29, 1993.
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended
and restated April 4, 1994. Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (No.
33-82728) filed with the Securities and Exchange Commission
on August 11, 1994.
10.11(ii) Lease effective June 30, 1995 between Registrant and Irvin
Saltzman. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.12 Demand Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America.
Incorporated by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with the
Securities and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the Registrant to
Penn Independent. Filed with Registrant's Report on Form 10-K for
the period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.13(i) Amendment No.1 dated November 30, 1995, to Demand Promissory Note
dated January 12, 1993 from Penn Independent Financial Services,
Inc. to Penn-America. Filed with the Registrant's Report on form
10-K for the period ended December 31, 1996 which has been filed
with the Securities and Exchange Commission.
10.14 1995 Multiple Line Excess of Loss (Casualty and Property)
Reinsurance Agreement with National Reinsurance Corporation.
Filed with Registrant's Report on Form 10-K for the period
ended December 31, 1995 which has been filed with the Securities
and Exchange Commission.
* Constitutes a compensatory plan arrangementrequired to be filed as an exhibit
to form.
Page 39
<PAGE>
Exhibit No. Description
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as of
January 1, 1995. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss Reinsurance
Agreement with National Reinsurance Corporation, effective as
of January 1, 1995. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed with
the Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with General Re
Corporation effective May 1, 1996. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996 which
has been filed with the Securities and Exchange Commission.
10.15 1995 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1994 which
has been filed with the Securities and Exchange Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996 which
has been filed with the Securities and Exchange Commission.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive Compensation
Plan, incorporated as Part I to Registrant's Registration
Statement on Form S-8 (No. 333-00050) filed with the Securities
and Exchange Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and Profit Sharing
Plan, incorporated as Exhibit 4 to Registrant's Registration
Statement on Form S-3 (No. 333-00046) filed with the Securities
and Exchange Commission on January 4, 1996.
10.18 Stipulation of Termination of Property and Liability Reinsurance
Agreement with National Reinsurance Corporation effective May 1,
1996. Filed with the Registrant's Report on Form 10-K for the
period ended December 31, 1996 which has been filed with the
Securities and Exchange Commission.
13. 1997 Annual Report to Shareholders.
21. As of December 31, 1997, the Registrant's only subsidiary is
Penn-America Insurance Company, a Pennsylvania Corporation.
23. Independent Auditor's Consent and Report on Schedules.
Page 40
<PAGE>
Exhibit No. Description
28.1 Loan and Security Agreement, Term Note and Stock Pledge Agreement
dated December 20, 1995 between Registrant and PNC Bank
(successor to Midlantic Bank, N.A). Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1995 which
has been filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
Page 41
EXHIBIT 10.2a
PERSONAL LINES
GENERAL AGENCY AGREEMENT
THIS AGREEMENT, made March 1, 1998 between CARNEGIE GENERAL INSURANCE
AGENCY at 3601 Calle Tecate, Suite 200, Camarillo, CA 93012 ("General Agent")
and PENN-AMERICA INSURANCE COMPANY, 420 S. York Road, Hatboro, Pennsylvania,
19040 ("Company").
1. General Provisions: The relationship between the Company and the
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
California and Nevada as specified in Schedule A, "Underwriting Requirements and
Authority".
3. Compensation: The General Agent will earn commissions and, if
applicable, Contingent Profit Commission on insurance written under this
Agreement as set forth in Schedule B, "Commissions, Policy Fees, and Contingent
Profit Commission." The 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 directive. See
Schedule B for the schedule of fees.
4. Premiums: The General Agent shall collect premiums due on all
business written for the Company, and shall be responsible for the timely
payment of all premiums written by the General Agents' subproducers and brokers
submitting business through the General Agent. All premiums must be received by
the Company no later than 45 days after the premium due date, and the 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 the General
Agent under this Agreement or any other agreement (regardless of the effective
date) entered into between the Company and the General Agent, against any
balance due or to become due to the Company from the General Agent or any other
agreement between them.
5. Records and Reports: The 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 the 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: The Company shall indemnify, hold harmless, and
defend the General Agent, and the General Agent shall indemnify and hold
harmless the 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 the General Agent shall
be conditioned on the Company receiving prompt notification of any suit or claim
against the General Agent and being afforded the opportunity to make such
investigation, settlement, or defense as the Company deems prudent.
1
<PAGE>
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 the Company, the other by the
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 the Company and the 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 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: The 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 the General Agent or the Company as they relate to
business written pursuant to this Agreement or as they relate to the General
Agent's capacity to act as a General Agent of the Company.
9. Errors and Omissions: The General Agent shall maintain errors and
omissions insurance and fidelity bonds providing coverage for matters arising
out of or relating to all aspects of the 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 the General Agent
unless the Company has given prior written approval.
11. Supplies: All supplies furnished by the Company to the General
Agent (including but not limited to policy forms, endorsements, certificates,
applications and claims drafts) shall remain the Company's property. The General
Agent shall account for and/or return all supplies upon demand.
12. Assignment: The General Agent may not assign any rights or
obligations under this Agreement without the 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 the General Agent's business, or substantially all of the business'
assets, from the 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 the Company. No charges
shall be made by the General Agent for services in settlement of its account or
in winding up the business of the Company.
2
<PAGE>
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, the Company and the
General Agent have executed this Agreement effective March 1, 1998.
PENN-AMERICA INSURANCE COMPANY CARNEGIE GENERAL INSURANCE AGENCY
BY: /s/ David D. Taylor BY: /s/ Charles W. Smith
David D. Taylor, CIC, CPCU Charles W. Smith
Senior Vice President Chairman and CEO
BY: /s/ Eileene N. Smith
Eileene N. Smith
Vice Chairman/Secretary
**********************************************
PERSONAL GUARANTEE: If the 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 the Company under this Agreement
and any successors hereto.
/s/ Charles W. Smith /s/ Eileene N. Smith
Charles W. Smith Eileene N. Smith
3
<PAGE>
SCHEDULE A
UNDERWRITING REQUIREMENTS AND AUTHORITY
1. The General Agent is authorized to bind, issue, and/or cancel private
passenger automobile insurance coverage on behalf of the Company, and
to have general supervision of the underwriting of this coverage. The
Company may cancel or reduce the amount of coverage on any risk it
considers to be unsatisfactory.
2. The General Agent shall adhere to all underwriting requirements,
guidelines, and manuals approved by the Company for its private
passenger automobile program, as published and updated from time to
time, and the General Agent shall not bind any risk that does not
satisfy this criteria.
3. The Company reserves the right to limit or suspend the binding
authority and/or premium volume written by the 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 subproducers utilized by the General Agent shall be deemed brokers
of the General Agent for all purposes other than licensing
requirements, and the General Agent shall be responsible and indemnify
the Company for any liability resulting from their acts or failures to
act as set forth in Section 6 of the Agreement.
4
<PAGE>
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 the General Agent.
LINES OF BUSINESS COMMISSION
California
Private Passenger Auto Twenty-one Percent (21%)
Liability and Physical Damage Package
Nevada
Private Passenger Auto Twenty-three Percent (23%)
Liability and Physical Damage Package
2. SCHEDULE OF FEES: (California and Nevada)
Policy Fee 58% to the General Agent
Billing Fee 100% 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, 1998)
The Company will also pay a Contingent Profit Commission as described
below ("Payments To You Under The Plan"). 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.
5
<PAGE>
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.
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
plan also terminates, with the final calculation of Contingent Profit
Commission payment concerning any eligible years 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.
1) In the event the General Agency Agreement is terminated by the
Company in accordance with the terms of Paragraph 13 (i), the
General Agency's right to Contingent Profit Commission shall
cease on December 31 of the year in which the termination is
effective with the final payment made at June 1 of the following
year.
2) In the event the General Agency Agreement is terminated by the
Company in accordance with the terms of Paragraph 13 (ii), or in
the event the General Agency Agreement terminates in accordance
with the terms of Paragraph 13 (iii) or (iv), no further
calculations shall be made, nor Contingent Profit Commission
paid.
3) In the event the General Agency Agreement is terminated by the
General Agency in accordance with the terms of Paragraph 13 (i)
or (ii), or in the event the Company gives written consent in
accordance with Paragraph (iv), 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. Payments
due concerning any eligible prior years will be made in
accordance with the terms of Paragraph A above.
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 representation, and understandings,
written and oral, on these subjects. The undersigned signatures hereby
warrant that they have full power and authority to execute this Addendum on
behalf of the respective parties thereto.
6
<PAGE>
EXAMPLE
PRIVATE PASSENGER AUTOMOBILE
Passenger Automobile for Policy Year 1998
Minimum Eligibility $1,000,000 (includes all fees)
<TABLE>
<CAPTION>
Profit Calculation:
(Subtract commission and fees from earned premium;
General multiply by difference between Company Desired Per Year
1998 Company Agency Loss Ratio and Agency Actual Loss Ratio; divide by Pay out
Policy Desired Actual half; then divide by half again to establish the Value (1/2of
Year Valued Class of Loss Loss General Agency's portion for each 1/2 expected
As Of Business Ratio Ratio year.) profit)
<S> <C> <C> <C> <C> <C>
3/31/00 * 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
3/31/01 * 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
* 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 1998: $277,500
</TABLE>
7
EXHIBIT 10.7
Service Agreement Amendment
Agreement effective March 1, 1997, by and between Penn Independent
Corporation, 420 S. York Road, Hatboro, Pennsylvania, 19040 ("PIC") and
Penn-America Group, Inc., 420 S. York Road, Hatboro, Pennsylvania, 19040
("PAG").
WHEREAS, the parties hereto are parties to a Service Agreement dated
August 20, 1993, as most recently amended effective March 1, 1996 (the "Service
Agreement"), and
WHEREAS, the parties wish to amend the Service Agreement effective as
of the effective date of this Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements contained herein, and intending to be legally bound,
the parties hereto agree that Exhibit A of the Service Agreement is amended to
read in its entirety as set forth on Exhibit A attached hereto and incorporated
herein by reference.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PENN INDEPENDENT CORPORATION PENN-AMERICA GROUP, INC.
BY: /s/ Robert Lear BY: /s/ Rosemary Ferrreo
<PAGE>
Exhibit A
Penn-Independent Employees:
<TABLE>
<CAPTION>
Percent of Annual Total
Annual Salary Charged to Annual Salary
Name Salary PAG Charged to PAG
<S> <C> <C> <C>
Irvin Saltzman $254,000 25% $64,000
James Heerin 79,000 5% 4,000
Robert A. Lear 224,000 5% 11,000
Executive Support 34,000 5% 2,000
Human Resources 238,500 36.19% 86,000
Office Supplies 123,500 40% 49,000
--------
$216,000
</TABLE>
Penn Independent Allocated Overhead and Administrative Support:
<TABLE>
<CAPTION>
Percent of Annual Total Annual
Cost Charged Cost Charged to
Description Annual Cost to PAG PAG
<S> <C> <C> <C>
Telephone 60,000 7.5% 5,000
Insurance 75,500 7.5% 6,000
Travel & Entertain. 25,000 7.5% 2,000
Rent 104,000 7.5% 8,000
--------
$21,000
Retirement Packages: $53,000
--------
Total Annualized Charges to PAG $290,000
========
Monthly Charges to PAG $24,167
</TABLE>
Assumptions:
Allocated Expenses: Penn Independent 1997 Budget
Salary: Kathy Mulberger report included FICA & Auto Allowance
Percentages: Individuals estimated time - Human Resources number of employees
Office Supplies: Actual Postage Usage
CARL DOMINO ASSOCIATES, L.P.
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, effective as of September 1,1997, by and between Penn
America Insurance Company, and its subsidiary Penn-Star Insurance Company
(hereinafter collectively referred to as the "Client") and Carl Domino
Associates, L.P., a Delaware Limited Partnership and registered investment
advisor under the Investment Advisors Act of 1940, as amended (the "Advisor").
WHEREAS, the Client desires to appoint and designate the Advisor to provide
investment advisory and management services for equity assets and such other
funds and/or securities as Client shall designate, any additions thereof or
changes therein (the "Account") and the Advisor agrees to so act;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is hereby agreed between the parties hereto as follows:
1. APPOINTMENT OF ADVISOR. The Client hereby designates and retains the
Advisor to furnish investment advisory and management services for the
Account, and the Advisor hereby accepts such appointment and agrees to
supervise the investment and reinvestment of assets of the Account in
accordance with the terms of this Agreement.
2. CUSTODY SECURITIES AND FUNDS. The Advisor shall at no time receive, retain
or physically control any cash, securities or other assets forming any part
of the Account.
1
<PAGE>
3. DISCRETION. The Advisor is hereby granted complete discretion in the
management of the investments in the Account, provided that all investment
transactions first receive approval, either written or verbal, from the
Chairman of the Investment Committee of the Client, and provided further,
however, that if the Chairman of the Investment Committee is not available
to give such approval and Advisor, in the exercise of its fiduciary
responsibility, believes the investment transaction should be executed
promptly, and the investment is within Client's Investment Objectives and
Policy Guidelines and Advisor's investment selection criteria, then Advisor
may execute the investment transaction and so advise the Chairman of the
Investment Committee as soon thereafter as possible. Subject to the
aforesaid, Advisor is authorized to invest and reinvest the assets in the
Account, the proceeds thereof and any additions thereto, to make investment
changes and to take any other lawful action with respect to the Account in
furtherance of Client's investment objectives, including, without
limitation, execution of documents, the making of investment decisions, the
placing of brokerage orders, and the rendering of decisions as to the
nature, amount and timing of transactions for the Account. Subject to the
aforesaid, Advisor shall have complete discretion to designate brokers and
to negotiate brokerage commissions and rates for transactions for the
Account, subject to the
2
<PAGE>
requirements of applicable law. In acting as an investment advisor, the
Advisor shall use its best judgment, and shall not be liable for any losses
sustained by Client or for any error in judgment, except if Advisor fails
to exercise the degree of care, skill, prudence and diligence that a
prudent person acting in a like capacity would use, or if Advisor's conduct
constitutes bad faith or gross negligence, provided, however, that the
foregoing shall not constitute a waiver by the Client of any rights or
claims the Client may have under federal or state securities laws,
including the anti fraud provisions of those laws.
1. INVESTMENT OBJECTIVE. The Client hereby directs the Advisor to manage the
Account in furtherance of Client's investment objectives. The Client's
investment objectives are set forth in its Investment Plans, copies of
which are attached at Addendums "A" and "B" and incorporated herein as
though fully set forth at length. The Client may establish additional or
different investment objectives, or impose investment restrictions on the
Advisor with respect to the Account, by furnishing written notice to the
Advisor of such change. In furtherance of the Client's investment
objectives, the Advisor is authorized to enter into those investments set
forth in the "Investment Policy Guidelines" section of Client's Investment
Plans. See Addendums "A" and"B," pp.2-3.
3
<PAGE>
2. COMPENSATION AND EXPENSES. Advisor shall be compensated in accordance with
Addendum C in this Agreement.
3. ALLOCATION OF BROKERAGE. Where the Advisor places orders for the execution
of portfolio transactions for the Account, the Advisor may allocate such
transactions to such brokers and dealers for execution on such markets at
such prices and at such commission rates as in the good faith judgment of
the Advisor will be in the best interest of the Account, taking into
consideration in the selection of such brokers and dealers not only the
available prices and rates of brokerage commissions but also other relevant
factors such as research, execution capabilities, and other services
provided by such brokers or dealers which are expected to enhance the
general portfolio management capabilities of the Advisor and the value of
any ongoing relationship of the Advisor with such brokers and dealers.
4. SERVICE TO OTHER CLIENTS. It is understood that the Advisor performs
investment advisory and management services for various clients. Client
agrees that the Advisor may give advice and take action with respect to any
of its other clients which may differ from advice given or the timing or
nature of action taken with respect to the Account so long as it is the
Advisor's policy, to the extent practical, to allocate investment
opportunities to the Account over a period of time on a fair and equitable
basis relative to other clients. It is understood
4
<PAGE>
that the Advisor shall not have any obligation to purchase or sell, or to
recommend for purchase or sale, for the Account any security which the
Advisor, its principals, affiliates, or employees may purchase or sell for
its or their own accounts or for the account of any other client, if in the
opinion of the Advisor such transaction or investment appears unsuitable,
impractical, or undesirable for the Account, subject to Client's approval.
5. CONFIDENTIAL RELATIONSHIP. All investment information and advice furnished
by the Advisor to the Client shall be treated as confidential and shall not
be disclosed to third parties except as required by law.
6. TERMINATION, ASSIGNMENT, ASSIGNS. This Agreement shall continue until
terminated by either party hereto. This Agreement may be terminated upon
thirty (30) days written notice by either party to the other of such
termination. Fees will be prorated to the date of termination specified in
the notice of termination. The Advisor, a limited partnership, will notify
the Client within a reasonable time after any change in the members of the
partnership. No assignment, as that term is defined in the Investment
Advisors Act of 1940, of this Agreement shall be made by Advisor. Subject
to the foregoing, this Agreement shall inure to the benefit of the heirs,
administrators, personal representatives, successors, or assigns of the
parties hereto.
5
<PAGE>
7. REPRESENTATIONS BY CLIENT. Client represents and confirms that the
employment of Advisor and the investment objectives set forth herein are
authorized by the governing documents relating to the Account and that the
terms hereof do not violate any obligation by which the Client is bound,
whether arising by contract, operation of law, or otherwise, and that (a)
this Agreement has been duly authorized by appropriate action and when
executed and delivered will be binding upon Client in accordance with its
terms, and (b) the Client will deliver to Advisor such evidence of such
authority as Advisor may reasonably require, whether by way of a certified
resolution or otherwise.
8. REPRESENTATIONS OF ADVISOR. Advisor represents that it is a registered
investment advisor under the Investment Advisors Act of 1940 as amended
and, for employee benefit accounts, acknowledges that it is a fiduciary to
the plan under Section 3 (38) of the Employee Retirement Income Security
Act of 1974 (ERISA).
9. REPORTS. The Advisor shall furnish the Client a quarterly statement of the
value of the Account and the manner by which the fee is calculated. The
Advisor shall also furnish such other reports or information as the Client
may reasonably request.
6
<PAGE>
10. CONFIMATIONS. The Client's execution of this Agreement shall constitute
authorization for the custodian of the Account to direct confirmation of
all transactions in the Account to the Advisor.
11. GENERAL.
(A) This Agreement shall be construed and enforced in accordance with the
laws of Florida.
(B) All Notices shall be in writing and shall be deemed given if delivered
or mailed, certified or registered mail postage prepaid, to the
principal office of the party hereto. The Advisor may rely upon any
Notice believed by it to be genuine and authorized.
(C) This Agreement constitutes the entire understanding of the parties and
may be amended only by written instrument executed by the parties
hereto.
(D) This Agreement supersedes any and all other agreements that may have
been entered into by and between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers on the dates appearing below.
CARL DOMINO ASSOCIATES, L.P.
DATE: 1/12/98 By: /s/ Carl J Domino
General Partner
Carl Domino, Inc.
Carl Domino, President
7
<PAGE>
DATE: 1/21/98 By: /s/ Rosemary Ferrero
Rosemary Ferrero
Secretary and Treasurer
Penn-America Insurance Company
and Penn-Star Insurance Company
8
<PAGE>
Addendum A
INVESTMENT PLAN
OF
PENN-AMERICA INSURANCE COMPANY
Investment Portfolio - Objectives and Guidelines
The Board of Directors of PENN AMERICA INSURANCE COMPANY (the "Company")
authorizes the Company's officers to engage the services of an Investment
Manager who possesses the necessary personnel and research facilities to manage
the Company's investment portfolio. The portfolio consists of common stocks,
preferred stocks and cash equivalents.
The policy guidelines for the Investment Portfolio shall be as stated
herein, and are subject to modification with Board approval from time to time by
the Company after consideration of the advice and recommendations of the
Investment Manager.
Execution of All Trades: It is hereby understood that all investment
transactions must have prior approval either written or verbal, of the Chairman
of the Investment Committee, Irvin Saltzman, prior to their initiation by the
investment manager, provided, however, that if the Chairman of the Investment
Committee is not available to give such approval and Advisor, in the exercise of
its fiduciary responsibility, believes the investment transaction should be
executed promptly, and the investment is within Client's Investment Objectives
and Policy Guidelines and Advisor's investment selection criteria, then Advisor
may execute the investment transaction and so advise the Chairman of the
Investment Committee as soon thereafter as possible.
Investment Portfolio
The Company's investment portfolio consists of funds allocated and invested
in one of two (2) basic forms of investment:
(A) Money market and analogous cash equivalent funds, awaiting permanent
investment into equities securities.
(B) Equity issues including common and preferred stocks, units of
beneficial interest, American Depository Receipts, and convertible
securities.
<PAGE>
The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a regular, periodic basis and which may be changed
from time to time.
Investment Objectives
1. The Company's investment portfolio is to be managed in a conservative,
risk adverse style with the objective of achieving long-term performance
superior to the widely followed market averages.
2. Primary investment emphasis shall be placed upon consistency of
performance, i.e., the achievement of investment objectives in such a manner as
to protect the Company's assets from excessive volatility in market value from
year to year.
3. Significant investment emphasis shall also be placed upon the
preservation of the purchasing power of the assets.
4. Sufficient liquidity shall be maintained to fund any possible corporate
outflows related to the property and casualty insurance business.
Investment Policv Guidelines
Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and the maintenance of
sufficient liquidity, should be the overriding guidelines for the investment
portfolio.
To underscore these considerations, as well as to recognize the fiduciary
responsibilities associated with the management of the Company's assets, there
are certain characteristics which are expected to be associated with the
portfolio and which shall be viewed as guidelines in formulating investment
strategies.
A. Equity Issues
1. Allocation. The target range of investments in equity issues is up to
thirty three and 1/3 percent (33 1/3%) of the value of the Company's capital
surplus.
2. Types of Securities. Equity securities shall mean common and preferred
stocks or equivalents (e.g., units of beneficial interest, American Depository
Receipts, plus issues convertible into common stock).
2
<PAGE>
3. Cash Equivalents. At the discretion of the Investment Manager, short
term money market funds and/or investments may represent a material portion of
the equity issues. However, if commercial paper is used, it must have a minimum
quality rating of A-2 or P-2 as established by Moody's or Standard & Poor's. In
addition, bankers' acceptances or certificates of deposit must be issued by
banks incorporated in the United States.
4. Diversification. Without prior approval of the Company, additions to a
single security may not be made once the market value of the security exceeds
five percent (5%) of the total portfolio (at market value). Other than these
constraints, there are no quantitative guidelines suggested as to insurer,
industry or individual security diversification. However, prudent
diversification standards should be developed and maintained by the Investment
Manger.
Exclusions
The following categories of securities are not permissible for investment in the
Company's portfolio without prior written approval:
(a) Unregistered or restricted stock;
(b) Commodities, including gold or currency futures;
(c) Conditional sales contracts;
(d) Options, including the purchase, sale or writing of options;
(e) Margin buying;
(f) Short selling;
(g) Leasebacks; and
(h) Fixed income securities.
3
<PAGE>
Regulatory Considerations
* Risk Based Capital
The Company, as an insurance entity, is regulated by various state
insurance departments, NAIC and A.M. Best. One element of the regulation is risk
based capital which has a RBC component related to the investment portfolio.
There are three factors which are evaluated by RBC: quality of invested assets,
mixed of invested assets and affiliate risk. Manager should be aware of the
RBC's current factors at all times when evaluating appropriate investment
consideration and not participate in any investment decision which would be
detrimental to the client's Risk Based Capital.
4
<PAGE>
Addendum B
INVESTMENT PLAN
OF
PENN STAR INSURANCE COMPANY
Investment Portfolio- Objectives and Guidelines
The Board of Directors of PENN-STAR INSURANCE COMPANY (the "Company")
authorizes the Company's officers to engage the services of an Investment
Manager who possesses the necessary personnel and research facilities to manage
the Company's investment portfolio. The portfolio consists of common stocks,
preferred stocks and cash equivalents.
The policy guidelines for the Investment Portfolio shall be as stated
herein, and are subject to modification with Board approval from time to time by
the Company after consideration of the advice and recommendations of the
Investment Manager.
Execution of All Trades: It is hereby understood that all investment
transactions must have prior approval either written or verbal, of the Chairman
of the Investment Committee, Irvin Saltzman, prior to their initiation by the
investment manager, provided, however, that if the Chairman of the Investment
Committee is not available to give such approval and Advisor, in the exercise of
its fiduciary responsibility, believes the investment transaction should be
executed promptly, and the investment is within Client's Investment Objectives
and Policy Guidelines and Advisor's investment selection criteria, then Advisor
may execute the investment transaction and so advise the Chairman of the
Investment Committee as soon thereafter as possible.
Investment Portfolio
The Company's investment portfolio consists of funds allocated and invested
in one of two (2) basic forms of investment:
(A) Money market and analogous cash equivalent funds, awaiting permanent
investment into equities securities.
(B) Equity issues including common and preferred stocks, units of
beneficial interest, American Depository Receipts, and convertible
securities.
<PAGE>
The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a regular, periodic basis and which may be changed
from time to time.
Investment Objectives
1. The Company's investment portfolio is to be managed in a conservative,
risk adverse style with the objective of achieving long term performance
superior to the widely followed market averages.
2. Primary investment emphasis shall be placed upon consistency of
performance, i.e., the achievement of investment objectives in such a manner as
to protect the Company's assets from excessive volatility in market value from
year to year.
3. Significant investment emphasis shall also be placed upon the
preservation of the purchasing power of the assets.
4. Sufficient liquidity shall be maintained to fund any possible corporate
outflows related to the property and casualty insurance business.
Investment Policy Guidelines
Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and the maintenance of
sufficient liquidity, should be the overriding guidelines for the investment
portfolio.
To underscore these considerations, as well as to recognize the fiduciary
responsibilities associated with the management of the Company's assets, there
are certain characteristics which are expected to be associated with the
portfolio and which shall be viewed as guidelines in formulating investment
strategies.
A. Equity Issues
1. Allocation. The target range of investments in equity issues is up to
thirty three and 1/3 percent (33 1/3%) of the value of the Company's capital
surplus.
2. Types of Securities. Equity securities shall mean common and preferred
stocks or equivalents (e.g., units of beneficial interest, American Depository
Receipts, plus issues convertible into common stock).
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3. Cash Equivalents. At the discretion of the Investment Manager, short
term money market funds and/or investments may represent a material portion of
the equity issues. However, if commercial paper is used, it must have a minimum
quality rating of A-2 or P-2 as established by Moody's or Standard & Poor's. In
addition, bankers' acceptances or certificates of deposit must be issued by
banks incorporated in the United States.
4. Diversification. Without prior approval of the Company, additions to a
single security may not be made once the market value of the security exceeds
five percent (5%) of the total portfolio (at market value). Other than these
constraints, there are no quantitative guidelines suggested as to insurer,
industry or individual security diversification. However, prudent
diversification standards should be developed and maintained by the Investment
Manger.
Exclusions
The following categories of securities are not permissible for investment
in the Company's portfolio without prior written approval:
(a) Unregistered or restricted stock;
(b) Commodities, including gold or currency futures;
(c) Conditional sales contracts;
(d) Options, including the purchase, sale or writing of options;
(e) Margin buying;
(f) Short selling;
(g) Leasebacks; and
(h) Fixed income securities.
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Regulatory Considerations
* Risk-Based Capital
The Company, as an insurance entity, is regulated by various state
insurance departments, NAIC and A.M. Best. One element of the regulation is risk
based capital which has a RBC component related to the investment portfolio.
There are three factors which are evaluated by RBC: quality of invested assets,
mixed of invested assets and affiliate risk. Manager should be aware of the
RBC's current factors at all times when evaluating appropriate investment
considerations and not participate in any investment decision which would be
detrimental to the client's overall Risk-Based Capital.
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ADDENDUM C
COMPENSATION AND EXPENSES The Client shall compensate the Advisor for its
services by the payment of an annual fee, calculated monthly, billed and payable
quarterly in arrears, based on the market value of the Account, including cash
or its equivalents, at the following rates.
Balanced Assets Annual Rate
First $ 1,000,000 .75%
Next $ 2,000,000 .563%
Up to $50,000,000 .375%
Over $50,000,000 *
* To be negotiated on a case by case basis.
/s/ RF initial as acknowledgement of fee schedule
The Advisor's fee shall be computed by applying 1/12th of the annual
percentage rate to the market value of the account computed on the last day of
each month. In computing the value of the assets in the Account, securities
listed on any national securities exchange shall be valued at the last quoted
sale price on the principal exchange in which the security is traded on the
valuation date. Any other asset shall be valued in a manner determined in good
faith by or as directed by the Advisor to reflect its fair market value. Advisor
shall exclude from the calculation of its fee any securities placed in the
account by Client which Advisor does not supervise and regarding which advisor
exercises no investment discretion and assumes no liability. Client shall inform
Advisor, in writing, when Client places any such securities in the Account.
The Client's execution of this Agreement shall constitute authorization by
the Client to the Independent Custodian of Client's funds to deduct the
Management Fee from the Client's Account when due, in accordance with the
following procedures:
1. Client provides authorization permitting Advisor's fees to be
paid directly from Client's account held by an independent
custodian,
2. Advisor sends Client and custodian, at least seven days prior to
the request for payment, a bill showing the amount of fee, the
value of Client's assets on which it was based, and the specific
manner in which Advisor's fee was calculated,
3. Custodian sends Client a statement, at least quarterly,
indicating all amounts disbursed from the account, including the
amount of the advisory fees paid directly to Advisor.
4. This billing arrangement may be terminated at any time by written
notice from Client to Advisor and custodian.
GENERAL RE- NEW ENGLAND ASSET MANAGEMENT, INC.
Investment Management Agreement
This Agreement is made as of the 15th day of April, 1997, between
1. GENERAL RE-NEW ENGLAND ASSET MANAGEMENT, INC., a corporation organized under
the laws of the State of Delaware ( "Manager"); and
2. PENN-AMERICA INSURANCE COMPANY and its subsidiary PENN-STAR INSURANCE
COMPANY, corporations organized under the laws of the State of Pennsylvania
("Client").
WHEREAS, Client desires to appoint Manager as the investment manager of
that portion of Client's assets constituting the Account (as defined below);
NOW THEREFORE, in consideration of the mutual agreements herein contained,
it is agreed as follows:
Section 1. The Account
The cash, securities and other assets placed by Client in the account to be
managed under this Agreement (the "Account") are listed on Schedule A. Assets
may be added to the Account at any time with the consent of the Manager. The
Account will include these assets and any changes in them resulting from
transactions directed by Manager, withdrawals made by Client, or dividends,
interest, stock splits and other earnings, gains or losses on the assets.
Assets placed in the Account by Client that are not to be managed by
Manager are separately identified on Schedule A ("Unmanaged Assets"). Manager
will include these assets in its periodic reports to Client, but will exclude
their value from the Account in calculating Manager's fees.
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Section 2. Management of the Account
Manager will make all investment decisions for the Account, in Manager's
sole discretion and without first consulting or notifying Client, in accordance
with the investment restrictions and guidelines which are attached as Schedule B
(the "Investment Guidelines"). Client may change these Investment Guidelines at
any time, but Manager will be bound by the changes only after it has received
and agreed to them in writing. Other than by the Investment Guidelines and the
terms of this Agreement, the investments made by Manager on behalf of the Client
will not be restricted in any manner, except by operation of law.
Manager will have full power and authority, on behalf of Client, to
instruct any brokers, dealers or banks to buy, sell, exchange, convert or
otherwise trade in all securities, futures or other investments for the Account.
Manager will not be responsible for giving Client investment advice or
taking any other action with respect to Unmanaged Assets.
Client appoints Manager as its true and lawful attorney of the Client for
and in the name, place and stead of Client, in Manager's unrestricted
discretion, to operate and conduct the brokerage accounts of the Client and to
do and perform all and every act and thing whatsoever requisite in furtherance
of the brokerage accounts and this Agreement, including the execution of all
writings related for the purchase or sale (including short sales), assignments,
transfers and ownership of any stocks, bonds, commodities, or other derivatives
or securities. Manager is hereby fully authorized to act and rely on the
authority vested pursuant to said power of attorney.
Effective as of January 1, 1997, and until further notice, Manager will
assist Client in preparing Client's statutory Schedule D. Client acknowledges
that Manager will provide accounting data according to Manager's standard
interpretation of accounting principles, unless expressly instructed otherwise
by Client's prior written notice.
Section 3. Transactions for the Account
Manager will arrange for securities transactions for the Account to be
executed through those brokers, dealers or banks that Manager believes will
provide best execution. In choosing a broker, dealer or bank, Manager will
consider the broker, dealer or bank's execution capability, reputation and
access to the markets for the securities being traded for the Account. Manager
will seek competitive commission rates, but not necessarily the lowest rates
available.
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Manager may also send transactions for the Account to brokers who charge
higher commissions than other brokers, provided that Manager determines in good
faith that the amount of commissions Manager pays is reasonable in relation to
the value of the brokerage and research services provided, viewed in terms
either of that particular transaction or Manager's overall responsibilities with
respect to all clients whose accounts Manager manages on a discretionary basis.
If Manager decides to purchase or sell the same securities for Client and
other clients at about the same time, Manager may combine Clients order with
those of other clients if Manager reasonably believes that it will be able to
negotiate better prices or lower commission rates or transaction costs for the
combined order than for Client's order alone. Client will pay the average price
and transaction costs obtained for such combined orders. If Manager cannot
obtain execution of the combined orders at prices or for transaction costs that
Manager believes to be desirable, Manager will allocate the securities purchased
or sold as part of the combined order by following its order allocation
procedures.
Manager generally will allocate securities purchased or sold as part of a
combined order to Client's Account and to accounts of other clients pro rata in
proportion to the size of the order placed for each client. However, Manager may
increase or decrease the amounts of securities allocated to each client if
necessary to avoid having odd or small numbers of shares held for the account of
any client. Each client that participates in a combined order will receive or
pay the average share price for all transactions executed as part of the
combined order and will pay its pro rata share of the transaction costs.
If Client directs Manager to use particular brokers, dealers or banks to
execute transactions for the Account, Manager will do so, but Manager will not
seek better execution services or prices for Client from other brokers, dealers
or banks, and Client may pay higher prices or transaction costs as a result.
Manager also may not be able to seek better execution services for Client by
combining Client's orders with those of other clients.
Client may direct all transactions for the Account to a particular broker,
dealer or bank, by writing the name and address of that broker, dealer or bank
in the space provided on Schedule A.
Client has the right to withdraw cash at any time with prior written notice
to the Manager.
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Section 4. Transaction Confirmations
Manager will instruct the brokers, dealers or banks who execute
transactions for the Account to send Client all transaction confirmations,
unless Client chooses not to receive confirmations. If Client does not wish to
receive individual confirmations, this box should be checked. []
Client may elect to receive individual confirmations at any time by giving
Manager written notices.
Section 5. Custody of Account Assets
The assets in the Account will be held for Client by the custodian named on
Schedule A (the "Custodian"). Manager will not have custody of any Account
assets. Client will pay all fees of the Custodian.
Client will authorize the Custodian to follow Manager's instructions to
make and accept payments for, and to deliver or to receive, securities, cash or
other investments purchased, sold, redeemed, exchanged, pledged or loaned for
the Account. Client also will instruct the Custodian to send Client and Manager
monthly statements showing the assets in and all transactions for the Account
during the month, including any payments of Manager's fees.
Client will provide Manager with a copy of its agreement with the
Custodian, and will give Manager reasonable advance notice of any change of
Custodian.
Section 6. Reports to Client
Manager will send Client at least monthly and annually written reports
showing the identity, cost, and current market value of the assets in the
Account, each transaction made for the Account during the period covered by the
report, and the Account's performance. Reports will be provided for each Client
company portfolio, as well as all Client companies, on a consolidated basis.
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<PAGE>
Section 7. Account Valuation
Manager will value the securities in the Account that are listed and traded
on a national securities exchange or on NASDAQ on the valuation date at the
closing price on the principal market where the securities are traded. Manager
will value other securities or investments in the Account in a manner that
Manager believes in good faith reflects their fair market value. Where the
market value of any security is not readily available, Client and the Manager
will each choose one broker dealer and the market value will be deemed to be the
average of the values determined by the two broker dealers.
Section 8. Manager's Fees
For Manager's services, Client will pay a percentage of the value, as
determined under Section 7 of this Agreement, of all assets on a consolidated
portfolio basis in the Account (excluding Unmanaged Assets) as of the last
trading day of each calendar month. The fees are payable at the end of each
calendar quarter for services provided by Manager during the prior three months.
The percentage amount of the fees is shown on Schedule A. In any partial
quarter, the fees will be reduced pro rata based on the number of days the
Account was managed.
Client agrees to pay Manager's fees as follows:
[x] The Custodian will deduct the fees from Client's Account and pay them
to Manager each quarter. Manager will send Client and the Custodian at
the same time a bill showing the amount of Manager's fees, the Account
value on which they were based and how they were calculated. The
Custodian will send Client a monthly statement showing all amounts
paid from the Account, including Manager's fees.
[ ] Client will be billed directly by Manager and will pay Manager's fees
within 30 days of receiving the bill.
If Manager invests in securities issued by money market funds or other
investment companies for the Account, these securities will be included in the
value of the Account when Manager's fees are calculated. These same assets will
be subject to additional investment management and other fees that are paid by
the investment company but ultimately borne by its shareholders. These
additional fees are described in each investment company's prospectus.
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<PAGE>
Section 9. Proxy Voting
Proxies for securities in the Account should be voted as follows:
[ ] Client directs Manager not to vote proxies for securities held for the
Account.
[x] Client directs Manager to vote all proxies for securities held for
Client's Account in accordance with -
[x] Manager's own discretion
or
[ ] Client's proxy voting guidelines attached as Schedule C.
Client will direct Custodian to send promptly all proxies and related
shareholder communications to Manager and to identify them as relating to
Client's Account. Client understands that Manager will not be able to vote
proxies if they are not received on a timely basis from the Custodian as
properly identified as relating to Client's Account.
These proxy voting instructions may be changed at any time by notifying
Manager in writing.
Section 10. Legal Proceedings
Manager is not the attorney for, nor will it advise or act for Client in
any legal proceedings, including bankruptcies or class actions, involving
securities held in the Account or issuers of those securities.
Section 11. Risk
Subject to Section 12, the Manager cannot guarantee the future performance
of the Account, promise any specific level of performance or promise that its
investment decisions, strategies or overall management of the Account will be
successful. The investment decisions Manager will make for Client are subject to
various market, currency, economic, political and business risks, and will not
necessarily be profitable.
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Section 12. Standard of Care; Limitation of Liability
Except as may otherwise be provided by law, Manager will not be liable to
Client for any loss (i) that Client may suffer as a result of Manager's good
faith decisions or actions where Manager exercises the degree of care, skill,
prudence and diligence that a prudent person acting in a like fiduciary capacity
would use; (ii) caused by following Client's instructions; or (iii) caused by
the Custodian, any broker, dealer or bank to which Manager directs transactions
for the Account or any other person.
Federal and state securities laws impose liabilities under certain
circumstances on persons who act in good faith, and this Agreement does not
waive or limit Client's rights under those laws, except to the extent Manager
negligently fails to comply with written instructions from Client relating to
Client's investments to the extent the investments must comply with applicable
insurance investment or tax laws .
Manager will not be responsible for Client's own compliance with the
insurance investment laws of Client's state of domicile or for Client's
compliance with applicable tax laws.
In managing the Account, Manager will not consider any other securities,
cash, or other investments or assets Client owns for diversification or other
purposes. Manager shall have no responsibility whatsoever for the management of
the Unmanaged Assets or any assets of Client other than the Account and shall
incur no liability for any loss or damage which may result from the management
of such other assets.
Section 13. Client Directions
The names and specimen signatures of each individual who is authorized to
give directions to Manager on Client's behalf under this Agreement are set forth
on Schedule D. Directions received by Manager from Client must be signed by at
least one such person. If Manager receives directions from Client which are not
signed by a person designated on Schedule D, Manager shall not be required to
comply with such directions until it verifies that the directions are properly
authorized by Client.
Manager shall be fully protected in relying upon any direction signed or
given by a person that is designated on Schedule D hereto, as attested, to give
such directions on Client's behalf. Manager also shall be fully protected when
acting upon an instrument, certificate, or paper that Manager reasonably
believes to be genuine and to be signed or presented by any such person or
persons. Manager shall be under no duty to make any
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<PAGE>
investigation or inquiry as to any statement contained in any writing and may
accept the same as conclusive evidence of truth and accuracy of statements
contained therein.
Section 14. Confidentiality
Except as Client and Manager otherwise agree or as may be required by law,
all information concerning the Account and services provided under this
Agreement shall be kept confidential.
Section 15. Non-Exclusive Agreement
Manager provides investment advice to other clients and may give them
advice or take actions for them, for Manager's own accounts or for accounts of
persons related to or employed by Manager, that is different from advice
provided to or actions taken for Client.
Manager is not obligated to buy, sell or recommend for Client's Account any
security or other investment that Manager may buy, sell or recommend for other
clients or for the account of Manager or its related persons or employees.
Manager will treat all clients fairly and equitably.
If Manager obtains material, non-public information about a security or its
issuer that Manager may not lawfully use or disclose, Manager will have no
obligation to disclose the information to Client or to use it for Client's
benefit.
Section 16. Term of Agreement
Either Client or Manager may cancel this Agreement at any time upon 30 days
written notice. Written notice is complete upon the date(s) of delivery of same
via fax transmittal or U.S. mail postage mark. This Agreement will remain in
effect until canceled. Termination of this Agreement will not affect (i) the
validity of any action that Manager or Client has previously taken; (ii) the
liabilities or obligations of Manager or Client for transactions started before
termination; or (iii) Client's obligation to pay Manager's fees through the date
of termination. Upon termination, Manager will have no obligation to recommend
or take any action with regard to the securities, cash or other assets in the
Account.
Section 17. Agreement Not Assignable
This Agreement may not be assigned within the meaning of the Investment
Advisers Act of 1940 (the "Advisers Act") by Manager without Client's consent.
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Section 18. Governing Law
The internal law of Connecticut will govern this Agreement. However,
nothing in this Agreement will be construed contrary to any provision of the
Advisers Act or the rules thereunder.
Section 19. Miscellaneous
If any provision of this Agreement is or becomes inconsistent with any
applicable law or rule, the provision will be deemed rescinded or modified to
the extent necessary to comply with such law or rule. In all other respects,
this Agreement will continue in full force and effect. This Agreement contains
the entire understanding between Manager and Client and may not be changed
except in writing signed by both parties. Failure to insist on strict compliance
with this Agreement or with any of its terms or any continued conduct will not
be considered a waiver by either party under this Agreement.
Section 20. Notices
All notices and instructions with respect to the Account or other matters
covered by this Agreement may be sent by U.S. mail, overnight courier, or
facsimile transmission (with a hard copy sent by U.S. mail) to Client and to
Manager at the addresses at the end of this agreement or to another address
provided in writing.
Section 21. Representations of Client
Client represents and warrants to Manager that (a) Client is the beneficial
owner of all assets in the Account and that there are no restrictions on
transfer or sale of any of those assets; (b) this Agreement has been duly
authorized, executed, and delivered by Client and is Client's valid and binding
obligation; (c) the names of the individuals who are authorized to act under
this Agreement on behalf of Client have been given to Manager in writing; (d) no
government authorizations, approvals, consents, or filings not already obtained
are required in connection with the execution, delivery, or performance of this
Agreement by Client; and (e) the assets in the Account are not and are not
deemed to be assets of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended. Client agrees to indemnify
and hold harmless Manager from all liability and costs (including costs of
defense) which may be asserted or incurred by reason of any defect in Clients
authority to appoint Manager or any defect in the conduct of Client in making
the appointment under this Agreement.
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Section 22. Representations of Manager
Manager represents and warrants that this Agreement has been duly
authorized, executed and delivered by Manager and is its valid and binding
obligation.
Section 23. Disclosure
Client has received and reviewed a copy of Part II of Manager's Form ADV
and a copy of this Agreement.
AGREED TO AND ACCEPTED BY:
GENERAL RE NEW ENGLAND PENN-AMERICA INSURANCE
ASSET MANAGER, INC COMPANY
/s/ Gerald T. Lynch By: /s/ Rosemary Ferrero
Gerard T. Lynch Rosemary Ferrero
Its President Vice President,
Treasurer, Secretary
Pond View Corporate Center 420 S York Road
76 Batterson Park Road Hatboro, PA 19040
Farmington, Connecticut 06032
23-1997049
(Taxpayer identification Number)
PENN-STAR INSURANCE COMPANY
By: /s/ Rosemary Ferrero
Rosemary Ferrero
Vice President,
Treasurer, Secretary
420 S. York Road
Hatboro, PA 19040
23-2865367
(Taxpayer Identification Number)
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<PAGE>
SCHEDULE A
ACCOUNT ASSETS.
A. Managed Assets Client has deposited the following securities. cash and
other assets with the Custodian identified below to be managed under this
Agreement:
See List attached hereto.
B. Unmanaged Assets Client also deposited with the Custodian the following
assets which are not to be managed under this Agreement:
Custodial Account number 32-32-300430029
II. CUSTODY OF ACCOUNT ASSETS. The assets to be managed under this Agreement and
any Unmanaged Assets will be held by:
PNC Bank, N.A. Custodial Account Number: 32-32-3004030011
Institutional Custody Service 32-32-3004030029
200 Stevens Drive, Suite 425
Lester, PA 19113
III. FEES. Manager's fees for services provided under this Agreement shall be as
follows:
Annual fee of .20 of 1% on the first $50 million of market value of invested
assets of "Available for Sale" portfolios and .15 of 1% on remaining market
value of invested assets of "Available for Sale" portfolios; and .05 of 1% of
market value of invested assets of "Held to Maturity" portfolios.
Market values of Penn America Insurance Company and Penn Star Insurance Company
are aggregated for fee purposes.
IV. BROKERAGE DIRECTION. Client directs Manager to cause all transactions for
the Account to be executed through the following broker, dealer or bank:
Client has read, understands and accepts the limitations that this direction
will place on Manager's ability to seek best execution for the Account. This
direction may be changed by Client at any time by notifying Manager in writing.
V. NAME OF CLIENT: VI. DATE:
PENN-AMERICA INSURANCE COMPANY
By: /s/ Rosemary Ferrero 4/15/97
<PAGE>
SCHEDULE A
ACCOUNT ASSETS.
A. Managed Assets Client has deposited the following securities, cash and
other assets with the Custodian identified below to be managed under this
Agreement:
See List attached hereto.
B. Unmanaged Assets Client also deposited with the Custodian the following
assets which are not to be managed under this Agreement:
II. CUSTODY OF ACCOUNT ASSETS. The assets to be managed under this Agreement and
any Unmanaged Assets will be held by:
PNC Bank, N.A. Custodian Account Number 32-32-300-4030053
Institutional Custody Service
200 Stevens Drive, Suite 425
Lester, PA 19113
III. FEES. Manager's fees for services provided under this Agreement shall be as
follows:
Annual fee of .20 of 1 % on the first $50 million of market value of invested
assets of "Available for Sale" portfolios and .15 of 1% on remaining market
value of invested assets of "Available for Sale" portfolios; and .05 of 1% of
market value of invested assets of "Held to Maturity" portfolios.
Market values of Penn-America Insurance Company and Penn-Star Insurance Company
are aggregated for fee purposes.
IV. BROKERAGE DIRECTION. Client directs Manager to cause all transactions for
the Account to be executed through the following broker, dealer or bank:
Client has read, understands and accepts the limitations that this direction
will place on Manager's ability to seek best execution for the Account. This
direction may be changed by Client at any time by notifying Manager in writing.
V. NAME OF CLIENT: VI. DATE:
PENN-STAR INSURANCE COMPANY
By: /s/ Rosemary Ferrero 4/15/97
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SCHEDULE B
INVESTMENT GUIDELINES: The investment guidelines to be followed by Manager in
managing Client's Account are set forth below:
See attached
NAME OF CLIENT DATE:
PENN-STAR INSURANCE COMPANY
BY: /S/ Rosemary Ferrero 4/15/97
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SCHEDULE B
INVESTMENT PLAN
OF
PENN-AMERICA INSURANCE COMPANY
Investment Portfolio - Objectives and Guidelines
The Board of Directors of PENN-AMERICA INSURANCE COMPANY (the "Company")
authorizes the Company's officers to engage the services of an Investment
Manager who possesses the necessary personnel and research facilities to manage
the Company's investment portfolio. The portfolio is a balanced accounting
consisting of fixed income obligations, asset based obligations and cash
equivalents.
The policy guidelines for the Investment Portfolio shall be as stated
herein, and are subject to modification with Board approval from time to time by
the Company after consideration of the advice and recommendations of the
Investment Manager.
Execution of All Trades: It is hereby understood that all investment
transactions must have prior approval either written or verbal, of the Chairman
of the Investment Committee, Irvin Saltzman, prior to their initiation by the
Investment Manager.
Investment Portfolio
The Company's investment portfolio consists of funds allocated and invested
in one of two (2) basic forms of investment:
(A) Money market and analogous cash equivalent funds, awaiting permanent
investment into fixed income securities.
(B) Fixed income securities including United States Government and Agency
issues and other issues backed by the full faith and credit of the United
States Government, corporate bonds, collateralized mortgage obligations,
municipal bonds, preferred stocks, and asset based obligations.
The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a regular, periodic basis and which may be changed
from time to time.
<PAGE>
Investment Objectives
1. The Company's investment portfolio is to be managed in a conservative,
risk adverse style with the objective of achieving long term performance
superior to the widely followed market averages.
2. Primary investment emphasis shall be placed upon consistency of
performance, i.e., the achievement of investment objectives in such a manner as
to protect the Company's assets from excessive volatility in market value from
year to year.
3. Significant investment emphasis shall also be placed upon the
preservation of the purchasing power of the assets.
4. Sufficient liquidity shall be maintained to fund any possible corporate
outflows related to the property and casualty insurance business.
Investment Policy Guidelines
Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and the maintenance of
sufficient liquidity, should be the overriding guidelines for the investment
portfolio.
To underscore these considerations, as well as to recognize the fiduciary
responsibilities associated with the management of the Company's assets, there
are certain characteristics which are expected to be associated with the
portfolio and which shall be viewed as guidelines in formulating investment
strategies.
Fixed Income Securities
1. Allocations. The target range of investments in fixed income securities
is zero percent (0%) to one hundred percent (100%) of the portfolio.
2. Types of Securities. Funds not invested in cash equivalents shall be
invested entirely in marketable debt securities issued by either (a) the United
States Government or agencies of the United States Government, (b) assets backed
by the full faith and credit of the United States Government, (c) issuers of
collateralized mortgage obligations, (d) domestic corporations, including
industrials and utilities and preferred stocks issued
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by said corporation, and (e) domestic banks and other United States financial
institutions.
At least ninety percent (90%) of the portfolio shall be rated A or better.
These ratings shall be established by recognized rating services (i.e., Moody's,
Standard & Poor's) and reinforced by independent in house credit analysis. An
issue which is split rated will be governed by the lower quality designation.
3. Diversification. Except for Treasury and Agency obligations, the debt
portion of the fixed income securities shall contain no more than five percent
(5%) of a given issuer (irrespective of the number of differing issues). Other
diversification standards shall be developed and applied by the Investment
Manager.
4. Cash Equivalents. At the discretion of the Investment Manager, short
term money market funds and/or instruments may represent a material portion of
the fixed income securities. However, if commercial paper is used, it must have
a minimum quality rating of A 2 or P 2 as established by Moody's or Standard and
Poor's. In addition, bankers' acceptances and certificates of deposit must be
issued by banks incorporated in the United States.
Exclusions
The following categories of securities are not permissible for investment
in the Company's portfolio without prior written approval:
(a) Unregistered or restricted stock;
(b) Commodities, including gold or currency futures;
(c) Conditional sales contracts
(d) Options, including the purchase, sale or writing of options;
(e) Margin buying;
(f) Short selling;
(g) Leasebacks; and
(h) Common or preferred stock.
3
<PAGE>
Regulatory and Investment Classification Considerations
* Risk Based Capital
The Company, as an insurance entity, is regulated by various state
insurance departments, NAIC and A.M. Best. One element of the regulation is risk
based capital which has a RBC component related to the investment portfolio.
There are three factors which are evaluated by RBC: quality of invested assets,
mixed of invested, and affiliate risk. Manager should be aware of the RBC's
current factors at all times when evaluating appropriate investment
considerations and not participate in any investment decision which would be
detrimental to the client's overall Risk Based Capital.
* Classifications for Fixed Income Securities
When new securities are purchased for the portfolio, a determination
will be made by manager and client as to their appropriate classification, "Held
to Maturity" or Available for Sale." This may be done after each purchased
transaction or minimally once each quarter. The decision as to the appropriate
investment category will be determined after taking into consideration maturity,
yield, cash flow requirements, and anticipated changes in interest rates.
4/15/97
4
<PAGE>
SCHEDULE B
INVESTMENT GUIDELINES: The investment guidelines to be followed by Manager
in managing Client's Account are set forth below:
See attached
NAME OF CLIENT: DATE:
PENN-STAR INSURANCE
COMPANY
/S/ Rosemary Ferrero 4/15/97
13
<PAGE>
SCHEDULE B
INVESTMENT PLAN
OF
PENN-STAR INSURANCE COMPANY
Investment Portfolio - Objectives and Guidelines
The Board of Directors of PENN-STAR INSURANCE COMPANY (the "Company")
authorizes the Company's officers to engage the services of an Investment
Manager who possesses the necessary personnel and research facilities to manage
the Company's investment portfolio. The portfolio is a balanced accounting
consisting of fixed income obligations, asset based obligations and cash
equivalents.
The policy guidelines for the Investment Portfolio shall be as stated
herein, and are subject to modification with Board approval from time to time by
the Company after consideration of the advice and recommendations of the
Investment Manager.
Execution of All Trades: It is hereby understood that all investment
transactions must have prior approval either written or verbal, of the Chairman
of the Investment Committee, Irvin Saltzman, prior to their initiation by the
Investment Manager.
Investment Portfolio
The Company's investment portfolio consists of funds allocated and invested
in one of two (2) basic forms of investment:
(A) Money market and analogous cash equivalent funds, awaiting permanent
investment into fixed income securities.
(B) Fixed income securities including United States Government and Agency
issues and other issues backed by the full faith and credit of the United
States Government, corporate bonds, collateralized mortgage obligations,
municipal bonds, preferred stocks, and asset based obligations.
The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a regular, periodic basis and which may be changed
from time to time.
<PAGE>
Investment Objectives
1. The Company's investment portfolio is to be managed in a conservative,
risk adverse style with the objective of achieving long term performance
superior to the widely followed market averages.
2. Primary investment emphasis shall be placed upon consistency of
performance, i.e., the achievement of investment objectives in such a manner as
to protect the Company's assets from excessive volatility in market value from
year to year.
3. Significant investment emphasis shall also be placed upon the
preservation of the purchasing power of the assets.
4. Sufficient liquidity shall be maintained to fund any possible corporate
outflows related to the property and casualty insurance business.
Investment Policv Guidelines
Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and the maintenance of
sufficient liquidity, should be the overriding guidelines for the investment
portfolio.
To underscore these considerations, as well as to recognize the fiduciary
responsibilities associated with the management of the Company's assets, there
are certain characteristics which are expected to be associated with the
portfolio and which shall be viewed as guidelines in formulating investment
strategies.
Fixed Income Securities
1. Allocations. The target range of investments in fixed income securities
is zero percent (0%) to one hundred percent (100%) of the portfolio.
2. Types of Securities. Funds not invested in cash equivalents shall be
invested entirely in marketable debt securities issued by either (a) the United
States Government or agencies of the United States Government, (b) assets backed
by the full faith and credit of the United States Government, (c) issuers of
collateralized mortgage obligations, (d) domestic corporations, including
industrials and utilities and preferred stocks issued
2
<PAGE>
by said corporation, and (e) domestic banks and other United States financial
institutions.
At least ninety percent (90%) of the portfolio shall be rated A or better.
These ratings shall be established by recognized rating services (i.e., Moody's,
Standard & Poor's) and reinforced by independent in house credit analysis. An
issue which is split rated will be governed by the lower quality designation.
3. Diversification. Except for Treasury and Agency obligations, the debt
portion of the fixed income securities shall contain no more than five percent
(5%) of a given issuer (irrespective of the number of differing issues). Other
diversification standards shall be developed and applied by the Investment
Manager.
4. Cash Equivalents. At the discretion of the Investment Manager, short
term money market funds and/or instruments may represent a material portion of
the fixed income securities. However, if commercial paper is used, it must have
a minimum quality rating of A-2 or P-2 as established by Moody's or Standard and
Poor's. In addition, bankers' acceptances and certificates of deposit must be
issued by banks incorporated in the United States.
Exclusions
The following categories of securities are not permissible for investment
in the Company's portfolio without prior written approval:
(a) Unregistered or restricted stock;
(b) Commodities, including gold or currency futures;
(c) Conditional sales contracts;
(d) Options, including the purchase, sale or writing of options;
(e) Margin buying;
(f) Short selling;
(g) Leasebacks; and
(h) Common or preferred stock.
3
<PAGE>
Regulatory and Investment Classification Considerations
* Risk Based Capital
The Company, as an insurance entity, is regulated by various state
insurance departments, NAIC and A.M. Best. One element of the regulation is risk
based capital which has a RBC component related to the investment portfolio.
There are three factors which are evaluated by RBC: quality of invested assets,
mixed of invested, and affiliate risk. Manager should be aware of the RBC's
current factors at all times when evaluating appropriate investment
considerations and not participate in any investment decision which would be
detrimental to the client's overall Risk Based Capital.
* Classifications for Fixed Income Securities
When new securities are purchased for the portfolio, a determination
will be made by manager and client as to their appropriate classification, "Held
to Maturity" or Available for Sale." This may be done after each purchased
transaction or minimally once each quarter. The decision as to the appropriate
investment category will be determined after taking into consideration maturity,
yield, cash flow requirements, and anticipated changes in interest rates.
4/15/97
4
<PAGE>
SCHEDULE C
PROXY VOTING GUIDELINES: The proxy voting guidelines to be followed by Manager
in voting securities held in the Account are set forth below:
(If none, check here (X)
NAME OF CLIENT: DATE:
PENN-AMERICA INSURANCE
COMPANY
Bv: /s/ Rosemary Ferrero 4/15/97
15
<PAGE>
SCHEDULE C
PROXY VOTING GUIDELINES: The proxy voting guidelines to be followed by Manager
in voting securities held in the Account are set forth below:
(If none, check here (X)
NAME OF CLIENT: DATE:
PENN-STAR INSURANCE COMPANY
By: /s/ Rosemary Ferrero 4/15/97
16
<PAGE>
SCHEDULE D
SECRETARY'S CERTIFICATE
I, Rosemary R. Ferrero, the Secretary of Penn America Insurance Company
(the "Corporation"), a Corporation organized and existing under the laws of the
State of Pennsylvania, hereby certify that each of the following officers of the
Corporation, acting singly, is authorized in the name and on behalf of the
Corporation, to give instructions to General Re - New England Asset Management,
Inc. ("Manager") with respect to any and all matters, including investment and
reinvestment of securities, pertaining to the Investment Management Agreement
between the Corporation and Manager, and to execute and deliver any and all
documents and to take any and all other action to carry out the purposes of said
Investment Management Agreement. I further certify that the specimen signature
set forth next to the names of such officers, is the true and genuine signature
of such persons.
<TABLE>
<CAPTION>
Name of Officer Title Signature
<S> <C> <C>
Irvin Saltzrnan Chairman /s/ Irvin Saltzman
Jon S. Saltzman President and CEO /s/ Jon S Saltzman
Rosemary R. Ferrero V.P., Treasurer, & Secretary /s/ Rosemary Ferrero
Greg Miscio Controller /s/ Greg Miscio
Anne Cullen Investment Manager /s/ Anne M Cullen
</TABLE>
This Certificate shall be in effect from the date hereof until written
notice is given on behalf of the Corporation to terminate or revise it.
IN WITNESS WHEREOF, I set my hand and seal of the Corporation.
(Corporate Seal) /s/ Rosemary Ferrero 4/15/97
Secretary
Rosemary R. Ferrero
17
<PAGE>
SCHEDULE D
SECRETARY'S CERTIFICATE
I, Rosemary R. Ferrero, the Secretary of Penn-Star Insurance Company (the
"Corporation"), a Corporation organized and existing under the laws of the State
of Pennsylvania, hereby certify that each of the following officers of the
Corporation, acting singly, is authorized in the name and on behalf of the
Corporation, to give instructions to General Re-New England Asset Management,
Inc. ("Manager") with respect to any and all matters, including investment and
reinvestment of securities, pertaining to the Investment Management Agreement
between the Corporation and Manager, and to execute and deliver any and all
documents and to take any and all other action to carry out the purposes of said
Investment Management Agreement. I further certify that the specimen signature
set forth next to the names of such officers, is the true and genuine signature
of such persons.
<TABLE>
<CAPTION>
Name of Officer Title Sign
<S> <C> <C>
Irvin Saltzman Chairman /s/ Irvin saltzman
Jon S. Saltzman President and CEO /s/ Jon S. Saltzman
Rosemary R. Ferrero V.P. Treasurer & Secretary /s/ Rosemary R Ferrero
Greg Miscio Controller /s/ Greg Miscio
Anne Cullen Investment Manager /s/ Anne Cullen
</TABLE>
This Certificate shall be in effect from the date hereof until written
notice is given on behalf of the Corporation to terminate or revise it.
IN WITNESS WHEREOF, I set my hand and seal of the Corporation.
(Corporate Seal) /s/ Rosemary Ferrero 4/15/97
Secretary
Rosemary R. Ferrero
18
Penn-America Group, Inc.
1997
Annual
Report
<PAGE>
Penn-America at a Glance
Penn-America Group, Inc. (NASDAQ: PAGI) is an insurance holding company
that grew from a family-owned agency which celebrated its 50th anniversary in
1996. Today, the second generation of the family which founded Penn-America owns
about one-third of its shares and a family member still leads the company.
Since its initial public offering in October 1993, the company has returned
17 consecutive profitable quarters and $2.4 million in dividends to its
stockholders. It is growing, profitably, at a compound average of 31% each year,
far outpacing the typical 3%-5% growth of the insurance industry. Two shares of
Penn-America stock purchased in 1993 for $18 are now three shares worth about
$60.
Unlike most insurance companies, Penn-America makes a profit in its basic
business -- underwriting the insurance products that entrepreneurs and
individuals in the cities and towns of Main Street America must have to operate
their businesses and vehicles. Through Penn-America Insurance Company and
Penn-Star Insurance Company, the company provides commercial property, general
liability, commercial multi-peril, non-standard personal and commercial
automobile insurance in small rural and suburban markets. In these markets, all
across the nation, the demand for the uncomplicated, small-premium insurance
products Penn-America sells is constant but the supply is dwindling. This is a
simple formula for profitable growth.
As Investor's Business Daily explained(1), "The larger the corporation, the
less inclined it is to stoop and pick up loose change. Multibillion-dollar
insurance behemoths leave loose change aplenty for nimble companies like
Penn-America." Penn-America has capitalized on a remarkable, profitable
distribution system for serving these markets, left behind by larger "name
brand" insurers.
Penn-America distributes its insurance products in all 51 U.S.
jurisdictions exclusively through 55 wholesale general insurance agents with
whom the company has unique and enduring relationships. These agents -- most of
them stockholders -- live and work in the communities they serve. They, in turn,
supply some 25,000 retail insurance brokers who, like them, are entrepreneurs,
serving the people the company insures. By listening attentively to its agents
and responding rapidly to the local opportunities they uncover, Penn-America
consistently ranks highly among all other companies with which its agents do
business, both in preference and sales volume.
Penn-America, located in Hatboro, PA, a small town near Philadelphia, is
rated "A" (Excellent) by A.M. Best Company.
Penn-America's Commitments:
* Make a profit in our basic business: underwriting insurance;
* Be the best, as defined by our agents, at what we do in our markets;
* Maintain our reputation as the company that provides the best, most
responsive service to its agents, bar none;
* Be number one in premium dollar volume in each of our agents' offices,
for the products we sell;
* Return exceptional value for our stockholders' investments;
* Practice the corporate values in which we believe.
1 Investor's Business Daily, Thursday, August 7, 1997
Contents
- -----------------------------------------------------------
President's Message to Stockholders 1
- -----------------------------------------------------------
Financial Review 8
- -----------------------------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
- -----------------------------------------------------------
Consolidated Balance Sheets -
December 31, 1997 and 1996 16
- -----------------------------------------------------------
Consolidated Statements of Earnings -
Years ended December 31, 1997, 1996and 1995 17
- -----------------------------------------------------------
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995 18
- -----------------------------------------------------------
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995 19
- -----------------------------------------------------------
Notes to Consolidated Financial Statements 20
- -----------------------------------------------------------
Stockholders, Board of Directors and
Management Information Inside Back Cover
- -----------------------------------------------------------
Safe Harbor Statement Inside Back Cover
- -----------------------------------------------------------
Financial Highlights
Exchange/Symbol NASDAQ/PAGI
Shares Outstanding 9,883,384
Closing Price $ 20.50
52-week Range $ 21.75-$10.33
Market Capitalization $ 203 million
Price/Book Ratio 2.08x
Stockholders' Equity $ 97.3 million
Book Value Per Share $ 9.85
Net Operating Earnings Per Share
Basic $ 1.08
Diluted $ 1.07
Net Earnings Per Share
Basic $ 1.19
Diluted $ 1.17
Price/Earnings Ratio
Basic 17.2x
Diluted 17.5x
Dividends Per Share $ 0.16 annual
Dividend Yield 0.8%
All figures as of 12/31/97
[GRAPHIC OMITTED - BAR CHART OF NET EARNINGS FOR 1993-1997]
[GRAPHIC OMITTED - BAR CHART OF STOCKHOLDERS' EQUITY FOR 1993-1997]
[GRAPHIC OMITTED - BAR CHART OF NET OPERATING EARNINGS FOR 1993-1997]
[GRAPHIC OMITTED - BAR CHART OF GROSS WRITTEN PREMIUMS FOR 1993-1997]
(Dollars in Millions)
<PAGE>
Our Values Create The Value
The Hatboro Creed:
We believe in . . .
Communication;
Accountability and Responsibility;
Bureaucracy Bashing;
Change;
Consistency; and
The Future.
In a year marked by change, nothing fundamental has changed at
Penn-America. While 1997 was the most newsworthy of our four years as a
publicly-traded company, we continued to return uncommon value to our
stockholders by adhering to common values that remain constant. These simple
principles, illustrated throughout this report, are at the very heart of our
success. We call them, together, The Hatboro Creed.
Before vision statements and core values became the common coinage in the
realm of Corporate America, these words have been the medium of daily exchange
at Penn-America. The Hatboro Creed is not and never will become a mere slogan.
The fact is that there are no more important events on my calendar than the
personal meetings I have with every new employee of Penn-America, to explain
these principles of our business.
By practicing these simple values, we do very ordinary things every day
that make an astounding difference in our success as a company. We are still a
small company of about 100 people who never forget that we are providing a vital
service to other folks, a service on which depends their businesses,
livelihoods, security and peace of mind. Our customers remind us of this every
day.
Thats why in this, the most public forum I have each year, I want first to
focus attention on how we produced the results that grabbed the headlines in
such respected media as the Philadelphia Inquirer and Investors Business Daily:
we practice our simple Creed. If youve come to these pages to discover what
makes this company tick, youve just learned all you really need to know about
Penn-America.
I've left the job of illustrating the tenets of our Creed to the six
customers who appear throughout this report. After all, they and 49 others like
them are why all of us here in Hatboro, Pennsylvania come to work each day. When
they speak, we listen.
1
<PAGE>
By asking our agents to speak about these values, I am allowed the pleasure
and the platform to share with you how practicing our values produced
extraordinary value for our stockholders, in a year marked by significant
events:
* In January, we announced a three-for-two stock split, in the form of a 50%
stock dividend. This was the first step we took during 1997 to improve our
liquidity, to expand our base of ownership and to return value to our
stockholders. During that month, we also reported that, for 1996, our net
earning from operations had grown by 23.4%;
* In March, we created a new subsidiary of Penn-America Insurance Company,
Penn-Star Insurance Company, capitalized by an initial $15 million
contribution from its parent and an additional $15 million infusion from
our secondary stock offering in July. Penn-Star was formed initially to
give us greater flexibility in the rapidly growing part of our business
represented by non-standard automobile insurance. (By years end, this part
of our insurance business represented 34.3% of our gross written premiums,
having grown 64.8% in volume since 1996.) Weve since expanded Penn-Stars
mission to provide us with the same flexibility on the commercial side of
our business. With two chartered insurance companies, we now can choose on
a state-by-state basis which subsidiary will act as an admitted carrier and
which as a non-admitted carrier, to best use our resources within 51 very
different regulatory environments;
* In April, we focused special attention on our investment portfolio, one of
the means by which we create value from the capital provided by our
policyholders and our stockholders. We appointed New England Asset
Management, Inc. (NEAM), a subsidiary of General Reinsurance (GenRe), to
manage the fixed income portion of our investment portfolio, which totaled
more than $136 million at year-end. NEAM, a leader in its industry, has
more than $10 billion in insurance company assets under management. We also
reported that month net operating earnings for the first quarter of 1997
that were up by 23.7%;
2
<PAGE>
* In May, our Board of Directors welcomed former U.S. Senator Paul Simon and
investment management executive Thomas M. Spiro to its ranks. Their
presence acknowledges the growing stature Penn-America enjoys in the
national business and investment communities. Both have and will continue
to make important contributions to the company;
* In June our rating of A (Excellent) was re-affirmed by A.M. Best Company,
the independent insurance rating firm. In the same month a new executive
joined us, David Taylor, CPCU, CIC, as senior vice president of our
personal lines business;
* In July, we completed a secondary stock offering of 4.025 million shares of
common stock, 3.025 million offered by the company and 1 million by
Penn-Independent Corporation, our largest stockholder. Perhaps nothing that
occurred during 1997 changed Penn-America so significantly. For example,
this significant improvement in our liquidity encouraged numerous
institutions to invest in Penn-America, shifting our institutional
ownership from 18% to 60%. Yet, as we criss-crossed the country meeting
with fund managers, equity analysts and stockholders, we heard over and
over again that it is the values we practice that have made us such an
attractive investment. Perhaps the most ringing endorsement of our
fundamental values was the fact that we had offers to purchase more than 16
million shares, four-times over-subscription. Also in July, we reported
that net operating earnings for the second quarter of 1997 had increased by
28.2%;
* During August and September, we undertook an intensive review of the ways
in which we use technology to serve all of the customers of Penn-America
our agents, employees, the investment community, regulators, vendors,
insureds and the community in which we live and work. Seven teams
representing all operating areas of the company set-out to better
understand each type of customer we serve and to recommend ways in which we
could improve our use of sophisticated technologies to better serve those
needs. The teams made
3
<PAGE>
more than 50 specific recommendations which are now being implemented
throughout the company. Much to my delight, the high value we place on
bureaucracy bashing was demonstrated throughout the process, as teams
identified forms, procedures and processes that could be simplified or
eliminated without fanfare;
* By October, we had solved The Year 2000 Problem, completing our examination
of millions of lines of computer code, making and testing all the changes
necessary to ensure that the information we maintain will move seamlessly
into the next century. Also in October, two respected regional
publications, the Philadelphia Inquirer and the Philadelphia Business
Journal again recognized Penn-Americas growing status in our own hometown
and in the business community. In a major feature article, the Inquirer
cleverly captured our strategy with the headline, Local Insurer Turns
Leftovers from Big Names into Banquet. The Business Journal flattered me
personally by including me among the 40 Under 40 leaders of our local
business community. In this month, we reported that net operating earnings
for the third quarter had increased by 35.3%;
* During November, we completed a significant upgrade to the computer and
communication backbone of the company to support growing internal and
external demands for the use of Intranet and Internet technologies. This
included numerous changes and upgrades to allow us to expand our
Internet-based services to our agents while ensuring complete integrity of
our network security. Earlier in the year, we had completed a company-wide
hardware and software upgrade, putting leading edge systems on the desks of
virtually every employee. Also in November, we began to rebuild our
presence on the World Wide Web at www.penn-america.com, including testing
new functions that will allow our agents to obtain detailed, personalized
information about their businesses with us. As these capabilities expand
during the next several years, we expect to achieve savings in the costs
associated with previous paper-based methods of exchanging information;
4
<PAGE>
* In December, we further expanded our package insurance products lines,
which we introduced early in the year with our equipment breakdown
coverage, which protects insureds from often-overlooked risk exposures such
as the loss of the use of key business equipment due to mechanical failure.
Just before year-end, we added both business automobile and umbrella
coverages as options for the hundreds of small businesses we already serve
on Main Streets throughout the country florists, garage owners, artisans
and restaurants.
The year included a very sad time for us, too. Late in October, we mourned
the untimely death of my friend, Tom Reed, our senior vice president of Claims.
All of us have too few friends on this earth to be able to afford the loss of a
single one. With Toms passing, we have lost a dear friend and colleague.
Our agents are the reason why we practice the values in our Creed. Our
close-in, responsive relationships with our agents, at every level of their
businesses and ours, distinguishes us and them from the rest of the marketplace.
For example, our agents front line underwriting personnel told us this year, in
our annual survey, that they rate our service as a 6.3 on a scale of 1 (awful)
to 7 (excellent). We wont rest until we have expanded the scale.
In dealing with our agents, we do and will always adhere to these fundamentals:
* Agents deserve and receive prompt answers when they submit risks to our
underwriters, whether the answer is yes or no;
* When agents ask us to adapt to changes in their markets, we do so by adding
new coverages or refining our programs to help them penetrate profitable
niches;
* Our agents reputations and business success depend upon how quickly and
fairly we settle the claims we receive from the people we insure. We are
committed to prompt, fair settlement of claims;
5
<PAGE>
* Our agents count on us, too, to deal closely and responsibly with the
regulators in their states so that our products and practices comply fully
with the law. They do.
It is within our relationships with our customers the 55 general agents who
distribute our products that we have the opportunity to demonstrate our
commitments and our values. Because these relationships are the core of our
business, our stockholders frequently ask about the relationships we have. Heres
the current line-up:
During 1997, we added four new agents in Mid-Western and Mountain states
for our commercial insurance products and one new agent, in Alabama, for our
personal automobile insurance products. This brings the total number of agents
to 51 in commercial products and four in personal lines. We serve the entire
U.S. with commercial products and five states (Alabama, California, Nevada,
South Dakota and Washington) with personal non-standard automobile products.
Our Values Create Bottom Line Value
The sum total of our values, our services and our commitments is measured in the
marketplace by a financial scorecard. Our 1997 numbers demonstrate that what we
are doing and how we are doing it add up to outstanding results and exceptional
value for stockholders:
* Total assets grew 42.0%, from $158.6 million last year to $225.2 million in
1997;
* Gross written premiums rose 30.1%, from $80.5 million in 1996 to $104.7
million in 1997;
* Net written premiums, after reinsurance, increased 31.4%, from $73.5
million in 1996 to $96.6 million in 1997;
* Net premiums earned expanded to $91.6 million, a 32.7% increase compared to
1996;
* Net earnings increased 37.9%, from $7.0 million in 1996 to $9.6 million in
1997;
6
<PAGE>
* Basic net operating earnings per share increased from $0.96 to $1.08 in
1997;
* Consistent with our commitment to make a profit selling insurance, we
produced an $8.1 million statutory profit in the past year, a 29.0%
increase over the previous years performance. Our statutory combined ratio
continued to perform better than our industry overall, at 95.3%;
* Our total investment portfolio increased by 56.0%, from $112.6 million in
1996, to $175.7 million in 1997. Income from these investments increased
37.5%, from $6.7 million in 1996, to $9.2 million, in 1997;
* Net realized capital gains were $864,000 after taxes, or $0.11 per share
(basic);
* As of December 31, 1997, 98.5% of our fixed maturity securities (78.6% of
the total investment portfolio) were rated A- or better by Standard &
Poors;
* During 1997, we distributed $0.16 per share in dividends, $1.3 million, to
our stockholders. Because of the three-for-two stock split in early 1997,
this represented an effective 50% increase over the dividends per share we
paid in 1996.
This past year was, like each year in the public life of this company,
filled with major events and minor miracles, all made possible because we hold
fast to a few simple values and keep our eyes on the real game serving our
agents. We are thriving because we are helping them to do so. Thats how our
values helped us during 1997, to keep our commitment to return exceptional value
for our stockholders investments.
Sincerely,
/S/ Jon S. Saltzman
Jon S. Saltzman, President and Chief Executive Officer
7
<PAGE>
<TABLE>
<CAPTION>
Financial Review
Selected Five Year Financial Data
(in thousands, except per share data) At or for the Years ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income statement data
Revenues
Premiums earned $91,649 $69,081 $57,228 $39,985 $25,961
Net investment income 9,218 6,705 5,067 3,635 2,886
Net realized investment gains (losses) 1,314 906 1,279 (713) 753
Other income 672 -- -- -- --
------- ------- ------- ------- ------
Total revenues 102,853 76,692 63,574 42,907 29,600
------- ------- ------- ------- ------
Losses and expenses
Losses and loss adjustment expenses 57,728 43,292 35,835 24,855 16,411
Amortization of deferred policy
acquisition costs 24,984 17,785 14,237 9,381 6,146
Other underwriting expenses 5,840 4,349 4,356 3,600 3,363
Interest expense 520 884 239 81 57
------- ------- ------- ------- ------
Total losses & expenses 89,072 66,310 54,667 37,917 25,977
------- ------- ------- ------- ------
Earnings before income taxes 13,781 10,382 8,907 4,990 3,623
Income taxes 4,136 3,389 2,881 1,579 1,115
------- ------- ------- ------- ------
Net earnings $9,645 $6,993 $6,026 $3,411 $2,508
======== ======== ======== ======= =======
Per share data (1) (6)
Basic
Net operating earnings(3) $1.08 $0.96 $0.78 $0.59 --
Net earnings $1.19 $1.05 $0.91 $0.51 $0.50
Weighted average shares outstanding 8,126 6,663 6,645 6,645 4,997
Diluted
Net operating earnings(3) $1.07 $0.95 $0.78 $0.59 --
Net earnings(2) $1.17 $1.04 $0.91 $0.51 $0.50
Weighted average shares outstanding 8,228 6,743 6,655 6,645 4,997
Cash dividends per share(4) $0.16 $0.11 $0.06 -- $1.13
Other data
Gross written premiums $104,694 $80,496 $66,953 $53,926 $35,521
Net written premiums 96,561 73,469 61,286 48,343 28,494
Net operating earnings(3) 8,781 6,395 5,182 3,882 2,011
Return on average stockholders equity 13.8% 17.8% 18.7% 12.2% 11.4%
GAAP data
Loss ratio 63.0% 62.7% 62.6% 62.2% 63.2%
Expense ratio 33.6 32.0 32.5 32.4 36.6
Combined ratio 96.6% 94.7% 95.1% 94.6% 99.8%
Statutory data
Policyholders surplus $83,459 $41,665 $39,118 $25,677 $25,337
Loss ratio 63.0% 62.7% 62.6% 62.2% 63.2%
Expense ratio 32.3 31.6 30.4 32.3 34.8
------- ------- ------- ------- ------
Combined ratio 95.3% 94.3% 93.0% 94.5% 98.0%
======== ======== ======== ======= =======
Property-casualty industry combined ratio (5) 101.1% 105.9% 106.4% 108.3% 106.8%
Balance sheet data (at end of period)
Cash and investments $177,819 $115,550 $100,428 $72,896 $61,764
Total assets 225,157 158,605 137,763 100,112 78,507
Notes payable -- 9,000 10,150 1,350 350
Total stockholders equity 97,307 42,337 36,250 28,366 27,380
Total stockholders equity per share (1) $9.85 $6.34 $5.46 $4.27 $4.12
</TABLE>
(1) Adjusted to reflect a three-for-two split of the Companys common stock
effected on March 7, 1997. (2) Net earnings per share for 1993 is pro forma to
reflect the economic impact of the dollar amount of a dividend in excess of 1993
net earnings, assuming the dividend had been paid at January 1, 1993, 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, 1993
at $6.00 per share. (3) Excludes realized investment gains (losses), assuming
34.2% for 1997 and 34% marginal tax rate for all other years. (4) Cash dividends
for 1993 reflect an extraordinary dividend of $5,000,000 paid to Penn
Independent prior to the Companys IPO in October 1993. (5) Source: For 1997 nine
months results, BestWeek P/C, December 29, 1997 edition; 1993 through 1996, Best
Aggregates & Averages-Property Casualty. (6) The Company adopted SFAS, 128
retroactively in 1997. (See Note 2)
8
<PAGE>
Managements 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 therein. All per
share information and share amounts in this annual report have been adjusted to
reflect a three-for-two split of the Companys common stock effected on March 7,
1997 and the adoption of FASB 128, Earnings Per Share, which defines the
computation, presentation and disclosure requirements for earnings per share
(EPS).
General
Penn-America Group, Inc. (PAGI) 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
non-standard personal automobile insurance. The Company provides commercial
property and casualty insurance both on an excess and surplus lines basis and on
an admitted basis, and non-standard personal automobile insurance on an admitted
basis. The Company markets its products through 55 high quality general agents,
who in turn produce business through more than 25,000 retail insurance brokers
located throughout the United States. The Company focuses on serving the
insurance needs of small or non-standard markets which generally are
characterized by small average policy premiums and are serviced by retail
insurance brokers with limited access to larger, standard lines insurers. The
Company believes that these markets generally are underserved by larger,
standard lines insurers which often limit their underwriting to policies greater
than a certain minimum premium size or to certain risk classes and which operate
in large-scale markets in which they can achieve economies of scale. The Company
believes that its distribution network enables it to access effectively 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 Companys strategy is demonstrated by its strong and
consistent growth and profitability. From 1993 to 1997, gross written premiums
grew at a 31.0% compound annual rate from $35.5 million to $104.7 million, and
net operating earnings (excluding realized investment gains) grew at a 44.6%
compound annual rate from $2.0 million to $8.8 million. The Company has operated
at a SAP combined ratio less than 100.0% in every year since 1992. The Companys
average SAP combined ratio from 1993 to 1997 was 95.0% and the Companys average
return on average stockholders equity during the same period was 14.8%.
The Companys 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 agents franchise value
within its marketing territory. The Company seeks to grow with these general
agents and develop strong, long-standing relationships by providing a high level
of service and support. From 1993 to 1997, the Company achieved 194.7%
cumulative growth in gross written premiums with a 44.7% increase in the number
of general agents, from 38 to 55. The
Growth Through Existing GeneralAgents
1993 1997 Increase
Gross Written Premiums $35.5 $104.7 194.7%
Number of General Agents 38 55 44.7%
Gross Written Premiums $0.9 $1.9 111.1%
per General Agent
9
<PAGE>
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
Companys 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 non-standard 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 tied substantially 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 non-standard 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, commercial umbrella, and some miscellaneous professional
liability coverages. The Company currently writes non-standard personal
automobile policies in five states. The Company has filed applications to write
non-standard personal automobile policies in three additional states and is
considering expanding into several other states.
The Companys 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 Companys
non-standard personal automobile insurance products are designed for insureds
who do not qualify for preferred or standard automobile insurance because of
their payment histories, driving records, ages, vehicle types 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 non-standard coverage and contributing to an increase in
the size of the non-standard automobile market. Non-standard personal automobile
business represented 34.3% of the Companys gross written premiums in 1997.
On February 21, 1997, the Insurance Department of Pennsylvania issued a
Certificate of Authority to Penn-Star Insurance Company, Penn-Americas newly
formed, wholly owned insurance subsidiary. Penn-Star was granted authority to
begin to transact business as of April 1, 1997. Penn-Star was formed initially
to give the Company greater flexibility in the rapidly growing segment of our
business represented by non-standard personal automobile insurance. Penn-Stars
purpose has since been expanded to provide flexibility on the commercial side of
our business by having two licensed insurance companies. The Company can choose
on a state-by-state basis which subsidiary will act as an admitted carrier and
which as a non-admitted carrier, to best use the Companys resources within 51
different regulatory environments.
On July 22, 1997, the Company completed a secondary stock offering of 4,025,000
shares of common stock of which 1,000,000 shares were sold by Penn-Independent
Corporation, the majority shareholder of the Company. The net proceeds to the
Company were $44.4 million. The Company utilized the proceeds from this offering
to pay-off $9 million of existing debt and to provide additional capital to its
insurance subsidiaries.
The Companys 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 Companys
business, results of operations or financial condition. Also, re-evaluations of
the Companys 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
<PAGE>
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 Company).
Penn-Americas 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.
The following is a brief description of the Companys various lines of insurance:
Commercial General Liability. The Companys commercial general liability
insurance is written on an occurrence policy form (as opposed to a claims-made
policy form) and provides limits generally ranging from $25,000 to $3 million,
with the majority of such policies having limits of between $500,000 and $1
million. The Companys general liability policies pay defense and related
expenses in addition to per occurrence and aggregate policy limits. General
liability insureds include restaurants, bars and taverns, retail operations,
artisan contractors and similar classes.
Commercial Property. The Companys commercial property lines provide limits
usually no higher than $4 million, with almost all of the policies being written
at limits less than $1 million. Properties insured include restaurants, bars and
taverns, retail operations, vacant buildings and other similar classes.
Commercial Multi-Peril. The Company also writes the same commercial property and
general liability risks together as a package for its insureds, generally
referred to as commercial multi-peril. The limits on these policies are the same
as if written on a monoline basis. Consistent with the current industry trend,
the Company has been writing more commercial multi-peril policies during the
last several years than individual property and liability policies. The Company
expects this trend to continue in light of the fact that a substantial number of
the Companys commercial insureds customarily require both liability and property
insurance coverage, together with the fact that recent revisions to Insurance
Services Office (ISO) forms make it easier and more efficient to write such
multi-peril policies.
Business Automobile and Commercial Umbrella. In late 1997, the Company added
both business automobile and commercial umbrella coverages to enhance its
commercial multi-peril (package) writings. The types of risks and insureds
targeted are similar to those already written, such as, restaurants, bars and
taverns, retail operations, artisan contractors and similar classes. The
business automobile insurance (cars and light trucks) can be written up to $1
million liability limits. Commercial umbrella insurance can be written for
limits up to $5 million with significant reinsurance support from General
Reinsurance. For commercial umbrella, Penn-America must write the primary $1
million liability limit. The Company expects that the addition of these
coverages in 1998 will further expand package writings and help increase renewal
retention of existing policies.
In all of its commercial product lines, the Company is continuously developing
specialized programs for certain industry segments to meet the needs of these
marketplaces. For example, the Company has developed programs for independent
fitness centers, day care operations, artisan contractors, low-hazard
miscellaneous professional liability coverages and special events. As a group,
these programs are a significant benefit to the Companys marketing efforts,
although individually they do not generate a material amount of the Companys
gross written premiums.
Non-standard Personal Automobile. The Company currently writes non-standard
personal automobile policies in the states of Washington, California, Alabama,
South Dakota and Nevada. These risks typically do not qualify for preferred or
standard insurance because of a drivers age, driving record, vehicle type or
other factors. The non-standard personal automobile business is writ-
11
<PAGE>
ten at very low coverage limits. The policies in force at December 31, 1997
provide physical damage coverage of $35,000 or less, and the Company writes
minimum state statutory liability limits. The Company writes a majority of this
coverage on a six-month basis in Washington, Alabama and South Dakota. In
California and Nevada, the coverage is written predominantly on a monthly policy
basis.
Results of Operations
Year ended December 31, 1997 compared to yearended December 31, 1996
Gross written premiums increased 30.1% to $104.7 million for the year ended
December 31, 1997, from $80.5 million for the year ended December 31, 1996. The
increase resulted from 64.8% growth in the personal automobile lines gross
written premiums to $35.9 million and 17.2% growth in the commercial lines gross
written premiums to $68.8 million. These increases in gross written premiums
were attributable primarily to increased volume; rate changes were not
significant.
Net written premiums increased 31.4% to $96.6 million for the year ended
December 31, 1997, from $73.5 million, for the year ended December 31, 1996.
During the same periods, net premiums earned increased 32.7% to $91.6 million
from $69.1 million. Net premiums earned increased due to the increase in gross
written premiums, partially offset by an increase in premiums ceded to
reinsurers.
Net investment income increased 37.5% to $9.2 million for the year ended
December 31, 1997, from $6.7 million, for the year ended December 31, 1996. The
increase resulted principally from the growth in invested assets funded
primarily by net proceeds from the secondary offering and from cash flows from
operations. The average investment yield of the fixed maturity portfolio for the
year ended December 31, 1997 was 6.70%, compared to 6.84% for the year ended
December 31, 1996.
Net realized investment gains after taxes for the year ended December 31, 1997
were $864,000 or $0.11 per share (basic) and $0.10 per share (diluted), as
compared to $598,000 or $0.09 per share (basic and diluted) for the year ended
December 31, 1996.
Losses and loss adjustment expenses increased 33.3% to $57.7 million for the
year ended December 31, 1997, from $43.3 million in 1996, primarily due to an
increase in net premiums earned.
Amortization of deferred acquisition costs increased 40.5% to $25.0 million for
the year ended December 31, 1997, from $17.8 million for the year ended December
31, 1996. The increase was attributable to an increase in net premiums earned
and to the higher percentage of net premiums earned in non-standard personal
automobile lines relative to commercial lines for the year ended December 31,
1997 compared to the same period ended December 31, 1996. Commission rates for
non-standard personal automobile lines are generally higher than commission
rates for commercial lines.
Other underwriting expenses increased 34.3% to $5.8 million for the year ended
December 31, 1997, from $4.3 million for the year ended December 31, 1996,
primarily due to the increase in gross written premiums.
The loss ratio increased slightly to 63.0% for the year ended December 31,1997,
from 62.7% for the year ended December 31, 1996. The statutory expense ratio
increased to 32.3% from 31.6% for the year ended December 31, 1996. The increase
in the statutory expense ratio is attributable to the increase in the percentage
of net premiums written in non-standard personal automobile lines relative to
commercial lines. The statutory combined ratio increased to 95.3% for the year
ended December 31, 1997, compared to 94.3% for the year ended December 31, 1996.
12
<PAGE>
As a result of the factors described above, the Companys net earnings for the
year ended December 31, 1997 increased 37.9% to $9.6 million or $1.19 per share
(basic) and $1.17 per share (diluted), from $7.0 million or $1.05 per share
(basic) and $1.04 (diluted) for the year ended December 31, 1996.
Year ended December 31, 1996 compared to year ended December 31, 1995
Gross written premiums increased 20.2% to $80.5 million in 1996, as compared to
$ 67.0 million in 1995. The 20.2% growth in gross written premiums in 1996
primarily was attributable to increased volume. The increase in volume was
attributable to an 18.4% increase in commercial multi-peril to $31.6 million as
compared to 1995 and a 63.3% increase in non-standard personal automobile to
$21.8 million. 72% of the Companys existing agents offices had increased gross
written premiums volume in 1996 over the previous year.
Net written premiums increased 19.9% to $73.5 million in 1996, as compared to
$61.3 million in 1995. The increase in net written premiums was due primarily to
the volume increase in both commercial multi-peril and non-standard 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 was 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 funded 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 was fueled by the proceeds from
a $10 million loan from PNC Bank in December 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 (basic and diluted), compared to $844,000 or
$0.13 (basic and diluted) per share for the year ended December 31, 1995. Gross
realized gains after-tax were $985,000 and consisted primarily of equity
securities. Gross realized losses after-tax were $387,000 and consisted
primarily of fixed maturities available for sale.
Losses and loss adjustment expenses increased 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 earned premiums. 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 was attributable to
premium growth, an increase in commercial lines contingent commission accrual
and increased volume in non-standard 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 was attributable primarily to more
significant growth in the non-standard personal automobile lines than the
commercial lines. Additionally, several cost savings were realized during 1996,
including a capital stock tax refund and a reduction in bad debt expense.
Net earnings increased 16% to $7.0 million or $1.05 per share (basic) and $1.04
per share (diluted) in 1996, as compared to $6.0 million or $0.91 per share
(basic and diluted) in 1995.
Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common stock of
Penn-America. PAGIs 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-Americas
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 increased 48.0% to $24.9 million for
the year ended December 31, 1997 from $16.8 million for the year ended December
31, 1996. The increase in net cash provided by operations resulted principally
from the increase in net written premiums during the period.
Net cash used by investing activities increased to $60.9 million for the year
ended December 31, 1997, from $17.3 million for year ended December 31, 1996.
This increase was due primarily to the investment of the net cash provided from
the Companys secondary stock offering and the increase in cash provided from
operating activities for the year ended December 31, 1997.
Net cash provided by financing activities was $35.2 million for the year ended
December 31, 1997, as compared to $1.7 million used for financing activities for
the same period in 1996. The cash provided by financing activities in 1997
resulted primarily from $45.6 million in proceeds from the offering and the
exercise of stock options,
13
<PAGE>
partially offset by the principal repayment of the $9 million term loan and $1.3
million of the cash dividends paid to stockholders.
The Company believes that it has sufficient liquidity to meet its anticipated
insurance obligations and operating and capital expenditure needs. The Companys
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 December 31, 1997 was
approximately 3.1 years.
The Companys fixed maturity portfolio including short-term investments
represented $148.3 million or 84.4% of the total investment portfolio as of
December 31, 1997. Approximately 98.5% of these securities were rated A- or
better by Standard & Poors or Moodys. Equities, the majority of which consist of
preferred stocks, represented $27.4 million or 15.6% of total investments as of
December 31, 1997.
As of December 31, 1997, the investment portfolio contained $38.4 million or
21.8% of mortgage-backed and asset-backed obligations. All of these securities
are AAA rated securities issued by government or government-related agencies,
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 December 31, 1997.
On July 25, 1997, the Company paid-off the entire outstanding principal balance
of $9 million plus interest on its term loan. In November 1997, the Company
signed a commitment letter for a revolving credit facility of $20.0 million. The
structure of the new credit facility will provide for the repayment of the
borrowed amounts to be repaid over six years with interest on the loan being
LIBOR plus a factor which can vary from 100 to 225 basis points. The terms of
the new agreement, including the interest rate, security and covenants, are
expected to be substantially similar to the terms of the previous term loan.
Borrowing under this new credit facility will be secured by the common stock of
Penn-America.
The principal source of cash to use for the payment of dividends to PAGIs
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 of 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.
Penn-Americas statutory surplus increased 100.3% to $83.5 million as of December
31, 1997, from $41.7 million as of December 31, 1996, primarily due to the
capital contribution of $35.0 million by PAGI to Penn-America.
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 Companys business, results of operations or financial condition to date.
The Company also considers inflation when estimating liabilities for losses and
loss adjustment expenses, particularly for claims having a long period between
occurrence and settlement. The liabilities for losses and loss adjustment
expenses are managements estimates of the
14
<PAGE>
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 be offset partially by higher claims and expenses.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Comprehensive Income, which establishes standards for the reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses). The statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. 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. The statement is effective for
fiscal years beginning after December 15, 1997. The Company will adopt the
statement in 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The statement is effective for fiscal years beginning after December
15, 1997. The Company is in the process of determining the effect of this
statement upon its financial reporting requirements.
Other
The National Association of Insurance Commissioners adopted risk-based capital
standards with which property and casualty insurers must comply. In concept,
risk-based capital is designed to measure the acceptable amount of capital an
insurer should have based on the inherent specific risks of each insurer.
Insurers failing to meet this benchmark capital level may be subject to scrutiny
by the insurers domiciled insurance department. Based on the currently adopted
standards, Penn-Americas capital and surplus is in excess of the prescribed
risk-based capital requirements for 1997, 1996 and 1995.
The Company relies on its existing management information systems to operate and
monitor all major aspects of the Companys 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
Companys business, results of operations or financial condition. Like many
computer systems, the Companys 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 Companys 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. 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.
15
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Balance Sheet
<TABLE>
<CAPTION>
(in thousands except share and per share data) December 31,
1997 1996
<S> <C> <C>
Assets
Investments:
Fixed Maturities:
Available for sale, at fair value
(amortized cost 1997, $89,185 and 1996, $49,244) $89,979 $48,954
Held to maturity, at amortized cost, (fair value 1997, $47,034
and 1996, $44,111) 46,842 44,227
Equity securities, at fair value (cost 1997, $25,662 and 1996, $10,597) 27,380 12,390
Short-term investments, at cost, which approximates fair value 11,455 7,000
-------- --------
Total investments 175,656 112,571
Cash 2,163 2,979
Receivables:
Accrued investment income 1,973 1,671
Premiums receivable, net 12,414 10,494
Reinsurance recoverable 16,605 15,719
Note receivable, affiliate -- 275
-------- --------
Total receivables 30,992 28,159
Prepaid reinsurance premiums 3,065 2,668
Deferred policy acquisition costs 8,563 7,231
Capital lease 1,865 1,950
Deferred income taxes 2,302 2,211
Income tax recoverable 40 249
Other assets 511 587
-------- --------
Total assets $225,157 $158,605
======== ========
Liabilities and Stockholders Equity
Liabilities:
Unpaid losses and loss adjustment expenses $84,566 $70,728
Unearned premiums 36,173 30,865
Accounts payable and accrued expenses 2,338 1,773
Capitalized lease obligations 1,920 2,030
Note payable -- 9,000
Other liabilities 2,853 1,872
-------- --------
Total liabilities 127,850 116,268
Stockholders equity:
Preferred stock, $ .01 par value; authorized 2,000,000 shares;
none issued -- --
Common stock, $ .01 par value; authorized 1997, 20,000,000
and 1996, 10,000,000 shares; issued and outstanding 1997,
9,883,384 shares and 1996, 6,676,131 (note 2) 99 67
Additional paid-in capital 68,221 21,844
Unrealized investment gains, net of taxes 1,649 993
Retained earnings 27,849 19,533
-------- --------
97,818 42,437
Unearned compensation from restricted stock awards (511) (100)
-------- --------
Total stockholders equity 97,307 42,337
-------- --------
Total liabilities and stockholders equity $225,157 $158,605
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Statements of Earnings
<TABLE>
<CAPTION>
(in thousands except per share data) For the years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenues
Premiums earned $ 91,649 $ 69,081 $ 57,228
Net investment income 9,218 6,705 5,067
Net realized investment gains 1,314 906 1,279
Other income 672 -- --
-------- -------- --------
Total revenues 102,853 76,692 63,574
-------- -------- --------
Losses and expenses
Losses and loss adjustment expenses 57,728 43,292 35,835
Amortization of deferred policy acquisition costs 24,984 17,785 14,237
Other underwriting expenses 5,840 4,349 4,356
Interest expense 520 884 239
-------- -------- --------
Total losses and expenses 89,072 66,310 54,667
-------- -------- --------
Earnings before income tax 13,781 10,382 8,907
Income tax 4,136 3,389 2,881
-------- -------- --------
Net earnings $ 9,645 $ 6,993 $ 6,026
======== ======== ========
Net earnings per share (note 2)
Basic $ 1.19 $ 1.05 $ 0.91
Diluted $ 1.17 $ 1.04 $ 0.91
======== ======== ========
Weighted average number of shares used in
calculating per share data (note 2)
Basic 8,126 6,663 6,645
Diluted 8,228 6,743 6,655
======== ======== ========
Cash dividends per share (note 2) $ 0.16 $ 0.11 $ 0.06
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
Penn-America Group, Inc. and Subsidiaries Consolidated Statements of
Stockholders Equity
(in thousands except share and per share data)
Unrealized Unearned
Investment Compensation
Additional Gains From
Common Stock Paid-In (Losses), Retained Restricted
Shares Amount Capital Net Earnings Stock Awards Total
<S> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock 3,207,253 32 46,377 46,409
Unearned compensation from
restricted stock awards (512) (512)
Net earnings 9,645 9,645
Cash dividends paid
($0.16 per share) (1,329) (1,329)
Unrealized investment gains, net 656 656
Amortization of compensation
expense from restricted stock 101 101
--------- ---- -------- ------- -------- ------ --------
Balance, at December 31, 1997 9,883,384 $ 99 $ 68,221 $ 1,649 $ 27,849 $ (511) $ 97,307
========= ==== ======== ======= ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the years ended
December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 9,645 $ 6,993 $ 6,026
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization and depreciation expense 449 331 352
Net realized investment gains (1,314) (906) (1,279)
Deferred tax benefit (434) (2) (497)
Net increase in premiums and note receivable, prepaid
reinsurance premiums and unearned premiums 3,266 3,001 619
Net increase in unpaid losses and loss adjustment expenses
and reinsurance recoverable 12,951 8,822 10,922
(Increase) decrease in:
Accrued investment income (302) (286) (290)
Deferred policy acquisition costs (1,332) (1,515) (895)
Income tax recoverable 562 281 (256)
Other assets (50) (454) (86)
Increase (decrease) in:
Accounts payable and accrued expenses 565 (68) (8)
Other liabilities 982 624 199
-------- -------- --------
Net cash provided by operating activities 24,988 16,821 14,807
-------- -------- --------
Cash flows from investing activities:
Purchases of equity securities (19,258) (8,636) (4,627)
Purchases of fixed maturities available for sale (61,966) (21,611) (17,177)
Purchases of fixed maturities held to maturity (13,082) (24,084) (15,343)
Proceeds from sales of equity securities 5,459 8,147 4,863
Proceeds from sales of fixed maturities available for sale -- 9,825 1,421
Proceeds from maturities of fixed maturities available for sale 13,604 5,000 11,877
Proceeds from maturities of fixed maturities held to maturity 18,789 14,008 2,222
Change in short-term investments (4,455) -- (3,000)
Other -- 9 19
-------- -------- --------
Net cash used by investing activities (60,909) (17,342) (19,745)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 45,544 259 --
Principal payments on notes payable (9,000) (1,150) (1,200)
Proceeds from note payable -- -- 10,000
Principal payments on capital lease obligations (110) (102) (73)
Dividends paid (1,329) (711) (398)
Net cash provided (used) by financing activities 35,105 (1,704) 8,329
(Decrease) increase in cash (816) (2,225) 3,391
Cash, beginning of period 2,979 5,204 1,813
-------- -------- --------
Cash, end of period $ 2,163 $ 2,979 $ 5,204
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income tax $ 4,009 $ 3,111 $ 3,634
Interest 576 857 204
Non-cash transaction:
Cost of securities transferred from available for
sale to held to maturity $ 8,002 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Penn-America Group, Inc. and Subsidiaries 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 31.2% 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) and its wholly owned subsidiary
Penn-Star Insurance Company (Penn-Star). All significant intercompany 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 and
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 and general liability insurance and
non-standard personal automobile insurance, generally referred to as property
and casualty insurance, on an excess and surplus lines or non-standard basis.
Penn-America is licensed as an admitted insurer in 27 states and is an approved
non-admitted (excess and surplus lines) insurer in 23 states and the District of
Columbia. In 1997, 1996 and 1995, a significant portion of Penn-Americas gross
written automobile premium was written by two agents who are located in the
states of Washington, California and Nevada. These agents accounted for 92% in
1997, 94% in 1996 and 100% in 1995, of the personal automobile gross written
premium. Additionally, these same agents accounted for 32%, 25% and 22% of total
written premium for 1997, 1996 and 1995, respectively. During 1997, 1996 and
1995 one agent in California accounted for 12%, 11% and 11%, 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 taxes 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 and asset-backed securities are calculated
using the interest method including consideration of anticipated prepayments at
the date of purchase. Significant changes in estimated cash flows from the
original 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 deferred income taxes. Short-term investments are carried at cost which
approximates fair value.
Premiums and Other Receivables
Premiums are recognized as revenue ratably over the terms of the respective
policies. Unearned premiums are calculated on the semi-monthly pro rata basis.
Management has established an allowance for doubtful accounts of $522,000 at
December 31, 1997 and 1996, on premium receivables, which management believes is
adequate to cover uncollectible accounts.
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 an estimate 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 reviewed periodically and adjusted as
necessary; such adjustments are reflected in current operations.
20
<PAGE>
Fair Values of Financial Instruments
The Company uses the following methods or assumptions in estimating fair value
disclosures:
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 values.
Note Payable and Capitalized Lease Obligation: Fair value is based upon the
present value of the underlying cash flows discounted at the Companys
incremental borrowing rate at year end. The carrying amounts reported in the
balance sheet approximate fair value.
Reinsurance
In the ordinary course of business, the Company reinsures certain risks,
generally on an excess of loss basis with other insurance companies which
principally are rated A+ or higher by A.M. Best. Such reinsurance arrangements
serve to limit the Companys maximum loss. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liabilities arising from the
reinsured policies and incurred but not reported losses.
Capitalized Lease
The capitalized lease is carried at cost less accumulated amortization.
Amortization is calculated on the straight line basis over 20 years, which
represents the term of the mortgage on the office space which the Company rents
from a related party (See note 3).
Income Tax
Deferred 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 in income in the
period that includes the enactment date.
Note 2
Basic and Diluted Earnings Per Share and
Retroactive Adjustment for Stock Split
In 1997, SFAS 128, Earnings Per Share was issued and implemented retroactively
by the Company. Earnings per share (EPS) requires dual presentation of basic EPS
and diluted EPS on the face of the income statement. For 1997, 1996 and 1995
basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
each period. Diluted EPS reflects the potential dilution that could occur if the
securities or other contracts to issue common stock were exercised or converted
into common stock. All per share calculations and stock option disclosures
presented have been adjusted retroactively to reflect a three-for-two stock
split declared in January, 1997. Shares outstanding have also been restated to
reflect the stock split.
The following is a reconciliation of the numerator and denominators of the basic
and diluted EPS computations:
Years ended December 31,
(in thousands except per share data) 1997 1996 1995
Basic EPS:
Net earnings $9,645 $6,993 $6,026
Weighted average common
shares outstanding 8,126 6,663 6,645
------ ------ ------
Basic EPS $ 1.19 $ 1.05 $ 0.91
====== ====== ======
Diluted EPS:
Net Earnings $9,645 $6,993 $6,026
Weighted average common
shares outstanding 8,126 6,663 6,645
Additional shares outstanding
after the assumed exercise of
options by applying the treasury
stock method 102 80 10
------ ------ ------
Total Shares 8,228 6,743 6,655
------ ------ ------
Diluted EPS $ 1.17 $ 1.04 $ 0.91
====== ====== ======
Note 3 Transactions with Affiliates
Penn-America leases its home office facility from the controlling shareholder,
Penn Independent. The lease is accounted for as a capitalized lease. The amount
of property capitalized, $2,440,000, is presented net of accumulated
amortization of $575,000 and $490,000 as of December 31, 1997 and 1996,
respectively. Penn Independent and its subsidiaries also lease a portion of the
building in which Penn-Americas home office facility is located. Management
believes that the lease terms are at market rates.
Penn Independent provides Penn-America with management and other services which
amounted to $296,000, $342,000, and $455,000, in 1997, 1996 and 1995
respectively. Such amounts are based on allocations of estimated costs.
21
<PAGE>
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-Americas expenses on a stand-alone basis would not be materially
different.
Premiums written resulting from transactions with insurance agency affiliates of
Penn Independent were $1,597,000 in 1997, $3,880,000 in 1996 and $3,621,000 in
1995. Commissions paid to such affiliates were $359,000 in 1997, $888,000 in
1996 and $775,000 in 1995.
Note 4 Investments
The Company invests primarily in investment grade fixed maturities,
substantially all of which are rated A or higher by Standard & Poors
Corporation. The cost, gross unrealized gains and losses and fair values of
investments are as follows:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities
Available for sale
U.S. Treasury securities and
obligations of U.S.
government agencies $ 22,730 $ 132 $ (31) $ 22,831
Corporate securities 30,053 486 (2) 30,537
Mortgage-backed securities 11,751 41 -- 11,792
Asset-backed securities 18,602 92 -- 18,694
Public utilities 6,049 76 -- 6,125
-------- -------- -------- --------
Totals 89,185 827 (33) 89,979
-------- -------- -------- --------
Held to maturity
U.S. Treasury securities and
obligations of U.S.
government agencies 21,466 75 (6) 21,535
Corporate securities 11,284 57 (15) 11,326
Mortgage-backed securities 7,901 114 (50) 7,965
Public utilities 6,041 19 (2) 6,058
Other securities 150 -- -- 150
-------- -------- -------- --------
Totals 46,842 265 (73) 47,034
-------- -------- -------- --------
Total fixed maturity securities 136,027 1,092 (106) 137,013
-------- -------- -------- --------
Equity securities 25,662 1,957 (239) 27,380
Short-term investments 11,455 -- -- 11,455
-------- -------- -------- --------
Total investments $173,144 $ 3,049 $ (345) $175,848
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities
Available for sale
U.S. Treasury securities
and obligations of U.S.
government agencies $ 20,767 $ 90 $ (354) $ 20,503
Corporate securities 16,053 189 (75) 16,167
Mortgage-backed securities 8,376 96 (191) 8,281
Public utilities 4,048 -- (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>
Fixed maturities at December 31, 1997, 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.
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
(in thousands) Cost Value Cost Value
Due in one year or less $ 1,004 $ 1,007 $ 7,026 $ 7,088
Due after one year through
five years 21,804 22,141 22,623 22,680
Due after five years through
ten years 20,828 20,954 6,280 6,295
Due after ten years 15,196 15,391 3,012 3,005
Asset/mortgage-backed
securities 30,353 30,486 7,901 7,966
Total $89,185 $89,979 $46,842 $47,034
A summary of net investment income is as follows:
Years ended December 31,
(in thousands) 1997 1996 1995
Interest on fixed maturities $ 7,506 $ 6,108 $ 4,615
Dividends on equity securities 1,123 691 533
Interest on short-term
investments and cash 852 380 291
Other 42 61 42
------- ------- -------
Total investment income 9,523 7,240 5,481
Less investment expense (305) (535) (414)
------- ------- -------
Net investment income $ 9,218 $ 6,705 $ 5,067
======= ======= =======
22
<PAGE>
All investments in fixed maturity securities have been income-producing during
1997, 1996 and 1995. Realized pre-tax gains (losses) on the sale of investments
are as follows:
Years ended December 31,
(in thousands) 1997 1996 1995
Fixed maturities:
Gross realized gains $ 77 $ 32 $ 13
Gross realized losses (30) (529) (276)
------- ------- -------
Net gains (losses) 47 (497) (263)
------- ------- -------
Equity securities:
Gross realized gains 1,321 1,460 1,656
Gross realized losses (54) (57) (114)
------- ------- -------
Net gains 1,267 1,403 1,542
------- ------- -------
Total net realized investment
gains $ 1,314 $ 906 $ 1,279
======= ======= =======
Income taxes on net realized investment gains were $450,000, $308,000 and
$435,000 in 1997, 1996, and 1995, respectively.
The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 1997 and 1996, amounted to $7,328,000 and
$4,409,000, respectively.
Note 5 Reinsurance
In the normal course of business, the Company seeks to reduce the losses 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,
1997, reinsurance recoverables and prepaid reinsurance premiums associated with
the two major reinsurers were: General Reinsurance Corporation, (Gen Re)
$9,270,000 and National Reinsurance Corporation, $5,657,000 which is owned by
Gen Re.
Premiums written and earned consisted of the following:
Years ended December 31,
(in thousands) 1997 1996 1995
Premiums written
Direct $104,694 $ 80,496 $ 66,953
Ceded 8,133 7,027 5,667
-------- -------- --------
Net of reinsurance $ 96,561 $ 73,469 $ 61,286
======== ======== ========
Premiums earned
Direct $ 99,385 $ 75,876 $ 63,005
Ceded 7,736 6,795 5,777
-------- -------- --------
Net of reinsurance $ 91,649 $ 69,081 $ 57,228
======== ======== ========
Recoveries recognized under reinsurance contracts were as follows:
1997 $ 5,132,000
1996 $ 8,530,000
1995 $ 8,148,000
Note 6 Capitalized Lease Obligation
Capitalized lease obligation of $1,920,000 and $2,030,000 at December 31, 1997
and 1996, 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.
Note 7 Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
(in thousands) 1997 1996 1995
Balance as of January 1 $ 70,728 $ 60,139 $ 44,796
Less reinsurance recoverables 15,072 13,627 9,489
-------- -------- --------
Net balance at January 1 55,656 46,512 35,307
-------- -------- --------
Incurred related to:
Current year 57,387 44,096 37,541
Prior years 341 (804) (1,706)
-------- -------- --------
Total incurred 57,728 43,292 35,835
-------- -------- --------
Paid related to:
Current year 20,861 16,940 12,247
Prior years 23,660 17,208 12,383
-------- -------- --------
Total paid 44,521 34,148 24,630
-------- -------- --------
Net balance at December 31 68,863 55,656 46,512
Plus reinsurance recoverables 15,703 15,072 13,627
-------- -------- --------
Balance as of December 31 $ 84,566 $ 70,728 $ 60,139
======== ======== ========
23
<PAGE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses increased $341,000 in 1997,
and decreased $804,000 in 1996 and decreased $1.7 million in 1995. The increase
in prior years incurred losses in 1997 is due primarily to longer loss
development in automobile liability partially offset by favorable development in
the commercial lines. The decrease in insured losses of prior years incurred in
1996 and 1995 was due to favorable development in commercial lines.
Note 8 Income Tax
The components of income tax expense are as follows:
Years ended December 31,
(in thousands) 1997 1996 1995
Current $ 4,570 $ 3,391 $ 3,378
Deferred (434) (2) (497)
------- ------- -------
Total $ 4,136 $ 3,389 $ 2,881
======= ======= =======
The actual income tax rate differed from the statutory income tax rate
applicable to income before income taxes as follows:
(in thousands) 1997 1996 1995
Statutory income tax rate 34.2% 34.0% 34.0%
Tax-exempt interest and dividends
received deduction (1.6) (1.4) (1.3)
Life insurance proceeds (2.5) -- --
Other (0.1) -- (0.4)
---- ---- ----
30.0% 32.6% 32.3%
==== ==== ====
The tax effects of temporary differences that result in a net deferred tax asset
as of December 31 are summarized as follows:
(in thousands) 1997 1996
Assets
Effect of discounting unpaid losses
and loss adjustment expenses $3,379 $2,906
Excess of tax over financial
reporting of earned premium 2,267 1,917
Other, net 577 383
------ ------
Total assets $6,223 $5,206
------ ------
Liabilities
Deferred policy acquisition costs 2,932 2,459
Unrealized investment gains 863 512
Other, net 126 24
------ ------
Total liabilities 3,921 2,995
------ ------
Net deferred tax asset $2,302 $2,211
====== ======
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.
Note 9 Debt
On July 22, 1997, the Company completed a secondary offering of 3,025,000 shares
of its common stock. On July 25, 1997, proceeds from the offering were used to
pay-off the outstanding balance of $9,000,000 on the term loan. In November
1997, the Company signed a commitment letter for a credit facility of
$20,000,000. The structure of the new credit facility provides for repayment
over six years with interest at LIBOR plus a factor which can vary from 100 to
225 basis points. Borrowings under the new credit facility will be secured by
the common stock of Penn-America.
Note 10 Stockholders Equity
A source of cash to use for the payment of dividends to the Companys
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 maximum dividend that may be paid by Penn-America to
the Company without prior approval of regulatory authorities in 1998 is
$9,531,000.
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, 1997 and 1996, the Companys 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 procedures 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:
December 31,
(in thousands) 1997 1996 1995
Statutory surplus as regards
policyholders $ 83,459 $ 41,665 $ 39,118
Deferred policy acquisition costs 8,563 7,231 5,716
Deferred income taxes 2,302 2,214 1,955
Unrealized investment gains
(losses) on fixed maturities
available for sale 794 (289) 334
Capital lease, net (55) (80) (104)
Provision for unauthorized
reinsurance 65 57 49
Non-admitted assets 889 589 287
Other assets (liabilities) 15 (95) (295)
Provision for uncollectible
accounts (622) (622) (705)
Holding company 1,897 (8,333) (10,105)
-------- -------- --------
GAAP stockholders equity $ 97,307 $ 42,337 $ 36,250
======== ======== ========
24
<PAGE>
Years ended December 31,
(in thousands) 1997 1996 1995
Statutory net income $ 8,075 $ 6,262 $ 5,364
Deferred acquisition costs 1,332 1,515 895
Deferred income tax 418 (2) 476
Allowance for uncollectible accounts -- 84 (90)
Capital lease 25 24 23
Life insurance proceeds 672 -- --
Other, net 99 201 98
Holding company (976) (1,091) (740)
------- ------- -------
GAAP net earnings $ 9,645 $ 6,993 $ 6,026
======= ======= =======
Note 11 Profit-Sharing Plans
Penn-America participates in a profit-sharing and 401(k) plan with Penn
Independent covering qualified employees. Penn-Americas contributions under the
401(k) plan were $74,000, $51,000 and $28,000 for 1997, 1996, and 1995,
respectively. There were no profit-sharing distributions in 1997, 1996 and 1995.
Note 12 Stock Incentive Plans
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, advisors and service providers of the Company and its affiliates
(as defined in the Plan) to participate in the Companys 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 to ten years after the date of grant. 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 the
Plan. Had compensation cost for the Plan been determined based on fair value at
the grant date consistent with FASB Statement No. 123, the effect on the
companys net earnings and earnings per share would have been:
Years ended December 31,
(in thousands) 1997 1996 1995
Net earnings (in thousands):
As reported $ 9,645 $ 6,993 $ 6,026
Pro forma 9,610 6,958 6,011
Basic earnings per share:
As reported $ 1.19 $ 1.05 $ 0.91
Pro forma 1.18 1.04 0.90
Diluted earnings per share:
As reported $ 1.17 $ 1.04 $ 0.91
Pro forma 1.17 1.03 0.90
The fair value of options is estimated on the grant date using the Black-Scholes
option pricing model. The model assumes the following for 1997, 1996, and 1995,
respectively: expected annual dividend rates of 1.1%, 1.2% and 1.5%; risk-free
interest rate of 6.8% for all years; weighted average expected lives of 2.5
years for all years; and expected stock price volatility of 30% for all years.
A summary of the status of the Companys stock option plan as of December 31,
1997, 1996, and 1995, and the changes during the years ended on those dates is
presented below:
(Options in thousands) 1997 1996 1995
Outstanding at beginning of year
(average price of $6.07, $5.86,
and $5.89 in 1997, 1996, and
1995 respectively) 405 382 352
Granted
(average price of $13.99, $8.83,
and $5.42 per share) 22 30 30
Exercised
(average price of $6.19 and
$6.00 per share) (114) (7) --
Forfeited -- -- --
----- ----- -----
Outstanding at end of year
(average price of $6.40, $6.07
and $5.86 per share) 313 405 382
===== ===== =====
Options exercisable at end of year
(in 000s) 250 279 118
===== ===== =====
Weighted average fair value
of options granted
during the year $2.45 $2.11 $1.27
===== ===== =====
25
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
12/31/97 Contractual Exercise 12/31/97 Exercise
Exercise Prices (in 000s) Life (Years) Price (in 000s) Price
$ 4.33 - $ 5.42 30 2.9 $ 4.88 30 $ 4.88
$ 6.00 253 5.8 $ 6.00 205 $ 6.00
$ 8.83 - $ 15.13 30 5.0 $ 11.36 15 $ 8.83
- -------------------------------------------------------------------------------
$ 4.33 - $ 15.13 313 5.5 $ 6.40 250 $ 6.03
- -------------------------------------------------------------------------------
Restricted Stock: The Company also awarded at the initial public offering in
October, 1993, to certain employees 45,000 shares of restricted stock having a
value of $270,000. During the secondary offering in July 1997, the Company
awarded an additional 32,500 shares of restricted stock having a value on the
date of the award of $512,000. Such shares are held by the Company and released
to each grantee at the rate of 20% per year provided that the grantee is still
employed by the Company or its affiliates. The Company charged $101,000, $54,000
and $54,000 to compensation expense relating to these awards for the years ended
1997, 1996 and 1995, respectively. During 1997, 1996 and 1995, 9,900, 9,000 and
9,000 shares, respectively, of the restricted stock were released to the
applicable employees as provided by the provisions of the grant.
Executive Incentive Compensation Plan: During 1995, the Board of Directors of
the Company adopted an executive incentive compensation plan which provides up
to 75,000 shares, over the life of the plan, to be granted to key officers,
executives and employees of the Company and its subsidiaries. In January 1998,
5,629 shares were distributed in accordance with the plans provisions for fiscal
year 1997. In January 1997 and 1996, 7,535 shares and 7,229 shares respectively
were distributed for the prior two fiscal years.
The shares issued under this plan are valued at the fair 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 Boards 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 of the contingent
commission award would be given in stock of the Company. Up to 75,000 shares of
the Companys stock were authorized for issuance under this plan. Agents stock
awards for the 1996 and 1995 years which were issued in May of 1997 and 1996,
amounted to 27,746 shares and 16,403 shares respectively. The awards for the
1997 year will not be determined until March of 1998.
Note 13 Commitments and Contingencies
The Companys insurance subsidiaries are subject to routine legal proceedings in
connection with their property and casualty insurance business. Neither the
Company nor its subsidiaries are involved in any pending or threatened legal or
administrative proceedings which management believes might have a material
adverse effect on the Companys financial condition or results of operations.
The Company leases various computer equipment for use by its insurance
subsidiaries. These leases have lease terms primarily expiring in less than a
three-year period. Rental expense for these operating leases were $417,000,
$485,000 and $382,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
At December 31, 1997, the future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year were: 1998, $431,000, 1999, $221,000, and 2000, $8,000
Note 14
Unaudited - Quarterly Results of Operations
for 1997 and 1996
<TABLE>
<CAPTION>
(in thousands, except per share data)
1997
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $ 22,840 $ 25,127 $ 26,950 $ 27,936 $102,853
Losses and expenses 20,251 22,328 23,031 23,462 89,072
Net earnings 1,750 2,019 2,587 3,289 9,645
Net earnings per share:(1)
Basic 0.26 0.30 0.28 0.33 1.19
Diluted 0.26 0.30 0.28 0.33 1.17
1996
First Second Third Fourth Total
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
Net earnings per share:(1)
Basic 0.21 0.24 0.28 0.32 1.05
Diluted 0.21 0.23 0.27 0.32 1.04
<FN>
(1) The quarterly net earnings per share data has been restated for the
retroactive implementation of SFAS #128. (see Note 2)
</FN>
</TABLE>
26
<PAGE>
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 subsidiaries as of December 31, 1997 and 1996, 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, 1997. These
financial statements are the responsibility of the Companys 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 subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 23, 1998
Philadelphia, Pennsylvania
27
<PAGE>
Stockholders, Board of Directors and Management Information
Principal Officers Penn-America Group, Inc.
Jon S. Saltzman
President and Chief Executive Officer
Rosemary R. Ferrero, CPA
Vice President - Finance, Secretary and Treasurer
Principal Officers
Penn-America Insurance Company and
Penn-Star Insurance Company
Jon S. Saltzman
President and Chief Executive Officer
John M. DiBiasi, CPCU
Executive Vice President Underwriting and Marketing
Rosemary R. Ferrero, CPA
Vice President - Finance, Secretary and Treasurer
David Taylor, CPCU
Senior Vice President, Personal Lines
J.Ransley Lennon
Vice President Information Systems
Linda Spaide
Vice President, Claims
Garland P. Pezzuolo
Corporate Counsel
Auditors
KPMG Peat Marwick LLP
1600 Market Street
Philadelphia PA 19103
Consulting Actuary
Ronald T. Kuehn
Ernst & Young LLP
Two Commerce Square
STE 4000
2001 Market Street
Philadelphia PA 19103
Registrar and Transfer Agency
First Union National Bank
Corporate Trust Operations
1525 W. WT Harris Boulevard
Charlotte NC 28288-1153
Stockholder Inquiries: (800) 829-8432
Corporate Communication Consultant
David Kirk, APR
127 Gateshead Way
Phoenixville PA 19460-1048
(610) 792-3329 or [email protected]
Graphic Design Firm
Malish Design Ltd.
211 N. 13th Street Suite 601
Philadelphia PA 19107
(215) 972-5340 or
[email protected]
Board of Directors
Penn-America Group, Inc.
Irvin Saltzman
Chairman of the Board of Directors
Jon S. Saltzman
President and Chief Executive Officer
Director
James E. Heerin, Jr.
Vice President and General Counsel
Penn Independent Corporation
Director
Senior Vice President and
General Council
InterAg Technologies, Inc.
Robert A. Lear
President
Penn Independent Corporation
Director
M. Moshe Porat, Ph.D., CPCU
Dean
School of Business and Management
Temple University
Director
Jami Saltzman-Levy
Vice President, Human Resources
Penn Independent Corporation
Director
Charles Ellman
Retired
Director
Paul Simon
Director, Public Policy Institute
Southern Illinois University
Director
Thomas M. Spiro
Managing General Partner
TMS Capital Partners, L.P.
Director
Annual Meeting
The Annual Stockholders Meeting will be held in our home office on May 20, 1998
at 10:00 A.M.
Stockholder Relations, Form 10-K
The Companys Form 10-K has been filed with the Securities and Exchange
Commission. A copy of the Form 10-K and interim reports are available to
stockholders without charge from the Investor Relations Department. Telephone
(215) 443-3656 or send your E-mail request to [email protected]
Corporate Headquarters
420 South York Road
Hatboro PA 19040-3949
(215) 443-3600 voice
(215) 443-3603 facsimile
http://www.penn-america.com
Market and Common Stock Information
The Companys common stock trades on the NASDAQ stock market under the symbol
PAGI. As of January 12, 1998, there were 1200 beneficial holders of record of
the Companys common stock. The high and low sales price of the common stock, as
reported by the National Association of Securities Dealers, were as follows:
1997
Quarter High Low
First $ 14.50 $ 10.33
Second 15.50 11.25
Third 21.25 14.38
Fourth 21.75 17.25
1996
Quarter High Low
First $ 10.33 $ 7.67
Second 11.17 8.50
Third 11.17 9.50
Fourth 11.08 10.42
Except for the historical information contained in this report, 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 Companys current best estimates
regarding its future operations. The Companys 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 report.
A variety of factors may materially impact estimates of future operations. Many
of such factors are outside the Companys 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 Companys general agents and
changes in state insurance regulations.
28
Exhibit 23
Independent Auditors' Consent and Report on Schedules
The Board of Directors and Stockholders
Penn-America Group, Inc.:
Under date of January 23, 1998, we reported on the consolidated balance sheets
of Penn-America Group, Inc., and subsidiaries as of December 31, 1997 and 1996,
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,
1997, as contained in the 1997 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1997. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules as listed in the accompanying
index. 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 whole, present fairly,
in all material respects, the information set forth therein.
We consent to incorporation by reference in the registration statement (No.
33-82728) on Form S-8 of Penn-America Group, Inc. and subsidiaries of our
reports dated January 23, 1998, relating to the consolidated balance sheets of
Penn-America Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of earnings, stockholders equity, and cash
flows and the related consolidated financial statement schedules for each of the
years in the three-year period ended December 31, 1997, which reports are
incorporated by reference in or appear in the December 31, 1997 annual report on
Form 10-K of Penn-America Group, Inc.
/S/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Earnings at December 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 89,979
<DEBT-CARRYING-VALUE> 46,842
<DEBT-MARKET-VALUE> 0
<EQUITIES> 27,380
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 175,656
<CASH> 2,136
<RECOVER-REINSURE> 16,605
<DEFERRED-ACQUISITION> 8,563
<TOTAL-ASSETS> 225,157
<POLICY-LOSSES> 84,566
<UNEARNED-PREMIUMS> 36,173
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 97,208
<TOTAL-LIABILITY-AND-EQUITY> 225,157
91,649
<INVESTMENT-INCOME> 9,218
<INVESTMENT-GAINS> 1,314
<OTHER-INCOME> 672
<BENEFITS> 57,728
<UNDERWRITING-AMORTIZATION> 24,984
<UNDERWRITING-OTHER> 5,840
<INCOME-PRETAX> 13,781
<INCOME-TAX> 4,136
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,645
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.17
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Earnings at December 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 48,954
<DEBT-CARRYING-VALUE> 44,227
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,390
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 112,571
<CASH> 2,979
<RECOVER-REINSURE> 15,719
<DEFERRED-ACQUISITION> 7,231
<TOTAL-ASSETS> 158,605
<POLICY-LOSSES> 70,728
<UNEARNED-PREMIUMS> 30,865
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 67
<OTHER-SE> 42,270
<TOTAL-LIABILITY-AND-EQUITY> 158,605
69,081
<INVESTMENT-INCOME> 6,705
<INVESTMENT-GAINS> 906
<OTHER-INCOME> 0
<BENEFITS> 43,292
<UNDERWRITING-AMORTIZATION> 17,785
<UNDERWRITING-OTHER> 4,349
<INCOME-PRETAX> 10,382
<INCOME-TAX> 3,389
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,993
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Earnings at December 31, 1995
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 43,281
<DEBT-CARRYING-VALUE> 34,276
<DEBT-MARKET-VALUE> 0
<EQUITIES> 10,667
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 95,224
<CASH> 5,204
<RECOVER-REINSURE> 13,952
<DEFERRED-ACQUISITION> 5,716
<TOTAL-ASSETS> 137,763
<POLICY-LOSSES> 60,139
<UNEARNED-PREMIUMS> 26,245
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 44
<OTHER-SE> 36,206
<TOTAL-LIABILITY-AND-EQUITY> 137,763
57,228
<INVESTMENT-INCOME> 5,067
<INVESTMENT-GAINS> 1,279
<OTHER-INCOME> 0
<BENEFITS> 35,835
<UNDERWRITING-AMORTIZATION> 14,237
<UNDERWRITING-OTHER> 4,356
<INCOME-PRETAX> 8,907
<INCOME-TAX> 2,881
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,026
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
