SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- ---------
Commission file number 0-22316
--------------------
Penn-America Group, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
---------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 South York Road, Hatboro, Pennsylvania 19040
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(Address of principal executive offices, including zip code)
(215) 443-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----- ----
At August 10, 2000, 7,557,417 shares of the registrant's common stock, $.01 par
value, were outstanding.
Page 1
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Index
Page
Number
Part I - Financial Information
Consolidated Unaudited Balance Sheets - June 30, 2000 and
December 31, 1999 3
Consolidated Unaudited Statements of Earnings - For the three
and six month periods ended June 30, 2000 and 1999 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the six months ended June 30, 2000 5
Consolidated Unaudited Statements of Cash Flows -
For the six months ended June 30, 2000 and 1999 6
Notes to Unaudited Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Part II - Other Information 19
Page 2
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- -----------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturities:
Available for sale, at fair value (amortized cost 2000, $115,675; 1999, $115,975) $112,610 $ 111,419
Held to maturity, at amortized cost (fair value 2000, $22,105; 1999, $16,103) 22,263 16,294
Equity securities, at fair value (cost 2000, $27,788; 1999, $28,014) 24,694 26,020
Short-term investments, at cost, which approximates fair value -- 449
---------------- -----------------
Total investments 159,567 154,182
Cash 6,883 12,045
Receivables:
Accrued investment income 2,050 1,965
Premiums receivable, net 11,463 8,981
Reinsurance recoverable 18,263 18,284
---------------- -----------------
Total receivables 31,776 29,230
Prepaid reinsurance premiums 4,227 3,529
Deferred policy acquisition costs 10,514 9,306
Capital lease 1,797 1,840
Deferred income taxes 5,340 5,487
Income tax recoverable 836 1,652
Other assets 406 511
---------------- -----------------
Total assets $221,346 $ 217,782
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 96,356 $ 93,719
Unearned premiums 41,416 36,332
Accounts payable and accrued expenses 2,440 1,755
Capitalized lease obligation 1,761 1,821
Other liabilities 3,055 3,537
---------------- -----------------
Total liabilities 145,028 137,164
---------------- -----------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares;
None issued -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
issued 2000 and 1999, 10,057,417 and 9,990,436 shares;
outstanding 2000 and 1999, 7,557,417 and 8,062,861 shares 100 100
Additional paid-in capital 70,047 69,591
Accumulated other comprehensive loss (4,066) (4,324)
Retained earnings 35,154 35,050
Treasury stock, 2000, 2,500,000 shares; 1999, 1,927,575 shares, at cost (24,161) (19,474)
Officers' stock loans (491) --
Unearned compensation from restricted stock awards (265) (325)
---------------- -----------------
Total stockholders' equity 76,318 80,618
---------------- -----------------
Total liabilities and stockholders' equity $ 221,346 $ 217,782
================ =================
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
For the three and six month periods ended June 30, 2000 and 1999
(In thousands, except per share data)
Three months ended June 30, Six months ended June 30,
-------------------------------- ----------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $ 22,479 $ 21,359 $ 44,026 $ 42,820
Net investment income 2,460 2,349 4,860 4,760
Net realized investment (losses) gains (16) 682 (29) 1,238
-------------- -------------- -------------- ---------------
Total revenues 24,923 24,390 48,857 48,818
-------------- -------------- -------------- ---------------
Losses and expenses:
Losses and loss adjustment expenses 17,994 13,822 31,899 27,546
Amortization of deferred policy
acquisition costs 6,473 6,087 12,712 12,240
Other underwriting expenses 1,722 1,431 3,372 2,884
Interest expense 36 36 73 73
-------------- -------------- -------------- ---------------
Total losses and expenses 26,225 21,376 48,056 42,743
-------------- -------------- -------------- ---------------
Earnings (loss) before income tax (1,302) 3,014 801 6,075
Income tax (benefit) expense (640) 817 (120) 1,670
-------------- -------------- -------------- ---------------
Net earnings (loss) $ (662) $ 2,197 $ 921 $ 4,405
============== ============== ============== ===============
Net earnings (loss) per share
Basic $(0.09) $0.25 $0.12 $0.50
Diluted $(0.09) $0.25 $0.12 $0.49
Weighted average number of shares outstanding
Basic 7,616 8,647 7,794 8,887
Diluted 7,663 8,724 7,840 8,965
Cash dividends per share $0.0525 $0.0525 $0.105 $0.1025
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the six months ended June 30, 2000
(In thousands, except share data)
Unearned
Compensation
Accumulated From
Common Stock Additional Other Officers' Restricted
-------------------- Paid-In Comprehensive Retained Treasury Stock Stock
Shares Amount Capital Income (Loss) Earnings Stock Loans Awards Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 9,990,436 $100 $69,591 $(4,324) $35,050 $(19,474) - $(325) $80,618
Net earnings 921 921
Other comprehensive income,
net of tax: unrealized gains
on investments, net of
reclassification adjustment 258 258
---
Comprehensive income 1,179
-----
Issuance of common stock 66,981 456 456
Officers' stock loans (491) (491)
Amortization of compensation
expense from restricted
stock awards issued 60 60
Cash dividends paid
($0.105 per share) (817) (817)
Purchase of treasury
stock, 572,425 shares (4,687) (4,687)
----------------------------------------------------------------------------------------------------
Balance at June 30, 2000 10,057,417 $100 $70,047 $(4,066) $35,154 $(24,161) $ (491) $(265) $76,318
====================================================================================================
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended June 30, 2000 and 1999
(In thousands)
Six months ended June 30,
2000 1999
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 921 $ 4,405
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Amortization and depreciation expense 324 311
Net realized investment losses (gains) 29 (1,238)
Deferred income tax 14 85
Net increase in premiums receivable, prepaid reinsurance premiums
and unearned premiums 1,904 1,350
Net increase (decrease) in unpaid losses and loss adjustment expenses
and reinsurance recoverable 2,659 (1,079)
Decrease (increase) in:
Accrued investment income (85) 131
Deferred policy acquisition costs (1,208) (356)
Income tax recoverable 816 710
Other assets 38 64
Increase (decrease) in:
Accounts payable and accrued expenses 684 (298)
Other liabilities (482) (745)
-------- --------
Net cash provided by operating activities 5,614 3,340
-------- --------
Cash flows from investing activities:
Purchases of equity securities (2,945) (5,634)
Purchases of fixed maturities available for sale (11,268) (24,270)
Purchases of fixed maturities held to maturity (9,899) (2,100)
Proceeds from sales of equity securities 3,674 3,520
Proceeds from sales and maturities of fixed maturities available for sale 10,812 16,921
Proceeds from maturities and calls of fixed maturities held to maturity 4,000 7,258
Change in short-term investments 449 997
-------- --------
Net cash used by investing activities (5,177) (3,308)
-------- --------
Cash flows from financing activities:
Issuance of common stock 456 465
Purchase of treasury stock (4,687) (10,418)
Principal payments on capital lease obligations (60) (70)
Officers' stock loans (491) --
Dividends paid (817) (900)
-------- --------
Net cash used by financing activities (5,599) (10,923)
-------- --------
Decrease in cash (5,162) (10,891)
Cash, beginning of period 12,045 24,077
-------- --------
Cash, end of period $ 6,883 $ 13,186
======== ========
Supplemental disclosure of cash flow information: Cash paid (recovered) during
the period for:
Interest paid $ 73 $ 73
Income taxes (recovered) paid (950) 875
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 6
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Organization and Basis of Presentation
Penn-America Group, Inc. ("PNG") is an insurance holding company whose
principal asset is the common stock of Penn-America Insurance Company
("Penn-America"). The "Company" refers to PNG and Penn-America, as well as to
Penn-America's wholly-owned subsidiary, Penn-Star Insurance Company. Penn
Independent Corporation ("Penn Independent") currently owns approximately 40.9%
of the outstanding common stock of PNG as of June 30, 2000.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the audited financial statements and notes for the year
ended December 31, 1999. In the opinion of management, the financial information
reflects all adjustments which are necessary for a fair presentation of the
Company's financial position, results of operations, and cash flows for the
interim periods. The Company's results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire year.
Note 2 - Reinsurance
Premiums earned are net of amounts ceded to reinsurers of $2.9 million
and $1.8 million for the three months ended June 30, 2000 and 1999,
respectively. Losses and loss adjustment expenses are net of amounts ceded to
reinsurers of $637,000 and $3.5 million for the three months ended June 30, 2000
and 1999, respectively.
Premiums earned are net of amounts ceded to reinsurers of $5.5 million
and $3.5 million for the six months ended June 30, 2000 and 1999, respectively.
Losses and loss adjustment expenses are net of amounts ceded to reinsurers of
$2.5 million and $4.1 million for the six months ended June 30, 2000 and 1999,
respectively.
Page 7
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 3 - Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income of the Company consists
solely of net unrealized (losses) gains on investment securities.
The following are components of other comprehensive (losses)/income (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Six Months ended June 30, 2000
------------------------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
----------------- ------------------ ---------------
Unrealized gains on investments:
Unrealized holding gains arising
during period $420 $(143) $277
Add: reclassification adjustment for
losses realized in net earnings (29) 10 (19)
----------------- ------------------ ---------------
Other comprehensive income $391 $(133) $258
================= ================== ===============
Six Months ended June 30, 1999
------------------------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
----------------- ------------------ ----------------
Unrealized losses on investments:
Unrealized holding losses arising
during period $(4,392) $ 1,493 $ (2,899)
Less: reclassification adjustment for
gains realized in net earnings (1,238) 421 (817)
----------------- ------------------ ---------------
Other comprehensive loss $(5,630) $ 1,914 $(3,716)
================= ================== ===============
</TABLE>
For the three months ended June 30, 2000, comprehensive loss of $1,090,000
consisted of net losses of $662,000 and other comprehensive loss of $428,000.
For the three and six months ended June 30, 1999, comprehensive income (loss) of
($184,000) and $689,000 consisted of net income of $2,197,000 and $4,405,000 and
other comprehensive losses of $2,381,000 and $3,716,000.
Page 8
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 4 - Basic and Diluted Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ----------------
Basic EPS:
<S> <C> <C> <C> <C>
Net Earnings (Loss) $(662) $2,197 $921 $4,405
---------------- --------------- --------------- ----------------
Weighted average common
shares outstanding 7,616 8,647 7,794 8,887
---------------- --------------- --------------- ----------------
Basic EPS $ (0.09) $ 0.25 $ 0.12 $ 0.50
================ =============== =============== ================
Diluted EPS:
Net Earnings (Loss) $(662) $ 2,197 $921 $4,405
---------------- --------------- --------------- ----------------
Weighted average common
shares outstanding 7,616 8,647 7,794 8,887
Additional shares outstanding
after the assumed exercise
of options by applying the
treasury stock method 47 77 46 78
---------------- --------------- --------------- ----------------
Total weighted average common
shares outstanding 7,663 8,724 7,840 8,965
================ =============== =============== ================
Diluted EPS $ (0.09) $ 0.25 $ 0.12 $ 0.49
================ =============== =============== ================
</TABLE>
Page 9
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 5- Segment Information
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 more
fully described in the summary of significant accounting policies in the
Company's annual report. The Company evaluates segment profit based on profit or
loss from operating activities. Segment profits or losses from operations 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 at June 30, 1999. This customer no longer accounts for more
than 10% of revenue at June 30, 2000. The Company derived approximately 10.7%
and 11.8% of its revenues from this agent for the three months and six months
ended June 30, 1999, respectively. This major customer was the agent who wrote
personal non-standard automobile coverage in the states of California and
Nevada. The Company announced on April 28, 1999 that it would be running off the
California automobile book with this customer. The Company had previously
announced the runoff of the Nevada automobile book with this agent in January
1999.
Page 10
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
The following is a summary of the Company's segment revenues, expenses
and profit for the three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended June 30, 2000
--------------------------------
Commercial Personal Total
--------------------------------------------
<S> <C> <C> <C>
Premiums earned $21,090 $1,389 $22,479
Net investment income from
insurance operations 1,304 146 1,450
--------------------------------------------
Total segment revenues 22,394 1,535 23,929
--------------------------------------------
Segment losses and LAE 16,935 1,059 17,994
Segment expenses 6,481 497 6,977
--------------------------------------------
Total segment expenses 23,416 1,556 24,971
--------------------------------------------
Segment losses $(1,022) $(20) $(1,042)
===============================
Plus unallocated items:
Net investment income from equity 994
Unallocated expenses (1,254)
Income tax benefit 640
-----------
Net losses $(662)
===========
(in thousands) Three Months Ended June 30, 1999
--------------------------------
Commercial Personal Total
--------------------------------------------
Premiums earned $17,422 $3,937 $21,359
Net investment income from
insurance operations 1,326 233 1,589
--------------------------------------------
Total segment revenues 18,748 4,170 22,918
--------------------------------------------
Segment losses and LAE 10,575 3,247 13,822
Segment expenses 5,225 1,273 6,498
--------------------------------------------
Total segment expenses 15,800 4,520 20,320
--------------------------------------------
Segment profit (loss) $2,948 $(350) $2,598
===============================
Plus unallocated items:
Net investment income from equity 1,472
Unallocated expenses (1,056)
Income tax expense (817)
-----------
Net earnings $2,197
===========
Page 11
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
The following is a summary of the Company's segment revenues, expenses
and profit for the six months ended June 30, 2000 and 1999:
(in thousands) Six Months Ended June 30, 2000
------------------------------
Commercial Personal Total
----------------------------------------------
Premiums earned $40,867 $3,159 $44,026
Net investment income from
insurance operations 2,501 302 2,803
----------------------------------------------
Total segment revenues 43,368 3,461 46,829
----------------------------------------------
Segment losses and LAE 29,688 2,211 31,899
Segment expenses 12,535 1,142 13,677
----------------------------------------------
Total segment expenses 42,223 3,353 45,576
----------------------------------------------
Segment profit $1,145 $108 $1,253
============================
Plus unallocated items:
Net investment income from equity 2,028
Unallocated expenses (2,480)
Income tax benefit 120
-----------
Net earnings $921
===========
(in thousands) Six Months Ended June 30, 1999
------------------------------
Commercial Personal Total
----------------------------------------------
Premiums earned $ 34,035 $8,785 $42,820
Net investment income from
Insurance operations 2,623 460 3,083
----------------------------------------------
Total segment revenues 36,658 4,170 45,903
----------------------------------------------
Segment losses and LAE 20,692 6,854 27,546
Segment expenses 10,226 2,849 13,075
----------------------------------------------
Total segment expenses 30,918 9,703 40,621
----------------------------------------------
Segment profit (loss) $5,740 $ (458) $5,282
============================
Plus unallocated items:
Net investment income from equity 2,915
Unallocated expenses (2,122)
Income tax expense (1,670)
-----------
Net earnings $4,405
===========
</TABLE>
Page 12
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Total segment revenue of $23.9 million and $46.9 million, plus
unallocated net investment income of $1.0 million and $2.0 million, equals total
Company segment revenue of $24.9 and $48.9 million for the three and six months
ended June 30, 2000, respectively.
Page 13
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended June 30, 2000 and 1999
Gross written premiums increased 15.9% to $28.3 million for the three
months ended June 30, 2000, compared to $24.4 million for the three months ended
June 30, 1999. The increase resulted from a 27.0% increase in commercial lines
premium to $27.3 million, partially offset by a 66.0% decrease in personal
automobile lines premium to $1.0 million from $2.9 million. This decrease was
due to the run-off by the company of the non-standard personal automobile
segment, which began in early 1999.
Net written premiums increased 11.7% to $25.0 million for the three
months ended June 30, 2000, compared to $22.4 million for the three months ended
June 30, 1999. This increase resulted from a 23.1% increase in commercial lines
net premium to $24.0 million, partially offset by a 66.0% decrease in personal
automobile lines net premium to $1.0 million.
Premiums earned increased 5.2% to $22.5 million for the three months
ended June 30, 2000, compared to $21.4 million for the three months ended June
30, 1999. This increase resulted from a 21.1% increase in commercial lines net
earned premium to $21.1 million, partially offset by a 64.7% decrease in
personal automobile lines net earned premium to $1.4 million.
Net investment income increased 4.7% to $2.5 million from $2.3 million,
respectively for the three months ended June 30, 2000 compared to the same
period in 1999, primarily due to an increase in the tax equivalent yield to
6.50% at June 30, 2000 from 6.20% at June 30, 1999.
Net realized investment (losses) gains before taxes were losses of
$16,000 for the three months ended June 30, 2000 compared to a realized gain of
$682,000 for the three months ended June 30, 1999. The realized losses were due
from sales from the Company's equity portfolio.
Losses and loss adjustment expenses increased 30.2% to $18.0 million
for the three months ended June 30, 2000, from $13.8 million for the three
months ended June 30, 1999, primarily due to an increase in the commercial lines
loss ratio to 80.3% for the three months ended June 30, 2000 compared to 60.7%
for the three months ended June 30, 1999. The increase in the commercial lines
loss ratio is mostly due to current year property losses and unfavorable
development in casualty lines. This increase was partially offset by a decrease
in the personal lines loss ratio to 76.2% for the three months ended June 30,
2000, compared to 82.5% for the three months ended June 30, 1999. Personal
lines, which is entirely non-standard personal automobile is currently in
run-off by the Company.
Page 14
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Amortization of deferred policy acquisition costs increased 6.3% to
$6.5 million from $6.1 million for the three months ended June 30, 2000 and June
30, 1999, respectively due to the increase in net earned premiums.
Other underwriting expenses increased 20.4% to $1.7 million for the
three months ended June 30, 2000 from $1.4 million for the three months ended
June 30, 1999. This increase is primarily attributable to the 15.9% increase in
gross written premiums experienced in the second quarter of 2000, compared to
the same quarter of 1999.
Net losses from operations before net realized investment losses for
the second quarter of 2000 were $651,000 or $(0.09) per share (basic and
diluted) compared with net operating gains from operations before net realized
investment gains of $1.7 million or $0.20 per share (basic and diluted) for the
second quarter of 1999.
As a result of the factors described above, the Company had a net loss
for the three months ended June 30, 2000 of $662,000 or $(0.09) per share (basic
and diluted), compared with $2.2 million net income or $0.25 per share (basic
and diluted) for the three months ended June 30, 1999.
Six Months Ended June 30, 2000 and 1999
Gross written premiums increased 17.3% to $54.6 million for the six
months ended June 30, 2000, compared to $46.5 million for the six months ended
June 30, 1999. The increase resulted from a 33.1% increase in commercial lines
premium to $52.1 million, partially offset by a 66.7% decrease in personal
automobile lines premium to $2.4 million. This decrease was due to the run-off
by the company of the non-standard personal automobile segment.
Net written premiums increased 12.2% to $48.4 million for the six
months ended June 30, 2000, compared to $43.1 million for the six months ended
June 30, 1999. This increase resulted from a 28.3% increase in commercial lines
net premium to $46.0 million, partially offset by a 66.7% decrease in personal
automobile lines net premium to $2.4 million.
Premiums earned increased 2.8% to $44.0 million for the six months
ended June 30, 2000, compared to $42.8 million for the six months ended June 30,
1999. This increase resulted from a 20.7% increase in commercial lines net
earned premium to $40.9 million, partially offset by a 64.0% decrease in
personal automobile lines net earned premium to $3.2 million.
Net investment income increased 2.1% to $4.9 million for the six months
ended June 30, 2000 compared to $4.8 million for six months ended June 30, 1999.
Page 15
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Net realized investment (losses) gains before taxes were a realized
loss of $29,000 for the six months ended June 30, 2000 compared to a realized
gain of $1.2 million for the six months ended June 30, 1999.
Losses and loss adjustment expenses increased 15.8% to $31.9 million
for the six months ended June 30, 2000, from $27.5 million for the six months
ended June 30, 1999, due to an increase in the commercial lines loss ratio to
72.6% for the six months ended June 30, 2000 compared to 60.8% for the six
months ended June 30, 1999. The increase in the commercial lines loss ratio is
mostly due to current year property losses and unfavorable development in
casualty lines. This increase was partially offset by a decrease in the personal
lines loss ratio to 69.7% for the six months ended June 30, 2000, compared to
78.0% for the six months ended June 30, 1999. Personal lines, which is entirely
non-standard personal automobile is currently in run-off by the Company.
Amortization of deferred policy acquisition costs increased 3.9% to
$12.7 million from $12.2 million for the six months ended June 30, 2000 and June
30, 1999, respectively due to the increase in net earned premiums.
Other underwriting expenses increased 16.9% to $3.4 million for the six
months ended June 30, 2000 from $2.9 million for the three months ended June 30,
1999. This increase is primarily attributable to the 17.3% increase in gross
written premiums experienced in the six months ended June 30, 2000, compared to
the same period in 1999.
Net earnings from operations before net realized investment losses or
gains for the six months ended June 30, 2000 were $940,000 or $0.12 per share
(basic and diluted) compared with $3.6 million or $0.40 per share (basic and
diluted) for the six months ended June 30, 1999.
The Company had net income for the six months ended June 30, 2000 of
$921,000 or $0.12 per share (basic and diluted), compared with $4.4 million net
income or $0.50 per share (basic) and $0.49 per share (diluted) for the six
months ended June 30, 1999. The June 30, 1999 earnings per share (basic &
diluted) includes $0.09 (basic & diluted) of realized investment gains after
tax, compared to no earnings per share impact from realized investment losses
for the six months ended June 30, 2000.
Page 16
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
As part of the Company's corporate stock repurchase program, the
Company has continued to repurchase its common stock. The Company repurchased
approximately 1.0 million shares between June 30, 1999 and June 30, 2000,
resulting in a reduction of weighted average diluted shares outstanding to
approximately 7.7 million shares outstanding during the second quarter of 2000,
compared to approximately 8.7 million shares outstanding during the second
quarter of 1999. Between June 30, 2000 and June 30, 1999, weighted average
shares outstanding decreased by approximately 12.5%.
Liquidity and Capital Resources
PNG is a holding company, the principal asset of which is the common
stock of Penn-America. PNG's cash flows depend primarily on dividends and other
payments from Penn-America. PNG uses these funds to pay (i) operating expenses,
(ii) taxes and other payments, (iii) dividends to PNG stockholders and (iv)
purchases of treasury shares. 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 principally to pay claims and
operating expenses, to purchase investments and to make dividend and other
payments to PNG.
Net cash provided by operating activities increased 68.1% to $5.6
million for the six months ended June 30, 2000, from $3.3 million for the six
months ended June 30, 1999, due primarily to the Company's growth in written
premiums.
Net cash used by investing activities was $5.2 million for the six
months ended June 30, 2000, compared to $3.3 million for the six months ended
June 30, 1999. The increase in cash used by investing activities was
attributable to the increase in cash flow from the growth in written premiums.
Net cash used by financing activities was $5.6 million for the six
months ended June 30, 2000, compared to $10.9 million for the same period in
1999. The principal use of cash by financing activities was the purchase of
572,425 shares of treasury stock at an approximate cost of $4.7 million during
the first two quarters of 2000, compared to the purchase of 958,700 shares of
treasury stock at an approximate cost totaling $10.4 million during the same
period ending June 30, 1999. As of June 30, 2000, the Company has acquired the
2.5 million shares at an average cost of $9.66 per share. The Company has
500,000 shares remaining which could be purchased under the current Board
authorized stock buy-back program. The funding for the treasury stock program
has been primarily provided by dividends from the Company's insurance
subsidiary, Penn-America.
Page 17
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
The Company believes that it has sufficient liquidity to meet its
anticipated insurance obligations and operating and capital expenditure needs.
The Company's investment strategy emphasizes quality, liquidity and
diversification, as well as total return. With respect to liquidity, the Company
considers liability durations, specifically related to loss reserves, when
determining desired investment maturities. In addition, maturities have been
staggered to produce cash flows for loss payments and reinvestment
opportunities. The average duration of the fixed maturity portfolio as of June
30, 2000 was approximately 3.3 years.
The Company's fixed maturity portfolio was $134.9 million or 84.5% of
the total investment portfolio as of June 30, 2000. Approximately 98.0% of these
securities were rated "A-" or better by Standard & Poor's or Moody's. Equities,
the majority of which consist of preferred stocks, were $24.7 million or 15.5%
of total investments as of June 30, 2000.
The investment portfolio contained $15.3 million of mortgage/
asset-backed obligations, which represents 11.5% of the total investments as of
June 30, 2000. 92.3% of these securities are "AAA" rated and 7.7% are "AA" rated
securities issued by government, government-related agencies or publicly held
corporations, are publicly traded, and have market values obtained from an
independent pricing service. Changes in estimated cash flows due to changes in
prepayment assumptions from the original purchase assumptions are revised based
on current interest rates and the economic environment. The Company had no other
derivative financial instruments, real estate or mortgages in the investment
portfolio as of June 30, 2000.
The principal source of cash for the payment of dividends to PNG's
stockholders is dividends from Penn-America. Penn-America is required by law to
maintain a certain minimum surplus on a statutory basis and is subject to
risk-based capital requirements and regulations under which payment of dividends
from statutory surplus may require prior approval from the Pennsylvania
regulatory authorities. The maximum dividend that may be paid as of June 30,
2000 by Penn-America to PNG without prior approval of regulatory authorities is
approximately $678,000.
Page 18
<PAGE>
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote by Security Holders - (See Attached)
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
Page 19
<PAGE>
PART II, ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The annual meeting of the Shareholders of Penn-America Group, Inc. was
held on May 17, 2000 (the "Annual Meeting" or "Meeting"), with the following
results:
The total number of shares represented at the Annual Meeting in person
or by proxy was 7,148,588 of the 7,719,161 share of common stock outstanding and
entitled to vote at the meeting.
On the proposal to elect Irvin Saltzman, Jon S. Saltzman, Robert A.
Lear, Jami Saltzman-Levy, M. Moshe Porat, Charles Ellman and Paul Simon as
Directors to serve until the 2001 Annual Meeting and until their successors are
duly elected and qualified, the nominees for Director received the number of
votes set forth opposite their respective names.
Number of Votes
For Withheld
Irvin Saltzman 6,801,132 347,456
Jon S. Saltzman 6,802,632 345,956
Robert A. Lear 6,802,632 345,956
Jami Saltzman-Levy 6,802,632 345,956
M. Moshe Porat 6,802,632 345,956
Charles Ellman 6,802,632 345,956
Paul Simon 6,703,832 444,756
There were no broker non-votes recorded. On the basis of the above
vote, Irvin Saltzman, Jon S. Saltzman, Robert A. Lear, Jami Saltzman-Levy, M.
Moshe Porat, Charles Ellman and Paul Simon were elected as Directors to serve
until the 2001 Annual Meeting and until their respective successors are duly
elected and qualified.
Page 20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: August 10, 2000 By: /s/ Jon S. Saltzman
---------------------- -------------------
Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Rosemary R. Ferrero
-----------------------
Rosemary R. Ferrero
Principal Finance and
Accounting Officer
Page 21
