SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
---------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22316
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Penn-America Group, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 South York Road, Hatboro, Pennsylvania 19040
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(Address of principal executive offices, including zip code)
(215) 443-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
At November 14, 2000, 7,565,025 shares of the registrant's common stock, $.01
par value, were outstanding.
Page 1
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Index
Page Number
Part I - Financial Information
Consolidated Unaudited Balance Sheets - September 30, 2000 and
December 31, 1999 3
Consolidated Unaudited Statements of Operations - For the three
and nine months ended September 30, 2000 and 1999 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the nine months ended September 30, 2000 5
Consolidated Unaudited Statements of Cash Flows -
For the nine months ended September 30, 2000 and 1999 6
Notes to Unaudited Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Part II - Other Information 25
Page 2
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
September 30, December 31,
2000 1999
---------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost 2000, $117,319;
1999, $115,975) $ 116,527 $ 111,419
Held to maturity, at amortized cost (fair value 2000, $17,225; 1999, $16,103) 17,271 16,294
Equity securities, at fair value (cost 2000, $27,324; 1999, $28,014) 24,914 26,020
Short-term investments, at cost, which approximates fair value -- 449
---------------- -----------------
Total investments 158,712 154,182
Cash 14,284 12,045
Accrued investment income 2,048 1,965
Premiums receivable, net 11,378 8,981
Reinsurance recoverable 17,607 18,284
Prepaid reinsurance premiums 4,596 3,529
Deferred policy acquisition costs 11,050 9,306
Capital lease 1,775 1,840
Deferred income taxes 4,655 5,487
Income tax recoverable 3,357 1,652
Other assets 341 511
---------------- -----------------
Total assets $ 229,803 $ 217,782
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 105,484 $ 93,719
Unearned premiums 43,687 36,332
Accounts payable and accrued expenses 2,544 1,755
Capitalized lease obligation 1,731 1,821
Other liabilities 3,548 3,537
---------------- -----------------
Total liabilities 156,994 137,164
---------------- -----------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares;
None issued -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
issued 2000 and 1999, 10,065,025 and 9,990,436 shares;
outstanding 2000 and 1999, 7,565,025 and 8,062,861 shares 101 100
Additional paid-in capital 70,084 69,591
Accumulated other comprehensive loss (2,114) (4,324)
Retained earnings 29,680 35,050
Treasury stock, 2000, 2,500,000 shares; 1999, 1,927,575 shares, at cost (24,161) (19,474)
Officers' stock loans (546) --
Unearned compensation from restricted stock awards (235) (325)
---------------- -----------------
Total stockholders' equity 72,809 80,618
---------------- -----------------
Total liabilities and stockholders' equity $ 229,803 $ 217,782
================ =================
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the three and nine month periods ended September 30, 2000 and 1999
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $23,366 $21,555 $67,392 $64,375
Net investment income 2,753 2,403 7,613 7,163
Net realized investment gain (loss) (1,148) 1 (1,177) 1,239
-------- -------- -------- --------
Total revenues 24,971 23,959 73,828 72,777
-------- -------- -------- --------
Losses and expenses:
Losses and loss adjustment expenses 24,546 21,329 56,445 48,874
Amortization of deferred policy acquisition costs 6,608 6,103 19,320 18,343
Other underwriting expenses 1,690 1,668 5,062 4,553
Interest expense 36 36 109 109
-------- -------- -------- --------
Total losses and expenses 32,880 29,136 80,936 71,879
-------- -------- -------- --------
Income (loss) before income tax benefit (7,909) (5,177) (7,108) 898
Income tax (benefit) (2,831) (1,933) (2,951) (263)
-------- -------- -------- --------
Net income (loss) $(5,078) $(3,244) $(4,157) $1,161
======== ======== ======== ========
Basic and diluted net earnings (loss) per share $(0.67) $(0.38) $(0.54) $0.13
Weighted average number of shares outstanding
Basic 7,558 8,457 7,714 8,742
Diluted 7,558 8,457 7,714 8,814
Cash dividends per share $0.0525 $0.0525 $0.1575 $0.155
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the nine months ended September 30, 2000
(In thousands, except share data)
Unearned
Compensation
Accumulated From
Common Stock Additional Other Officers' Restricted
-------------------- Paid-In Comprehensive Retained Treasury Stock Stock
Shares Amount Capital Income (Loss) Earnings Stock Loans Awards Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 9,990,436 $100 $69,591 $(4,324) $35,050 $(19,474) - $(325) $80,618
Net loss (4,157) (4,157)
Other comprehensive income:
unrealized gains
on investments,
net of tax
and reclassification
adjustment 2,210 2,210
------
Comprehensive income (1,947)
------
Issuance of common stock 74,589 1 493 494
Officers' stock loans (546) (546)
Amortization of compensation
expense from restricted
stock awards issued 90 90
Cash dividends paid
($0.1575 per share) (1,213) (1,213)
Purchase of treasury
stock, 572,425 shares (4,687) (4,687)
----------------------------------------------------------------------------------------------------
Balance at September 30, 2000 10,065,025 $101 $70,084 $(2,114) $29,680 $(24,161) $(546) $(235) $72,809
====================================================================================================
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 2000 and 1999
(In thousands)
<S> <C> <C>
Nine months ended September 30,
-------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income (loss) $(4,157) $1,161
Adjustments to reconcile net earnings to net cash provided by
Operating activities:
Amortization and depreciation expense 396 389
Net realized investment (gains) losses 1,177 (1,239)
Deferred income tax (benefit) (306) 104
Net decrease in premiums receivable, prepaid reinsurance premiums
And unearned premiums 3,891 1,755
Net increase in unpaid losses and loss adjustment expenses
And reinsurance recoverable 12,442 4,642
Accrued investment income (83) (296)
Deferred policy acquisition costs (1,744) (512)
Income tax recoverable (1,705) (1,242)
Other assets 74 89
Accounts payable and accrued expenses 789 1,223
Other liabilities 11 (400)
-------- --------
Net cash provided by operating activities 10,785 5,674
-------- --------
Cash flows from investing activities:
Purchases of equity securities (11,957) (7,372)
Purchases of fixed maturities available for sale (60,771) (29,704)
Purchases of fixed maturities held to maturity (9,949) (2,785)
Proceeds from sales of equity securities 12,753 3,764
Proceeds from sales and maturities of fixed maturities available for sale 57,972 22,877
Proceeds from maturities and calls of fixed maturities held to maturity 9,000 7,256
Change in short-term investments 449 997
-------- --------
Net cash used by investing activities (2,503) (4,967)
-------- --------
Cash flows from financing activities:
Issuance of common stock 493 465
Purchase of treasury stock (4,687) (11,346)
Officers' stock loans (546) --
Principal payments on capital lease obligations (90) (102)
Dividends paid (1,213) (1,342)
-------- --------
Net cash used by financing activities (6,043) (12,325)
-------- --------
Increase (decrease) in cash 2,239 (11,618)
Cash, beginning of period 12,045 24,077
-------- --------
Cash, end of period $14,284 $12,459
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $109 $109
Taxes (recovered) (950) 875
</TABLE>
Page 6
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Organization and Basis of Presentation
Penn-America Group, Inc. ("PAGI") is an insurance holding company that
operates through its wholly owned subsidiaries, Penn-America Insurance Company
("Penn-America") and Penn-Star Insurance Company. "The Company" refers to PAGI
and its subsidiaries. Penn Independent Corporation ("Penn Independent") owns
approximately 41% of the outstanding common stock of PAGI as of September 30,
2000.
The accompanying condensed unaudited consolidated financial statements
and notes have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of results for the interim periods have been
included. It is suggested that these condensed unaudited consolidated financial
statements and notes be read in conjunction with the financial statements and
notes included in the Corporation's Form 10-K for the year ended December 31,
1999. The Company's results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire year.
Note 2 - Reinsurance
Premiums earned are presented net of amounts ceded to reinsurers of
$2.9 million and $2.5 million for the three months ended September 30, 2000 and
1999, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $0.4 million and $2.0 million for the three
months ended September 30, 2000 and 1999, respectively.
Premiums earned are presented net of amounts ceded to reinsurers of
$8.4 million and $5.9 million for the nine months ended September 30, 2000 and
1999, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $2.9 million and $6.1 million for the nine months
ended September 30, 2000 and 1999, respectively
Note 3 - Comprehensive Income
Accumulated other comprehensive income (loss) of the Company consists
solely of unrealized gains (losses) on investment securities net of income tax
(benefit) and reclassification adjustments.
Page 7
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 4 - Basic and Diluted Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Net income (loss) $(5,078) $(3,244) $(4,157) $1,161
------- ------- ------- -------
Weighted average common
shares outstanding 7,558 8,457 7,714 8,742
------- ------- ------- -------
Basic Earnings Per Share $(0.67) $(0.38) $(0.54) $0.13
======= ======= ======= =======
Diluted Earnings Per Share:
Net income (loss) $(5,078) $(3,244) $(4,157) $1,161
------- ------- ------- -------
Weighted average common
shares outstanding 7,558 8,457 7,714 8,742
Additional shares outstanding
after the assumed exercise
of options by applying the
treasury stock method * * * 72
------- ------- ------- -------
Total weighted average common
shares outstanding 7,558 8,457 7,714 8,814
======= ======= ======= =======
Diluted Earnings Per Share $(0.67) $(0.38) $(0.54) $0.13
======= ======= ======= =======
<FN>
* The company has issued options to purchase 369,250 shares of common stock to
employees and directors at prices ranging from $5.42 to $19.00. These options
are not considered in the computation of EPS for these periods, as the impact
would be anti-dilutive.
</FN>
</TABLE>
Note 5- Change in accounting estimate
During the third quarter of 2000, the Company completed a routine
actuarial review, which included a study by the Company's outside consulting
actuary. The third quarter 2000 operating results include a strengthening of
prior year loss reserves by $7.6 million, or $4.9 million net of tax benefit
($0.65 per basic and diluted share) relating principally to the Company's
commercial automobile liability, CMP liability and other liability lines of
business.
Page 8
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 6- Segment Information
The Company has two reportable segments: non-standard personal minimum
limits automobile and commercial lines. The Company announced in April 1999 that
it would run-off its remaining portfolio of the personal lines automobile
business, which was underwritten through a single agent in California. This
followed a decision earlier in 1999 to eliminate the remainder of the Company's
non-standard personal automobile portfolio of this business in nine other
states. The Company will continue to report on this segment separately until the
amounts relating to the non-standard personal automobile business become
immaterial to the financial statements presented. These segments are managed
separately because they have different customers, pricing and expense
structures. The Company does not allocate assets between segments because assets
are reviewed in total by management for decision-making purposes.
The accounting policies of the segments are the same as those more
fully described in the summary of significant accounting policies in the
Company's annual report. The Company evaluates segment profit based on profit or
loss from operating activities. Segment profits or losses from operations are
pre-tax and do not include unallocated expenses but does include investment
income attributable to insurance transactions. Segment profit or loss therefore
excludes federal income taxes, unallocated expenses and investment income
attributable to equity as opposed to investment income attributable to insurance
transactions.
The following is a summary of the Company's segment revenues, expenses
and profit for the nine months ended September 30, 2000 and 1999:
(in thousands) Three months ended September 30, 2000
-------------------------------------
Personal
Commercial Automobile Total
---------------------------------------------
Premiums earned $22,749 $617 $23,366
Net investment income from
insurance operations 831 100 931
---------------------------------------------
Total segment revenues 23,580 717 24,297
---------------------------------------------
Segment losses and LAE 24,359 187 24,546
Segment expenses 5,367 217 5,584
---------------------------------------------
Total segment expenses 29,726 404 30,130
---------------------------------------------
Segment profit (loss) $(6,146) $313 $(5,833)
---------------------------------------------
Unallocated items:
Net investment income from equity 674
Unallocated expenses (2,750)
Income tax benefit 2,831
-----------
Net loss $(5,078)
===========
Page 9
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 6- Segment Information (Continued)
(in thousands) Three months ended September 30, 1999
----------------------------------------------
Commercial Personal
Automobile Total
----------------------------------------------
Premiums earned $18,632 $2,923 $21,555
Net investment income from
insurance operations 1,138 237 1,375
----------------------------------------------
Total segment revenues 19,770 3,160 22,930
----------------------------------------------
Segment losses and LAE 16,278 5,051 21,329
Segment expenses 5,770 1,020 6,790
----------------------------------------------
Total segment expenses 22,048 6,071 28,119
----------------------------------------------
Segment loss $(2,278) $(2,911) $(5,189)
----------------------------------------------
Unallocated items:
Net investment income from equity 1,029
Unallocated expenses (1,017)
Income tax benefit 1,933
-----------
Net loss $(3,244)
===========
The following is a summary of the Company's segment revenues, expenses and
profit for the nine months ended September 30, 2000 and 1999:
(in thousands) Nine months ended September 30, 2000
----------------------------------------------
Commercial Personal
Automobile Total
----------------------------------------------
Premiums earned $63,616 $3,776 $67,392
Net investment income from
insurance operations 3,332 402 3,734
----------------------------------------------
Total segment revenues 66,948 4,178 71,126
----------------------------------------------
Segment losses and LAE 54,047 2,398 56,445
Segment expenses 17,904 1,358 19,262
----------------------------------------------
Total segment expenses 71,951 3,756 75,707
----------------------------------------------
Segment profit (loss) $(5,003) $422 $(4,581)
----------------------------------------------
Unallocated items:
Net investment income from equity 2,702
Unallocated expenses (5,229)
Income tax benefit 2,951
-----------
Net loss $(4,157)
===========
Page 10
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 6- Segment Information (Continued)
(in thousands) Nine months ended September 30, 1999
----------------------------------------------
Personal
Commercial Automobile Total
----------------------------------------------
Premiums earned $52,666 $11,709 $64,375
Net investment income from
insurance operations 3,761 698 4,459
----------------------------------------------
Total segment revenues 56,427 12,407 68,834
----------------------------------------------
Segment losses and LAE 36,970 11,904 48,874
Segment expenses 15,996 3,870 19,866
----------------------------------------------
Total segment expenses 52,966 15,774 68,740
----------------------------------------------
Segment profit (loss) $3,462 $(3,368) $94
----------------------------------------------
Plus unallocated items:
Net investment income from equity 3,943
Unallocated expenses (3,139)
Income tax benefit
263
-----------
Net income $ 1,161
===========
Page 11
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended September 30, 2000 and 1999
Premiums earned increased 8.4% to $23.4 million for the three
months ended September 30, 2000 from $21.6 million for the three months ended
September 30, 1999, due to a 22.1% increase in commercial premiums, partially
offset by a 78.9% decline in non-standard personal lines automobile caused by
the run off of personal lines. The company announced in 1999 that it is running
off its non-standard personal automobile business.
Gross written premiums increased 9.0% for the three months ended
September 30, 2000 to $28.5 million compared to $26.2 million in 1999, due to a
18.5% increase in commercial gross written premiums partially offset by a 87.0%
decline in non-standard personal lines automobile.
Net written premiums increased 12.7% for the three months ended
September 30, 2000 to $25.3 million compared to $22.4 million in 1999, due to a
24.1% increase in commercial net written premiums, partially offset by a 86.3%
decline in non-standard personal lines.
Net investment income increased 14.6% to $2.8 million for the three
months ended September 30, 2000, from $2.4 million for the three months ended
September 30, 1999. This increase resulted principally from an increase in the
tax equivalent investment yield of the fixed income security portfolio and the
growth in invested assets. In the quarter ended September 30, 2000, the Company
sold approximately $50 million of primarily fixed-income securities to utilize
tax benefits available from capital gain carry forwards and re-invested the
proceeds principally in higher-yielding taxable securities. As a result of this
transaction, the Company realized net investment losses at $1.1 million.
Losses and loss adjustment expenses increased 15.1% to $24.5 million
for the three months ended September 30, 2000, from $21.3 million for the three
months ended September 30, 1999. The Company strengthened reserves by $4.9
million, after tax benefit, following a reserve review, which included a study
by the Company's outside consulting actuary. The Company strengthened reserves
and recorded additional property losses in the third quarter of 1999, resulting
in a charge of $4.9 million, net of tax benefit.
Amortization of deferred policy acquisition costs increased 8.3% to
$6.6 million for the three months ended September 30, 2000 compared to $6.1
million in 1999, due primarily to the 8.4% increase in net premiums earned.
Other underwriting expenses remained at $1.7 million for both the
three-month periods ended September 30, 2000 and 1999.
The overall statutory combined ratio for the Company increased to 139.5
for the three months ended September 30, 2000, from 133.2 for the three months
ended September 30, 1999, primarily due to the increase in the loss ratio to
105.1 in 2000, compared to 99.0 in 1999. The increase in the loss ratio is
primarily due to the third quarter 2000 reserve strengthening. The expense ratio
increased slightly to 34.4 for the three months ended September 30, 2000,
compared to 34.2 for the three months ended September 30, 1999.
Page 12
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
As a result of the factors described above, the Company recorded a net
loss for the three months ended September 30, 2000 of $5.1 million or $0.67 per
share (basic and diluted), compared to a net loss of $3.2 million or $0.38 per
share (basic and diluted) for the three months ended September 30, 1999. Per
share amounts for the three months ended September 30, 2000 are based on
weighted average shares outstanding of 7,558,000 (basic and diluted). Per share
amounts for the three months ended September 30, 1999 are based on weighted
average shares outstanding of 8,457,000 (basic and diluted).
Nine Months Ended September 30, 2000 and 1999
Premiums earned increased 4.7% to $67.4 million for the nine months
ended September 30, 2000 from $64.4 million for the nine months ended September
30, 1999. This increase was due to a 20.8% increase in commercial premiums
earned, partially offset by a 67.7% decline in non-standard personal lines
automobile premiums earned caused by the run off of personal lines as announced
in 1999.
Gross written premiums increased 14.3% for the nine months ended
September 30, 2000 to $83.1 million compared to $72.7 million in 1999, due to a
27.5% increase in commercial gross written premiums offset by a 71.4% decline in
non-standard personal lines automobile.
Net written premiums increased 12.3% for the nine months ended
September 30, 2000 to $73.7 million compared to $65.6 million in 1999, due to a
26.8% increase in commercial net written premiums, partially offset by a 71.4%
decline in non-standard personal lines automobile.
Net investment income increased 6.3% to $7.6 million for the nine
months ended September 30, 2000, from $7.2 million for the nine months ended
September 30, 1999. This increase resulted principally from an increase in the
tax equivalent investment yield of the fixed income portfolio and the growth in
invested assets. In the quarter ended September 30, 2000, the Company sold
approximately $50 million of primarily fixed-income securities to utilize tax
benefits available from capital gain carry forwards and re-invested the proceeds
principally in higher-yielding taxable securities. Primarily as a result of this
transaction, the Ccompany realized net investment losses of $1.1 million in the
nine months ended September 30, 2000, compared to a realized gain of $1.2
million in the nine months ended September 30, 1999.
Losses and loss adjustment expenses increased 15.5% to $56.4 million
for the nine months ended September 30, 2000, from $48.9 million for the nine
months ended September 30, 1999. The Company strengthened reserves by $6.2
million, after tax benefit, following a reserve review, which included a study
by the Company's outside consulting actuary. The Company strengthened reserves
and recorded additional property losses in the third quarter of 1999, resulting
in a charge of $4.9 million, net of tax benefit.
Amortization of deferred policy acquisition costs increased 5.3% to
$19.3 million for the nine months ended September 30, 2000, compared to $18.3
million for the nine months ended September 30, 1999, primarily due to an
increase in net premiums earned.
The overall statutory combined ratio for the Company increased to 118.6
for the nine months ended September 30, 2000, from 110.3 for the nine months
ended September 30, 1999, primarily due to the increase in the loss ratio to
83.8 in 2000, compared to 75.9 in 1999. The increase in the loss ratio is
primarily due to the
Page 13
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
reserve strengthening. The expense ratio increased slightly to 34.8 for the nine
months ended September 30, 2000, compared to 34.4 for the nine months ended
September 30, 1999.
As a result of the factors described above, the Company's net loss for
the nine months ended September 30, 2000 was $4.2 million or $0.54 per share
(basic and diluted), compared to net income of $1.2 million or $0.13 per share
(basic and diluted) for the nine months ended September 30, 1999. Per share
amounts for the nine months ended September 30, 2000 are based on weighted
average shares outstanding of 7,714,000 (basic and diluted). Per share amounts
for the nine months ended September 30, 1999 are based on weighted average
shares outstanding of 8,742,000 (basic) and 8,814,000 (diluted).
Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common
stock of Penn-America. PAGI's cash flows depend primarily on dividends and other
payments from Penn-America and its subsidiary, Penn-Star. PAGI uses these funds
to pay (i) operating expenses, (ii) taxes and other payments, and (iii)
dividends to PAGI stockholders. Penn-America's sources of funds are operations,
investment income and proceeds from sales and redemptions of investments. Funds
are used by Penn-America and Penn-Star 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 90.0% to $10.8
million for the nine months ended September 30, 2000, from $5.7 million for the
nine months ended September 30, 1999, due primarily to the increase in gross
commercial premiums written, along with the decrease in paid losses and loss
adjustment expenses.
Net cash used by investing activities decreased 49.6% to $2.5 million
for the nine-month periods ended September 30, 2000, from $5.0 million for the
nine months ended September 30, 1999.
Net cash used by financing activities decreased to $6.0 million for the
nine months ended September 30, 2000, compared to $12.3 million for the same
period in 1999. This decrease is due to the repurchase of the Company's common
stock of $4.7 million for the nine-month period ended September 30, 2000,
compared to $11.3 million for the nine months ended September 30, 1999. The
Company announced a corporate stock buy-back program in July 1998. As of
September 30, 2000, the Company has acquired 2.5 million shares (the maximum
that can be acquired under current authority from the Company's Board of
Directors) at an average cost of $9.66 per share. The funding for the treasury
stock program has been provided by dividends from the Company's insurance
subsidiary, Penn-America.
As a result of the dividends paid to PAGI, and the strengthening of its
loss reserves, statutory surplus of Penn-America as of September 30, 2000
decreased to $55.8 million from $69.4 million as of September 30, 1999.
In the third quarter, the Company terminated its $25 million revolving
credit facility. The Company had not borrowed from this facility since its
inception in 1998. The Company believes that it has sufficient liquidity to meet
its anticipated insurance obligations and operating and capital expenditure
needs. The Company's investment strategy emphasizes quality, liquidity and
diversification, as well as total return. With respect to liquidity, the Company
considers liability durations, specifically related to loss reserves, when
determining
Page 14
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
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 September 30, 2000 was
approximately 3.39 years.
The Company's fixed maturity portfolio of $133.8 million was 84.3% of
the total investment portfolio as of September 30, 2000. Approximately 99% of
these securities were rated "A" or better by Standard & Poor's or Moody's.
Equity securities, the majority of which consist of preferred stocks and
exchange traded funds, were $24.9 million or 15.7% of total investments as of
September 30, 2000.
As of September 30, 2000, the investment portfolio contained $5.2
million of mortgage/asset-backed obligations, which represents 3.3% of the total
investments as of September 30, 2000. All of these securities are "AAA" rated
securities issued by government, government-related agencies or publicly held
corporations, are publicly traded, and have market values obtained from an
independent pricing service. Changes in estimated cash flows due to changes in
prepayment assumptions from the original purchase assumptions are revised based
on current interest rates and the economic environment. The Company had no
derivative financial instruments, real estate or mortgages in the investment
portfolio as of September 30, 2000.
The principal source of cash for the payment of dividends to PAGI's
stockholders, PAGI operating expenses and repurchase of PAGI stock is dividends
from Penn-America and its subsidiary, Penn-Star. Penn-America is required by law
to maintain a certain minimum surplus on a statutory basis and is subject to
risk-based capital requirements and regulations under which payment of dividends
from statutory surplus may require prior approval from the Pennsylvania
Insurance Department. Penn-America may pay dividends to PAGI without advance
regulatory approval only from unassigned surplus and only to the extent that all
dividends in the past twelve months do not exceed the greater of 10% of total
statutory surplus or statutory net income for the prior year. Using this
criteria, the available ordinary dividend for 2000 was $.6 million, however no
ordinary dividends were paid to PAGI in 2000. Rather, Penn-America paid a $6.4
million return of capital in 2000 to PAGI, after receiving approval from the
Pennsylvania Insurance Department. Given that Penn-America has negative
unassigned surplus as of September 30, 2000, it is expected that no dividend may
be paid in 2001 without prior regulatory approval. However, the Company believes
that it will receive regulatory approval for requests for return of capital
dividends in 2001.
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<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote by Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
Page 16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: November 14, 2000 By: /s/ Jon S. Saltzman
---------------------- -----------------------------
Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Joseph F. Morris
-----------------------------
Joseph F. Morris
Senior Vice President and
Chief Financial Officer
Page 17
