SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
---------------------------------------------
[ ] 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_____
PENN-AMERICA GROUP, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2731409
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
420 S. York Road, Hatboro, PA 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:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common stock, par value, per share New York
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
(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. [ ]
As of March 23, 2000, the aggregate market value of the outstanding Common Stock
held by non-affiliates of the Registrant was approximately $39,948,076. As of
March 23, 2000, there were 7,719,161 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, 1999 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 2000 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, 1999
Page
PART I
ITEM 1. BUSINESS........................................................... 3
ITEM 2. PROPERTIES.........................................................17
ITEM 3. LEGAL PROCEEDINGS..................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS...................................................17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS....................................18
ITEM 6. SELECTED FINANCIAL DATA............................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.........................................................18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.........................................................19
ITEM 11. EXECUTIVE COMPENSATION.............................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..............................................19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K...........................................20
Page 2
<PAGE>
PART I
ITEM 1. BUSINESS
General
Penn-America Group, Inc. (PNG) is a specialty property and casualty
insurance holding company (collectively referred to as the "Company") which,
through its subsidiaries, Penn-America Insurance Company and Penn-Star Insurance
Company markets and underwrites commercial property, general liability, business
automobile, and multi-peril insurance for small businesses located primarily in
small towns and suburban and rural areas. During 1999, the Company announced the
run-off of its entire book of personal non-standard automobile. This line of
business was previously written in seven states. The Company provides commercial
property and casualty insurance on both an excess and surplus lines basis and an
admitted basis. The Company markets its products through about 50 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 non-standard markets which are generally
characterized by small to 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 under-served by larger,
standard lines insurers who often limit their underwriting to policies above a
certain minimum premium size or to certain risk classes and who operate in
large-scale markets in which they can achieve economies of scale. The Company
believes that its distribution network enables it to effectively access these
numerous small markets at a relatively low fixed cost through the marketing,
underwriting and administrative support of its general agents, as well as the
localized market knowledge and expertise of its general agents and their retail
insurance brokers.
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1992 to 1999, commercial gross written
premiums cumulative average growth rate was 20.7%, which grew from $22.6 million
to $84.5 million during that time period. 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 the agent's experience and reputation and strives to
preserve each agent's franchise value within their market territory. The Company
seeks to grow with these general agents and develop strong, longstanding
relationships by providing a high level of service and support. From 1992 to
1999, the Company achieved 273.9% cumulative growth in gross written premiums
with a 31.6% increase in the number of general agents from 38 to 50. 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 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.
The contingent commissions are paid through the issuance of shares of PNG common
stock, options and cash.
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. 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
Page 3
<PAGE>
high quality general agents. Examples of such additional products and programs
include a commercial automobile product and specialty programs.
The Company's commercial insureds consist primarily of small, "Main Street"
businesses, including restaurants, taverns, mercantiles 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 daycare 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 run-off of the non-standard personal automobile business represented
approximately 12% of the Company's gross written premiums in 1999 as compared to
25% and 34% of gross written premium in 1998 and 1997. In 2000, non-standard
personal automobile premium is not expected to represent more than approximately
2% of the Company's gross written premiums.
Penn-America Insurance Company 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, which was then followed by a secondary
offering in July of 1997 where approximately 3 million shares were sold by the
Company. Currently, the Saltzman family, substantially through their ownership
of Penn Independent Corporation (Penn-Independent), owns approximately 38.3% of
the Company's Common Stock.
Financial Information About Business Segments
The Company has two reported segments: commercial and personal lines, of
which personal lines is comprised solely of non-standard personal automobile
coverages which has been in run-off since March 1999. These segments are managed
separately because they have different customers and require different 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 described in
the summary of significant accounting policies in the Company's 1999 Annual
Report which is incorporated by reference under Item 8. The Company evaluates
segment profit based on profit or loss from operating activities. Segment profit
or loss from operations is pre-tax and does 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. In 1999, no one
customer accounted for more than 10% of the Company's revenue. In 1998 and 1997,
the Company derived approximately 18.4% and 21.3% of its revenues from one
agent.
Page 4
<PAGE>
Lines of Business
The following table sets forth an analysis of gross earned premium by
specific product lines during the periods indicated:
<TABLE>
<CAPTION>
Years ended
------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------- --------- ----------- ------------ ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial lines:
Commercial multi-peril $43,851 46.7% $39,113 40.3% $35,687 35.9%
Liability 24,961 26.6 24,863 25.6 23,486 23.6
Property 5,498 5.9 5,398 5.6 5,502 5.6
Business automobile 5,580 5.9 958 1.0 170 0.2
---------- --------- ----------- ------------ ----------- ----------
79,890 85.1 70,332 72.5 64,845 65.3
---------- --------- ----------- ------------ ----------- ----------
Personal lines:
Auto liability 11,400 12.1 22,125 22.8 29,145 29.3
Auto physical damage 2,614 2.8 4,560 4.7 5,395 5.4
---------- --------- ----------- ------------ ----------- ----------
14,014 14.9 26,685 27.5 34,540 34.7
---------- --------- ----------- ------------ ----------- ----------
Total gross earned premium $93,904 100.0% $97,017 100.0% $ 99,385 100.0%
========== ========= =========== ============ =========== ==========
</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 generally
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.
Increased General Liability Limits. The Company also writes the same
general liability risks (often on a package basis) for limits beyond the
standard $1 million per occurrence limit up to $3,000,000 per occurrence
with significant reinsurance support from General Reinsurance Corporation
(Gen Re).
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 standard Insurance Services Office ("ISO") forms
which make it easier and more efficient to write such multi-peril policies.
Program Business. The Company writes specialized underwriting and marketing
programs for individual agents based upon specific territorial needs and
opportunities. The individual agent is given exclusive marketing authority
for the program subject to territorial limitations. The Company believes it
can achieve superior underwriting results and expense savings on these
programs.
Page 5
<PAGE>
o Business Automobile and Commercial Umbrella. The Company writes 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 covered by other policies, 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 Corporation. For commercial
umbrella, Penn-America usually writes the primary $1 million liability
limit. The Company expects that these coverages 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 markets. For example, the Company has developed programs for
independent fitness centers, day-care operations, 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.
o Non-Standard Personal Automobile. The Company announced in 1999 that it
would run-off its non-standard personal automobile business in the seven
states where it had been written. The company wrote $11.5 million of
personal automobile premium during 1999 principally related to renewal
premium in those states that requires policies to be renewed for a certain
period of time if not placed with another carrier. The Company expects
run-off from non-standard personal automobile written premium in 2000 to be
approximately $2.0 million.
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 the
area 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 as specified in the Company's
underwriting manual. 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
Page 6
<PAGE>
liability, commercial multi-peril and commercial 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. During 1998, the
Company increased by 10%, the commission on commercial business from 20% to 22%.
For personal lines automobile business, the average commission is 26.5%. 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 sharing incentives 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. Such contingent
commissions and performance awards accounted for 6.8% of the total commissions
incurred by the Company in 1999. The Agents' Profit Sharing and Performance
Award Program was changed in 1999 to provide for a stock option component in
addition to the stock and cash components. The contingent stock award for 1999
will be issued in May 2000. Stock awards for 1998, which were issued in May
1999, amounted to 42,035 shares, accounting for 33.6% of the total contingent
commissions paid for 1998. Additionally, the Company awards $1,000 in the form
of PNG common stock to each new general agent it appoints.
The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------- ------------------------------ -------------------------------
1999 1998 1997
------------------------------- ------------------------------ -------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Pacific $19,931 20.8% $23,969 25.3% $ 26,126 25.0%
Midwest 18,255 19.0 14,392 15.2 12,198 11.7
South 17,355 18.1 16,346 17.2 16,236 15.5
Southwest 14,331 14.9 16,027 16.6 18,625 17.8
Mid-Atlantic 10,359 10.8 8,998 9.5 9,876 9.4
Mountain/Northwest 9,818 10.2 9,321 9.8 14,119 13.4
New England 5,934 6.2 6,044 6.4 7,514 7.2
-------------- ------------ --------------- ------------ --------------- ------------
$95,983 100.0% $95,097 100% $104,694 100%
============== ============ =============== ============ =============== ============
</TABLE>
Underwriting and Pricing
In the commercial property and casualty market, the rates and terms of
coverage provided by property and casualty insurance carriers are frequently
based on ISO rates and forms. ISO makes available to its members advisory,
rating, statistical and actuarial services, policy language and related
services. ISO and its related organizations currently provide such services,
including rates and forms, to more than 1,500 property and casualty insurance
companies in the U.S. One of the important services that ISO provides is an
actuarial-based estimate of the "ideal" 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.
Page 7
<PAGE>
The Company primarily uses ISO statistics as a benchmark for risk selection
and pricing. Other carriers may or may not rely as heavily on this information,
and several of the larger standard carriers have developed their own actuarial
databases. As a general rule, most standard carriers set rates lower than ISO
rates. However, the Company, because of its strategy of providing insurance to
under-served markets, typically charges 100% or more of prescribed ISO rates.
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. According to ISO data, most standard
carriers typically price at 60-80% of ISO rates.
All policies written by the Company are either generated by the general
agents pursuant to their binding authority or on approval by the Company upon
submission by the general agents if the risk falls outside of that authority. In
1999, approximately 97.8% of the commercial policies written by the Company were
on a binding authority basis, generating approximately 96.5% of the Company's
commercial lines gross written premiums. 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 (prohibited risks).
The agency manual was prepared after extensive research, including input
from the Company's commercial reinsurers, and is regularly updated by the
Company's underwriting staff. 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. In addition, 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 provides its general
agent with written feedback based on the results of its audits and monitors its
timely responses to any issues highlighted in such audits.
Page 8
<PAGE>
Claims Management and Administration
Commercial Claims:
The Company's approach to commercial 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 commercial general agents have no
authority to settle commercial claims or otherwise exercise control over the
claims process. All commercial lines claims are supervised and processed
centrally by the Company's claims management staff. Senior management reviews
all claims over $25,000.
Personal Automobile Claims in Run-Off:
All claims for the personal automobile run-off business are handled by the
Company's internal claims unit. Prior to February 1, 2000, if an automobile
claim was in the States of California and Washington, they were handled by
outside third-party claims management companies. An initial reserve is
established using an average reserve which reflects that state's automobile loss
experience. Subsequent to the establishment of the initial reserve, adjustments
are made to the reserve to reflect new information on the claims' ultimate
settlement costs.
For those claims previously handled by the claims management company, a
pre-established settlement authority depending on coverage was in place. The
claims management company established an initial average reserve based on the
specific state's experience. Any changes to the initial average reserve had to
be approved by the Company.
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 lapse 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 established 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 for more than 90 days, the open case reserve is evaluated and the reserve
is adjusted upward or downward according to the facts 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
Page 9
<PAGE>
and are continually reviewed. As part of this process, the Company reviews
historical data and considers various factors, including known and anticipated
legal developments, changes in social attitudes, inflation and economic
conditions. As experience develops and other data become available, these
estimates are revised, as required, resulting in increases or decreases to
existing reserves. Adjustments are reflected in results of operations in the
period in which they are made and may deviate substantially from prior
estimates.
The following table sets forth a reconciliation of beginning and ending
reserves as shown on the Company's financial statements (on a GAAP basis,
without regard to reinsurance) for unpaid losses and loss adjustment expenses
for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C>
Reserves for unpaid losses and loss adjustment expenses,
at beginning of year $88,937 $84,566 $70,728
---------------- ---------------- ----------------
Incurred losses and loss adjustment expenses:
Provision for insured events of the current year 60,911 60,740 61,916
Increase in provision for insured
events of prior years 9,458 1,074 916
---------------- ---------------- ----------------
Total incurred losses and loss adjustment expenses 70,369 61,814 62,832
---------------- ---------------- ----------------
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year 24,504 22,716 21,408
Losses and loss adjustment expenses attributable
to insured events of prior years 41,083 34,727 27,586
---------------- ---------------- ----------------
Total payments 65,587 57,443 48,994
---------------- ---------------- ----------------
Reserves for unpaid losses and loss adjustment expenses,
at end of year $93,719 $88,937 $84,566
================ ================ ================
</TABLE>
The Company has experienced adverse development of gross reserves of $9.5
million, $1.1 million and $916,000 in 1999, 1998 and 1997, respectively, for
prior years' insured events. The increase in 1999 prior year incurred losses is
due to loss development in non-standard personal automobile, which the Company
is exiting, and commercial property and liability lines. The increase in 1998
and 1997 prior years' incurred losses is due primarily to loss development in
non-standard personal automobile liability. The establishment of reserves is an
inherently subjective process and, therefore, the historical gross or net
redundancies or deficiencies may not be 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, 1998. The
top of the table reflects the ten-year development of the Company's reserves net
of reinsurance. The bottom of the table reconciles 1992 through 1999 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.
Page 10
<PAGE>
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid losses $25,391 $25,352 $25,681 $26,110 $26,830 $35,307 $46,512 $55,656 $68,863 $72,435 $75,633
and loss adjustment
Expenses, as stated
(In thousands)
a.Net cumulative paid as of
1 year later $8,655 $6,929 $6,605 $7,381 $6,852 $12,383 $17,208 $23,660 $30,236 36,449
2 years later 13,361 11,610 10,988 11,127 13,127 20,617 29,612 38,819 51,141
3 years later 16,952 14,667 13,325 15,546 18,656 27,266 38,091 50,982
4 years later 19,050 16,341 16,417 19,253 22,254 32,119 44,016
5 years later 20,359 18,363 19,283 21,503 24,303 34,883
6 years later 21,866 20,214 20,872 22,796 25,642
7 years later 23,383 21,470 21,881 23,714
8 years later 24,476 22,084 22,452
9 years later 24,978 22,432
10 years later 25,280
b.Reserves re-estimated
as of end of year
1 year later $25,128 $23,468 $23,228 $24,478 $23,897 $33,601 $45,708 $55.997 $68,946 $80,855
2 years later 24,329 22,658 22,383 21,945 23,489 34,281 47,225 57,913 76,217
3 years later 23,923 22,252 20,471 22,032 24,558 36,453 47,378 63,575
4 years later 23,615 21,465 20,819 22,767 26,335 36,359 50,704
5 years later 23,639 21,469 21,726 23,935 26,380 38,768
6 years later 24,021 21,990 22,550 24,143 27,532
7 years later 24,683 22,609 22,761 24,776
8 years later 25,379 22,609 23,117
9 years later 25,460 23,004
10 years later 25,844
Net cumulative redundancy
(deficiency) ($453) $2,348 $2,564 $1,334 ($702) ($3,461) ($4,192) ($7,919) ($7,354) ($8,419) -----
Gross liability for unpaid
losses and loss
adjustment expenses, as
stated $31,703 $33,314 $44,796 $60,139 $70,728 $84,566 $88,937 $93,719
Reinsurance recoverable 5,593 6,484 9,489 13,627 15,072 15,703 16,502 18,086
Net liability for unpaid
losses and loss
adjustment expenses, as
stated 26,110 26,830 35,307 46,512 55,656 68,863 72,435 75,633
Gross liability re-estimated -
1 year later 30,609 32,796 48,173 63,884 71,644 85,640 98,395
Reinsurance recoverable
re-estimated 6,131 8,899 14,572 18,176 15,647 16,694 17,540
Net liability re-estimated -
1 year later 24,478 23,897 33,601 45,708 55,997 68,946 80,855
Gross liability re-estimated -
2 years later 30,390 36,243 53,009 66,405 74,312 92,832
Reinsurance recoverable
re-estimated 8,445 12,754 18,728 19,180 16,399 16,615
Net liability re-estimated -
2 years later 21,945 23,489 34,281 47,225 57,913 76,217
Gross liability re-estimated -
3 years later 33,992 41,600 56,042 66,891 80,574
Reinsurance recoverable
re-estimated 11,960 17,042 19,589 19,513 16,999
Net liability re-estimated -
3 years later 22,032 24,558 36,453 47,378 63,575
Gross liability re-estimated -
4 years later 38,165 43,824 56,167 68,927
Reinsurance recoverable
re-estimated 15,398 17,489 19,808 18,223
Net liability re-estimated -
4 years later 22,767 26,335 36,359 50,704
Gross liability re-estimate -
5 years later 39,956 44,466 58,272
Reinsurance recoverable
re-estimated 16,021 18,086 19,504
Net liability re-estimated -
5 years later 23,935 26,380 38,768
Gross Liability re-estimate -
6 years later 40,670 45,595
Reinsurance recoverable
re-estimated 16,527 18,063
Net liability re-estimated -
6 years later 24,143 27,532
Gross liability re-estimated -
7 years later 41,679
Reinsurance recoverable
re-estimated 16,903
Net liability re-estimated -
7 years later 24,776
Gross cumulative deficiency ($9,976)($12,281)($13,476) ($8,787) ($9,846) ($8,266) ($9,458)
<FN>
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 Amounts were calculated as the sum of the cumulative paid amounts
described in (a.) above plus the amounts of unpaid losses and loss
adjustment expenses reevaluated at the end of each succeeding year-end.
</FN>
</TABLE>
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").
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
The Company:
SAP Basis
Loss and loss adjustment expense ratio 73.8% 62.3% 63.0%
Expense ratio 34.9 35.0 32.3
------------ ----------- ------------
Combined ratio 108.7% 97.3% 95.3%
============ =========== ============
Years ended December 31,
---------------------------------------
1999 (1) 1998 (2) 1997 (2)
------------ ----------- ------------
Property and casualty insurance industry :
SAP Basis
Loss and loss adjustment expense ratio 88.3% 75.7% 73.4%
Expense ratio 28.1 27.2 26.6
Dividend ratio 1.1 1.4 1.1
------------ ----------- ------------
Combined ratio 107.5% 104.3% 101.1%
============ =========== ============
<FN>
(1) Source: Industry Estimate for 1999, Viewpoint, P/C Supplement, January 10,
2000 edition, including dividend ratio.
(2) Source: 1998 and 1997, Best Aggregates & Averages - P/C.
</FN>
</TABLE>
Reinsurance
The Company purchases reinsurance through contracts called "treaties" to
reduce its exposure to liability on individual risks, and to protect against
catastrophic losses. Reinsurance involves an insurance company transferring or
"ceding" a portion of its exposure on a risk to another insurer (the
"reinsurer"). The reinsurer assumes the exposure in return for a portion of the
premium. The ceding of liability to a reinsurer does not legally discharge the
primary insurer from its liability for the full amount of the policies on which
it obtains reinsurance. The primary insurer will be required to pay the entire
loss if the reinsurer fails to meet its obligations under the reinsurance
agreement.
In formulating its reinsurance programs, the Company is selective in its
choice of reinsurers and considers numerous factors, the most important of which
are the financial stability of the reinsurer, its history of responding to
claims and its overall reputation. In an effort to minimize its exposure to the
insolvency of its reinsurers, the Company evaluates the acceptability and
reviews the financial condition of each reinsurer annually. The Company's policy
is to use only reinsurers that have an A.M. Best rating of "A (Excellent)" or
better and that have at least $250 million in policyholder surplus.
Page 12
<PAGE>
The Company's current treaty reinsurance is with Gen 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, except during the first six month period of
1999, where the Company raised its casualty net retention to $1 million. As of
July 1, 1999, the casualty retention was returned to its previous casualty
retention limit of $500,000. The Company had an unearned premium transfer
related to this change in retention limits. Net retention limits for property
insurance were $300,000 per risk for 1999 and 1998 and $200,000 per risk for
1997. The combined Company retention for any one loss resulting from a common
occurrence involving both the property and casualty coverage on a single risk is
$500,000. The Company also maintains casualty contingent excess coverage with
General Re, which covers exposures such as punitive damages and other
extra-contractual obligations, losses in excess of policy limits (such as bad
faith and errors and omissions) and liability actions brought by two or more of
the Company's insureds against each other resulting from the same occurrence.
Effective December 1, 1997, reinsurance was added for both commercial
automobile and commercial umbrella risks. Reinsurance is with General Re, and
the Company has maintained for commercial automobile a net retention of $100,000
per occurrence and a net retention of 10% of the first $1,000,000 for commercial
umbrella in 1999 and 1998, respectively. Commercial automobile and umbrella
policy limits are $1,000,000 and $5,000,000, respectively.
For 1999 and 1998, the Company is covered for catastrophe losses by a
consortium of reinsurers including General Re, Lloyds 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 layer (i.e., 1st layer, $3
million, 2nd layer, $5 million, 3rd layer, $15 million) within the $23 million.
For 2000, the Company is covered for catastrophe losses with a retention of $1
million by a consortium of "A" rated or better reinsurers, such as Gerling
Global Reinsurance, American Reinsurance, Sedgewick Reinsurance, Willis Faber
North America and Herbert Clough, who underwrite 95% to 100% of the layers in
excess of $1 million up to $24 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:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gross written premiums $95,983 $95,097 $104,694
Ceded written premiums $ 8,947 $ 7,268 $ 8,133
</TABLE>
Investments
The Company's investment policy seeks to maximize investment income consistent
with the overriding objective of maintaining liquidity and minimizing risk.
Approximately 97.8% of the Company's fixed income securities as of December 31,
1999 were rated "A" or better by Standard & Poor's or an equivalent rating by
Moody's. As of December 31, 1999, the Company's fixed maturity investments had
an average duration of approximately 4.5 years. Publicly traded equity
securities, the majority of which consisted of preferred stocks, represented
16.8% of the Company's investment portfolio as of December 31, 1999.
Page 13
<PAGE>
As of December 31, 1999, the Company's investment portfolio contained $17.6
million of mortgage- and asset-backed securities at their carrying value. 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
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
selected members of the Company's Board). 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.
The Investment Committee retained New England Asset Management ("NEAM"), a
subsidiary of Gen Re, to manage its fixed income portfolio and Carl Domino
Associates, L.P. ("CDA"), a registered investment advisor, to recommend
purchases and sales for the equity portfolio and Madison Monroe, Inc., an
investment advisor, who manages a small segment of the fixed income portfolio
representing less than 10%.
The following table shows the classifications of the Company's investments at
December 31, 1999:
<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 $ 9,381 $ 9,381 6.1%
Corporate securities 31,844 31,844 20.6
Mortgage-backed securities 9,401 9,401 6.1
Other structured securities 8,207 8,207 5.3
Municipal 28,214 28,214 18.3
Public Utilities 24,372 24,372 15.8
------------- ---------------- -------------
Total 111,419 111,419 72.2
------------- ---------------- -------------
Held to maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 7,669 7,791 5.1
Corporate securities 7,298 7,360 4.8
Municipal 150 150 .1
Public utilities 986 993 .6
------------- ---------------- --------------
Total 16,103 16,294 10.6
------------- ---------------- --------------
Total fixed maturity securities 127,522 127,713 82.8
------------- ---------------- --------------
Equity securities:
Common stock 7,585 7,585 4.8
Preferred stock 18,435 18,435 12.0
------------- ---------------- -------------
Total equity investments 26,020 26,020 16.8
------------- ---------------- -------------
Short-term investments 449 449 0.4
------------- ---------------- -------------
Total investments $153,991 $154,182 100.0%
============= ================ =============
</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, 1999:
<TABLE>
<CAPTION>
Amortized Percentage Cumulative
Cost of portfolio percentage
---------------------------------------------
(in thousands)
Ratings (1)
- -----------------------------------------------
<S> <C> <C> <C>
AAA (including U.S. government obligations) $64,928 49.1% 49.1%
AA 24,638 18.7 67.8
A 39,667 30.0 97.8
BBB 2,036 1.5 99.3
BB 1,000 0.7 100.0
---------------------------------------------
Total $132,269 100.0% 100.0%
=============================================
<FN>
(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.
</FN>
</TABLE>
The following table sets forth the net investment income results of the
Company for each of the years in the periods indicated:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Interest on fixed maturities $7,629 $8,921 $ 7,506
Dividends on equity securities 1,492 1,528 1,123
Interest on short-term
Other 4 2 42
--------------------------------------------
Total investment income 9,912 11,183 9,523
Investment expense (375) (420) (305)
--------------------------------------------
Net investment income $ 9,537 $10,763 $ 9,218
============================================
</TABLE>
Competition
The property and casualty insurance industry is highly competitive and
includes several thousand insurers, ranging from large companies offering a wide
variety of products worldwide to smaller, specialized companies in a single
state or region and offering in some cases only a single product. The Company
competes with a significant number of these insurers in attracting quality
general agents and in selling insurance products. Many of the Company's existing
or potential competitors are larger, have considerably greater financial and
other resources, have greater experience in the insurance industry and offer a
broader line of insurance products than the Company. In commercial lines, the
Company competes with excess and surplus lines and specialty admitted insurers
including Scottsdale Insurance Company (part of Nationwide Mutual Insurance
Company), Essex Insurance Company (Markel Corporation), Nautilus Insurance
Company (W.R. Berkley Corporation), and Western World Insurance Company. The
Company also competes with new forms of insurance organizations (such as risk
retention groups) and alternative self-insurance mechanisms. The Company
believes that in order to be successful in its market, it must be aware of
pricing cycles, must be able to minimize the impact of such cycles through tight
expense control and superior customer service and must continually identify
profitable opportunities. Other competitive factors include ratings by A.M.
Best, pricing and admitted versus excess and surplus lines status in a given
state.
Page 15
<PAGE>
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 Insurance Company was completed
by the Pennsylvania Insurance Department in 1999, covering the five-year period
ended December 31, 1998, and for Penn-Star Insurance Company, covering a two
year period ended December 31, 1998, since its initial licensing in 1997.
Since 1993, Penn-America Insurance Company has maintained an "A
(Excellent)" rating from A.M. Best Company, Inc. ("A.M. Best"), which rating was
reaffirmed by A.M. Best in January 2000, and included Penn-Star as a pooled
rating. 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.
As of December 31, 1999, Penn-America Insurance Company and Penn-Star
Insurance Company combined are licensed as an admitted insurer in 35 states and
are approved non-admitted (excess and surplus lines) insurers in the other 15
states and the District of Columbia. All insurance is written through licensed
agents and brokers. In states in which the Company operates on a non-admitted
basis, general agents and their retail insurance brokers generally are required
to certify that a certain number of licensed admitted insurers will not write a
particular risk prior to placing that risk with the Company.
Insurance Holding Company Laws. Pennsylvania, the Companies' state of
domicile, has laws governing insurers and insurance holding companies. The
Pennsylvania statutes generally require insurers and insurance holding companies
to register and file reports concerning their capital structure, ownership,
financial condition and general business operations. Under the statutes, a
person must generally obtain the Pennsylvania Insurance Department's approval to
acquire, directly or indirectly, 10% or more of the outstanding voting
securities of the Company or any of its insurance company subsidiaries. The
insurance department's determination of whether to approve any such acquisition
is based on a variety of factors, including an evaluation of the acquirer's
financial condition, the competence of its management and whether competition
would be reduced. All transactions within a holding company's group affecting an
insurer must be fair and reasonable, and the insurer's policyholders' surplus
following any such transaction must be both reasonable in relation to its
outstanding liabilities and adequate for its needs. Notice to applicable
regulators is required prior to the consummation of certain transactions
affecting insurance subsidiaries of the holding company group.
Dividend Restrictions. As an insurance holding company, the Company 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 the Company 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 2000 is
approximately $6,950,000. In 1999, Penn-America
Page 16
<PAGE>
paid dividends of $14.5 million, of which $12.5 million were extraordinary
dividends requiring prior approval from the state of domicile's Insurance
Department. 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.
The Board of Directors has authorized the repurchase of up to 2.5 million
shares. As of December 31, 1999, 1,927,575 shares have been repurchased at an
average cost of $10.10 per share for a total cost of $19.5 million.
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 except
in New Jersey, and their policyholders aren't eligible to file claims against
the guaranty funds.
Additional Legislation or Regulations. New regulations and legislation are
proposed from time to time to limit damage awards, to bring the industry under
regulation by the federal government, to control premiums, policy terminations
and other policy terms, and to impose new taxes and assessments. Difficulties
with insurance availability and affordability have increased legislative
activity at both the federal and state levels. Some state legislatures and
regulatory agencies have enacted measures, particularly in personal lines, to
limit midterm cancellations by insurers and require advance notice of renewal
intentions. In addition, Congress is investigating possible avenues for federal
regulation of the insurance industry.
Employees
The Company has approximately 109 employees. 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 23,000 square feet in an office building
located in Hatboro, Pennsylvania. The office building also houses Penn
Independent and certain of 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 $281,112, which amount is considered by the
Company to be at fair market value. The parties have agreed to renew this lease
for an additional five (5) year term. The parties are currently negotiating the
terms of this new lease.
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 1999 to a vote of
holders of the Company's Common Stock.
Page 17
<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 pages 1 and 7 of the Company's Annual Report to stockholders for the year
ended December 31, 1999, 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, 1999,
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, 1999, 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 28 of the Company's
Annual Report to stockholders for the year ended December 31, 1999, 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 18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Director's information will be in the Company's definitive Proxy
Statement with respect to the Company's 2000 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 12, 2000 are as follows:
Irvin Saltzman 77 Chairman of the Board of Directors of PNG
and Penn-America
Jon S. Saltzman 42 President and Chief Executive Officer of
PNG and Penn-America, and Director
Rosemary R. Ferrero, CPA 44 Vice President - Finance, and Treasurer of
PNG, Vice President and Chief Financial
Officer of Penn-America
Garland P. Pezzuolo 35 Secretary and General Counsel of PNG and
Penn-America
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 2000 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 2000 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 2000 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 19
<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, 1999 and 1998 16
Consolidated Statements of Earnings for the years
ended December 31, 1999, 1998, and 1997 17
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 18
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998, and 1997 19
Notes to Consolidated Financial Statements 20-27
Independent Auditors' Report 28
The following consolidated financial statement schedules for the years 1999,
1998 and 1997 are submitted herewith:
2. Financial Statement Schedules. Page
Schedule I. Summary of Investments - Other Than
Investments in Related Parties 26
Schedule III. Condensed Financial Information of
Parent Company 27-29
Schedule V. Supplementary Insurance Information 30
Schedule VI. Reinsurance 31
Schedule X. Supplemental Insurance Information
Concerning Property and Casualty 32
Independent Auditors' Consents and Reports on Schedules
(filed as Exhibit 23)
Independent Auditors' Report for the year 1999
Prior Independent Auditors' Report for the
years 1998 and 1997
All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes
thereto.
3. Exhibit Index: 21-25
- --------
* Refers to the respective page of Penn-America Group's 1999 Annual Report to
Stockholders attached as Exhibit (13). The Consolidated Financial Statements and
Independent Auditors' Report on pages 16 to 28 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 Securities and Exchange Act of 1934.
Page 20
<PAGE>
Exhibit Index
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) and filed with the Securities and Exchange
Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998,
filed with the Registrant's report on Form 10-K for
the period ended December 13, 1997, which has been
filed with the Securities and Exchange Commission.
10.2(b) Notice of Termination of Carnegie Agreement, dated
April 30, 1999.
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) and
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 Securities and Exchange Commission
with Registrant's Report on Form 10-K for the period
ended December 31, 1995.
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 reference to Exhibit
10.4 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) and 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) and filed with the Securities
and Exchange Commission on August 2, 1993.
Page 21
<PAGE>
Exhibit No. Description
10.5(i) Endorsement No. 3 to Property Per Risk of Excess Loss
(Commercial) Reinsurance Agreement with Employers
Reinsurance Corporation, filed with the Securities
and Exchange Commission with Registrant's Report on
Form 10-K for the period ending December 31, 1994.
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) and 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) and
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,
filed with Registrant's Report on Form 10-K for the
period ended December 31, 1997, which has been filed
with the Securities and Exchange Commission.
10.7(iv) Amendment dated January 1, 1999 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs,
filed with the Registrant's Report on Form 10-K for
the period ended December 31, 1998, which has been
filed with the Securities and Exchange Commission.
Page 22
<PAGE>
Exhibit No. Description
10.7(v) Amendment dated January 1, 2000 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs.
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) and 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., filed with the Registrant's Report on Form 10-K
for the period ending December 31, 1997, which was
filed with the SEC.
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 filed
with the Registrant's Report on Form 10-K for the
period ending December 31, 1997, which was filed with
the SEC.
10.9(iii) Investment Advisory Agreement effective February 19,
1999 between Penn-America Insurance Company and
Madison Monroe, Inc.
10.10 1993 Stock Incentive Plan, incorporated by reference
to Exhibit 10.10 to Amendment No. 4 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) and 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) and
filed with the Securities and Exchange Commission on
August 11, 1994.
10.10(ii) Employee Bonus Plan, January 1, 2000
10.11 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) and 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.
Page 23
<PAGE>
Exhibit No. Description
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.
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) and 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) and filed with the Securities and Exchange
Commission on January 4, 1996.
10.17(i) Penn-America Insurance Company's Agency Award and
Profit Sharing Plan, attached as Exhibit 4 to
Registrant's Registration Statement on Form S-3 (No.
333-49055) and filed with the Securities and Exchange
Commission on March 31, 1998.
Page 24
<PAGE>
Exhibit No. Description
10.17(ii) Amended General Agency Profit Sharing Addendum to
Agency Award & Profit Sharing Plan.
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.
11 Statement re: computation of per share earnings,
incorporated by reference to Note 2 to the
Consolidated Financial Statements.
13 1999 Annual Report to Shareholders, incorporated by
reference under Item 8.
21 As of December 31, 1999, the Registrant's only
subsidiary is Penn-America Insurance Company, a
Pennsylvania Corporation.
23 Independent Auditors' Consents and Reports on
Schedules
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.
28.2 Credit Agreement among Registrant, Certain Lenders
and First Union National Bank dated September 28,
1998, filed with the Securities and Exchange
Commission, filed with the Registrant's Report on
Form 10-K for the period ended December 31, 1998,
which has been filed with the Securities and Exchange
Commission.
28.3 First Amendment to Credit Agreement, dated May 12,
1999, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
28.4 Second Amendment to Credit Agreement, dated August
26, 1999, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
28.5 Third Amendment to Credit Agreement, dated March 15,
2000, among registrant certain lenders and First
Union National Bank, dated September 28, 1998.
30.0 Reinsurance Pooling Agreement between Penn-America
Insurance Company and Penn- Star Insurance Company
dated July 1, 1998, filed with the Securities and
Exchange Commission.
b) Reports on Form 8-K - None were filed during the last quarter of 1999
Page 25
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule I - Summary of Investments - Other than Investments in Related Parties
(in thousands)
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------
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 $ 10,666 $ 9,381 $ 9,381
Corporate securities 33,005 31,844 31,844
Mortgage-backed securities 9,630 9,401 9,401
Other structured securities 8,230 8,207 8,207
Municipal 29,222 28,214 28,214
Public Utilities 25,222 24,372 24,572
------------------ ----------------- -----------------
Total available for sale 115,975 111,419 111,419
------------------ ----------------- -----------------
Held to maturity
U.S. treasury securities and obligations of
U.S. government agencies 7,791 7,669 7,791
Corporate securities 7,360 7,298 7,360
Municipal 150 150 150
Public Utilities 993 986 993
------------------ ----------------- -----------------
Total held to maturity 16,294 16,103 16,294
------------------ ----------------- -----------------
Total fixed maturities 132,269 127,522 127,713
------------------ ----------------- -----------------
Equity securities:
Common stock 7,484 7,585 7,585
Preferred stock 20,530 18,435 18,435
------------------ ----------------- -----------------
Total equity investments 28,014 26,020 26,020
------------------ ----------------- -----------------
Short term investments: 449 449 449
------------------ ----------------- -----------------
Total investments $160,732 $153,991 $154,182
================== ================= =================
</TABLE>
Page 26
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule III--Condensed Financial Information of Parent Company
Condensed Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Cash $ 55 $ 316
Short-term investments 449 997
Investment in subsidiary, equity method 79,680 98,355
Other assets 499 962
---------------- ----------------
Total assets $ 80,683 $100,630
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 65 $ ---
---------------- ----------------
Total liabilities 65 ---
---------------- ----------------
Stockholders' equity:
Preferred stock, $ .01 par value; authorized 2,000,000 shares;
none issued
Common stock, $.01 par value; authorized 20,000,000 in 1999 and 1998;
issued 1999, 9,990,436 and 1998, 9,938,179 shares; outstanding 1999,
8,062,861 and 1998, 9,395,854 100 99
Additional paid-in capital 69,591 69,035
Other comprehensive (loss) income, net ( 4,324) 2,714
Treasury stock, 1999, 1,927,575 and 1998, 542,325, shares at cost (19,474) (5,643)
Retained earnings 35,050 34,779
---------------- ---------------
80,943 100,984
Unearned compensation from restricted stock awards ( 325) ( 354)
---------------- ---------------
Total stockholders' equity 80,618 100,630
---------------- ----------------
Total liabilities and stockholders' equity $ 80,683 $100,630
================ ================
</TABLE>
Page 27
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule III--Condensed Financial Information of Parent Company
Condensed Statements of Earnings
(in thousands except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Dividend income $ 14,500 $ 7,950 $ 1,555
Other 56 65 122
Operating expenses ( 1,306) (1,532) (1,636)
Income tax benefit 425 499 539
------------- ------------- --------------
Income before equity in undistributed
net income of subsidiary 13,675 6,982 580
Equity in undistributed net earnings (loss)
of subsidiary (11,637) 1,899 9,065
------------- ------------- --------------
Net earnings $ 2,038 $8,881 $ 9,645
============= ============= ==============
Net earnings per share
Basic $0.24 $0.91 $ 1.19
Diluted $0.24 $0.90 $ 1.17
Weighted average number of shares used in calculating
per share data
Basic 8,592 9,766 8,126
Diluted 8,658 9,873 8,228
Cash dividends per share $0.2075 $0.20 $ 0.16
============= ============= ==============
</TABLE>
Page 28
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule III - Condensed Financial Information of Parent Company
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years ended
December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,038 $8,881 $ 9,645
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed (net earnings) losses of subsidiary 11,637 (1,899) (9,065)
Increase (decrease) in :
Accounts payable and accrued expenses 65 (196) (22)
Other, net 328 (519) (200)
Amortization 256 309 221
-------------- ------------ --------------
Net cash provided by operating activities 14,324 6,576 579
-------------- ------------ --------------
Cash flows from investing activities:
Change in short-term investments 548 (997) ---
------------- ------------ --------------
Net cash (used) provided by investing activities 548 (997) ---
------------- ------------ --------------
Cash flows from financing activities:
Repayment of notes payable --- --- (9,000)
Issuance of common stock (net of expenses) 465 815 45,897
Purchase of treasury stock (13,831) (5,643) ---
Equity contributions to subsidiary --- --- (35,000)
Dividends paid ( 1,767) (1,951) (1,329)
------------- ------------ --------------
Net cash (used) provided by financing activities (15,133) (6,779) 568
------------- ------------ --------------
Increase (decrease) in cash ( 261) (1,200) 1,147
Cash, beginning of period 316 1,516 369
------------- ------------ --------------
Cash, end of period $ 55 $ 316 $ 1,516
============= ============ ==============
</TABLE>
Page 29
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule V - Supplementary Insurance Information
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Liability Amortization
for Unpaid of
Deferred Losses and Losses Deferred
Policy Loss Net and Loss Policy Other Net
Acquisition Adjustment Unearned Earned Investment Adjustment Acquisition Underwriting Premiums
Costs Expenses Premiums Premiums Income Expenses Costs Expenses Written
----- -------- -------- -------- ------ -------- ----- -------- -------
1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 8,914 $ 82,192 $ 35,188 $ 71,731 $ 4,347 $ 49,744 $ 20,269 $ 1,596 $ 75,574
Personal 392 11,527 1,144 13,946 735 13,443 4,533 - 11,462
Unallocated - - - - 4,455 - - 4,443 -
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
Total $ 9,306 $ 93,719 $ 36,332 $ 85,677 $ 9,537 $ 63,187 $ 24,802 $ 6,039 $ 87,036
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
1998
Commercial $ 7,553 $ 69,845 $ 30,625 $ 62,949 $ 4,119 $ 37,121 $ 17,112 $ 1,575 $ 64,283
Personal 1,175 19,092 3,628 26,544 943 18,612 8,340 207 23,546
Unallocated - - - - 5,701 - - 4,607 -
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
Total $ 8,728 $ 88,937 $ 34,253 $ 89,493 $ 10,763 $ 55,733 $ 25,452 $ 6,389 $ 87,829
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
1997
Commercial $ 6,449 $ 69,022 $ 29,546 $ 57,189 $ 4,214 $ 32,723 $ 14,327 $ 1,495 $ 60,768
Personal 2,114 15,544 6,627 34,460 774 25,005 10,657 347 35,793
Unallocated - - - - 4,230 - - 3,998 -
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
Total $ 8,563 $ 84,566 $ 36,173 $ 91,649 $ 9,218 $ 57,728 $ 24,984 $ 5,840 $ 96,561
---------- ----------- ---------- ---------- ---------- ------------ ------------ ------------ ----------
</TABLE>
Page 30
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule VI - Reinsurance
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Ceded to Assumed Net Premium Percentage
Other from Other Written of Assumed to
Direct Companies Companies Net
--------------- -------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
1999
Premiums
Property and
liability insurance $ 94,967 $ 8,947 $1,016 $87,036 1.2%
--------------- -------------- ------------ ------------- ---------------
Total
premiums $ 94,967 $ 8,947 $1,016 $87,036 1.2%
=============== ============== ============ ============= ===============
1998
Premiums
Property and $ 94,831 $7,268 $ 266 $87,829 0.3%
liability insurance
--------------- -------------- ------------ ------------- ---------------
Total
premiums $ 94,831 $7,268 $ 266 $87,829 0.3%
=============== ============== ============ ============= ===============
1997
Premiums
Property and
liability insurance $104,694 $8,133 --- $96,561 ---
--------------- -------------- ------------ ------------- ---------------
Total
premiums $104,694 $8,133 --- $96,561 ---
=============== ============== ============ ============= ===============
</TABLE>
Page 31
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule X - Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Loss and Loss
Liability Adjustment Expenses
for Unpaid Discount (Benefits) Incurred
Losses and If Any, Related to Paid Losses
Loss Deducted ----------------------------- and Loss
Adjustment From Current Prior Adjustment
Expenses Reserves Year Year Expenses
--------------- -------------- ------------ -------------- -------------------
<S> <C> <C> <C> <C> <C>
Years Ended
December 31, 1999 $93,719 $54,768 $8,419 $59,989
December 31, 1998 $88,937 $55,647 $ 86 $52,161
December 31, 1997 $84,566 $57,387 $ 341 $44,521
</TABLE>
Page 32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Penn-America Group, Inc.
We have audited the accompanying consolidated balance sheet of Penn-America
Group, Inc. (the Company) as of December 31, 1999, and the related consolidated
statement of income, changes in capital and surplus and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Penn-America
Group, Inc. at December 31, 1999, and the consolidated results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 20, 2000
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Penn-America Group, Inc.:
We have audited the accompanying consolidated balance sheet of Penn-America
Group, Inc. and subsidiaries as of December 31, 1998 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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, 1998, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
January 22, 1999
Philadelphia, Pennsylvania
<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 24, 2000 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.
<TABLE>
<S> <C> <C>
/s/ Irvin Saltzman Chairman of the Board of Directors March 24, 2000
- -------------------------- and Director
Irvin Saltzman
/s/ Jon S. Saltzman President, Chief Executive Officer and March 24, 2000
- -------------------------- Director (Principal Executive Officer)
Jon S. Saltzman
/s/ Robert A. Lear Director March 24, 2000
- --------------------------
Robert A. Lear
/s/ Rosemary R. Ferrero Vice President-Finance, and Treasurer March 24, 2000
- -------------------------- (Principal Financial and Accounting Officer)
Rosemary R. Ferrero
/s/ Garland P. Pezzuolo Secretary and General Counsel March 24, 2000
- --------------------------
Garland P. Pezzuolo
/s/ Paul Simon Director March 24, 2000
- --------------------------
Paul Simon
/s/ Charles Ellman Director March 24, 2000
- --------------------------
Charles Ellman
/s/ M. Moshe Porat Director March 24, 2000
- --------------------------
M. Moshe Porat
/s/ Jami Saltzman-Levy Director March 24, 2000
- --------------------------
Jami Saltzman-Levy
</TABLE>
<PAGE>
Exhibit Index
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) and filed with the Securities and Exchange
Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998,
filed with the Registrant's report on Form 10-K for
the period ended December 13, 1997, which has been
filed with the Securities and Exchange Commission.
10.2(b) Notice of Termination of Carnegie Agreement, dated
April 30, 1999.
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) and
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 Securities and Exchange Commission
with Registrant's Report on Form 10-K for the period
ended December 31, 1995.
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 reference to Exhibit
10.4 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) and 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) and filed with the Securities
and Exchange Commission on August 2, 1993.
<PAGE>
Exhibit No. Description
10.5(i) Endorsement No. 3 to Property Per Risk of Excess Loss
(Commercial) Reinsurance Agreement with Employers
Reinsurance Corporation, filed with the Securities
and Exchange Commission with Registrant's Report on
Form 10-K for the period ending December 31, 1994.
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) and 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) and
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,
filed with Registrant's Report on Form 10-K for the
period ended December 31, 1997, which has been filed
with the Securities and Exchange Commission.
10.7(iv) Amendment dated January 1, 1999 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs,
filed with the Registrant's Report on Form 10-K for
the period ended December 31, 1998, which has been
filed with the Securities and Exchange Commission.
Exhibit No. Description
<PAGE>
Exhibit No. Description
10.7(v) Amendment dated January 1, 2000 to August 20, 1993
Agreement between Penn Independent and Registrant
regarding the sharing of certain operating costs.
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) and 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., filed with the Registrant's Report on Form 10-K
for the period ending December 31, 1997, which was
filed with the SEC.
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 filed
with the Registrant's Report on Form 10-K for the
period ending December 31, 1997, which was filed with
the SEC.
10.9(iii) Investment Advisory Agreement effective February 19,
1999 between Penn-America Insurance Company and
Madison Monroe, Inc.
10.10 1993 Stock Incentive Plan, incorporated by reference
to Exhibit 10.10 to Amendment No. 4 to the
Registrant's Registration Statement on Form S-1 (No.
33-66892) and 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) and
filed with the Securities and Exchange Commission on
August 11, 1994.
10.10(ii) Employee Bonus Plan, January 1, 2000.
10.11 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) and 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.
<PAGE>
Exhibit No. Description
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.
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) and 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) and filed with the Securities and Exchange
Commission on January 4, 1996.
10.17(i) Penn-America Insurance Company's Agency Award and
Profit Sharing Plan, attached as Exhibit 4 to
Registrant's Registration Statement on Form S-3 (No.
333-49055) and filed with the Securities and Exchange
Commission on March 31, 1998.
<PAGE>
Exhibit No. Description
10.17(ii) Amended General Agency Profit Sharing Addendum to
Agency Award and Profit Sharing Plan.
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.
11 Statement re: computation of per share earnings,
incorporated by reference to Note 2 to the
Consolidated Financial Statements.
13 1999 Annual Report to Shareholders, incorporated by
reference under Item 8.
21 As of December 31, 1999, the Registrant's only
subsidiary is Penn-America Insurance Company, a
Pennsylvania Corporation.
23 Independent Auditors' Consents and Reports on
Schedules
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.
28.2 Credit Agreement among Registrant, Certain Lenders
and First Union National Bank dated September 28,
1998, filed with the Securities and Exchange
Commission, filed with the Registrant's Report on
Form 10-K for the period ended December 31, 1998,
which has been filed with the Securities and Exchange
Commission.
28.3 First Amendment to Credit Agreement, dated May 12,
199, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
28.4 Second Amendment to Credit Agreement, dated August
26, 1999, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
28.5 Third Amendment to Credit Agreement, dated March 15,
2000, among registrant, certain lenders and First
Union National Bank, dated September 28, 1998.
30.0 Reinsurance Pooling Agreement between Penn-America
Insurance Company and Penn- Star Insurance Company
dated July 1, 1998, filed with the Securities and
Exchange Commission.
b) Reports on Form 8-K - None were filed during the last quarter of 1999
PENN-AMERICA INSURANCE COMPANY
420 S. York Road, Hatboro, Pennsylvania 19040
Telephone: (215) 443-3652 * Fax: (800)882-8569/(215) 441-5098
FACSIMILE TRANSMISSION
FAX: 805-445-1480 DATE: April 30, 1999
TO: Charles Smith
COMPANY: Carnegie General Agency, Inc.
FROM: John DiBiasi
PAGE 1 OF 1
MESSAGE:
RE: PENN-AMERICA AND PENN-STAR CALIFORNIA AUTO PROGRAMS
Dear Charles:
I had not heard from you as a follow-up to our Tuesday conversation regarding
the California programs and, when I called, I found you were out for the day. I
have also called Jack. We have already made a public announcement for the
termination of the programs so I need to establish some parameters. Certainly, I
want to hear back from either you or Jack as soon as possible about what you've
got going.
First, although I've already given you notice that we are terminating both the
Penn-America and Penn-Star programs, this is the official 90-day written notice.
As such, both programs will officially end on August 1, 1999. I realize that,
for marketing reasons, you may wish to move much faster than that. Nonetheless,
it is still necessary to give you the official 90-day notice.
As with the runoff of the Nevada program, please take us off any competitive
rating systems by August 1. Also, I would prefer that you not reinstate policies
cancelled for non-payment but I can be flexible on this item.
As for claims handling, i.e. Platinum, Tom Bowie feels you are doing a very good
job and was impressed with your overall operation. If you would like to continue
handling claims, that is fine. Please let me know.
Charles, after a long run together, I'm personally disappointed that it is no
longer feasible for Penn-America to continue in this overheated competitive
environment. Realistically there are many capable players operating with much
greater efficiencies and totally different cost structures. While Penn-America
can no longer compete effectively I wish you good luck with your operation,
which is clearly top notch. Please let me know what information you need to make
a smooth transition.
Regards,
/s/ John DiBiasi
JMDB:srm
cc: Jack Smith
Service Agreement Amendment
Agreement effective January 1, 2000, 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
("PAGI").
WHEREAS, the parties hereto are parties to a Service Agreement dated
August 20, 1993, as most recently amended effective January 1, 1999 (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 PAGI will pay to PIC a "monthly expense estimate",
as follows:
(1) Effective January 1, 2000 through June 30, 2000, PAGI will pay to PIC
$16,700 (approx.) per month.
In accordance with paragraph 3 of the original Service Agreement dated
August 20, 1993, the parties agree to meet prior to June 30, 2000 to discuss any
adjustments required to the monthly expense estimate. In the event of any
shortfall between what PAGI is paying and what PAGI should be paying, the
difference will be adjusted in the monthly expense estimate for the period from
July 1, 2000 to December 31, 2000. In the event of any disagreement between PIC
and PAGI, the parties shall in good faith attempt to resolve any dispute arising
out of the interpretation or implementation of the agreement and this Amendment.
The parties agree that the "monthly expense estimate" is based on: (a)
telephone, insurance and building rental; and, (b) expenses for the salaries of
Irvin Saltzman, Human Resources and office services and facilities management
expenses, as more fully set forth in the attachments hereto, which are
incorporated herein as though fully set forth at length.
<PAGE>
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/ Jason W. Waksman BY: /s/ Rosemary Ferrero
<PAGE>
<TABLE>
<CAPTION>
Penn America Group, Inc.
Monthly Expense Estimate
2000
Total Percent* Rounded
----- -------- -------
<S> <C> <C> <C> <C>
Telephone 26,500 6.89% 1,827 2,000
Insurance 20,000 6.89% 1,379 1,000
Rent 104,000 6.89% 7,171 7,000
Total 10,000
EE Cost Percent Total Rounded
Irvin Saltzman*** 282,755 19.00% 53,723 54,000
Human Resources** 179,269 39.42% 70,661 71,000
Office Services** 101,575 39.42% 40,037 40,000
Facilities Mgmt**** 67,716 46.62% 31,571 32,000
Total 197,000
Estimated annual savings based on reduction of Irvin Saltzman's
time to be recalculated July 1, 2000. (30,000)
Retirement Packages 23,000
Total Allocated 200,000
=======
Monthly Estimate 16,667
======
*Calculated as follows:
Office Services 60% 101,575 39.42% 40,037
Facilities Mgmt 40% 67,716 46.62% 31,571
WTD AVG
Total 169,291 71,608 42.30%
Square Footage:
Mail Room 450
Supplies 320
Total 770 42.30% 326
Human Resources 1,050 39.42% 414
Irvin Saltzman Office 776 19.00% 147
Allocated Total Sq. Footage 887
Total PIC Square Footage 12,869
Penn-America Allocation % 6.89%
**108 PAGI headcount as of 1/1/2000; 274 headcount
all PIC entities and PennAmerica as of 1/1/2000 = 39.42%.
*** Fixed percentage used each year.
**** Facilities Management based on square footage 23426/50246.
</TABLE>
CONFIDENTIAL
Investment Management Agreement
AGREEMENT made this, 25th day of February, 1999, to be effective as of
February 19, 1999 (the "Effective Date") by and between Penn-America Insurance
Company, an insurance company incorporated under the laws of the Commonwealth of
Pennsylvania and maintaining its head office at 420 South York Road, Hatboro,
Pennsylvania 19040 (the "Client") and Madison Monroe, Inc., a corporation
established under the laws of the Commonwealth of Pennsylvania and maintaining
its principal office at 621 East Germantown Pike (Suite 105), Plymouth Valley,
Pennsylvania 19401 ("MMI").
WHEREAS, the Client has established and maintains a custodial arrangement
(the "Custodial Arrangement") with PNC Bank, N.A. (the "Custodian"); and
WHEREAS, the Client has identified to the Custodian certain assets (the
"Assets") held under the Custodial Arrangement to be held or maintained in a
custodial account that is segregated for accounting and investment purposes (the
"Account") from all other assets held under the Custodial Arrangement (see
Appendix B, "Administrative Procedures" for a list of the Assets and the
location and number of the Account); and
WHEREAS, the Client wishes to engage MMI to direct the manner assets in the
Account are invested; and
WHEREAS, MMI agrees to direct the investment of the Assets held in the
Account under the terms and conditions hereinafter set forth (see Appendix C,
"Investment Plan of Penn-America Insurance Company for Madison Monroe, Inc."),
NOW, THEREFORE, the parties hereto, for and in consideration of the
premises and of the mutual covenants herein contained, agree as follows:
1. Appointment and Status of MMI. The Client hereby appoints MMI as the
exclusive investment manager with respect to the Account. MMI shall act as
agent for the Client in connection with the Account insofar as investment
direction thereof and the Assets held therein is concerned, but MMI shall
not at any time take physical custody of the Assets. MMI shall direct the
investment of the Assets subject, however, to prior confirmation and
approval of the contemplated transaction by Jerry Lynch at New England
Asset Management ("NEAM") and by a member of the Investment Committee of
the Client who is authorized to confirm or approve each transaction. See
Section V of Appendix B, attached hereto.
2. Acceptance of Appointment by MMI. MMI hereby accepts the appointment
described in paragraph 1 above, and agrees to direct the Custodian to
invest the Assets in accordance with the Investment Objectives set forth in
Appendix C to this Agreement. Subject thereto, and also subject to
applicable governmental statutory and other regulatory guidelines and
restrictions, MMI may direct the Custodian to buy, sell or otherwise
execute transactions
<PAGE>
pertaining to sovereign indebtedness, including, without limitation, direct
debt obligations of sovereign states and debt obligations issued by central
banks (regardless of the currency in which denominated, as limited to
directions set forth in Appendix B, Section VI).
3. Management Services and the Account. MMI shall have power and authority to
manage the Account within the Investment Guidelines set forth in Appendix
C. As provided in Section 1 of this Agreement, subject to prior
confirmation and approval by NEAM and to prior confirmation and approval of
each transaction by an authorized member of the Client's Investment
Committee, MMI shall be authorized to notify and instruct the Custodian
concerning the management, sale or disposition of the Assets of the Account
and the purchase or acquisition of other assets of the same type and
quality of the Assets, for deposit to the Account. Subject to the
Investment Guidelines as set forth in Appendix C, the investment management
authority granted to MMI hereunder shall comprise, and shall not exceed,
all powers, authority and discretion granted to investment managers duly
appointed under the terms of the Custodial Arrangement. In the performance
of its investment management functions, and in the making of investment
management decisions, MMI shall not take into account the tax or accounting
consequences that might be experienced by the Client with respect to any
investment(s), nor shall it take into account other considerations (such
as, by way of example, regulatory agency reporting requirements) peculiar
to the nature or circumstance of the Client, except as stipulated in
Appendix C, Investment Guidelines.
4. Account Information. The client shall instruct the Custodian to send to MMI
and to NEAM (or such other entity as may be stipulated in writing by the
Client in Appendix B hereto) confirmations of all transactions for the
Account. In addition, the client shall instruct the Custodian to provide
promptly to MMI all information concerning the Account at the same time as
such information is provided to the Client by the Custodian. The Client
hereby holds MMI harmless from any injury or damage suffered by Client as a
result of the Custodian's failure to promptly forward the information.
MMI shall provide the Client with statements, not less frequently than
monthly, but within three (3) business days of the monthly close (except in
extenuating circumstances, in which case such statements shall be provided
as promptly as practicable), showing investment performance of the Account
for the period covered by the statement, a listing of Assets held in the
Account and a list of the transactions occurring with respect to the
Account during the reporting period. MMI shall furnish such additional
information concerning activities undertaken for the Account as the Client
may reasonably request, including, but not limited to, the date of each
such transaction, and, if such broker or dealer was selected by MMI, the
names of brokers or dealers through whom such transactions were effected
and the amounts of fees and commissions payable in connection therewith.
2
<PAGE>
If MMI fails to forward the information within three (3) business days
after the end of the month, or as soon thereafter as is practicable due to
extenuating circumstances, the Client may terminate this Agreement in
accordance with paragraph 8 herein. MMI will be entitled to its fees, in
accordance with paragraph 8 herein. However, the Client expressly reserves
the right to seek indemnification from MMI in the event that the Account
information is not forwarded to the Client within three (3) business days
of the monthly close, or as soon thereafter as is practicable given
extenuating circumstances, IF such delay is the result of any action or
inaction on the part of MMI and/or NEAM.
5. Brokerage. MMI shall effect all securities transactions for the Account
with or through such broker or dealer as Client shall stipulate in Appendix
B. If Client does not stipulate a broker or dealer, MMI may place buy and
sell orders with or through such brokers or dealers as it may select;
provided, however, that in the latter case MMI shall use its best efforts
to effect such orders through brokers and dealers whose fees and
commissions are reasonable in the aggregate and competitive in the
marketplace.
6. Fees, Invoicing and Payment. MMI shall be paid the fees set forth in the
Fee Schedule attached as Appendix A hereto, which payment shall be complete
compensation for all services and performance rendered by MMI under this
Agreement. Invoices for said fees are to be sent by MMI to the Client at
the name and address specified in Appendix B. Generally, such invoices will
be sent within thirty (30) days after the close of the quarterly period in
which such fees are earned. All invoices and fee statements are due and
payable upon receipt. Any such fee which is undisputed and unpaid within
five (5) business days of the date on which the invoice or fee statement is
received by the Client shall be charged directly against the Account and
deducted therefrom.
7. Confidential Information. All information regarding the Account provided by
the Custodian and by the Client shall be considered confidential by MMI.
Information and directions provided by MMI to the Custodian not already
subject to prior confirmation and approval by the Client, as set forth in
Section 1, may be shared by the Custodian with the Client and all such
information and directions may be shared with NEAM (or such other entity as
is designated in Appendix B by the Client) and information provided by MMI
to the Client may be shared by the Client with the Custodian and with NEAM
(or such other entity as is designated by the Client with the consent of
MMI), but will otherwise be considered confidential. None of the Custodian
nor the Client nor any entity designated by the Client in Appendix B (such
as NEAM) will use such information, directly or indirectly, in connection
with investment of assets other than the Assets of the Account, nor will
any of them share such information with any other party except to the
extent compelled by court or regulatory agency order or as provided in the
following sentence. Information and directions shared by either MMI with
NEAM (or other party designated by the Client) or by the Client with NEAM
(or other party designated by the Client with the consent of MMI) shall be
so
3
<PAGE>
shared only on the condition that the party with which such information is
to be shared (NEAM or other entity designated by the Client) has agreed to
treat such information as confidential and that it will not use such
information, directly or indirectly, in connection with the investment of
assets other than the assets of the Account; and, to the extent that
information is disclosed by either the Client or MMI with NEAM (or other
party designated by the Client), solely for the purpose of such disclosure,
both MMI and the Client waive confidentiality.
8. Resignation or Removal of MMI. The appointment of MMI hereunder may be
terminated by Client, or MMI may resign as investment manager hereunder,
upon thirty (30) days' notice in writing by one party to the other, with a
simultaneous copy to the Custodian. On or before the thirtieth (30th) day
after the receipt of such notice by the recipient of the written notice of
such removal or resignation, MMI shall provide the Client with a final
report containing the same information as provided in a monthly investment
report hereinabove described. Upon the resignation or removal of MMI, all
deferred and current fees earned by MMI will be accelerated and will become
immediately payable.
9. Representations and Warranties of the Client.
A. The Client represents and warrants to MMI that it has legal
capacity to enter into this Agreement, to perform in full its
obligations and duties hereunder, and that neither its entry into
this Agreement nor its performance of the terms and provisions
thereof will constitute a violation of any law, regulation, order
or contractual undertaking by which it is bound; and
B. The Client represents and warrants to MMI that none of the funds
in the Account are assets of any employee benefit plan subject to
the provisions of the Employee Retirement Income Security Act of
1974, as amended, and that, therefore, MMI shall not, by reason
of services rendered pursuant to this Agreement, be a fiduciary
with respect to any such plan.
10. Representation and Warranty of MMI. MMI represents and warrants to the
Client that it will use its best efforts to satisfy the Investment
Guidelines attached hereto as Appendix C, and that it has legal capacity to
enter into this Agreement, to perform in full its obligations and duties
hereunder, and that neither its entry into this Agreement nor its
performance of the terms and provisions thereof will constitute a violation
of any law, regulation, order or contractual undertaking by which it is
bound and that it, and each associated person of MMI engaged in the
services described hereunder, is duly registered and licensed in the
applicable jurisdictions and has the qualifications and legal capacity to
perform the obligations and duties assigned to it or him hereunder. MMI
also represents and warrants that a copy of this
4
<PAGE>
Agreement has been delivered to the Custodian and that the Custodian has
communicated its approval of this arrangement to MMI.
11. Services to Other Clients. The Client understands and acknowledges that MMI
may, at any time and from time to time, represent and perform services for
other clients, and that, in connection with such services, MMI may be
advising such clients and managing assets for such clients in a manner
inconsistent with the advice being given and investment management services
being rendered on behalf of the Client. By way of example, and not by way
of limitation,
A. MMI may be advising or directing the sale or disposition of
certain assets for the Account while advising or directing the
purchase or acquisition of the same or similar assets for the
account of one or more other clients;
B. MMI may be advising or directing the purchase or acquisition of
certain assets for the Account while advising or directing the
sale or disposition of the same or similar assets for the account
of one or more other clients;
C. MMI may give advice to any other client or may direct the
management of assets for any other client in a manner
inconsistent with the advice being rendered or management by MMI
of the Account, and MMI shall not be required to share any such
advice or directions relating to the assets of any other client
with the Custodian or with the Client, nor will MMI be required
to take action in connection with the Account in a manner
consistent with such advice or management direction by MMI for
any other client; and
D. MMI may be directing transactions for the Account substantially
simultaneously with similar transactions for others of its
clients under circumstances which result in varied asset and
market availability, varied brokerage commissions and fees,
varied currency exchange rates, varied timing and other varied
conditions, any or all of which may work to the relative benefit
or relative detriment of the Account. The existence of such
variable conditions is in the nature of the marketplace and is
beyond the control of MMI. Accordingly, MMI shall not be liable
for any aspect of financial impact on the Account attributable to
any of the foregoing or to the inherent nature of the
marketplace.
MMI's relationship with clients other than the Client, the transactions in which
it engages for clients other than the Client and the advice it gives to clients
other than the Client shall be proprietary information as to MMI. On its own
behalf, and on behalf of its agents and nominees, Client agrees not to seek, and
disavows all right to or interest in information relating to MMI's relationships
with parties other than the Client, transactions in which MMI engages on behalf
of persons or entities
5
<PAGE>
other than the Client, and advice MMI gives, directly or indirectly, to persons
or entities other than the Client.
12. Protection of Custodian. The Custodian may at all times treat MMI as agent
of the Client unless and until the Custodian has received written notice
from the Client or MMI to the contrary. Any instruction, direction or
authority granted the Custodian by MMI shall be considered an instruction,
direction or authority granted by the Client without any requirement that
the Custodian authenticate the same unless (a) it is patently unreasonable
to believe such communication to be genuine, or (b) such communication is
not made through customary channels or means. Investment directions with
respect to the Account from MMI to the appropriate identified Custodian
employee as outlined in Appendix B, may be made in writing, by electronic
means, by facsimile transmission, or by any other mutually agreed
communication mode, provided that all transactions shall be confirmed by
the Custodian in writing in the normal course.
13. Liability of MMI. MMI is the exclusive developer and owner of various
methodologies, data applications, and financial projection devices (the
"MMI Property"). The Client has specifically requested that MMI apply, as
it sees fit, some or all of the MMI Property for the benefit of the
Account. Client acknowledges that MMI's use or application of MMI Property
for its benefit does not give Client any right to own, use or disclose any
of the MMI Property, nor does Client have an exclusive right to the use of
such MMI Property for its benefit. While MMI believes that the data it
receives from sources upon which it relies are accurate, that the
methodologies employed by MMI and the models created by MMI are valid, and
that the projections provided by MMI are provided in good faith, MMI does
not warrant in any way the validity of the methodologies or models created
by MMI, the accuracy of the projections provided by MMI, or advice given by
MMI. Moreover, the historical performance of funds under management by MMI,
whether or not invested in a manner consistent with the dictates of the MMI
Property, are not to be considered a prediction of future performance of
any such funds. The parties agree that MMI has no obligation to inquire
into the accuracy or applicability of data received from sources reasonably
considered to be reliable by MMI unless such data would appear on its face,
to any reasonable person, to be faulty or to raise in any reasonable person
questions as to its accuracy or application, or the prospective accuracy of
projections made by MMI at any time, and that MMI shall be free from all
liability to the Client with respect to the application of MMI Property as
herein described; that MMI shall be free to rely on the MMI Property in
directing the investment of the Account, and that under no circumstance
shall MMI be considered a guarantor as to either the preservation of the
principal of the Account or the magnitude of the yield generated by the
investment of the Account. If this contract is assigned by MMI to an
affiliate of MMI (as defined in Section 17 of this Agreement), MMI or its
affiliate shall notify the Client within thirty (30) days of the occurrence
of the event, if the affiliate's license from MMI to utilize MMI Property
for the benefit of the Client is
6
<PAGE>
terminated or revoked, or if limitations are introduced into such license
such that the affiliate would no longer be free to use MMI Property as a
basis for direction of the investment of the Account.
14. Reliance on Documents, Communications and Employee Authority. Each of the
parties hereto may rely without further inquiry or verification on the
authenticity and genuineness of any document or other communication
received from an authorized employee of the other, and may rely on the
authority of the employee to whom such document or other communication is
ascribed unless, under the circumstances then prevailing, it is
unreasonable to rely on such apparent authority.
15. Tern of Agreement. The term of this Agreement shall commence on the
Effective Date and shall continue until terminated at will by either party
in accordance with the written notice of termination required by paragraph
8 hereof. If this Agreement is terminated by the Client, the Client shall,
prior to the effective date of the termination, provide MMI with written
instructions as to the liquidation or settlement of the Account, which
instructions may, at the Client's option, limit the discretion of MMI to
enter into further transactions after the date such instructions are first
received. MMI agrees to be bound by such instructions after receipt thereof
(It is understood that fees (see Appendix A) shall be prorated to the date
of settlement of the Account.)
16. Notices. Any notice from MMI or from the Custodian to the Client shall be
mailed to the following address and shall be effective on the date that it
is deposited, postage prepaid, in certified or registered U.S. mail:
Penn-America Insurance Company
(Attn: Mr. Jon S. Saltzman)
420 South York Road
Hatboro, PA 19040
Any notice from the Client or from the Custodian to MMI shall be mailed to
the following address and shall be effective on the date it is deposited,
postage prepaid, in certified or registered U.S. mail:
Madison Monroe, Inc. (Attn: Mr. James Saltzman)
621 E. Germantown Pike (Suite 105)
Plymouth Valley, PA 19401
7
<PAGE>
Any notice from MMI or the Client to the Custodian shall be mailed to the
following address and shall by effective on the date it is deposited,
postage paid, in certified or registered U.S. mail:
PNC Bank, N.A.
Institutional Custody Service
200 Stevens Drive, Suite 425
Lester, PA 19113
17. Binding Effect; Assignment. This Agreement shall be binding upon and shall
inure to the benefit of each of the parties hereto, and their respective
successors. However, except as provided in the following sentence, the
rights and obligations hereunder shall not be assignable, transferable or
delegable without the prior written consent of the other party, and any
attempted assignment, transfer or delegation thereof without such consent
shall be void. MMI shall have the right (but not the obligation) to assign
any or all of its rights, benefits, duties and obligations under this
Agreement to any affiliate of MMI; provided, however, that no such
assignment, transfer or delegation by MMI shall be effective until at least
thirty (30) days after notice in writing of such proposed assignment,
transfer or delegation has been delivered by MMI to the Client, unless (a)
the Client waives such notice, or (b) the giving of such notice would
violate a confidentiality agreement associated with an information
"blackout" relating to a transaction involving MMI and not uniquely,
peculiarly or specifically related to the Account. For the purpose of the
preceding sentence (and for the purposes of Section 13 of this Agreement),
the term "affiliate" shall mean any entity in which MMI has at least a 50%
ownership interest, effective control of the Board of Directors or other
governing body of such entity, and has licensed the entity to use MMI
Property for the benefit of the Client (or for the benefit of the Client
and others).
18. Amendment. This Agreement may be amended only by written instrument
executed by both parties.
19. Severability. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of
this Agreement or affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction.
20. Preservation of Rights and Remedies. The failure of either party to enforce
any right provided under this Agreement or the waiver by such party of any
breach of this Agreement shall be an indulgence only, and shall not be
construed to be either an abandonment of such
8
<PAGE>
right or a waiver of any subsequent breach thereof, nor shall it be
considered a waiver of any other provision of this Agreement.
21. Headings and Captions. The headings and captions in this Agreement are for
convenience of reference only, and shall not be considered a substantive
part of the Agreement nor used in the interpretation or construction of any
provision thereof.
22. Entire Agreement; Supersedeas. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof
This Agreement supersedes all prior discussions and writings, if any, with
respect to the subject matter hereof.
23. Governing Law. Except to the extent that it may be superseded by federal
law, each and every provision of this Agreement shall be construed and
applied in accordance with the laws of the Commonwealth of Pennsylvania,
without regard to any principles of conflict of law.
IN WITNESS WHEREOF, and as evidence of their respective intentions to be
legally bound hereby, the parties hereto have caused this instrument to be
executed by their respective duly authorized officers and their corporate seals
to be affixed as of the day and date first above written.
Penn-American Insurance Company
By: /s/ Rosemary Ferrero
Title: Vice President of Finance
Madison Monroe, Inc.
By: /s/ James S. Saltzman
Title: Vice Chairman
Receipt of a copy of this Agreement and the applicability of the notice
provisions set forth in Section 16 hereof acknowledged by the Custodian:
9
<PAGE>
PNC Bank, N.A.
By: /s/ Brian R. Burns
Date: March 1, 1999 Title: SVP
10
<PAGE>
APPENDIX A
MMI Fee Schedule
A Management Fee, being the sum of the Base Fee and the Performance Incentive
Fee (if any), will be paid on the Amount Under Management for the period. For
the purposes hereof, the "Amount Under Management" with respect to any period
is the opening cost basis of investments in the Account for such period,
increased by all amounts deposited into the Account during the period and
reduced by all amounts withdrawn from the Account during the period, calculated
on the basis of month-end balances using the AIMR time-weighted calculation.
Except as to the first such period during which this Agreement is in effect,
each period shall commence on the calendar day next following the calendar day
on which the preceding period ended, whether or not either or both of such days
was a business day. Percentages set forth herein are expressed on an annual or
annualized basis, and shall be applied to any period of less than one year by
proration on the basis of a 365-day year.
Base Fee
The Base Fee shall be 0.20 percent (.20 of 1 percent) of the original cost
of securities Under Management for the period with respect to which the fee is
calculated. The base fee will be paid quarterly in arrears based upon the fee
invoicing and payment schedule in paragraph 6.
Performance Incentive Fee
The Performance Incentive Fee, if any, due for a period shall be based on
performance in excess of the Performance Incentive Fee Base plus 100 basis
points, as defined below.
"The Performance Incentive Fee Base" - The Performance Incentive Fee Base
shall be based on the categories of assets under management by MMI, as follows:
(1) Performance with respect to investment by MMI in money market and cash
equivalent funds, fixed income securities of the United States government
and debt obligations guaranteed by the full faith and credit of the United
States government during the period will be measured with reference to the
Lehman Brothers Intermediate Corporate Government Bond Fund, plus 100 basis
points.
(2) Performance with respect to investment by MMI in Sovereign debt issued by
central banks on the approved list will be measured with reference to the
benchmark index
11
<PAGE>
stipulated by the parties in an addendum to this Agreement to be adopted
prior to the making of the first such investment.
" Actual Percentage Yield" with respect to any period means the annualized rate
of return on the Amount Under Management for that period, calculated prior to
charging against the Amount Under Management any fees hereunder, taxes, or other
expenses properly charged thereto. The "Actual Percentage Yield for the Period"
is the Actual Percentage Yield, multiplied by a fraction, the numerator of which
is the number of calendar days in the period, and the denominator of which is
365.
" Performance Incentive Fee Payment" shall be based on the applicable Incentive
Fee Base category of managed assets based on the Actual Percentage Yield as
previously defined, calculated using a time weighted calculation from AIMR on a
rolling two year period with 100 basis points added to the Performance Incentive
Fee Base at the end of the calculation period. The reference to "100 basis
points" herein is a reference to the same "100 basis points" as the "100 basis
points" referred to in (1) and (2) above, and is NOT 100 basis points in
addition to the basis points referred to therein.
The Performance Incentive Fee Base and the amount of the Performance Incentive
Fee Payment (if any) shall be determined separately as to each category of
assets under management.
The payment of the "Performance Incentive Fee Payment" will be as follows:
NOTE: Calculation of Performance Incentive Fees will be based on a rolling
average over a 2-year period, payable for that year at the end of the two-year
period commencing with that year.
Example
Year 1 2 3 4
Actual Percentage Yield (after 100 20% 30% 35% 25%
Basis points added on at the end of
Each 12-month period)
o Pay-out for Year 1: at end of Year 2, based on rolling average of Years 1
and 2 performance (i.e., 25%, being the average of 20% and 30%)*
o Pay-out for Year 2: at end of Year 3, based on rolling average of Years 2
and 3 performance (i.e., 32.5%, being the average of 30% and 35%)*
12
<PAGE>
o The actual rolling average will vary from the example given since example
is based on straight average. AIMR time-weighted fee illustration is
attached.
13
<PAGE>
APPENDIX B
Administrative Procedures
I. ACCOUNT ASSETS: Penn-America Insurance Company (hereinafter "Client") has
deposited the following securities, cash and other assets with the Custodian
identified below to be managed by Madison Monroe, Inc. (hereinafter "MMI")
under the Agreement attached hereto (the "Agreement") and of which this Appendix
is a part:
United States dollars: Ten million ($ 10,000,000) in cash
II. CUSTODY OF ACCOUNT: The assets to be managed under the Agreement will be
held by:
PNC Bank, N.A. Custodial Account Number:
Institutional Custody Service 32-32-300-40330168
200 Stevens Drive, Suite 425
Lester, PA 19113
III. BROKERAGE DIRECTION: Client directs MMI to cause all transactions for the
Account to be effected solely through the following broker, dealer or bank:
New England Asset Management (Jerry Lynch) ("NEAM")
This direction may be changed by the Client at any time and from time to
time, subject to prior written notification to MMI.
Client has read, understands and accepts the limitations that these
directions and any prospective changes will place on MMI's ability to seek best
execution for the Account, and hereby holds MMI harmless for any loss, cost or
damage experienced by Client or the Account, directly or indirectly, by reason
of MMI's compliance with this direction.
IV. REPORTING:
MMI, or its appointed administrative agent, shall provide to Client (to the
attention of Rosemary R. Ferrero, Chief Financial Officer, Penn-America
Insurance Company, 420 S. York Road, Hatboro, PA 19040), not less frequently
than monthly, but within three (3) business days of the monthly close,
statements showing the assets managed by MMI as of the date of the statement.
Such statement shall include the following information: par value, cost basis
and fair market value of the securities managed by MMI, along with unrealized
gains and losses and income received.
14
<PAGE>
Unless denominated in United States dollars, if securities are of sovereign debt
of a country other than the United States, currency pricing will also need to be
provided by MMI as of the statement date.
V. AUTHORIZATION FOR INVESTMENTS:
Approvals for all security transactions made within the Account under
management by MMI must be obtained by MMI from Jerry Lynch at NEAM and a member
of Penn-America's Investment Committee prior to the consummation of such
transaction. The members of the Investment Committee are the persons whose names
are set forth in the attached list. Penn-America will be responsible for
notifying MMI in writing of any additional appointments to the said list and of
any persons whose names are to be deleted from said list. MMI shall at all times
be fully protected by Penn-America in reasonably relying on said list, as from
time to time modified by Penn-America. MMI shall at all times be fully protected
by Penn-America in relying on the authenticity of signatures purporting to be
signatures of members of the Investment Committee of Penn-America except where
MMI knew or clearly should have known that any such signature is a forgery.
VI. APPROVED COUNTRIES:
[List to be provided by Penn-America]
Penn-America may modify this list at any time and from time to time,
provided, however, that no such modification shall be effective unless set forth
in writing and delivered to MMI in accordance with the notice procedures set
forth in the Agreement. MMI shall at all times be fully protected by
Penn-America in relying on said list, as from time to time modified by
Penn-America. If Penn-America notifies MMI of the removal of the name of any
country from the Approved Countries list, and if at the time of such removal
some of the Assets of the Account are invested in sovereign debt of such
country, MMI shall take such removal as an Investment Committee instruction to
liquidate all securities so invested as promptly as practicable following the
receipt of such notice, UNLESS Penn-America has specifically provided in such
notice that the securities so invested may continue to be held as Assets in the
Account. MMI shall not be responsible for, nor shall it be held liable for, any
losses suffered by the Account by reason of the liquidation of securities
pursuant hereto, nor for any extraordinary cost borne by the Account to
effectuate the liquidation transaction.
15
<PAGE>
VII. BILLING:
All invoices from MMI to Client shall be directed to:
Rosemary R. Ferrero
Chief Financial Officer
Penn-America Insurance Company
420 S. York Road
Hatboro, PA 19040
16
<PAGE>
APPENDIX C
INVESTMENT PLAN
OF
PENN-AMERICA INSURANCE COMPANY
FOR MADISON MONROE, INC.
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 Madison Monroe, Inc.
("MMI") to manage a portion of the Company's investment portfolio. The
portfolio consists of fixed income obligations and cash equivalents.
The policy guidelines for the designated 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 MMI.
Execution of All Trades: It is hereby understood that all investment
transactions must be initially reported to Jerry Lynch of New England Asset
Management ("NEAM" ) and must receive approval, either written or oral, of the
Chairman of the Investment Committee, Irvin Saltzman, or a member thereof, prior
to their implementation by MMI.
Investment Portfolio
The Company's designated portfolio consists of assets allocated and
invested in one of (3) basic forms of investment:
(A) Money market and analogous cash equivalent funds, awaiting permanent
investment into fixed income securities.
(B) Fixed income securities including, but not limited to, United States
Government and Agency issues and other issues backed by the full faith
and credit of the United States Government.
17
<PAGE>
(C) Sovereign debt issued by central banks for countries on the approved
list (Appendix B).
The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a quarterly basis and which may be changed from time
to time.
Investment Objectives
1. The Company's designated portfolio is to be managed in a conservative,
risk-adverse style with the objective of achieving, for each portion
of the portfolio, long-term performance superior to the index
identified in Appendix A to this Agreement as the "benchmark" index
for that type of investment.
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.
It shall be the exclusive responsibility of the Company to notify MMI as to its
anticipated liquidity requirements relating to the portfolio under management by
MMI. Such notification shall be sufficiently in advance of the Company's need
for cash to permit orderly liquidation by MMI of investments. Company shall hold
MMI harmless from any investment loss or extraordinary expense experienced by
the Account by reason of a need to conform to the Company's liquidity
requirements as communicated by the Company to MMI.
Investment Policy Guidelines for MMI
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 maintenance of
sufficient liquidity, shall be the overriding guidelines for the portfolio.
Additionally, all investments shall comply with the Insurance Regulatory Laws of
Pennsylvania and the National Association of Insurance Companies (NAIC) Model
Investment Act.
18
<PAGE>
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.
In order to comply with certain loan covenants, the following limitations
are also placed on the investment decisions:
For the purposes of defining the term " investment grade security" as set
forth under our loan covenants, Investment Grade means: (1) Non-equity
securities or preferred equity securities rated "NAIC 2" or better by the
NAIC, "BBB" or better by Standard & Poor's ("S&P"), "Baa3" or better by
Moody's, or "BBB" or better by Duff & Phelps; (2) municipal bonds rated
"NAIC 2" or better by the NAIC, "SP-2" or better by S&P, "Pa a3/MiG4" or
better by Moody's, or "BBB" or better by Duff & Phelps, and (3) permitted
CMO's and mortgaged backed securities, and investments in sovereign debt of
countries outside of the United States and partnership and real estate
interest.
Any investment which does not meet the definition of " investment grade" as
defined in the previous paragraph will be considered, for purposes of the
policy guidelines, "Noninvestment grade" and will be limited to NO more
than 5% of the Company's invested assets.
Inasmuch as the Company has information with regard to the composition of its
entire portfolio, and MMI has information only as to that portion of the
Company's portfolio that is within its scope of investment management, it shall
be the exclusive responsibility of the Company to notify MMI at any time and
each time that an adjustment of holdings is required to satisfy the investment
quality requirements and investment diversity requirements described herein.
Moreover, the Company shall hold MMI harmless from any losses or expenses
experienced by the Account by reason of a need to change the investment
composition of the Account to comply with the foregoing standards.
A. Fixed Income Securities
1. Types of Securities. Funds not invested in cash equivalents shall be
invested entirely in sovereign indebtedness, including direct debt
obligations of sovereign states and debt obligations issued by central
banks for countries on the approved list (Appendix B).
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, S&P, etc.) and
19
<PAGE>
reinforced by independent in-house credit analysis. An issue which is
split-rated will be governed by the lower quality designation.
2. Diversification. Except for U.S. 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 MMI.
3. Cash Equivalents. At the discretion of MMI, 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
S&P. In addition, bankers' acceptances and certificates of deposit
must be issued by banks incorporated in the United States.
Exclusions
The following categories of assets are not permissible for investment
in the Company's portfolio without prior written approval:
1. Unregistered or restricted stock;
2. Common stocks;
3. Commodities, including commodity fund shares, gold or currency
futures;
4. Conditional sales contracts;
5. Options, including the purchase, sale or writing of options,
6. Margin buying;
7. Short selling; and
8. Leasebacks.
20
<PAGE>
Regulatory and Investment Classification Considerations
$ Risk-Based Capital ("RBC")
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, mixture of invested assets, and
affiliate risk. MMI should be aware of the RBC's current factors at
all times when evaluating appropriate investment considerations. MMI
shall not be required to perform an RBC analysis in connection with
any transaction the consummation of which is contingent upon approval
by a member of the Investment Committee of the Company or by an agent
of the Company. MMI shall not execute any transaction if, prior to the
execution thereof, MMI is notified by the Company that the
consummation of such transaction would be detrimental to 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 MMI and Client as to their appropriate
classifications, "Held to Maturity" or "Available for Sale." This may
be done after each purchase 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.
21
EMPLOYEE BONUS PLAN
Penn-America Insurance Company
Penn-Star Insurance Company
Hatboro, PA
Effective January 1, 2000
1
<PAGE>
Penn-America Insurance Company
Penn-Star Insurance Company
EMPLOYEE BONUS PLAN
I. Introduction
Penn-America Insurance Company and Penn-Star Insurance Company (hereinafter
collectively "the Company") want to provide employees with a bonus program
(where appropriate) that grants employees non-qualified stock options.
The Company has, therefore, developed the Employee Bonus Plan ("the Plan").(1)
The Plan is an annual program providing opportunities for eligible employees to
earn non-qualified stock options based on both overall Company and individual
performance during the preceding fiscal year. The Plan demonstrates the
Company's appreciation to its employees. Its purpose is two-fold: to foster
interest in the growth of the Company and afford employees recognition for a job
well done during the past year. This Plan is an integral part of the total
compensation opportunity offered by the Company to its employees.
The Plan is based on the 1993 Stock Incentive Plan ("the 1993 Plan), as amended
and restated April 4, 1994. It becomes effective January 1, 2000; and like the
1993 Plan, the Plan will not continue after April 3, 2004.
The Plan has been submitted to, and approved by, the Board of Directors ("the
Board") of the Company's parent insurance holding company, Penn-America Group,
Inc. ("PAGI"), through its Compensation and Stock Option Committee ("the
Committee").
II. Participation
Management of the Company, via the President, shall present recommendations to
the Committee and the Board relative to those entitled to participate in the
Plan. The Committee and the Board ultimately determine participation in this
Plan.
_____________________
1 Management may also award employees cash as part of any employee bonus in a
given year. The cash component of any such bonus is left to the discretion of
management and does not fall within this Plan or the 1993 Stock Incentive (as
amended and restated April 4, 1994), on which this Plan is based.
2
<PAGE>
III. Establishment of Parameters
At the time the parameters for the Key Employee Incentive Plan and the
respective fiscal year budget are presented, the President of the Company will
present to the Committee parameters recommended by management for a bonus under
this Plan, if appropriate, for the next fiscal year. The Committee will then
adopt and recommend to the Board parameters relative to the grant of
non-qualified stock options that include, but are not limited to (i) the amount
of non-qualified stock options available under the Plan for that year, (ii) the
individuals entitled to participate in the Plan for that year, (iii) the vesting
period of the non-qualified stock options, if any, for that year, (iv) the date
of grant for non-qualified stock options, if any, for that year, (v) the time
within which employees have to exercise the non-qualified stock options, if any,
for that year, (vi) the date of valuation of the non-qualified stock options, if
any, for that year, and (vii) such other matters related to the operation of the
Plan. A copy of the parameters applicable to the current year - i.e., 1999 - is
attached as Exhibit 1. On approval by the Board, the parameters will define and
establish the terms of the grant of non-qualified stock options to employees as
a bonus for the year.
IV. Distribution of Employee Bonuses
Subject to approval and adoption by the Committee and the Board, the President
will instruct the managers relative to the parameters of bonuses to be awarded
to eligible employees for the year. The managers of each department will
thereafter see that each employee is awarded their bonus, with an explanation as
to the contents of the bonus and the reasons for its issuance. The manager will
document the reasons for the bonus given to the eligible employee.
Compensation payable in PAGI stock options will be distributed for no
consideration on or before April 1, but may be subject to conditions or
restrictions imposed by the Committee.
V. Miscellaneous Provisions
Decisions on all matters affecting the implementation, operation,
continuation, modification, or termination of the Plan will be made at the sole
discretion of the Committee or its delegate(s). If any provision of this Plan is
determined to be invalid or unenforceable, said invalid or unenforceable
provision shall be deemed null and void, and this Plan shall continue and shall
be construed in all respects to the extent possible to fulfill the purposes of
the Plan as if such invalid or unenforceable provision was omitted.
3
<PAGE>
Penn-America Insurance Company
Penn-Star Insurance Company
EMPLOYEE BONUS PLAN
1999 Parameters
1. Compensation:
Given the Company's performance this year, the employees' bonus for fiscal
year 1999 (payable in 2000) is based solely on non-qualified stock options,
which serves the duel purpose of encouraging interest in the growth of the
Company while recognizing that employees cannot be rewarded with a cash bonus
during poor Company performance years.
2. Employees Entitled to Participate:
All employees actively employed with the Company for one or more years
shall be entitled to participate and receive a bonus for fiscal year 1999.
Normally, all employees currently participating in the Key Employee Incentive
Compensation Plan ("the KEIC Plan") would not be entitled to a bonus under this
Plan. However, given the Company's performance in 1999 and the fact that
employees normally entitled to compensation under the KEIC Plan will not (and
have not) received additional compensation under that plan, an exception is
being made for all employees that fall under the provisions of the KEIC Plan,
BUT FOR Jon S. Saltzman, President, John M. DiBiasi, Executive Vice President,
Underwriting and Marketing, Rosemary R. Ferrero, Chief Financial Officer, Thomas
Bowie, Sr. Vice President, Claims, Garland P. Pezzuolo, Secretary and General
Counsel, and Ransley Lennon, Vice President, Information Technology. These
employees will not receive a bonus under the Plan.
3. Key Terms of 1999 Bonus:
(a) The number of non-qualified stock options afforded each eligible
employee is based on an individual, eligible employee's salary
level as of January 1, 2000. Those eligible employees making
$30,999 or under as of January 1st shall receive 250 options;
those eligible employees making between $31,000 and $85,000 as of
January 1, 2000 shall receive 500 options; and Duane Wohlgemuth
shall receive 1000 options.
(b) The options shall be valued at the fair market value of
Penn-America Group, Inc. common stock as of the close of the
market on the night before the date of grant;
(c) The options shall vest one year after the date of grant;
(d) The options shall be exercisable for five (5) years after the
date the options first vest;
(e) Eligible employees will have the option of exercising the options
via a cashless or regular transaction. In a cashless transaction,
the employee is ideally entitled in one transaction to exercise
options and realize the cash
4
<PAGE>
gain from the sale of the resulting stock, without having to
expend any money; and,
(f) All parttime employees employed with the Company, so long as they
are actively employed with the Company a minimum of 20 hours per
week for one or more years, shall be entitled to participate. The
number of options to which an eligible parttime employee is
entitled will be based on annualizing the parttime employee's
salary and dividing the annualized salary by two (2).
4. Distribution of Bonus:
At the first quarterly meeting of the Company in 2000, the President will
announce the bonus for fiscal year 1999. Thereafter, each manager shall
meet with each eligible employee and distribute his or her respective
non-qualified stock option bonus agreement. As soon thereafter as
practical, a representative from a third party administrator retained by
the Company to monitor the Plan shall be available to meet with all
eligible employees to discuss the basics of the Plan, the terms and
conditions of the employees' bonuses, and to answer any questions the
employees may have.
5
GENERAL AGENCY PROFIT SHARING ADDENDUM
THIS ADDENDUM, effective * forms part of the agreement between PENN-AMERICA
INSURANCE COMPANY and PENN-STAR INSURANCE COMPANY (hereinafter referred to as
"Companies") and [[agency]] (hereinafter referred to as "Agent"), dated
[[date]].
I. INTRODUCTION
A. This plan is designed to reward you for your favorable underwriting
results on a policy year loss ratio basis.
B. Payments of your Agency Profit Sharing under this Addendum will be
made 25% in stock of the Companies' parent, Penn-America Group, Inc.
("PAGI") ("PAGI Stock" or "Stock") and 75% in cash though you can
choose to be paid 50%, 75%, or 100% in shares of stock. Payments will
be in accordance with the provisions of Section IV below. This change
applies to Profit Sharing payments made beginning in May of 2000.
C. In addition to the amount which you receive for your profit sharing in
a given year, you are entitled to receive stock options for policy
years 1999 and later in accordance with the provisions of Section III
below.
II. HOW YOUR AGENCY QUALIFIES FOR THE PLAN
A. There is a two-year waiting period for eligibility owing to loss
development.
B. If you satisfy all requirements, you are eligible for your first
payment by June 1 of the second year following the year of initial
eligibility.
C. To initially qualify you must have written at least $500,000 total
calendar year premium according to the Companies' books as of December
31st.
D. To remain eligible in succeeding calendar years, you must write at
least 90 percent of the previous year's total written premium, subject
to the $500,000 total premium minimum. This 90 percent requirement is
waived in any year you write in excess of $1 million in premium.
E. You must maintain E&O coverage in conformity with the Companies'
standards for such coverage.
F. You agree that the Companies' records are final.
1
<PAGE>
III THE PLAN
A. Eligible Lines of Business include only the following and will be
evaluated at the end of the second, third, and fourth years. At the
end of each year, you will receive one-third (1/3) of the profit
sharing payment for that year:
1. CMP and Garage Liability includes Section II of commercial multi
peril, liquor liability, garage liability, and when written as
part of commercial multi peril professional liability classes and
increased limits general liability.
2. Monoline General Liability includes general liability, liquor
liability, professional liability and increased general liability
limits when written on a monoline basis.
3. Commercial Automobile Liability includes bodily injury, property
damage, uninsured and underinsured motorists, personal injury
protection, medical payments, and hired and non-owned coverages.
4. Property Business includes Section I of commercial multi peril,
monoline fire and allied lines, crime, glass, inland marine,
automobile physical damage, dealers open lot, and garage keepers
liability.
NOTE: Any classes not specifically mentioned above are not included in
the Plan.
B. Your loss ratio is calculated on a policy-year basis, earned to
incurred. Incurred losses include indemnity paid, reserves, and loss
adjustment expenses and credit for salvage and subrogation.
C. Your profit sharing will be calculated for each policy year you
continue to remain eligible as of March 31; if you qualify, you will
be paid by June 1.
D. The profit calculation includes the following "loss ratios":
"Desired loss ratio" is the target. A loss ratio below the
Desired loss ratio will generate profit subject to the Floor. A
loss ratio above the Desired loss ratio will reduce profit in
other lines of business subject to the Ceiling.
"Ceiling loss ratio" - If you are above this figure, the
calculation will be completed using this figure (a sort of "stop
loss").
"Floor loss ratio" - If you are below this figure, the
calculation will be completed using this figure (a sort of "stop
gain").
2
<PAGE>
E. Because the policy-year formula is used, there is no need for loss
carry forwards or stop losses - each year stands alone.
F. The "Desired" loss ratio is the ratio which your agency loss ratio
must be below to be eligible for profit sharing. The "Floor" loss
ratio is the lowest loss ratio eligible for profit sharing as any loss
ratio below the floor is calculated using the floor. Similarly, the
"Ceiling" loss ratio limits the amount by which a loss ratio above the
ceiling will reduce profits in other classes of business.
G. The current annual "Companies' Desired, Floor, and Ceiling Loss
Ratios" are:
Pay Out Floor Desired Ceiling
Class of Business Year Ratio Loss Ratio Ratio
- ----------------- -------- ----- ---------- -------
CMP and Garage Liability 1st Year 12.50% 27.50% 42.50%
2nd Year 17.50% 37.50% 57.50%
3rd Year 30.00% 47.50% 65.00%
Commercial Auto Liability 1st Year 27.50% 40.00% 52.50%
2nd Year 35.00% 47.50% 60.00%
3rd Year 37.50% 50.00% 62.50%
Monoline General Liability 1st Year 12.50% 20.00% 27.50%
2nd Year 17.50% 25.00% 32.50%
3rd Year 25.00% 35.00% 45.00%
Property Business 1st Year 40.00% 50.00% 60.00%
2nd Year 40.00% 55.00% 70.00%
3rd Year 40.00% 55.00% 70.00%
3
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE:
Policy Year 1999 - Total Written Premium Volume $1,400,000:
- -----------------------------------------------------------
(CMP Liability Written Premium = $300,000)
(Monoline Liability Written Premium = $500,000)
(Commercial Auto Written Premium = $100,000)
(Property Written Premium = $500,000)
Profit Calculation:
(Subtract commission paid from
1999 earned premium; multiply by Per Year
Policy difference between Companies Pay Out Value
Year Company Agency Desired Loss Ratio and Agency (1/3 of 1/2 agency
Valued Class of Desired Actual Actual Loss Ratio; divide by half to portion) of
As Of Business Loss Ratio Loss Ratio establish value of Agency portion) expected profit
- ----- -------- ---------- ---------- --------------------------------- ---------------
<S> <C> <C> <C> <C> <C>
3/31/01* CMP and Garage 27.50% 15.00% Earned Premium = $300,000 $4,875
Liability - $66,000 commission paid
$234,000 x 12.5% = $29,250
$29,250/2 = $14,625
Monoline General 20.0% 12.5% Earned Premium = $500,000 $4,875
Liability - $110,000 commission paid
$390,000 x 7.5% = $29,250
$29,295 / 2 = $14,625
Commercial Auto 40.0% 30.0% Earned Premium = $100,000 $1,300
- $22,000 commission paid
$78,000 x 10.0% = $7,800
$7,800 / 2 = $3,900
Property 50.0% 55.0% Earned Premium = $500,000 $(3,250)
- $110,000 commission paid
$390,000 x -5.0% = $(19,500)
$(19,500) / 2 = $(9,750)
1999 First Payout $7,800
------
*Note: First Year loss ratios below the Floor will be evaluated at the Floor
percentage above. First Year loss ratios above the Ceiling will be
evaluated at the Ceiling percentage above.
4
<PAGE>
EXAMPLE (Cont.):
Profit Calculation:
(Subtract commission paid from
1999 earned premium; multiply by Per Year
Policy difference between Companies Pay Out Value
Year Company Agency Desired Loss Ratio and Agency (1/3 of 1/2 agency
Valued Class of Desired Actual Actual Loss Ratio; divide by half to portion) of
As Of Business Loss Ratio Loss Ratio establish value of Agency portion) expected profit
3/31/02* CMP and Garage 37.5% 20.0% Earned Premium = $300,000 $6,825
Liability - $66,000 commission paid
$234,000 x 17.5% = $40,950
$40,950 / 2 = $20,475
Monoline General 25.0% 17.5% Earned Premium = $500,000 $4,875
Liability - $110,000 commission paid
$390,000 x 7.5% = $29,250
$29,250 / 2 = $14,625
Commercial Auto 47.5% 35.0% Earned Premium = $100,000 $1,625
Liability - $22,000 commission paid
$78,000 x 12.5% = $9,750
$9,750 / 2 = $4,875
Property 55.0% 40.0% Earned Premium = $500,000 $9,750
- $110,000 commission paid
$390,000 x 15% = $58,500
$58,500 / 2 = $29,250
1999 Second Payout $23,075
-------
*Note: Second Year loss ratios below the Floor will be evaluated at the Floor
percentage above. Second Year loss ratios above the Ceiling will be
evaluated at the Ceiling percentage above.
3/31/03* CMP and Garage 47.5% 30.0% Earned Premium = $300,000 $6,825
Liability - $66,000 commission paid
$234,000 x 17.5% = $40,950
$40,950 / 2 = $20,475
Monoline General 35.0% 25.0% Earned Premium = $500,000 $6,500
Liability - $110,000 commission paid
$390,000 x 10.0% = $39,000
$39,000 / 2 = $19,500
Commercial Auto 50.0% 40.0% Earned Premium = $100,000 $1,300
Liability - $220,000 commission paid
$78,000 x 10.0% = $7,800
$7,800 / 2 = $3,900
Property 55.0% 40.0% Earned Premium = $500,000 $9,750
- $110,000 commission paid
$390,000 x 15.0% = $58,500
$58,500 / 2 = $29,250
1999 Third Payout $24,375
-------
*Note: Third Year loss ratios below the Floor will be evaluated at the Floor
percentage above. Third Year loss ratios above the Ceiling will be
evaluated at the Ceiling percentage above.
Total three-year Value of Pay Out for Policy Year 1999: $55,250
=======
6
</TABLE>
<PAGE>
The above examples only reflect calculations and payments for the 1999
policy year. It is possible that you may be paid on more than one
policy-year statement in a given year as calculations for subsequent
policy-year statements are made assuming you maintain eligibility each
year.
Example: In 2003 you could be paid profit sharing payments based upon
property experience from policy years 1999, 2000, and 2001.
H. In addition to the amount to which you are entitled for your profit
sharing in a given year, you are entitled to receive stock options
based on the following formula: Your profit sharing for the policy
years 1999 and later times 10% divided by the stock price on the date
of grant. The options will vest as of the date of grant and will be
exercisable for a period of five (5) years from the date of grant.
For example, if your payments for the 1999 policy year in 2001, 2002,
and 2003 are $7,800, $23,075, and $24,375 and the stock price on March
31, 2001, 2002, and 2003 is $12, $14, and $16, your options would be
calculated as follows:
<TABLE>
<CAPTION>
Stock
Profit Price # of
Policy Pmt Sharing Formula Divided 3/31 of Options Vesting Exercisable
Year Year Amount % by Pmt Year Granted Date Through
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2001 $7,800 X 10% / $12 65 3/31/01 3/31/06
1999 2002 $23,075 X 10% / $14 165 3/31/02 3/31/07
1999 2003 $24,375 X 10% / $16 152 3/31/03 3/31/08
---
Total three-year options granted for policy year 1999 382
===
</TABLE>
IV. PAYMENTS TO YOU UNDER THE PLAN
A. Allocation of Profit Sharing between stock and cash:
1) You may, at your option, exercisable by written notice to the
Companies received by us on or before March 15, take either 25%,
50%, 75%, or 100% of your Profit Sharing in shares of PAGI stock.
2) For purposes of the calculation, any portion of your payment in
PAGI Stock will be valued as of the median between the bid and
asked price for the Stock as of the March 31 profit sharing
calculation date. If the stock markets are closed on that date,
the valuation will be made on the same basis as of the nearest
previous business day.
6
<PAGE>
3) Notwithstanding the above, if the value of your Profit Sharing is
less than $2,500, payment of the Profit Sharing will be made
entirely in cash.
B. Payment Due Date:
1) Your Profit Sharing 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 Profit Sharing will be subject to income tax in accordance with
applicable IRS laws and regulations. Stock distributed to you under
the Plan may not be sold until after August 1 of the same year and
will be legended accordingly.
V. TERMINATION
A. If your General Agency Agreement is terminated by either party, the
program also terminates, with the final calculation and pro-rata
payment made at June 1 of the following year.
B. The plan may be terminated or amended by us at any time without cause,
but existing obligations will be honored.
C. Profit Sharing Upon Termination. Upon termination of this Addendum for
any reason:
1) Before the end of a full calendar year, its terms and conditions
shall apply to all prior calendar years in which this Addendum
was in effect, without proration and without allowance for the
portion of the year in which this Addendum was terminated; and
2) The Agency's right to Profit Sharing shall cease on December 31
of the year preceding the year in which termination is effective,
notwithstanding the continuance in force and effect of any
unexpired policies or binders after such calendar year.
3) In the event of termination of the General Agency Agreement by
either party, this Addendum shall terminate simultaneously and
the Agency shall not be eligible for Profit Sharing in the
termination or succeeding years.
D. If the General Agency Agreement is terminated by us because of a
breach of its terms by you and/or in accordance with any of the terms
of paragraphs 9 (iii) or (iv) of the General Agency Agreement, there
shall be no further calculations made, nor profit sharing payments
made.
7
<PAGE>
VI. GENERAL
This Profit Sharing Program constitutes the entire and exclusive agreement
between Companies and Agency on the subjects of profit sharing (contingent
commissions), and supersedes any and all prior or contemporaneous
agreements, representations, and understandings, written and oral, on these
subjects. The undersigned signatories hereby warrant that they have full
power and authority to execute this Addendum on behalf of the respective
parties thereto.
IN WITNESS WHEREOF, this Addendum has been executed in duplicate by the parties
hereto.
DATE:
PENN-AMERICA INSURANCE COMPANY
PENN-STAR INSURANCE COMPANY [[agency]]
By: By:
John M. DiBiasi, CPCU [[attention]]
Executive Vice President [[title2]]
8
The 1999 Annual Report: Penn-America Group, Inc.
Behind the scenes:
The Penn-Americans
Main Street
Today
In depth: Penn-America 1999
SMALL BUSINESS
ON MAIN STREET
America's Economic
Engine
Are Small
Firms Important?
Living on Main Street
Five Penn-America Agents
And Their Markets
Penn-America Shareholder
Number One Main Street
Smalltown US 10000-0000
<PAGE>
Penn-America Group at a Glance
Penn-America Group, Inc. (NYSE:PNG) is a specialty niche insurance company
which, through its subsidiaries Penn-America Insurance Company and Penn-Star
Insurance Company underwrites commercial property and casualty, general
liability, commercial multi-peril and commercial automobile insurance. The
company's speciality program lines of insurance (such as for couriers and
cargo), introduced in 1998, have contributed meaningfully to strong growth in
the company's core Main Street markets.
Penn-America has developed a unique niche providing small premium insurance
products to small growing businesses in small vibrant cities and towns in all 50
United States and the District of Columbia, through a small network of about 50
wholesale general agents. These entrepreneurial agents live and work in the same
markets they serve, comprising a finely tuned, responsive and powerful system,
empowered by technology, for spotting and responding to market opportunities.
Penn-America is traded on the New York Stock Exchange under the symbol
"PNG." In 1999, the company paid quarterly dividends of $.0525 per share. Rated
"A" (Excellent) by A.M. Best Company, it is located in Hatboro, Pennsylvania, a
small vibrant town near Philadelphia.
Penn-America's Commitments
o Make a profit in our basic business: insurance.
o Be the best, as defined by our agents, at what we do in our markets.
o Maintain our reputation as the company that provides the best, most
responsive service to its agents, bar none.
o Be number one in premium dollar volume in each of our agents' offices, for
the products we sell.
o Return exceptional value for our stockholders' investments.
o Practice the corporate values in which we believe.
Important Facts
1999
Shares Outstanding 8,062,861
Closing Price $7.75
52-Week Range $7.125-
$11.3125
Market Capitalization $62.5 Million
Price/Book Ratio 0.78x
Stockholders' Equity $80.6 Million
Book Value Per Share $10.00
Net Operating Earnings
Per Share:
Basic $0.17
Diluted $0.17
Net Earnings Per Share
Basic $0.24
Diluted $0.24
Price/Earnings Ratio
Basic and Diluted 32.3x
Dividends Per Share $0.2075
Dividend Yield 2.8%
As of 12/31/99
<PAGE>
MAIN STREET
TODAY
Penn-America's 1999 Annual Report
IN THIS ISSUE
Featured Company
- --------------------------------------------------------------------------------
Penn-America Group At A Glance Inside Front
Cover
Letter From The Publisher
- --------------------------------------------------------------------------------
Welcome!....................................................................1
Cover Story
- --------------------------------------------------------------------------------
Small Business On Main Street:America's Economic Engine ....................2
- --------------------------------------------------------------------------------
Vital Statistics: Small Business In America ................................2
- --------------------------------------------------------------------------------
A Month In The Life of Main Street .........................................3
Technology
- --------------------------------------------------------------------------------
How Modern Technology Makes Old-Fashioned Relationships Better .............4
People
- --------------------------------------------------------------------------------
Behind the Scenes On Main Street: The Penn-Americans .......................5
- --------------------------------------------------------------------------------
Living on Main Street: Five Penn-America Agents And Their Markets ..........6
Guest Opinion
- --------------------------------------------------------------------------------
Are Small Firms Important? .................................................6
Money and Finance
- --------------------------------------------------------------------------------
Financial Review ...........................................................8
- --------------------------------------------------------------------------------
Management Discussion and Analysis of
Financial Condition and Results of Operations ..............................9
- --------------------------------------------------------------------------------
Financial Statements ......................................................16
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements ................................20
- --------------------------------------------------------------------------------
Independent Auditors' Report ..............................................28
<PAGE>
Principal Officers Penn-America Group, Inc.
Jon S. Saltzman
President and Chief Executive Officer
Rosemary R. Ferrero, CPA
Vice President - Finance and Treasurer
Garland P. Pezzuolo
Secretary and General Counsel
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 and Treasurer
Thomas P. Bowie
Senior Vice President, Claims
J.Ransley Lennon
Vice President Information Systems
Garland P. Pezzuolo
Secretary and General Counsel
Board of Directors Penn-America Group, Inc.
Irvin Saltzman
Chairman of the Board of Directors, Director, Penn Independent
Corporation
Jon S. Saltzman
President and Chief Executive Officer,
Penn-America Group, Inc.
Director, Penn Independent Corporation
Robert A. Lear
President and Director, Penn Independent Corporation,
Director, Dynasil Corporation of America
M. Moshe Porat, Ph.D., CPCU
Dean, Fox School of Business and Management, Temple University
Jami Saltzman-Levy
Vice President, Human Resources, Director, Penn Independent
Corporation
Charles Ellman
Retired Insurance Executive
Paul Simon
Director, Public Policy Institute,
Southern Illinois University
Independent Auditors
Ernst & Young LLP
Two Commerce Square, 2001 Market Street
Philadelphia PA 19103
Consulting Actuary
Ernst & Young LLP
Two Commerce Square, 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 & Pagonis, 623 South 3rd Street, Philadelphia PA 19147,
(215) 629-3699 or [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
<PAGE>
Letter from the Publisher
[GRAPHIC OMITTED - PHOTO]
Welcome to Main Street Today, Penn-America's 1999 Annual Report. Just what
are we up to with this magazine idea? We couldn't think of a better way in which
to report the many facets of the Penn-America story. Here's the banner headline
on Page One: Penn-America's Main Street Core Is Vibrant and Growing. That's Main
Street Today.
The events of 1999 were, in a word, ironic. On the one hand, the core of
our business regained the momentum it had lost in the soft markets of 1998. Yet
our decision to run-off our non-standard personal automobile business and
developments in our other liability lines ultimately required that we strengthen
our reserves by $5.5 million. Combined with a third-quarter after tax charge of
$1.3 million in our property lines, the bottom line of 1999 masks what's going
on "under the hood" of the company. That's the real "story."
More than a year ago, we saw disturbing trends in our small town, small
premium, small business insurance marketplace. Large, "brand name" insurance
companies responded to softening insurance markets by literally giving away
their excess capital. They did this by underwriting insurance in our traditional
markets below their cost. We said then that we'd pull back, watch the battle
from the sidelines and let the big guys slug it out. Yes, we took a punch or two
even from that vantage point. But while those competitors were frittering away
their capital, we were investing ours in the future of Penn-America. For
example, in 1999 we repurchased nearly two million shares of our outstanding
stock at near book value, completed upgrades to our technology infrastructure
and deployed new technologies to help our customers--our wholesale general
agents-- to do their jobs more efficiently and profitably.
At the same time we reinvested our capital in these ways, we also refocused
on our core commercial business and closed the books on the non-standard
personal automobile insurance portfolio that was a significant part of our
business for more than 10 years. The marketplace for personal automobile
insurance changed dramatically during 1998 and 1999 to a direct-selling
environment and we made the decision not to invest further in this niche. This
allowed us to concentrate fully on our core commercial business that, by the
fourth quarter of 1999, was growing at the rate of about 25%; for the year our
core grew about 19%. Commercial programs, part of our strategy to expand the
core business, took firm hold this year and, by year end, had contributed $7.5
million in gross written premium--from a start at nearly zero last year.
In many ways, our future is our past. Although we have invested heavily in
technology to stay on the leading edge of innovation in our industry, it's not
the bells and whistles that make Penn-America a great company and a great
long-term investment. We are great because the markets we serve through our
general agents are great. They are the heart, the soul, the backbone, the brain,
the sweat, the blood and the brawn of the American economy. They are the small,
entrepreneurial businesses that line every Main Street in America. They are
where innovation is born and jobs are created. Together they form the economic
engine driving our company's success, indeed, our nation's success. That is why
this 1999 Annual Report puts the emphasis where it belongs: at the busy
intersections of Main Street America.
Welcome to Main Street Today. Welcome to Penn-America.
Sincerely,
/s/ Jon S. Saltzman
Jon S. Saltzman, President and Chief Executive Officer
1
<PAGE>
COVER STORY
SMALL BUSINESS ON MAIN STREET: AMERICA'S ECONOMIC ENGINE
[GRAPHIC OMITTED - PHOTO]
The story of Penn-America is, from every angle, the story of small things. The
company underwrites small premium commercial insurance policies for small,
entrepreneurial businesses located in small cities and towns through a small
network of entrepreneurial wholesale general agents people at a small company
located on the main street of a quintessentially small American town: Hatboro,
Pennsylvania.
In America, small business is big business. According to the United States
Small Business Administration, small businesses (companies with fewer than 500
employees) represent 99.7% of all employers, provide 67% of all American workers
with their first jobs and training in basic skills and represent 47% of all
sales in the nation.
At Penn-America, small is everything. The average Penn-America insured
(there are about 42,000 of them) is a very small (3.3 employees) entrepreneurial
(79% of policies purchased by an owner), established business (5.9 years in
business) paying a small annual premium (the average is about $1,500.) Because
Penn-America itself is a small entrepreneurial company (109 employees) its
management team is flat (only two layers deep) and fast to respond to changing
marketplace demands. Everything about Penn-America mirrors its markets. The
company is located in the former local middle school building on the main street
of Hatboro between the YMCA and the local municipal offices are housed in
another old school building built in 1848. Hatboro is a thriving little town on
the outskirts of Philadelphia, founded in 1705, 1.2 square miles in area with a
population of 7,382 served by 59 retail shops, 17 restaurants, 35 professional
offices, 13 churches, 45 service businesses and 4 banks.
Welcome to Main Street Today.
- ------------------------------------------------------
Vital Statistics: Penn-America's Insureds
- ------------------------------------------------------
Number of insureds About 42,000
- ------------------------------------------------------
Average size of business 3.3 employees
- ------------------------------------------------------
Average length of time in business 5.9 years
- ------------------------------------------------------
Average premium About $1,500
- ------------------------------------------------------
Vital Statistics: Small Business In America (1)
o There are 24 million small businesses in the United States
o In 1997 the U.S. economy created nearly 3 million new jobs. Six out of
10 of the industries adding those jobs were dominated by small
business.
Small businesses...
o Represent 99.7% of all employers
o Provide 55% of innovations
o Employ 53% of the private work force
o Provide 47% of all sales in the country
o Employ 38% of the private workers in high-tech occupations
o Account for 35% of all Federal contract dollars
(1) Source: United States Small Business Administration publication 5/4/99
2
<PAGE>
Distribution of Employer Firms in the United States [PIE CHART OMITTED}
Number of Jobs Created By Industry and Employment Size of Firm
[BAR CHART OMITTED]
[GRAPHIC OMITTED - PHOTO]
A Month In The Life Of Main Street
In one month during 1999, Penn-America helped to provide insurance
protection to small businesses like these all across America.
Apartment building
Food distributor
Public parking
Apartment complex
Fraternal lodge
Residential moving & delivery
Athletic association
Garage
Restaurant
Auto repair shop
Gift shop
Restaurant & cigar shop
Auto sales
Grading of land
Restaurant with dance floor
Bar/club
Grocery store
Roofing & gutters
Beauty salon/tanning
Ice cream shop
Roofing and carpentry
Beauty shop
Interior construction
Sale of Indian artifacts
Building owner
Landscape maintenance
Screen printing
T-shirts
Cable TV line installer
Language school
Sheet metal-flashings
Cafe' & lounge
Maid service
Shopping center
Candy manufacturer
Martial arts academy
Stereo/video sales installation Carpentry contractor
Massage therapist
Tavern
Carpentry/painting
Mortgage broker
Telemarketing office
Catering service
Motel
Town Homes
Commercial roofing
Nail salon
Dance hall
Painting
Two-family dwelling
Daycare center
Used car dealer
Pet sitting
Wholesale circuit breakers
Electrical equipment distributor
Excavation
Prefab building erection
Exercise and fitness
3
<PAGE>
TECHNOLOGY
How Modern Technology Makes Old-Fashioned Relationships Better
Penn-America's success depends on some very old-fashioned technologies:
listening, honest relationships, handshakes, open communication, shoe leather.
The company's agents are in the trenches, every day, engaged in the kind of
ground-level reconnaissance, responsiveness and person-to-person contact that
separates nimble entrepreneurs from lumbering bureaucrats. Yet, old fashioned
ideas and practices must be supported by sophisticated technologies-- the same
technologies that are transforming the livelihoods of the small entrepreneurs
the company serves. Penn-America works hard, and invests substantially, to
harness modern technologies to improve the quality and efficiency of its
relationship with its agents.
In 1999, Penn-America took great strides down this critical path to success
including:
o Converting the company's agency underwriting manual to CD-ROM format
and distributing it to the 625 manual holders in its agents' offices.
Many have adopted this better, faster, less expensive format and more
than 10% have cancelled their orders for the paper-based version;
o Completing an electronic data transfer system, through which now more
than 70% of all account current information from the company's agents
is exchanged;
o Introducing Pennlink, a first-of-its kind private intranet system for
agents that provides immediate and real time access to forms,
production statistics and other business data and resources;
o Upgrading the 135 personal computers used throughout the company, to
improve speed and efficiency;
o Developing and hosting sites on the World Wide Web for company agents
who did not have them at the beginning of 1999;
o Partnering with DocuCorp International (NASDAQ:DOCC) in a beta test of
the new Internet Policy Production System (iPPS) that will allow the
company's agents to issue policies and supporting documentation via
the Internet.
[GRAPHIC OMITTED - PHOTOS]
4
<PAGE>
PEOPLE
Behind The Scenes On Main Street:
The Penn-Americans
When you're "Just Doin' Business" with Penn-America, it's with people who are
remarkably like the general agents and small town business people they serve.
Here is a profile of the people of Penn-America:
- -----------------------------------------------------------
Average age 40.3 yrs
- -----------------------------------------------------------
Married 70.1%
- -----------------------------------------------------------
Have children 72.4%
- -----------------------------------------------------------
Have grandchildren 17.2%
- -----------------------------------------------------------
Live in a small town 83.7%
- -----------------------------------------------------------
Average distance to work 13.8 miles
- -----------------------------------------------------------
Have a small business in the family 40.7%
- -----------------------------------------------------------
Grew up in a family with a small business 18.6%
- -----------------------------------------------------------
Penn-America has a motto: "Just Doin' Business." It's a shorthand way to recall
the five principles by which the company operates:
Solid relationships
Sound underwriting
Adequate reserves
Strong reinsurance partnerships
Prudent investing
[GRAPHIC OMITTED - PHOTOS]
5
<PAGE>
GUEST OPINION
Are Small Firms Important?
By Jere W. Glover
Chief Counsel for Advocacy, Office of Economic Research of the U.S. Small
Business Administration's Office of Advocacy
Are small firms important? Yes. The impressive performance of the U.S.
economy over the past six years can be contrasted with the rather lackluster
performance in both Europe and Japan. This divergent macroeconomic performance
can be explained in part by differences in competition, entrepreneurship and new
firm start-ups. Small firms make two indispensable contributions to the American
economy.
First, they are an integral part of the renewal process that pervades and
defines market economies. New and small firms play a crucial role in
experimentation and innovation, which leads to technological change and
productivity growth. In short, small firms are about change and competition
because they change market structure! The U. S. economy is a dynamic
organization always in the process of becoming, rather than an established one
that has arrived.
Second, small firms are the essential mechanism by which millions enter the
economic and social mainstream of American society. Small business is the
vehicle by which millions access the American Dream by creating opportunities
for women, minorities and immigrants. In this evolutionary process, community
plays the crucial and indispensable role of providing the social glue and
networking that binds small firms together in both high tech and "Main Street"
activities. The American economy is a democratic system, as well as an economic
system, that invites change and participation.
A successful entrepreneurial environment features continual "creative
destruction," to use Joseph Schumpeter's apt term. New companies prosper and
help the economy, in part by destroying the markets for semi-monopolistic
industries. Nations that protect the markets and incomes of existing larger
companies prevent the creative destruction so essential to progress. Therefore,
the crucial barometer for economic and social well-being is the continued high
level of creation of new and small firms in all sectors of the economy by all
segments of society. It should be the role of government policy to facilitate
that process by eliminating barriers to entry, lowering transaction costs, and
minimizing monopoly profits by large firm. (4)
(4) Reprinted with permission from the "Summary and Policy" implications portion
of "The New American Evolution: The Role and Impact of Small Firms," a report
prepared by the Office of Economic Research of the United States Small Business
Administration's Office of Advocacy.
Penn-America's Core Commerical Business Shows Strong Growth
[BAR CHART OMITTED]
6
<PAGE>
PEOPLE
Five Penn-America Agents and Their Markets
Living On Main Street:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
<S> <C> <C>
Frank R. Berry R. Edward Kraft
Chairman [GRAPHIC OMITTED - PHOTO] President [GRAPHIC OMITTED]
Agency Specialty Insurance American Insurance
Managers, Inc. Managers, Inc.
Location Austin TX Seattle WA
Years in Business 36 44
Number of Employees 50 7
Annual Sales $ 27M $ 2.5M
Number Of Businesses
In State With Employees in 1997 375,357 174,516
Percentage Of Businesses In State
That Are Small 98.7% 98.3%
Net New Jobs Created by Small Businesses
in Agent's State (1992-1996) 909,965 262,258
- ------------------------------------------------------------------------------
Kenneth E. Kukral, CIC George Rothert Michael Goodell, CIC
President [GRAPHIC OMITTED] President [GRAPHIC OMITTED] President [GRAPHIC OMITTED]
Agency International Excess George Rothert R&R/Select
Agency, Inc. & Associates
Location Cleveland OH Santa Rosa CA Tulsa OK
Years in Business 43 4 10
Number of Employees 14 8 37
Annual Sales $ 13.5M $ 3.2M $ 24M
Number Of Businesses
In State With Employees in 1997 228,772 837,802 72,648
Percentage Of Businesses In State
That Are Small 98.4% 99.2% 97.6%
Net New Jobs Created by Small Businesses
in Agent's State (1992-1996) 348,113 1,066,182 85,023
- ------------------------------------------------------------------------------------
</TABLE>
Annual Meeting
The Annual Stockholders' Meeting will be held in our home office on May 17, 2000
at 10:00 A.M.
Stockholder Relations, Form 10-K
The company's 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]
Market and Common Stock Information
Since August 4, 1998, the company's common stock has traded on the New York
Stock Exchange under the symbol "PNG." Previously, the company's stock was
listed on NASDAQ. As of February 1, 2000 there were approximately 1400
beneficial holders of record of the company's common stock. The high and low
sale prices of the common stock were as follows:
1998 1999
Quarter High Low Quarter High Low
First $ 23.00 $ 19.50 First $ 11.44 $ 9.13
Second 21.25 13.00 Second 11.06 9.44
Third 13.25 8.25 Third 10.31 8.44
Fourth 11.13 8.63 Fourth 8.44 7.13
7
<PAGE>
MONEY
MONEY & FINANCE
<TABLE>
<CAPTION>
Selected Five Year Financial Data
(in thousands except per share data) At or for the years ended December 31,
1999 1998 1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income statement data
Revenues
Premiums earned $85,677 $89,493 $91,649 $69,081 $57,228
Net investment income 9,537 10,763 9,218 6,705 5,067
Net realized investment gains 841 18 1,314 906 1,279
Other income -- -- 672 -- --
------------------------------------------------------------------
Total revenues 96,055 100,274 102,853 76,692 63,574
------------------------------------------------------------------
Losses and expenses
Losses and loss adjustment expenses 63,187 55,733 57,728 43,292 35,835
Amortization of deferred policy
acquisition costs 24,802 25,452 24,984 17,785 14,237
Other underwriting expenses 6,039 6,389 5,840 4,349 4,356
Interest expense 145 177 520 884 239
------------------------------------------------------------------
Total losses & expenses 94,173 87,751 89,072 66,310 54,667
------------------------------------------------------------------
Earnings before income taxes 1,882 12,523 13,781 10,382 8,907
Income tax (benefit) expense (156) 3,642 4,136 3,389 2,881
------------------------------------------------------------------
Net earnings $2,038 $8,881 $9,645 $6,993 $6,026
==================================================================
Per share data (1)
Basic
Net operating earnings(2) $0.17 $0.91 $1.08 $0.96 $0.78
Net earnings $0.24 $0.91 $1.19 $1.05 $0.91
Weighted average shares outstanding 8,592 9,766 8,126 6,663 6,645
Diluted
Net operating earnings(2) $0.17 $0.90 $1.07 $0.95 $0.78
Net earnings $0.24 $0.90 $1.17 $1.04 $0.91
Weighted average shares outstanding 8,658 9,873 8,228 6,743 6,655
Cash dividends per share $0.2075 $0.20 $0.16 $0.11 $0.06
Other data
Gross written premiums $95,983 $95,097 $104,694 $80,496 $66,953
Net written premiums 87,036 87,829 96,561 73,469 61,286
Net operating earnings(2) 1,483 8,869 8,781 6,395 5,182
Return on average stockholders' equity 2.2% 9.0% 13.8% 17.8% 18.7%
GAAP data
Loss ratio 73.8% 62.3% 63.0% 62.7% 62.6%
Expense ratio 36.0 35.6 33.6 32.0 32.5
------------------------------------------------------------------
Combined ratio 109.8% 97.9% 96.6% 94.7% 95.1%
Statutory data
Policyholders' surplus $69,515 $85,358 $83,459 $41,665 $39,118
Loss ratio 73.8% 62.3% 63.0% 62.7% 62.6%
Expense ratio 34.9 35.0 32.3 31.6 30.4
------------------------------------------------------------------
Combined ratio 108.7% 97.3% 95.3% 94.3% 93.0%
==================================================================
Property-casualty industry combined ratio(3) 107.5% 104.3% 101.1% 105.9% 106.4%
Balance sheet data (at end of period)
Cash and investments $166,227 $182,866 $177,819 $115,550 $100,428
Total assets 217,782 230,504 225,157 158,605 137,763
Notes payable -- -- -- 9,000 10,150
Total stockholders' equity 80,618 100,630 97,307 42,337 36,250
Total stockholders' equity per share(1) $10.00 $10.71 $9.85 $6.34 $5.46
<FN>
(1) Adjusted to reflect a three-for-two split of the company's common stock
effected on March 7, 1997. (2) Excludes realized investment gains (losses),
assuming 34.2% for 1997 and 34% marginal tax rate for all other years. (3)
Source: For 1999, January 10, 2000 Best Viewpoint; 1995 through 1998, Best
Aggregates & Averages-Property Casualty.
</FN>
</TABLE>
8
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes included therein.
General
Penn-America Group, Inc. (PNG) is a specialty property and casualty insurance
holding company which, through its subsidiaries, Penn-America Insurance Company
and its subsidiary Penn-Star Insurance Company, markets and underwrites
commercial property, general liability and multi-peril insurance for small
businesses located primarily in small towns and suburban and rural areas. The
Company provides commercial property and casualty insurance both on an excess
and surplus lines basis and on an admitted basis. During 1999, the company
announced that it would exit the non-standard personal automobile business
entirely. That business is now in run-off.
Penn-America markets its products through about 50 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.
Penn-America 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.
Same Store Sales Growth
Dollars in millions 1992 1999 Increase
Commercial GWP $22.6 $84.5 273.9%
Number of General Agents 38 50 31.6%
Commercial
GWP Per Agent $0.59 $ 1.7 188.1%
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1992 to 1999, commercial gross written
premiums grew at a 20.7% compound annual rate from $22.6 million to $84.5
million.
Penn-America'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 general 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, long-standing relationships by providing a
high level of service and support. From 1992 to 1999, Penn-America achieved
273.9% cumulative growth in commercial gross written premiums with a 31.6%
increase in the number of general agents, from 38 to 50. The Company maintains
low fixed-costs by underwriting the substantial majority of its policies on a
binding authority basis.
Penn-America closely monitors the quality of business it underwrites. The
Company provides its general agents with a comprehensive, regularly updated
underwriting manual, which also is available online through a private Intranet
site called Pennlink. The manual clearly outlines the Company's pricing and
underwriting guidelines Penn-America 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 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 its common stock, options and cash as payment of the
contingent commissions. Since 1996, the Company has awarded agents approximately
107,000 shares of the Company's stock through its contingent commission
structure. Historically, the Company has underwritten the majority of its
commercial lines business on an excess and surplus basis. In recent years,
Penn-America 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. The Company expects to
continue to expand its commercial
9
<PAGE>
lines business by offering additional products and packages which enhance its
current property and liability coverage, 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 coverage. The Company announced in 1999
that it would be running-off all of the non-standard personal automobile
business. Non-standard personal automobile business represented approximately
12.0% of the total gross premium written by the Company in 1999 as compared with
24.9% in 1998. The Company anticipates that run-off from non-standard personal
automobile written premium in 2000 will be approximately $2.0 million.
Penn-America's commercial insureds consist primarily of small, "Main Street"
businesses including restaurants, taverns, mercantiles and artisan contractors,
located principally in small towns and suburban and rural areas. In addition,
the Company has developed customized products and coverage for other small
commercial insureds such as daycare 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.
Penn-America's financial position and results of operations are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on the Company's
business, results of operations or financial condition. Also, re-evaluations of
the Company's loss reserves could result in an increase or decrease in reserves
and a corresponding adjustment to earnings. Additionally, the insurance industry
is highly competitive. Penn-America 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.
The Internet is an obvious force that is affecting every segment of the economy.
A host of new competitors is aimed at the immense E-commerce market. The
magnitude of the roles that the Internet and its participants will take is yet
to be determined.
Competition is based on many factors, including the perceived market strength of
the insurer, pricing and other terms and conditions, services provided, the
speed of claims payment, the reputation and experience of the insurer and
ratings assigned by independent rating organizations such as A.M. Best Company.
Penn-America and its subsidiary, Penn-Star currently have a pooled rating from
A.M. Best of "A" (Excellent) which was reaffirmed by Best in January 2000. This
rating is based upon factors of concern to policyholders, including financial
condition and solvency and is not directed to the protection of investors.
Gross Premium Mix by Business Segment [PIE CHART OMITTED]
The following is a brief description of the Company's business segments and
lines of insurance
Penn-America manages its business in two segments: commercial and personal
lines. Commercial lines consist of general liability, property, multi-peril,
business automobile and commercial umbrella. Personal lines consist solely of
non-standard personal automobile. During 1999, the Company began exiting
non-standard personal automobile and running-off its remaining policies. The
Company will continue to report non-standard personal automobile as a separate
business segment until it no longer is significant as a segment to the financial
statements of the Company.
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 provide for 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
Penn-America'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.
10
<PAGE>
Commercial Multi-Peril
Penn-America 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 than individual
property and liability policies during the last several years. 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 fact that Insurance Services
Office (ISO) forms make it easier and more efficient to write such multi-peril
policies.
Business Automobile and Commercial Umbrella
The Company recently added both business automobile and commercial umbrella
coverage 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, mercantile, artisan contractors and similar
classes. The business automobile insurance line (cars and light trucks) can be
written with liability limits up to $1 million. Commercial umbrella insurance
can be written for limits up to $5 million with significant reinsurance support
from General Reinsurance Corporation. For commercial umbrella coverage,
Penn-America usually writes the primary $1 million liability limit. The Company
expects that the addition of these coverages will expand package writings
further and help to increase renewal retention of existing policies.
Program Business.
Penn-America creates specialized underwriting and marketing programs for
individual agents based upon specific territorial needs and opportunities. The
individual agent is given exclusive marketing authority for the program subject
to territorial limitations. The Company believes it can achieve superior
underwriting results and expense savings on these programs. In all of its
commercial product lines, the Company continuously is developing specialized
programs for certain industry segments to meet the needs of these marketplaces.
For example, Penn-America has developed programs for independent fitness
centers, daycare operations, low-hazard miscellaneous professional liability
coverage and special events. As a group, these programs are a significant
benefit to the Penn-America's marketing efforts, although they do not generate a
material amount of the Company's gross written premiums. During 1999, the
Company began cargo, courier and dwelling programs for specific agents. These
programs contributed approximately $7.5 in gross written premiums during 1999.
Non-Standard Personal Automobile
Penn-America wrote non-standard personal automobile policies in seven states. In
1999, the Company announced that it was pulling-out of this line entirely and
that it would be in run-off. The business being run-off represented $11.5
million of gross premiums written in 1999. The non-standard automobile written
premium anticipated to be written by the Company in 2000 is largely the result
of the statutory requirements of states regarding renewals. The Company
estimates that only about $2.0 million of personal non-standard automobile
premiums will be written in 2000.
Results of Operations
Year ended December 31, 1999 compared with year ended December 31, 1998
Gross written premiums increased 0.9% to $95.9 million for the year ended
December 31, 1999 from $95.1 million for the year ended December 31, 1998. The
slight increase resulted from an 18.3% increase in commercial lines premium to
$84.5 million offset by the 51.3% decline in the non-standard personal
automobile line's gross written premiums to $11.5 million.
Net written premiums decreased 0.9% to $87.0 million for the year ended December
31, 1999 from $87.8 for the year ended December 31, 1998. During the same
period, net premiums earned decreased 4.3% to $85.7 from $89.5 million. Net
premiums earned decreased due to the decrease in gross written premium which, in
turn, was due primarily to the run-off of non-standard personal automobile.
1999 Commercial Premium Growth As Compared with The P&C Industry
[BAR CHART OMITTED]
11
<PAGE>
Net investment income decreased 11.4% to $9.5 million for the year ended
December 31, 1999 from $10.8 million for the year ended December 31, 1998. The
decrease resulted principally from the use of excess capital to purchase $13.8
million of treasury stock; a decrease in investment tax equivalent yields to
6.27% from 6.52%; and a decline in cash flows from operations due principally to
the run-off of the non-standard personal automobile line.
Net realized investment gains after taxes for the year ended December 31, 1999
were $555,000 as compared with $12,000 for the year ended December 31, 1998.
Losses and loss adjustment expenses increased 13.4% to $63.2 million in 1999 as
compared with $55.7 million in 1998 due primarily to an increase in property
losses in the current year and increased developments on prior accident years of
$8.4 million in the commercial casualty and personal automobile lines.
Amortization of deferred acquisition costs decreased 2.6% to $24.8 million for
the year ended December 31, 1999 from $25.5 million for the year ended December
31, 1998. The decrease was attributable primarily to a decrease in non-standard
automobile premium written and the change in the mix of business. Typically
non-standard automobile commission rates are higher than the commercial rates.
Other underwriting expenses decreased 5.5% to $6.0 million for the year ended
December 31, 1999 from $6.4 million for the year ended December 31, 1998.
The loss ratio increased to 73.8% for the year ended December 31, 1999 from
62.3% for the year ended December 31, 1998. The statutory expense ratio
decreased slightly to 34.9% from 35.0% for the year ended December 31, 1998. The
decrease in the statutory expense ratio is attributable mainly to the decrease
in the net premiums written in the non-standard personal automobile line, which
has a higher commission rate. The statutory combined ratio increased to 108.7%
for the year ended December 31, 1999 compared with 97.3% for the year ended
December 31, 1998.
As a result of the factors described above, the Company's net operating earnings
before realized investment gains for the year ended December 31, 1999 decreased
83.3% to $1.5 million or $0.17 per share (basic and diluted) from $8.9 million
or $0.91 per share (basic) and $0.90 per share (diluted) for the year ended
December 31, 1998.
Net earnings for the year ended December 31, 1999 were $2.0 million or $0.24 per
share (basic and diluted) as compared with $8.9 million or $0.91 per share
(basic) and $0.90 per share (diluted) in 1998.
Year ended December 31, 1998 compared with year ended December 31, 1997
Gross written premiums decreased 9.2% to $95.1 million for the year ended
December 31, 1998 from $104.7 million for the year ended December 31, 1997. The
decrease resulted from a 34.0% decline in the non-standard personal automobile
line's gross written premiums to $23.7 million. Commercial lines gross written
premiums grew 3.8% to $71.4 million. The overall decrease in gross written
premiums was attributable primarily to actions taken by the Company throughout
1998 to limit losses in certain states' automobile programs by cutting-back on
production. Further, in January 1999, the Company announced that it would focus
its non-standard automobile premium writings solely in the state of California
and would run-off the non-standard personal automobile business in six other
states.
Net written premiums decreased 9.0% to $87.8 million for the year ended December
31, 1998 from $96.6 for the year ended December 31, 1997. During the same
periods, net premiums earned decreased 2.4% to $89.5 from $91.6 million. Net
premiums earned decreased due to the decrease in gross written premiums.
Net investment income increased 16.8% to $10.8 million for the year ended
December 31, 1998 from $9.2 million for the year ended December 31, 1997. The
increase resulted principally from growth in invested assets funded primarily by
net proceeds from the secondary offering in July 1997 and cash flows from
operations, which was partially offset by an increase in tax-exempt securities
in the portfolio, which grew to $35.3 million from $550,000 at year-end December
31, 1997. The average tax equivalent investment yield on the fixed-income
portfolio as of December 31, 1998 was 6.52% compared to 6.70% for December 31,
1997.
Net realized investment gains after taxes for the year ended December 31, 1998
were $12,000 as compared with $864,000 for the year ended December 31, 1997.
Losses and loss adjustment expenses decreased 3.5% to $55.7 million in 1998 as
compared with $57.7 million in 1997 due primarily to the decrease in net
premiums earned.
Amortization of deferred acquisition costs increased 1.9% to $25.5 million for
the year ended December 31, 1998 from $25.0 million for the year ended December
31, 1997. The increase was attributable primarily to an increase in commercial
lines commission rates from 20% to 22%, a 10% increase during 1998 and was
offset partially by the decline in earned premiums.
Other underwriting expenses increased 9.4% to $6.4 million for the year ended
December 31, 1998 from $5.8 million for the year ended December 31, 1997. The
increase in 1998 expenses was due primarily to expenses related to new programs
and other non-recurring expenses of the holding company.
12
<PAGE>
The loss ratio decreased to 62.3% for the year ended December 31, 1998 from
63.0% for the year ended December 31, 1997. The statutory expense ratio
increased to 35.0% from 32.3% for the year ended December 31, 1997. The increase
in the statutory expense ratio was attributable mainly to the decrease in the
net premiums written primarily in the non-standard personal automobile lines as
well as the increase in the commercial lines commission rate. The statutory
combined ratio increased to 97.3% for the year ended December 31, 1998 compared
with 95.3% for the year ended December 31, 1997.
As a result of the factors described above, the Company's net operating earnings
before realized investment gains for the year ended December 31, 1998 increased
1.0% to $8.9 million or $0.91 per share (basic) and $0.90 per share (diluted)
from $8.8 million or $1.08 per share (basic) and $1.07 per share (diluted) for
the year ended December 31, 1997.
Net earnings for the year ended December 31, 1998 were $8.9 million or $0.91 per
share (basic) and $0.90 per share (diluted) as compared with $9.6 million or
$1.19 per share (basic) and $1.17 per share (diluted) in 1997.
Liquidity and Capital Resources
Penn-America Group (PNG) is a holding company, the principal asset of which is
the common stock of Penn-America Insurance Company. PNG's cash flows depend
primarily on dividends and other payments from Penn-America and its subsidiary
Penn-Star. PNG uses these funds to pay (i) operating expenses, (ii) taxes and
other payments, (iii) dividends to PNG stockholders and (iv) more recently to
fund the company's stock repurchase program. Penn-America's source of funds
consists primarily of premiums, 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 PNG.
The principal source of cash to use for the payment of dividends to PNG's
stockholders 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 of the Pennsylvania regulatory authorities. The maximum dividend
that may be paid in 2000 by Penn-America to PNG without prior approval of
regulatory authorities is $6.9 million. Penn-America's statutory surplus
decreased 18.6% to $69.5 million as of December 31, 1999, from $85.4 million as
of December 31, 1998. This decrease was due primarily to dividends of $14.5
million to PNG and offset by consolidated statutory net income of $1.9 million
from Penn-America. These dividends were used primarily to purchase stock under
the corporate stock buy-back program ($13.8 million) and to pay dividends to PNG
stockholders ($1.8 million).
Net cash provided by operating activities decreased 19.2% to $8.6 million for
the year ended December 31, 1999 from $10.6 million for the year ended December
31, 1998. The decrease in net cash provided by operations resulted principally
from the decrease in net premiums written during the year due to the run-off of
non-standard personal automobile business. Net cash used by investing activities
was $5.4 million for the year ended December 31, 1999, compared with $18.2
million provided by investing activities for the year ended December 31, 1998.
This decrease in cash from investing activities in 1999 was due to the Company's
decision to invest excess cash in the purchase of its own stock. During 1998,
cash flow was provided by investing activities due to the Company's decision to
remain liquid through year-end as the Company evaluated interest rates and the
financial markets.
Net cash used by financing activities was $15.3 million for the year ended
December 31, 1999 as compared with $6.9 million for the same period in 1998. In
1999 and 1998, $13.8 and $5.6 million were used by the Company to repurchase
1,385,250 and 542,325 shares of Company stock through the stock buy-back program
and $1.8 and $1.9 million were used for PNG stockholder dividends for 1999 and
1998, respectively. The cash provided by financing activities in
STOCK REPURCHASE PROGRAM [BAR CHART OMITTED]
13
<PAGE>
1997 resulted primarily from $45.6 million in proceeds from the secondary stock
offering and the exercise of stock options, partially offset by the principal
repayment of $9 million on the 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 Company's
investment strategy emphasizes quality, liquidity and diversification, as well
as total return. With respect to liquidity, the Company considers liability
durations, specifically related to loss reserves, when determining desired
investment maturities. In addition, maturities have been staggered to produce
cash flows for loss payments and reinvestment opportunities. The average
duration of the fixed-maturity portfolio as of December 31, 1999 was
approximately 4.5 years.
The Company's fixed-maturity portfolio represented $127.7 million or 82.8% of
the total carrying value of the investment portfolio as of December 31, 1999.
Approximately 97.8% 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, represented $26.0 million or 16.8% of total investments as of December
31, 1999.
As of December 31, 1999, the investment portfolio contained $17.6 million of
mortgage- and asset-backed obligations. All of these securities were "AAA"-rated
securities issued by government or government-related agencies, were publicly
traded and had 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, 1999.
In September 1998, the Company completed a revolving credit facility for $25
million with First Union National Bank. This facility provides for an interest
rate tied to LIBOR plus a variable factor to be charged on borrowed funds based
on the Company's debt-to-equity ratio at the time of borrowing. This variable
interest factor ranges from 75 to 150 basis points. The facility is available
until the year 2004 with a structured step-down in the available credit line
over that period. As of December 31, 1999, the Company had not drawn upon this
credit facility.
Market Risk
The Company is subject to market risk principally arising from the potential
change in the value of its investment portfolio.
The major components of market risk affecting the Company are interest rate and
equity risk. The Company has a fixed-maturities investment portfolio with a fair
value of $127.7 million at December 31, 1999 that is subject to changes in value
principally due to changes in market interest rates. A component of the
fixed-maturities portfolio includes mortgage-backed and asset-backed securities
($17.6 million in fair value at December 31, 1999), which are exposed to
accelerated prepayment risk generally caused by decreases in interest rates.
Acceleration of repayments could affect adversely future investment income, if
reinvestment of the cash received from repayments is in lower-yielding
securities.
The Company's preferred equity portfolio of $18.4 million at December 31, 1999
is subject to interest rate risk similar to the fixed-maturities portfolio
described above.
In addition to interest rate risk, the Company's common equity portfolio of $7.6
million at December 31, 1999 is subject to changes in value based on changes in
equity prices in United States markets.
The Company manages its exposure to market risk through a disciplined
asset/liability matching and capital management process. In the management of
market risk, the characteristics of duration, credit and variability of cash
flows are critical elements. These risks constantly are assessed and balanced
within the context of the liability and capital position of the Company.
The following is a tabular presentation of the Company's investment portfolio
(dollars are presented in millions) at December 31, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date
Fair
There- Value
2000 2001 2002 2003 2004 after Total Total
- ---------------------------------------------------------------------------------------------------------------
Fixed-Maturities Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal amount $15.4 $13.1 $12.1 $ 6.0 $17.2 $84.1 $147.9
Average interest rate 6.19% 6.41% 6.32% 5.77% 5.95% 5.42% 5.78%
Fair value $127.5
Yield on fair value 6.55%
Preferred Stock
Principal amount $20.4 $20.4
Average interest rate 6.32% 6.32%
Fair value $18.4
Yield on fair value 7.04%
Common Stock
Fair value $7.6
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The average interest rate presented above is the yield on amortized cost of
fixed maturities and the yield on actual cost of preferred stocks. The principal
amounts are the par values or the cash flow at maturity. The expected maturity
date anticipates calls and prepayments.
14
<PAGE>
Impact of Inflation
Inflation can have a significant impact on property and casualty insurers
because premium rates are established before the amounts of loss and loss
adjustment expenses are known. The Company attempts to anticipate increases from
inflation in establishing rates, subject to limitations imposed for competitive
pricing. The Company does not believe that inflation has had a material impact
on the Company's business, results of operations or financial condition to date.
The Company also considers inflation when estimating liabilities for 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 management's estimates of the ultimate net cost of underlying
claims and expenses and are not discounted for the time value of money. In times
of high inflation, the normally higher yields on investments may be offset
partially by higher claims and expenses.
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 insurer's domiciled insurance department. Based on the currently adopted
standards, Penn-America's and Penn-Star's capital and surplus is in excess of
the prescribed risk-based capital requirements for 1999.
The Year 2000
Introduction
The Company has referred to the "Year 2000, or "Y2K," as any problem that
automated systems could encounter on or after January 1, 2000, including
February 29, 2000, due to computers' or other electronic devices' inability to
register the year 2000 correctly, rather than as the year 1900. In this regard,
the Company has relied on its (and its key customers', suppliers' and vendors')
information technology systems ("IT systems") to operate and monitor all major
aspects of the Company's business, including underwriting, claims and various
financial systems, and non-information technology systems ("non-IT-systems"),
such as electricity, telephones, facsimile machines, heating and
air-conditioning and fire protection systems.
State of Readiness
As of December 31, 1999, all remediations to and of the IT and non-IT systems of
the Company and its key customers, suppliers and vendors were completed. The
Company also had completed and tested a Contingency Plan that could be used in
the event of a Year 2000, or Y2K, problem.
As of the date of this report, neither the Company nor any of its key customers,
suppliers and vendors has experienced any significant Year 2000 or Y2K problems.
The Company continues to monitor the Year 2000 situation, but has seen no Year
2000 disruption to date and has no basis on which to expect a disruption.
Cost
The Company incurred approximately $120,000 to re-code and test its IT systems,
upgrade certain non-IT systems and participate in a Y2K audit mandated by the
Pennsylvania Department of Insurance.
Risks
While the Company believes as of this date that it has not and will not
experience any Year 2000 or Y2K related problems, the Company cannot guarantee
that a significant problem will not arise, either with IT systems and non-IT
systems of the Company or any key customer, supplier or vendor with which the
Company does business. It is still possible that a disruption in the receipt
and/or processing of insurance policies, claims, payment of receivables or other
problems could occur. This could result in business disruption, operational
problems, financial losses, legal liability and similar risks to the business.
While the Company has not yet received any demand for coverage for a Y2K event,
it is possible that the Company could be exposed to insurance risks related to
Y2K exposures of its insureds. This is despite the endorsement of a Y2K
exclusion in new and renewal policies as of November 1, 1998.
Contingency Plans
The Company continues to maintain its written Contingency Plan, which
incorporates its Disaster Recovery Plan, and is available in the event of an
unforeseen Year 2000 or Y2K related problem.
The foregoing constitutes a "Year 2000 Readiness Disclosure" within the meaning
of the Year 2000 Readiness Disclosure Act.
15
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(In thousands except share and per share data)
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost 1999, $115,975; 1998, $103,365) $111,419 $105,598
Held to maturity, at amortized cost (fair value 1999, $16,103; 1998, $27,270 16,294 26,956
Equity securities, at fair value (cost 1999, $28,014; 1998, $23,358) 26,020 25,238
Short-term investments, at cost, which approximates fair value 449 997
-----------------------------
Total investments 154,182 158,789
Cash 12,045 24,077
Receivables:
Accrued investment income 1,965 1,871
Premiums receivable, net 8,981 10,349
Reinsurance recoverable 18,284 18,766
-----------------------------
Total receivables 29,230 30,986
Prepaid reinsurance premiums 3,529 2,809
Deferred policy acquisition costs 9,306 8,728
Capital lease 1,840 2,051
Deferred income taxes 5,487 1,598
Income tax recoverable 1,652 884
Other assets 511 582
-----------------------------
Total assets $217,782 $230,504
=============================
Liabilities and Stockholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses $93,719 $88,937
Unearned premiums 36,332 34,253
Accounts payable and accrued expenses 1,755 1,179
Capitalized lease obligation 1,821 2,080
Other liabilities 3,537 3,425
-----------------------------
Total liabilities 137,164 129,874
-----------------------------
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; 1999, 9,990,436 and 1998, 9,938,179 shares; outstanding 1999,
8,062,861 and 1998, 9,395,854 100 99
Additional paid-in capital 69,591 69,035
Accumulated other comprehensive (loss) income (4,324) 2,714
Retained earnings 35,050 34,779
Treasury stock, 1999, 1,927,575 shares and 1998, 542,325 shares, at cost (19,474) (5,643)
-----------------------------
80,943 100,984
Unearned compensation from restricted stock awards (325) (354)
-----------------------------
Total stockholders' equity 80,618 100,630
-----------------------------
Total liabilities and stockholders' equity $217,782 $230,504
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Statements of Earnings
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands except per share data) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums earned $ 85,677 $ 89,493 $ 91,649
Net investment income 9,537 10,763 9,218
Net realized investment gains 841 18 1,314
Other income -- -- 672
-----------------------------------------
Total revenues 96,055 100,274 102,853
-----------------------------------------
Losses and expenses
Losses and loss adjustment expenses 63,187 55,733 57,728
Amortization of deferred policy acquisition costs 24,802 25,452 24,984
Other underwriting expenses 6,039 6,389 5,840
Interest expense 145 177 520
-----------------------------------------
Total losses and expenses 94,173 87,751 89,072
-----------------------------------------
Earnings before income tax 1,882 12,523 13,781
Income tax (benefit) expense (156) 3,642 4,136
-----------------------------------------
Net earnings $ 2,038 $ 8,881 $ 9,645
=========================================
Net earnings per share (note 2)
Basic $ 0.24 $ 0.91 $ 1.19
Diluted $ 0.24 $ 0.90 $ 1.17
=========================================
Weighted average number of shares used in
calculating per share data (note 2)
Basic 8,592 9,766 8,126
Diluted 8,658 9,873 8,228
=========================================
Cash dividends per share $ 0.2075 $ 0.20 $ 0.16
=========================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unearned
Accumulated Compensation
Additional Other From
(In thousands except share Common Stock Paid-In Comprehensive Retained Treasury Restricted
and per share data) Shares Amount Capital Income(Loss) Earnings Stock Stock Awards Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, at December 31, 1996 6,676,131 $67 $21,844 $993 $19,533 -- $(100) $42,337
Net earnings 9,645 9,645
Other comprehensive income,
net of tax:
Unrealized gains on investments,
net of reclassification adjustment 656 656
---------
Comprehensive income 10,301
---------
Issuance of common stock 3,207,253 32 46,377 46,409
Unearned compensation from
restricted stock awards (512) (512)
Cash dividends paid
($0.16 per share) (1,329) (1,329)
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
Net earnings 8,881 8,881
Other comprehensive income,
net of tax:
Unrealized gains on investments,
net of reclassification adjustment 1,065 1,065
---------
Comprehensive income 9,946
---------
Issuance of common stock 54,795 814 814
Amortization of compensation
expense from restricted
stock awards 157 157
Cash dividends paid ($0.20 per share) (1,951) (1,951)
Purchase of treasury stock, at cost (5,643) (5,643)
-----------------------------------------------------------------------------------------------
Balance, at December 31, 1998 9,938,179 $ 99 $ 69,035 $2,714 $ 34,779 $ (5,643) $(354) $100,630
Net earnings 2,038 2,038
Other comprehensive (loss),
net of tax:
Unrealized losses on
investments, net of
reclassification adjustment (7,038) (7,038)
---------
Comprehensive (loss) (5,000)
---------
Issuance of common stock 52,257 1 556 557
Unearned compensation from
restricted stock awards (91) (91)
Amortization of compensation
expense from restricted
stock awards 120 120
Cash dividends paid ($0.2075
per share) (1,767) (1,767)
Purchase of treasury stock, at cost (13,831) (13,831)
----------------------------------------------------------------------------------------------
Balance, at December 31, 1999 9,990,436 $100 $ 69,591 $(4,324) $35,050 $(19,474) $ (325) $80,618
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,038 $ 8,881 $ 9,645
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization and depreciation expense 493 720 449
Net realized investment gains (841) (18) (1,314)
Deferred tax (benefit) expense (263) 159 (434)
Net increase in premiums and note receivable, prepaid
reinsurance premiums and unearned premiums 2,727 401 3,266
Net increase in unpaid losses and loss adjustment expenses
and reinsurance recoverable 5,264 2,210 12,951
(Increase) decrease in:
Accrued investment income (94) 102 (302)
Deferred policy acquisition costs (578) (165) (1,332)
Income tax recoverable (768) (844) 562
Other assets (64) (215) (50)
Increase (decrease) in:
Accounts payable and accrued expenses 576 (1,159) 565
Other liabilities 112 572 982
-------------------------------------------
Net cash provided by operating activities 8,602 10,644 24,988
-------------------------------------------
Cash flows from investing activities:
Purchases of equity securities (8,320) (17,388) (19,258)
Purchases of fixed maturities available for sale (38,521) (45,533) (61,966)
Purchases of fixed maturities held to maturity (2,785) (1,015) (13,082)
Proceeds from sales of equity securities 4,462 19,633 5,459
Proceeds from sales of fixed maturities available for sale -- 23,037 --
Proceeds from maturities of fixed maturities available for sale 25,995 7,997 13,604
Proceeds from maturities of fixed maturities held to maturity 13,256 20,988 18,789
Change in short-term investments 548 10,458 (4,455)
-------------------------------------------
Net cash (used) provided by investing activities (5,365) 18,177 (60,909)
-------------------------------------------
Cash flows from financing activities:
Issuance of common stock 465 814 45,544
Purchase of treasury stock (13,831) (5,643) --
Principal payments on notes payable -- -- (9,000)
Principal payments on capital lease obligations (136) (127) (110)
Dividends paid (1,767) (1,951) (1,329)
-------------------------------------------
Net cash (used) provided by financing activities (15,269) (6,907) 35,105
-------------------------------------------
(Decrease) increase in cash (12,032) 21,914 (816)
Cash, beginning of period 24,077 2,163 2,979
-------------------------------------------
Cash, end of period $ 12,045 $ 24,077 $ 2,163
===========================================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income tax $ 875 $ 4,248 $ 4,009
Interest 145 177 576
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") at December 31, 1999, owns
approximately 38.3% 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
accounting principles generally accepted in the United States, 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 and its subsidary Penn-Star underwrites commercial property and
general liability insurance and multi-peril insurance, generally referred to as
"property and casualty" insurance. The companies write their business on an
excess and surplus lines or non-standard basis as well as on an admitted basis.
Penn-America and Penn-Star combined are licensed admitted insurers in 35 states
and are approved non-admitted (excess and surplus lines) insurers in 15 states
and the District of Columbia.
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, and are included as a separate component of
accumulated other comprehensive income in stockholders' equity. "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 using the specific
identification basis.
The amortized cost of mortgage- and asset-backed securities iscalculated 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, and are included as a component of accumulated
other comprehensive income. 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 using the semi-monthly pro-rata
basis. Management has established an allowance for doubtful accounts of $422,000
at December 31, 1999 and $522,000 1998, 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
periods 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 values, 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 (LAE) 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.
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.
20
<PAGE>
Premium and Reinsurance Receivables and Payables: The carrying amounts reported
in the balance sheet for these instruments approximate their fair values.
Capitalized Lease Obligation: Fair value is based upon the present value of the
underlying cash flows discounted at the Company's incremental borrowing rate at
year end. The carrying amounts reported in the balance sheet approximate fair
value.
The fair value of options is estimated on the grant date using the Black-Scholes
option pricing model. The model assumes the following for 1999, 1998 and 1997,
respectively: expected annual dividend rates of 1.9%, 1.1%, and 1.2%; risk-free
interest rates of 6.0%, 6.0% and 6.8%; weighted average expected life of the
options of 2.5 years for all years; and expected stock price volatility of 30%
for all years.
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 Company's maximum loss. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liabilities arising from the
reinsured policies and incurred but not reported losses.
Capitalized Lease
The capitalized lease is carried at cost less accumulated amortization.
Amortization is calculated using the interest method 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
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 also have been restated to reflect the stock
split.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations:
Years ended December 31,
----------------------------
(In thousands except per share data) 1999 1998 1997
----------------------------
Basic EPS:
Net earnings $2,038 $8,881 $9,645
Weighted average common
shares outstanding 8,592 9,766 8,126
----------------------------
Basic EPS $0.24 $0.91 $1.19
----------------------------
Diluted EPS:
Net Earnings $2,038 $8,881 $9,645
----------------------------
Weighted average common
shares outstanding 8,592 9,766 8,126
Additional shares outstanding
after the assumed exercise of
options by applying the treasury
stock method 66 107 102
----------------------------
Total Shares 8,658 9,873 8,228
----------------------------
Diluted EPS $0.24 $0.90 $1.17
============================
Note 3 Transactions with Affiliates
Penn-America leases its home office facility from a stockholder. The lease is
accounted for as a capitalized lease. The amounts of property capitalized,
$2,603,000 and $2,727,000 are presented net of accumulated amortization of
$763,000 and $676,000 as of December 31, 1999 and 1998, respectively. Penn
Independent and its subsidiaries also lease a portion of the building in which
Penn-America's home office facility is located. Management believes that the
lease terms are at market rates.
Penn Independent provides the Company with management and other services. The
Company paid $200,000, $225,000 and $296,000 in 1999, 1998 and 1997,
respectively, for such services. Such amounts are based on allocations of
estimated costs.
All costs incurred by Penn Independent on behalf of Penn-America have been
allocated to Penn-America and are reflected in the financial statements.
Management believes that the methods used to allocate such costs are reasonable
and that Penn-America's expenses on a stand-alone basis would not be materially
different.
Premiums written resulting from transactions with insurance agency affiliates of
Penn Independent were $1,732,000 in 1999, $1,279,000 in 1998 and $1,597,000 in
1997. Commissions
21
<PAGE>
paid to such affiliates were $441,000 in 1999, $294,000 in 1998 and $359,000 in
1997. Agents' balances receivable from affiliates were $196,000 and $153,000 as
of December 31, 1999 and 1998 respectively.
Note 4 Investments
The Company invests primarily in investment-grade fixed maturities,
substantially all of which are rated "A" or higher by Standard & Poor's
Corporation. The cost, gross unrealized gains and losses and fair values of
investments are as follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------
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 $10,666 $30 $(1,315) $9,381
Corporate securities 33,005 43 (1,204) 31,844
Mortgage-backed securities 9,630 0 (229) 9,401
Other structured securities 8,230 32 (55) 8,207
Municipal 29,222 0 (1,008) 28,214
Public utilities 25,222 2 (852) 24,372
----------------------------------------------
Total $115,975 $107 $(4,663) $111,419
----------------------------------------------
Held to maturity
U.S. Treasury securities and
obligations of U.S.
government agencies 7,791 0 (122) 7,669
Corporate securities 7,360 1 (63) 7,298
Municipal 150 1 (1) 150
Public utilities 993 0 (7) 986
----------------------------------------------
Total 16,294 2 (193) 16,103
----------------------------------------------
Total fixed-maturity securities 132,269 109 (4,856) 127,522
----------------------------------------------
Equity securities 28,014 951 (2,945) 26,020
Short-term investments 449 -- -- 449
----------------------------------------------
Total investments $160,732 $1,060 $(7,801) $153,991
==============================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------
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 $5,512 $149 $-- $5,661
Corporate securities 28,725 1,024 (1) 29,748
Mortgage-backed securities 10,074 96 (3) 10,167
Other structured securities.15,668 69 -- 15,737
Municipal 35,295 624 -- 35,919
Public utilities 8,091 275 -- 8,366
---------------------------------------------------
Total $103,365 $2,237 $(4) $105,598
===================================================
</TABLE>
<TABLE>
December 31, 1998 (cont'd)
-------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
U.S. Treasury securities and
obligations of U.S.
government agencies 11,046 148 -- 11,194
Corporate securities 9,396 101 (1) 9,496
Mortgage-backed securities 5,123 37 (2) 5,158
Municipal 399 4 -- 403
Public utilities 992 27 -- 1,019
-------------------------------------------------
Total 26,956 317 (3) 27,270
-------------------------------------------------
Total fixed-maturity securities 130,321 2,554 (7) 132,868
-------------------------------------------------
Equity securities 23,358 2,348 (468) 25,238
Short-term investments 997 -- -- 997
-------------------------------------------------
Total investments $154,676 $4,902 $(475) $159,103
=================================================
</TABLE>
Fixed maturities at December 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
-------------------------------------------------
Amortized Amortized
(In thousands) Cost Fair Value Cost Fair Value
-------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $2,000 $1,992 $9,013 $8,999
Due after one year through
five years 28,586 28,100 6,281 6,146
Due after five years through
ten years 36,959 35,331 1,000 958
Due after ten years 30,570 28,388 0 0
Asset- and mortgage-backed
securities 17,860 17,608 0 0
-------------------------------------------------
Total $115,975 $111,419 $16,294 $16,103
=================================================
</TABLE>
A summary of net investment income is as follows:
Years ended December 31,
------------------------------------
(In thousands) 1999 1998 1997
------------------------------------
Interest on fixed maturities $7,629 $8,921 $7,506
Dividends on equity securities 1,492 1,528 1,123
Interest on short-term
investments and cash 787 732 852
Other 4 2 42
------------------------------------
Total investment income 9,912 11,183 9,523
Less investment expense (375) (420) (305)
------------------------------------
Net investment income $9,537 $10,763 $9,218
====================================
22
<PAGE>
All investments in fixed-maturity securities have been income-producing during
1999, 1998 and 1997. Realized pre-tax gains (losses) on the sale of investments
are as follows:
Years ended December 31,
---------------------------------
(In thousands) 1999 1998 1997
---------------------------------
Fixed maturities:
Gross realized gains $66 $87 $77
Gross realized losses (23) (11) (30)
---------------------------------
Net gains 43 76 47
---------------------------------
Equity securities:
Gross realized gains 1,266 724 1,321
Gross realized losses (468) (782) (54)
---------------------------------
Net gains (losses) 798 (58) 1,267
---------------------------------
Total net realized investment gains $841 $18 $1,314
=================================
Income taxes on net realized investment gains were $286,000, $6,000, and
$450,000 in 1999, 1998 and 1997, respectively.
The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 1999 and 1998, amounted to $8,295,000 and
$7,341,000, 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,
1999, reinsurance recoverables and prepaid reinsurance premiums associated with
one major reinsurer, General Reinsurance Corporation, were $19,875,000.
Premiums written and earned consisted of the following:
Years ended December 31,
----------------------------------
(In thousands) 1999 1998 1997
==================================
Premiums written:
Gross $95,983 $95,097 $104,694
Ceded 8,947 7,268 8,133
----------------------------------
Net of reinsurance $87,036 $87,829 $96,561
==================================
Premiums earned:
Gross $93,904 $97,017 $99,385
Ceded 8,227 7,524 7,736
----------------------------------
Net of reinsurance $85,677 $89,493 $91,649
==================================
Recoveries recognized under reinsurance contracts were as follows:
1999 $ 7,182,000
1998 $ 6,081,000
1997 $ 5,132,000
Note 6 Capitalized Lease Obligation
Capitalized lease obligation of $1,821,000 and $2,080,000 at December 31, 1999
and 1998, respectively, represented the lease obligation 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) 1999 1998 1997
--------------------------------
Balance as of January 1 $88,937 $84,566 $70,728
Less reinsurance recoverables 16,502 15,703 15,072
--------------------------------
Net balance at January 1 72,435 68,863 55,656
--------------------------------
Incurred related to:
Current year 54,768 55,647 57,387
Prior years 8,419 86 341
--------------------------------
Total incurred 63,187 55,733 57,728
--------------------------------
Paid related to:
Current year 23,540 21,903 20,861
Prior years 36,449 30,258 23,660
--------------------------------
Total paid 59,989 52,161 44,521
--------------------------------
Net balance at December 31 75,633 72,435 68,863
Plus reinsurance recoverables 18,086 16,502 15,703
--------------------------------
Balance as of December 31 $93,719 $88,937 $84,566
================================
As a result of changes in estimates of insured events of prior years, the
provision for losses and loss adjustment expenses increased $8,419,000, $86,000
and $341,000 in 1999, 1998 and 1997, respectively. The increase in prior year
incurred losses in 1999 is due to loss development in non-standard personal
automobile line which the company is exiting, and commercial lines primarily as
a result of the Company strengthening its reserves. The increase in prior years'
incurred losses in 1998 and 1997 is due primarily to loss development in
non-standard personal automobile liability partially offset by favorable
development in the commercial lines.
Note 8 Income Tax
The components of income tax expense are as follows:
Years ended December 31,
-------------------------------------
(In thousands) 1999 1998 1997
-------------------------------------
Current $107 $3,483 $4,570
Deferred (263) 159 (434)
-------------------------------------
Total $(156) $3,642 $4,136
=====================================
23
<PAGE>
The actual income tax rate differed from the statutory income tax rate
applicable to income before income taxes as follows:
1999 1998 1997
-----------------------------------
Statutory income tax rate 34.0% 34.0% 34.2%
Tax-exempt interest and dividends
received deduction (44.5) (5.4) (1.6)
Life insurance proceeds -- -- (2.5)
Other 2.2 0.5 (0.1)
-----------------------------------
(8.3)% 29.1% 30.0%
-----------------------------------
The tax effects of temporary differences that result in a net deferred tax asset
as of December 31, are summarized as follows:
(In thousands) 1999 1998
-----------------------
Assets
Effect of discounting unpaid losses
and loss adjustment expenses $3,607 $3,530
Excess of tax over financial
reporting of earned premium 2,231 2,138
Unrealized investment losses 2,278 --
Other, net 788 476
-----------------------
Total deferred assets 8,904 6,144
-----------------------
Liabilities
Deferred policy acquisition costs 3,164 $3,024
Unrealized investment gains -- 1,398
Other, net 253 124
-----------------------
Total deferred liabilities 3,417 4,546
-----------------------
Net deferred tax asset $5,487 $1,598
=======================
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
Segment Information In 1998, the Company implemented Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which establishes standards about a company's operating
segments.
The Company has two reportable segments: personal lines and commercial lines.
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 described in the
summary of significant accounting policies. The Company evaluates segment profit
based on profit or loss from operating activities. Segment profit or loss from
operations is pre-tax and does 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 company had one major customer accounting for more than 10% of the Company's
revenue prior to 1999. In 1998 and 1997, the Company derived approximately 18.4%
and 21.3% of its revenues from this agent. In 1999, no one customer accounted
for more than 10% of revenue.
The following is a summary of the Company's segment revenues, expenses and
profit for the years ended December 31, 1999, 1998 and 1997:
(In thousands) 1999
----------------------------------------
Commercial Personal Total
----------------------------------------
Premiums earned $71,731 $13,946 $85,677
Net investment income from
insurance operations 4,730 800 5,530
----------------------------------------
Total segment revenues 76,461 14,746 91,207
----------------------------------------
Segment losses and LAE 49,744 13,443 63,187
Segment expenses 21,905 4,533 26,438
----------------------------------------
Total segment expenses 71,649 17,976 89,625
----------------------------------------
Segment profit (loss) $4,812 $(3,230) $1,582
========================================
Plus unallocated items:
Net investment income from equity 4,848
Unallocated expenses (4,548)
Income taxes 156
------
Net earnings $2,038
======
(In thousands) 1998
----------------------------------------
Commercial Personal Total
----------------------------------------
Premiums earned $62,949 $26,544 $89,493
Net investment income from
insurance operations 4,126 945 5,071
----------------------------------------
Total segment revenues 67,075 27,489 94,564
----------------------------------------
Segment losses and LAE 37,121 18,612 55,733
Segment expenses 18,687 8,547 27,234
Total segment expenses 55,808 27,159 82,967
----------------------------------------
Segment profit $11,267 $330 $11,597
========================================
Plus unallocated items:
Net investment income from equity 5,710
Unallocated expenses (4,784)
Income taxes (3,642)
------
Net earnings $8,881
======
24
<PAGE>
(In thousands) 1997
----------------------------------------
Commercial Personal Total
----------------------------------------
Premiums earned $57,189 $34,460 $91,649
Net investment income from
insurance operations 4,764 934 5,698
Other income 442 230 672
----------------------------------------
Total segment revenues 62,395 35,624 98,019
----------------------------------------
Segment losses and LAE 32,723 25,005 57,728
Segment expenses 15,822 11,004 26,826
----------------------------------------
Total segment expenses 48,545 36,009 84,554
----------------------------------------
Segment profit (loss) $13,850 $(385) $13,465
========================================
Plus unallocated items:
Net investment income from equity 4,834
Unallocated expenses (4,518)
Income taxes (4,136)
------
Net earnings $9,645
======
Total segment revenues of $91.2 million, $94.6 million and $98.0 million, plus
unallocated net investment income from equity of $4.9 million, $5.7 million and
$4.8 million, equals total Company revenues of $96.1 million, $100.3 million and
$102.9 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Note 10 Stockholders' Equity
A source of cash to use for the payment of dividends to the Company's
stockholders is dividends from Penn-America. Penn-America is required by law to
maintain a certain minimum surplus on a statutory basis and is subject to
risk-based capital requirements and regulations under which payment of a
dividend from statutory surplus may require prior approval of the Pennsylvania
regulatory authorities. The maximum dividend that may be paid by Penn-America to
the Company without prior approval of regulatory authorities in 2000 is
$6,950,000.
The National Association of Insurance Commissioners has adopted risk-based
capital (RBC) requirements for property and casualty insurance companies. This
requirement may have a further impact on the payment of dividends to the
stockholders. At December 31, 1999 and 1998, the Company's actual RBC exceeded
minimum requirements. Therefore, there are no further restrictions on the
payment of dividends.
The following tables reconcile 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 accounting principles generally
accepted in the United States as reported herein:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
(In thousands) 1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Statutory surplus as regards policyholders $69,515 $85,358 $83,459
Deferred policy acquisition costs 9,306 8,728 8,563
Deferred income taxes 5,483 1,576 2,302
Unrealized investment gains
(losses) on fixed maturities available for sale (5,027) 2,233 794
Capital lease, net 19 (29) (55)
Provision for unauthorized reinsurance -- 184 65
Non-admitted assets 896 889 889
Other assets (liabilities) 10 38 15
Provision for uncollectible accounts (522) (622) (622)
Holding company 938 2,275 1,897
---------------------------------------------
GAAP stockholders' equity $80,618 $100,630 $97,307
=============================================
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
(In thousands) 1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Statutory net income $1,869 $9,805 $8,075
Deferred acquisition costs 578 165 1,332
Deferred income tax 281 (169) 418
Allowance for uncollectible accounts 100 -- --
Capital lease 25 25 25
Life insurance proceeds -- -- 672
Other, net 10 23 99
Holding company (825) (968) (976)
----------------------------------------
GAAP net earnings $2,038 $8,881 $9,645
========================================
</TABLE>
Note 11 Profit-Sharing Plans
Penn-America participates in a profit-sharing and a 401(k) plan with Penn
Independent that covers qualified employees. Penn-America's contributions under
the 401(k) plan were $105,000, $114,000, and $74,000 for 1999, 1998 and 1997,
respectively. There were no profit-sharing distributions in 1999, 1998 and 1997.
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, employees, directors,
consultants, advisors and service providers of the Company and its affiliates
(as defined in the Plan) to participate in the Company's future and to enable
the Company to attract and retain these persons by offering them proprietary
interests in the Company. The Plan authorizes the issuance of up to 825,000
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.
25
<PAGE>
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
Company's net earnings and earnings per share would have been:
Years ended December 31,
1999 1998 1997
------------------------------------
Net earnings (in thousands):
As reported $2,038 $8,881 $9,645
Pro forma 2,013 8,845 9,610
Basic net earnings per share:
As reported $0.24 $0.91 $1.19
Pro forma 0.23 0.91 1.18
Diluted net earnings per share:
As reported $0.24 $0.90 $1.17
Pro forma 0.23 0.90 1.17
A summary of the status of the Company's stock option plan as of December 31,
1999, 1998, 1997 and the changes during the years ended on those dates is
presented below:
(Options in thousands) 1999 1998 1997
-------------------------------
Outstanding at beginning of year
(average price of $6.98, $6.40
and $6.07, in 1999, 1998 and 1997
respectively) 298 313 405
Granted
(average price of $10.63, $19.00
and $13.99 per share) 9 16 22
Exercised
(average price of $0.00, $6.00
and $6.19 per share) -- (29) (114)
Forfeited (average price of $0.00,
$15.13, and $0.00 per share) -- (2) --
-------------------------------
Outstanding at end of year
(average price of $7.09, $6.98,
and, $6.40 per share in 1999, 1998
and 1997 respectively) 307 298 313
===============================
Options exercisable at end of year 298 286 250
===============================
Weighted average fair value
of options granted
during the year $3.29 $4.43 $2.45
===============================
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
12/31/99 Contractual Exercise 12/31/99 Exercise
Exercise Prices (in 000's) Life(Years) Price (in 000's) Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.33 - $ 5.42 30 0.9 $ 4.88 30 $ 4.88
$ 6.00 225 3.8 $ 6.00 225 $ 6.00
$ 8.83 - $ 19.00 52 3.3 $13.01 43 $13.50
- -------------------------------------------------------------------------------------------
$ 4.33 - $ 19.00 307 3.5 $ 7.09 298 $ 6.98
===========================================================================================
</TABLE>
Restricted Stock: The Company awarded to certain employees 45,000 and 32,500
shares of restricted stock having values on the dates of the awards of $270,000
and $512,000 respectively. 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 $120,000,
$157,000 and $101,000 to compensation expense relating to these awards for the
years ended 1999, 1998 and 1997, respectively. During 1999, 1998 and 1997,
6,500, 14,600, and 9,900 shares, respectively, of the restricted stock were
released to the applicable employees as allowed 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. No shares were
issued in 1999 in accordance with this plan for fiscal year December 31, 1998.
In January 1998 and 1997, 5,629 and 7,535 shares were distributed in accordance
with the plan's provisions for the years 1997 and 1996. 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 year and are issued in the subsequent year, subject to the
Board's approval and attainment of corporate objectives.
Agents' Contingent Commission Plan: During 1999, the Agents' Contingent
Commission Plan was modified to provide that at least 25% of the contingent
commission award to the Company's agents each year would be given in stock of
the Company. Additionally, stock options will be awarded as part of the
contingent commission. Agents' stock awards for the 1998, 1997 and 1996 years,
which were issued in May of 1999, 1998 and 1997, amounted to 42,035, 20,437 and
27,746 shares, respectively. The awards for the 1999 year will not be determined
until March 2000.
Note 13 Commitments and Contingencies
The Company's insurance subsidiaries are subject to routine legal proceedings in
connection with their property and casualty insurance business. Neither the
Company nor its subsidiaries is involved in any pending or threatened legal or
administrative proceedings which management believes might have a material
adverse effect on the Company's financial condition or results of operations.
During 1998 the Company secured a revolving credit facility with First Union
National Bank for $25 million. This facility provides an interest rate tied to
libor plus a variable factor to be charged on borrowed funds based on the
Company's debt-to-equity ratio at the time of borrowing. This variable interest
factor ranges from 75 to 150 basis points. This facility is available until the
year 2004 with a structured step-down in the available credit line over the
period. The line also includes cer-
26
<PAGE>
tain financial covenants which must be met by the Company. The Company has not
drawn upon this credit facility as of December 31, 1999.
The Company leases various computer equipment for use by its insurance
subsidiaries. These leases have terms primarily expiring in less than a
three-year period. Rental expenses for these operating leases were $392,000,
$379,000 and $417,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
At December 31, 1999, the future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year were $183,000, $153,000 and $91,000 for 2000, 2001 and 2002,
respectively.
Note 14 Comprehensive Income
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income." This statement was implemented retroactively by the
Company in 1998. The statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of financial position. Accumulated other comprehensive (loss) income
of the Company consists solely of net unrealized gains or losses on investment
securities.
The following are components of other comprehensive (loss) income for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(In thousands) 1999
--------------------------------------------
Before Tax Tax Net of Tax
Amount Benefit Amount
--------------------------------------------
<S> <C> <C> <C>
Unrealized losses on investments:
Unrealized holding losses arising
during period $(9,823) $3,340 $(6,483)
Less: reclassification adjustment for
gains realized in net income (841) 286 (555)
--------------------------------------------
Other comprehensive loss $(10,664) $3,626 $(7,038)
============================================
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------
Before Tax Tax Net of Tax
Amount Benefit Amount
--------------------------------------------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding gains arising
during the period $1,632 $(555) $1,077
Less: reclassification adjustment for
gains realized in net income (18) 6 (12)
--------------------------------------------
Other comprehensive income $1,614 $(549) $1,065
============================================
1997
--------------------------------------------
Before Tax Tax Net of Tax
Amount Benefit Amount
--------------------------------------------
Unrealized gains on investments:
Unrealized holding gains arising
during period $2,311 $(790) $1,521
Less: reclassification adjustment for
gains realized in net income (1,314) 449 (865)
--------------------------------------------
Other comprehensive income $997 $(341) $656
============================================
</TABLE>
Note 15 Unaudited Quarterly Results of Operations for 1999 and 1998
<TABLE>
<CAPTION>
(In thousands except per share data)
1999
---------------------------------------------------------------------------
First Second Third Fourth Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $24,428 $24,390 $23,959 $23,278 $96,055
Losses and expenses 21,366 21,376 29,136 22,295 94,173
Net earnings 2,209 2,197 (3,244) 876 2,038
Net earnings per share:
Basic 0.24 0.25 (0.38) 0.14 0.24
Diluted $0.24 $0.25 $(0.38) $0.14 $0.24
1998
---------------------------------------------------------------------------
First Second Third Fourth Total
---------------------------------------------------------------------------
Revenues $25,776 $25,300 $24,877 $24,321 $100,274
Losses and expenses 22,099 21,733 22,426 21,493 87,751
Net earnings 2,580 2,525 1,784 1,992 8,881
Net earnings per share:
Basic 0.26 0.25 0.18 0.21 0.91
Diluted $0.26 $0.25 $0.18 $0.21 $0.90
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Penn-America Group, Inc.
We have audited the accompanying consolidated balance sheet of
Penn-America Group, Inc. (the Company) as of December 31, 1999, and the
related consolidated statements of income, changes in capital and surplus
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of the Company as of December 31, 1998 and for each of the two
years in the period ended December 31, 1998 were audited by other auditors
whose report dated January 22, 1999 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. 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
audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Penn-America Group, Inc. at December 31, 1999, and the consolidated results
of its operations and its cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
/s/ Ernest & Young LLP
Philadelphia, Pennsylvania
January 21, 2000 Ernest & Young LLP
28
Independent Auditors' Consent and Report on Schedules
The Board of Directors
Penn-America Group, Inc.:
The audits referred to in our report dated January 22, 1999 include the related
financial statement schedules as of December 31, 1998, and for each of the years
in the two year period ended December 31, 1998, included in the annual report on
Form 10-K. These financial statement schedules are the responsibility of
management. Our responsibility is to express art opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
We consent to incorporation by reference in the Registration Statement (No.
33-82728) on Form S-8 of Penn-America Group, Inc. of our reports dated January
22, 1999, relating to the consolidated balance sheet of Penn-America Group, Inc.
and subsidiaries as of December 31, 1998, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1998, and all related schedules,
which reports appear in the December 31, 1999 annual report on Form 10-K of
Penn-America Group, Inc.
KPMG LLP
Philadelphia, Pennsylvania
March 23, 2000
<PAGE>
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
The Board of Directors
Penn-America Group, Inc.
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Penn-America Group, Inc. of our report dated January 21, 2000, included in
the 1999 Annual Report to Shareholders of Penn-America Group, Inc.. Our audit
also included the financial statement schedules of Penn-America Group, Inc.
listed in Item 14(a) as of December 31, 1999 and for the year then ended. These
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audit.
In our opinion, the 1999 financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We consent to incorporation by reference in the Registration Statement (Form S-8
No. 33-82728) of Penn-America Group and its subsidiaries of our report dated
January 21, 2000, with respect to the consolidated financial statements and
schedules of Penn-America Group, Inc., incorporated by reference in this Annual
Report (Form 10-K) for the year end December 31, 1999.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 20,2000
<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, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000910110
<NAME> Penn-America Group, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 111,419
<DEBT-CARRYING-VALUE> 16,294
<DEBT-MARKET-VALUE> 0
<EQUITIES> 26,020
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 154,182
<CASH> 12,045
<RECOVER-REINSURE> 18,284
<DEFERRED-ACQUISITION> 9,306
<TOTAL-ASSETS> 217,782
<POLICY-LOSSES> 93,719
<UNEARNED-PREMIUMS> 36,332
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 100
<OTHER-SE> 80,518
<TOTAL-LIABILITY-AND-EQUITY> 217,782
85,677
<INVESTMENT-INCOME> 9,537
<INVESTMENT-GAINS> 841
<OTHER-INCOME> 0
<BENEFITS> 63,187
<UNDERWRITING-AMORTIZATION> 24,802
<UNDERWRITING-OTHER> 6,184
<INCOME-PRETAX> 1,882
<INCOME-TAX> (156)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,038
<EPS-BASIC> .24
<EPS-DILUTED> .24
<RESERVE-OPEN> 88,937
<PROVISION-CURRENT> 60,911
<PROVISION-PRIOR> 9,458
<PAYMENTS-CURRENT> 24,504
<PAYMENTS-PRIOR> 41,083
<RESERVE-CLOSE> 93,719
<CUMULATIVE-DEFICIENCY> 9,458
</TABLE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of the 12th day of
May, 1999 (this "Amendment"), is made among PENN-AMERICA GROUP, INC, a
Pennsylvania corporation (the "Borrower"), the banks and financial institutions
from time to time party to the Credit Agreement (as defined herein)
(collectively, the "Lenders"), and FIRST UNION NATIONAL BANK ("First Union"), as
agent for the Lenders (in such capacity, the "Agent").
RECITALS
A. The Borrower, the Lenders and the Agent are parties to a Credit
Agreement, dated as of September 28, 1998 (as amended, the "Credit Agreement"),
providing for the availability of certain credit facilities to the Borrower upon
the terms and conditions set forth therein. Capitalized terms used herein
without definition shall have the meanings given to them in the Credit
Agreement.
B. The Borrower has requested certain amendments to the Credit
Agreement, and the Lenders have agreed to effect such amendments and waivers,
effective as of March 31, 1999, upon the terms and conditions set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS
1.1 Margin Regulations. Section 5.9 of the Credit Agreement is hereby
amended and restated in its entirety as follows:
5.9 Margin Regulations. Neither the Borrower nor any
of its Subsidiaries is engaged principally, or as one of its
important activities, in the business of extending credit for
the purpose of purchasing or carrying Margin Stock. No
proceeds of the Loans will be used, directly or indirectly, to
purchase or carry any Margin Stock (other than Borrower Margin
Stock purchased in accordance with Section 8.6), to extend
credit for such purpose or for any other purpose that would
violate or be inconsistent with Regulations T, U or X or any
provision of the Exchange Act.
<PAGE>
1.2 Statutory Surplus. Section 7.6 of the Credit Agreement is hereby
amended and restated in its entirety as follows:
7.6 Statutory Surplus. The Borrower will not permit
the Combined Statutory Capital and Surplus of the Insurance
Subsidiaries, as of the last day of any fiscal quarter,
beginning with the fiscal quarter ending September 30, 1998,
to be less than (i) the greater of (A) 90% of Combined
Statutory and Capital Surplus as of June 30, 1998 or (B)
$78,000,000, plus 50% of the aggregate (without duplication)
of the increases in the stated capital and additional paid-in
capital accounts of the Insurance Subsidiaries occurring after
June 30, 1998, as determined in each case in accordance with
SAP, minus (ii) the aggregate amount (without duplication) (up
to a maximum of $10,000,000) of dividends paid by the
Insurance Subsidiaries to the Borrower, the proceeds of which
were used directly to fund stock repurchases by the Borrower
occurring between June 30, 1998 and September 30, 1999.
1.3 Compliance Certificate. Part C of Attachment A to Exhibit C-2 to
the Credit Agreement (Form of SAP Compliance Certificate) is hereby amended and
restated as set forth on Exhibit A hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Agent and each
Lender as follows:
2.1 Representations and Warranties. After giving effect to this
Amendment, each of the representations and warranties of the Borrower contained
in the Credit Agreement and in the other Credit Documents is true and correct on
and as of the date hereof with the same effect as if made on and as of the date
hereof (except to the extent any such representation or warranty is expressly
stated to have been made as of a specific date, in which case such
representation or warranty is true and correct as of such date).
2.2 No Default. After giving effect to this Amendment, no Default or
Event of Default has occurred and is continuing.
ARTICLE III
EFFECTIVE DATE
This Amendment shall be effective as of March 31, 1999.
2
<PAGE>
ARTICLE IV
MISCELLANEOUS
4.1 Effect of Amendment. From and after the effective date of the
amendments to the Credit Agreement set forth herein, all references to the
Credit Agreement set forth in any other Credit Document or other agreement or
instrument shall, unless otherwise specifically provided, be references to the
Credit Agreement as amended by this Amendment and as may be further amended,
modified, restated or supplemented from time to time. This Amendment is limited
as specified and shall not constitute or be deemed to constitute an amendment,
modification or waiver of any provision of the Credit Agreement except as
expressly set forth herein. Except as expressly amended hereby, the Credit
Agreement shall remain in full force and effect in accordance with its terms.
4.2 Governing Law. This Amendment shall be governed by and construed
and enforced in accordance with the laws of the State of North Carolina (without
regard to the conflicts of law provisions thereof).
4.3 Expenses. The Borrower agrees to pay upon demand all reasonable
out-of-pocket costs and expenses of the Agent and each Lender (including,
without limitation, the reasonable fees and expenses of counsel to the Agent and
each Lender) in connection with the preparation, negotiation, execution and
delivery of this Amendment and the other Credit Documents delivered in
connection herewith.
4.4 Severability. To the extent any provision of this Amendment is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Amendment in any jurisdiction.
4.5 Successors and Assigns. This Amendment shall be binding upon, inure
to the benefit of and be enforceable by the respective successors and assigns of
the parties hereto.
4.6 Construction. The headings of the various sections and subsections
of this Amendment have been inserted for convenience only and shall not in any
way affect the meaning or construction of any of the provisions hereof.
4.7 Counterparts; Effectiveness. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. This Amendment
shall become effective upon the execution and delivery of a counterpart hereof
by each of the parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
PENN-AMERICA GROUP, INC.
By: /s/ Rosemary Ferrero
Title: Vice President of Finance
FIRST UNION NATIONAL BANK,
as Agent and as Lender
By: /s/ Thomas L. Stitchberry
Title: Senior Vice President
4
<PAGE>
EXHIBIT A
TO
FIRST AMENDMENT TO CREDIT AGREEMENT
C. Statutory Capital and Surplus
(Section 7.6 of the Credit Agreement)
(1) Combined Statutory Capital and Surplus as
of the date of determination $
=========
(2) Minimum Combined Statutory Capital and
Surplus
(a) 90% of the Combined Statutory
Capital and Surplus as of 6/30/98 $_________
(b) $78,000,000 plus 50% of aggregate
increases in capital for the
Insurance Subsidiaries occurring
after June 30, 1998 $_________
(c) Greater of Lines 2(a) and 2(b) $_________
(d) Amount of dividends paid by the
Insurance Subsidiaries to the
Borrower, the proceeds of which
were used directly to fund stock
repurchases by the Borrower
occurring between 6/30/98 and
9/30/99(1) $_________
(e) Minimum Combined Statutory Capital
and Surplus: Subtract Line 2(d)
from Line 2(c) $
=========
____________________________
1 Shall not be greater than $10,000,000.
5
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of the 26th day of
August, 1999 (this "Amendment"), is made among PENN-AMERICA GROUP, INC, a
Pennsylvania corporation (the "Borrower"), the banks and financial institutions
from time to time party to the Credit Agreement (as defined herein)
(collectively, the "Lenders"), and FIRST UNION NATIONAL BANK ("First Union"), as
agent for the Lenders (in such capacity, the "Agent").
RECITALS
A. The Borrower, the Lenders and the Agent are parties to a Credit
Agreement, dated as of September 28, 1998, as amended by a First Amendment to
Credit Agreement, dated as of May 12, 1999 (as further amended, the "Credit
Agreement"), providing for the availability of certain credit facilities to the
Borrower upon the terms and conditions set forth therein. Capitalized terms used
herein without definition shall have the meanings given to them in the Credit
Agreement.
B. The Borrower has requested certain amendments to the Credit Agreement,
and the Lenders have agreed to effect such amendments, effective as of June 30,
1999, upon the terms and conditions set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS
1.1 Definitions. Section 1.1 of the Credit Agreement is amended by deleting
the proviso at the end of the definition of Fixed Charge Coverage Ratio and
substituting the following therefor "provided that, the stock repurchases
referred to in subclause (z) of clause (ii) above shall not include (a) any such
repurchases occurring prior to July 1, 1999 and (b) the first $5,000,000 of such
repurchases occurring on or between July 1, 1999 and September 30, 2000."
1.2 Statutory Surplus. Section 7.6 of the Credit Agreement is hereby
amended and restated in its entirety as follows.
7.6 Statutory Surplus. The Borrower will not permit Combined
Statutory Capital and Surplus of the Insurance Subsidiaries, as
of the last day of any fiscal quarter, beginning with the fiscal
quarter ending December 31, 1999, to be less than 90%
<PAGE>
of Combined Statutory and Capital Surplus as of September 30,
1999, as determined in accordance with SAP.
1.3 Compliance Certificate. Part C of Attachment A to Exhibit C-1 to the
Credit Agreement (Form of GAAP Compliance Certificate) is hereby amended and
restated as set forth on Exhibit A hereto. Part C of Attachment A to Exhibit C-2
to the Credit Agreement (Form of SAP Compliance Certificate) is hereby amended
and restated as set forth on Exhibit B hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Agent and each Lender as
follows:
2.1 Representations and Warranties. After giving effect to this Amendment,
each of the representations and warranties of the Borrower contained in the
Credit Agreement and in the other Credit Documents is true and correct on and as
of the date hereof with the same effect as if made on and as of the date hereof
(except to the extent any such representation or warranty is expressly stated to
have been made as of a specific date, in which case such representation or
warranty is true and correct as of such date).
2.2 No Default. After giving effect to this Amendment, no Default or Event
of Default has occurred and is continuing.
ARTICLE III
EFFECTIVE DATE
This Amendment shall be effective as of June 30, 1999.
ARTICLE IV
MISCELLANEOUS
4.1 Effect of Amendment. From and after the effective date of the
amendments to the Credit Agreement set forth herein, all references to the
Credit Agreement set forth in any other Credit Document or other agreement or
instrument shall, unless otherwise specifically provided, be references to the
Credit Agreement as amended by this Amendment and as may be further amended,
modified, restated or supplemented from time to time. This Amendment is limited
as specified and shall not constitute or be deemed to constitute an amendment,
modification or waiver of any provision of the Credit Agreement except as
expressly set forth herein. Except as expressly amended hereby, the Credit
Agreement shall remain in full force and effect in accordance with its terms.
2
<PAGE>
4.2 Governing Law. This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State of North Carolina (without
regard to the conflicts of law provisions thereof).
4.3 Expenses. The Borrower agrees to pay upon demand all reasonable
out-of-pocket costs and expenses of the Agent and each Lender (including,
without limitation, the reasonable fees and expenses of counsel to the Agent and
each Lender) in connection with the preparation, negotiation, execution and
delivery of this Amendment and the other Credit Documents delivered in
connection herewith.
4.4 Severability. To the extent any provision of this Amendment is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Amendment in any jurisdiction.
4.5 Successors and Assigns. This Amendment shall be binding upon, inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto.
4.6 Construction. The headings of the various sections and subsections of
this Amendment have been inserted for convenience only and shall not in any way
affect the meaning or construction of any of the provisions hereof.
4.7 Counterparts; Effectiveness. This Amendment may be executed in any
number of a counterparts and by different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument. This
Amendment shall become effective upon the execution and delivery of a
counterpart hereof by each of the parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
PENN-AMERICA GROUP, INC.
By: /s/ Rosemary Ferrero
Title: Vice President, Finance
FIRST UNION NATIONAL BANK,
as Agent and as Lender
By: /s/ Thomas L. Stitchberry
Title: Senior Vice President
4
<PAGE>
EXHIBIT A
TO
SECOND AMENDMENT TO CREDIT AGREEMENT
C. Fixed Charge Coverage Ratio (Section 7.3 of the Credit Agreement)
(shall not be less than 1.25 : 1.0)
(1) Available coverage as of the last day of any
period of four consecutive fiscal quarters
(the "Measurement Period"):
(a) Available Dividend Amount for the
Measurement Period (list by
Insurance Subsidiary other than
Subsidiaries of Insurance
Subsidiaries)
(i) PAIC $__________
(ii) Other (list separately) $__________
(iii) Total $__________
(b) Net Tax Sharing Payments with
respect to the Measurement Period
(i) Tax Payments received by $__________
Borrower
(ii) Tax Payments to be received by $__________
Borrower
(iii) Tax Payments made by $__________
Borrower
(iv) Tax Payments to be made by $__________
Borrower
(v) Net Payments (the sum of $__________
Lines l(b)(i) and l(b)(ii)
minus Lines l(b)(iii) and
I (b)(iv))
(c) Combined Net Cash Flow of non- $__________
Insurance Subsidiaries for the
Measurement Period (attach detail)
<PAGE>
(d) Holding Company Expenses accrued $__________
during the Measurement Period
(e) Available coverage: add Lines $==========
1(a)(iii), l(b)(v) and 1(c), and subtract
Line 1 (d)
(2) Fixed Charges:
(a) Debt Service for the period of four
consecutive fiscal quarters
immediately following the
Measurement Period (the "Pro Forma
Period")
(i) Debt Service on the Loans $__________
(ii) Debt Service on other $__________
consolidated Indebtedness
(iii) Total Debt Service (add Lines $__________
2(a)(i) and 2(a)(ii))
(b) Dividends to shareholders of the $__________
Borrower for the Pro Forma Period
(based upon the most recent quarterly
rate)
(c) Stock purchases for the Measurement $__________
Period (net of stock repurchases
occurring (i) prior to 7/01/99 in the
amount of $___________ and
(ii) on or between 7/01/99 and
9/30/00 in the amount of _________ (1))
(d) Fixed Charges: $==========
Add Lines 2(a)(iii), 2(b) and 2(c)
(3) Fixed Charge Coverage Ratio: $==========
Divide Line 1(e) by Line 2(d)
__________
1 Not to exceed $5,000,000.
2
<PAGE>
EXHIBIT B
TO
SECOND AMENDMENT TO CREDIT AGREEMENT
C. Statutory Capital and Surplus
(Section 7.6 of the Credit Agreement)
(1) Combined Statutory Capital and
Surplus as of the date of
determination $
===========
(2) Minimum Combined Statutory
Capital and Surplus--90% of the
Combined Statutory Capital and
Surplus as of 9/30/99 $
===========
THIRD AMENDMENT TO CREDIT AGREEMENT
AND WAIVER
THIS THIRD AMENDMENT TO CREDIT AGREEMENT AND WAIVER, dated as of the 15th
day of March, 2000 (this "Amendment"), is made among PENN-AMERICA GROUP, INC., a
Pennsylvania corporation (the "Borrower"), the banks and financial institutions
from time to time party to the Credit Agreement (as defined herein)
(collectively, the "Lenders"), and FIRST UNION NATIONAL BANK ("First Union"), as
agent for the Lenders (in such capacity, the "Agent").
RECITALS
A. The Borrower, the Lenders and the Agent are parties to a Credit
Agreement, dated as of September 28, 1998 (as previously amended, the "Credit
Agreement"), providing for the availability of certain credit facilities to the
Borrower upon the terms and conditions set forth therein. Capitalized terms used
herein without definition shall have the meaning given to them in the Credit
Agreement.
B. The Borrower has notified the Agent that it has made loans to certain
employees in an aggregate amount not exceeding $500,000 for the purpose of
purchasing Capital Stock of the Borrower, which has resulted in an breach or
violation of Sections 5.9, 8.5 and 8.7 of the Credit Agreement (the "Specified
Events of Default"). The Borrower has requested that the Lenders waive the
Specified Events of Default and make certain requested amendments to the Credit
Agreement, effective as of January 1, 2000. The Lenders have agreed to waive the
Specified Events of Default and effect such amendments, upon the terms and
conditions set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS
1.1 Margin Regulations. Section 5.9 of the Credit Agreement is hereby
amended and restated in its entirety as follows:
5.9 Margin Regulations. Neither the Borrower nor any of its
Subsidiaries is engaged principally, or as one of its important activities,
in the business of extending credit for the purpose of purchasing or
carrying Margin Stock (other than Borrower Margin Stock). No proceeds of
the Loans will be used, directly or indirectly, to purchase or carry any
Margin Stock, to extend credit for such purpose or for any other purpose,
in each case if such
<PAGE>
action would violate or be inconsistent with Regulations T, U or X or any
provision of the Exchange Act.
1.2 Investments. Section 8.5 of the Credit Agreement is amended by (x)
deleting the words "and" at the end of clause (vii) thereof, (y) deleting the
period (".") at the end of subclause (d) of clause (viii) thereof and replacing
it with "; and", and (z) adding a new clause (ix) as follows:
(ix) other Investments by the Borrower consisting of loans to
employees of the Borrower or a Subsidiary not exceeding $ 1,000,000 in
aggregate principal amount outstanding at any time for the purpose of
purchasing Capital Stock of the Borrower.
1.3 Transactions with Affiliates. Section 8.7 of the Credit Agreement is
amended by (x) deleting the word "and" at the end of clause (i) thereof, (y)
deleting the period (".") at the end of clause (ii) thereof and replacing it
with "; and", and (z) adding a new clause (iii) as follows:
(iii) loans to employees permitted under clause (ix) of Section 8.5.
ARTICLE II
LIMITED WAIVER
Based upon the representations and warranties contained herein, the Lenders
hereby waive the Specified Events of Default. This Waiver is limited as
specified and shall not constitute or be deemed to constitute an amendment,
modification or waiver of any provision of the Credit Agreement or a waiver of
any Default or Event of Default except as expressly set forth herein with
respect to the Specified Events of Default.
ARTICLE III
EFFECTIVE DATE
This Amendment shall be effective as of January 1, 2000.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Agent and each Lender as
follows:
4.1 Representations and Warranties. After giving effect to this Amendment,
each of the representations and warranties of the Borrower contained in the
Credit Agreement and in the other Credit Documents is true and correct on and as
of the date hereof with the same effect as if made on and as of the date hereof
(except to the extent any such representation or warranty is
2
<PAGE>
expressly stated to have been made as of a specific date, in which case such
representation or warranty is true and correct as of such date).
4.2 No Default. After giving effect to this Amendment, no Default or Event
of Default has occurred and is continuing.
ARTICLE V
MISCELLANEOUS
5.1 Effect of Amendment. From and after the effective date of the
amendments to the Credit Agreement set forth herein, all references to the
Credit Agreement set forth in any other Credit Document or other agreement or
instrument shall, unless otherwise specifically provided, be references to the
Credit Agreement as amended by this Amendment and as may be further amended,
modified, restated or supplemented from time to time. This Amendment is limited
as specified and shall not constitute or be deemed to constitute an amendment,
modification or waiver of any provision of the Credit Agreement except as
expressly set forth herein. Except as expressly amended hereby, the Credit
Agreement shall remain in full force and effect in accordance with its terms.
5.2 Governing Law . This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State of North Carolina (without
regard to the conflicts of law provisions thereof).
5.3 Expenses. The Borrower agrees to pay upon demand all reasonable
out-of-pocket costs and expenses of the Agent and each Lender (including,
without limitation, the reasonable fees and expenses of counsel to the Agent and
each Lender) in connection with the preparation, negotiation, execution and
delivery of this Amendment and the other Credit Documents delivered in
connection herewith.
5.4 Severability. To the extent any provision of this Amendment is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Amendment in any jurisdiction.
5.5 Successors and Assigns. This Amendment shall be binding upon, inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto.
5.6 Construction. The headings of the various sections and subsections of
this Amendment have been inserted for convenience only and shall not in any way
affect the meaning or construction of any of the provisions hereof.
5.7 Counterparts; Effectiveness. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. This Amendment
shall become effective upon the execution and delivery of a counterpart hereof
by each of the parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
PENN-AMERICA GROUP, INC.
By: /s/ Rosemary Ferrero
Title: Vice President Finance
FIRST UNION NATIONAL BANK,
as Agent and as Lender
By: /s/ Thomas L. Stitchberry
Title: Senior Vice President
4
