SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22316
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Penn-America Group, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2731409
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 South York Road, Hatboro, Pennsylvania 19040
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(Address of principal executive offices, including zip code)
(215) 443-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
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At May 11, 2001, 7,592,525 shares of the registrant's common stock, $.01 par
value, were outstanding.
Page 1
Penn-America Group, Inc. and Subsidiaries
Index
Page Number
Part I - Financial Information
Consolidated Balance Sheets - March 31, 2001 (unaudited) and
December 31, 2000 3
Consolidated Unaudited Statements of Operations - For the three
months ended March 31, 2001 and 2000 4
Consolidated Unaudited Statement of Stockholders' Equity -
For the three months ended March 31, 2001 5
Consolidated Unaudited Statements of Cash Flows -
For the three months ended March 31, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II - Other Information 14
Page 2
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
March 31, December 31,
2001 2000
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ASSETS (Unaudited)
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost 2001, $127,309; 2000, $ 130,698 $ 125,477
$123,873)
Held to maturity, at amortized cost (fair value 2001, $17,619; 2000, $17,441) 17,294 17,282
Equity securities, at fair value (cost 2001, $29,389; 2000, $27,324) 25,783 24,491
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Total investments 173,775 167,250
Cash 5,416 11,425
Accrued investment income 1,975 2,181
Premiums receivable, net 10,621 9,695
Reinsurance recoverable 24,466 24,447
Prepaid reinsurance premiums 4,348 4,635
Deferred policy acquisition costs 9,716 10,317
Capital lease 1,731 1,753
Deferred income taxes 4,103 4,272
Income tax recoverable 2,474 2,982
Other assets 570 529
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Total assets $ 239,195 $ 239,486
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 115,542 $ 115,314
Unearned premiums 40,965 43,239
Accounts payable and accrued expenses 2,579 2,353
Capitalized lease obligation 1,670 1,701
Other liabilities 3,169 2,828
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Total liabilities 163,925 165,435
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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 2001 and 2000, 10,086,525 and 10,076,025 shares, respectively;
outstanding 2001 and 2000, 7,586,525 and 7,576,025 shares, respectively 101 101
Additional paid-in capital 70,226 70,164
Accumulated other comprehensive loss (144) (811)
Retained earnings 30,152 29,583
Treasury stock, 2,500,000 shares in 2001 and 2000 at cost (24,161) (24,161)
Officers' stock loans (655) (546)
Unearned compensation from restricted stock awards (249) (279)
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Total stockholders' equity 75,270 74,051
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Total liabilities and stockholders' equity $ 239,195 $ 239,486
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Page 3
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the three months ended March 31, 2001 and 2000
(In thousands, except per share data)
Three months ended
March 31,
--------------------------
2001 2000
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Revenues
Premiums earned $ 23,042 $ 21,546
Net investment income 2,850 2,400
Net realized investment gain (loss) 102 (13)
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Total revenues 25,994 23,933
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Losses and expenses
Losses and loss adjustment expenses 16,734 13,905
Amortization of deferred policy acquisition costs 6,224 6,239
Other underwriting expenses 1,534 1,430
Corporate expenses 162 220
Interest expense 40 36
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Total losses and expenses 24,694 21,830
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Income before income tax 1,300 2,103
Income tax expense 333 520
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Net income $ 967 $ 1,583
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Net income per share, basic and diluted $ 0.13 $ 0.20
Page 4
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the three months ended March 31, 2001
(In thousands, except per share data)
Unearned
Compensation
Accumulated From
Additional Other Officers' Restricted Total
Common Paid-In Comprehensive Retained Treasury Stock Stock Stockholders'
Stock Capital Income (Loss) Earnings Stock Loans Awards Equity
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Balance at December 31, 2000 $ 101 $ 70,164 $ ( 811) $ 29,583 $ (24,161) $ (546) $ (279) $ 74,051
Net income -- -- -- 967 -- -- -- 967
Other comprehensive income:
unrealized gains on
investments, net of
tax and reclassification
adjustment -- -- 667 -- -- -- -- 667
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Comprehensive income 1,634
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Issuance of common stock -- 62 -- -- -- -- -- 62
Officers' stock loans -- -- -- -- -- (109) -- (109)
Amortization of compensation
expense from restricted
stock awards issued -- -- -- -- -- -- 30 30
Cash dividends paid
($0.0525 per share) -- -- -- (398) -- -- -- (398)
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Balance at March 31, 2001 $ 101 $ 70,226 $ (144) $ 30,152 $ (24,161) $ (655) $ (249) $ 75,270
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Page 5
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended March 31, 2001 and 2000
(In thousands)
Three months ended March 31,
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2001 2000
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Cash flows from operating activities:
Net income $ 967 $ 1,583
Adjustments to reconcile net income to net cash provided (used) by Operating
activities:
Amortization and depreciation expense (26) 154
Net realized investment (gains) losses (102) 13
Deferred income tax (benefit) expense (175) 7
Net decrease in premiums receivable, prepaid reinsurance premiums
and unearned premiums (2,913) (12)
Net increase (decrease) in unpaid losses and loss adjustment expenses
and reinsurance recoverable 209 (323)
Accrued investment income 206 (335)
Deferred policy acquisition costs 601 (536)
Income tax recoverable 508 1,652
Other assets (41) 52
Accounts payable and accrued expenses 226 265
Other liabilities 341 833
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Net cash provided (used) by operating activities (199) 3,353
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Cash flows from investing activities:
Purchases of equity securities (2,065) (2,260)
Purchases of fixed maturities available for sale (9,905) (8,276)
Purchases of fixed maturities held to maturity -- (9,899)
Proceeds from sales of equity securities -- 2,736)
Proceeds from sales and maturities of fixed maturities available for sale 6,636 9,689
Proceeds from maturities and calls of fixed maturities held to maturity -- 3,000
Change in short-term investments -- 449
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Net cash used by investing activities (5,334) (4,561)
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Cash flows from financing activities:
Issuance of common stock 62 --
Purchase of treasury stock -- (2,648)
Officers' stock loans (109) (508)
Principal payments on capital lease obligations (31) (34)
Dividends paid (398) (420)
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Net cash used by financing activities (476) (3,610)
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Decrease in cash (6,009) (4,818)
Cash, beginning of period 11,425 12,045
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Cash, end of period $ 5,416 $ 7,227
=============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 40 $ 36
Taxes recovered -- (1,500)
Page 6
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Organization and Basis of Presentation
Penn-America Group, Inc. ("PAGI" or the "Company") is an insurance
holding company. Approximately 41% of the outstanding common stock of the
Company was owned by Penn Independent Corporation ("Penn Independent") at March
31, 2001. 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").
Penn-America and Penn-Star underwrite 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 can write business in all 50 states and the
District of Columbia. The companies write business on both an admitted and
excess and surplus lines basis in 33 states, on an admitted basis only in 5
states and on an excess and surplus lines basis only in 13 states.
The accompanying condensed unaudited consolidated financial statements
and notes have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of results for the interim periods have been
included. All significant intercompany accounts and transactions have been
eliminated in consolidation. It is suggested that these condensed unaudited
consolidated financial statements and notes be read in conjunction with the
financial statements and notes in the Company's 2000 Annual Report which was
incorporated by reference into the Company's Form 10-K for the year ended
December 31, 2000. The Company's results of operations for interim periods are
not necessarily indicative of the results to be expected for the entire year.
Note 2 - Reinsurance
Premiums earned are presented net of amounts ceded to reinsurers of
$3.0 million and $2.6 million for the three months ended March 31, 2001 and
2000, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $2.7 million and $1.9 million for the three
months ended March 31, 2001 and 2000, respectively.
Note 3 - Comprehensive Income
Accumulated other comprehensive income (loss) of the Company consists
solely of unrealized gains or losses on investment securities net of applicable
income tax expense or benefit and reclassification adjustments.
Page 7
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 4 - Income Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted income per share computations:
Three months ended
(in thousands, except per share data) March 31,
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2001 2000
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Basic per share computation:
Net income $ 967 $1,583
Weighted average common shares outstanding 7,579 7,972
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Basic net income per share $ 0.13 $ 0.20
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Diluted per share computation:
Net income $ 967 $1,583
Weighted average common shares outstanding 7,579 7,972
Additional shares outstanding after the assumed
exercise of stock options by applying the
treasury stock method 56 38
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Total shares
7,635 8,010
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Diluted net income per share $ 0.13 $ 0.20
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Page 8
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 5- Segment Information
The Company has two reportable segments: non-standard personal
automobile and commercial lines. The Company announced in April 1999 that it
would run-off its remaining portfolio of the personal lines automobile business,
which was underwritten through a single agent in California. This followed a
decision earlier in 1999 to eliminate the remainder of the Company's
non-standard personal automobile business in nine other states. The Company will
continue to report on this segment separately until the amounts relating to the
non-standard personal automobile business become immaterial to the financial
statements presented. These segments are managed separately because they have
different customers, pricing and expense structures. The Company does not
allocate assets between segments because assets are reviewed in total by
management for decision-making purposes.
The accounting policies of the segments are the same as those more
fully described in the summary of significant accounting policies in Note 1 of
the Company's 2000 Annual Report, which was incorporated by reference into the
Company's 2000 Form 10-K. The Company evaluates segment profit based on profit
or loss from operating activities. Segment profits or losses from operations are
pre-tax and do not include unallocated expenses but do include investment income
attributable to insurance transactions. Segment profit or loss therefore
excludes federal income taxes, unallocated expenses and investment income
attributable to equity as opposed to investment income attributable to insurance
transactions.
The following is a summary of the Company's segment revenues, expenses
and profit:
(in thousands) Three months ended March 31, 2001
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Personal
Commercial Automobile Total
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Premiums earned $ 23,026 $ 16 $ 23,042
Net investment income from insurance operations 1,866 84 1,950
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Total segment revenues 24,892 100 24,992
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Segment losses and loss adjustment expenses 17,930 (1,196) 16,734
Segment expenses 6,591 5 6,596
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Total segment expenses 24,521 (1,191) 23,330
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Segment income $ 371 $ 1,291 $ 1,662
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Unallocated items:
Net investment income from equity 1,002
Unallocated expenses (1,364)
Income tax expense (333)
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Net income $ 967
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Page 9
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(continued)
Note 5- Segment Information (Continued)
(in thousands) Three months ended March 31, 2000
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Commercial Personal
Automobile Total
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Premiums earned $19,776 $ 1,770 $21,546
Net investment income from insurance operations 1,197 156 1,353
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Total segment revenues 20,973 1,926 22,899
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Segment losses and loss adjustment expenses 12,753 1,152 13,905
Segment expenses 6,055 645 6,700
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Total segment expenses 18,808 1,797 20,605
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Segment income $ 2,165 $ 129 $ 2,294
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Unallocated items:
Net investment income from equity 1,034
Unallocated expenses
(1,225)
Income tax expense (520)
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Net income $1,583
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Page 10
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended March 31, 2001 and 2000
Premiums earned increased 6.9% to $23.0 million for the three months
ended March 31, 2001 from $21.5 million for the three months ended March 31,
2000, due to a 16.4% increase in commercial earned premiums, partially offset by
a 99.1% decline in non-standard personal automobile earned premiums. The Company
announced in 1999 that it is running off its non-standard personal automobile
business.
Gross written premiums decreased 9.3% for the three months ended March
31, 2001 to $23.8 million compared to $26.3 million for the three months ended
March 31, 2000, due to a 4.0% decrease in commercial gross written premiums and
a 99.9% decline in non-standard personal automobile premiums.
Net written premiums decreased 10.0% for the three months ended March
31, 2001 to $21.1 million compared to $23.4 million for the three months ended
March 31, 2000, due to a 4.1% decrease in commercial net written premiums and a
99.9% decline in non-standard personal lines.
Net investment income increased 18.8% to $2.9 million for the three
months ended March 31, 2001, from $2.4 million for the three months ended March
31, 2000. This increase resulted principally from an increase in the investment
yield of the fixed income investment portfolio and the growth in invested
assets.
Losses and loss adjustment expenses increased 20.3% to $16.7 million
for the three months ended March 31, 2001, from $13.9 million for the three
months ended March 31, 2000.
Amortization of deferred policy acquisition costs ("DAC") remained
unchanged at $6.2 million for the three months ended March 31, 2001 and March
31, 2000. Although earned premiums increased as discussed above, DAC
amortization remained flat due to a reduction in commission rates.
Other underwriting expenses increased 7.3% to $1.5 million for the
three months ended March 31, 2001, from $1.4 million for the three months ended
March 31, 2000.
The overall statutory combined ratio for the Company increased to 106.9
for the three months ended March 31, 2001, from 99.8 for the three months ended
March 31, 2000, primarily due to the increase in the loss ratio to 72.6 in 2001,
compared to 64.5 in 2000. The expense ratio decreased to 34.3 for the three
months ended March 31, 2001, compared to 35.3 for the three months ended March
31, 2000, due in part to the aforementioned commission reduction.
As a result of the factors described above, net income for the three
months ended March 31, 2001 was $1.0 million or $0.13 per share (basic and
diluted), compared to net income of $1.6 million or $0.20 per share (basic and
diluted) for the three months ended March 31, 2000.
Page 11
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common
stock of Penn-America. The principal source of cash for the payment of dividends
to PAGI's stockholders, PAGI operating expenses and repurchase of PAGI stock is
dividends from Penn-America and Penn-Star. Penn-America's principal sources of
funds are operations, investment income and proceeds from sales and redemptions
of investments. Funds are used by Penn-America and Penn-Star principally to pay
claims and operating expenses, to purchase investments and to make dividend and
other payments to PAGI.
Penn-America is required by law to maintain a certain minimum surplus
on a statutory basis and is subject to risk-based capital requirements and
regulations under which payment of dividends from statutory surplus may require
prior approval from the Pennsylvania Insurance Department. Penn-America may pay
dividends to PAGI without advance regulatory approval only from unassigned
surplus and only to the extent that all dividends in the past twelve months do
not exceed the greater of 10% of total statutory surplus, or statutory net
income for the prior year. Using this criteria, the available ordinary dividend
for 2001 is $5.5 million. No ordinary dividends were paid to PAGI in 2000. In
2000, Penn-America paid a $6.4 million return of capital to PAGI, after
receiving approval from the Pennsylvania Insurance Department, which PAGI used
to repurchase stock and to pay dividends and PAGI operating expenses.
Penn-America paid a $0.6 million dividend to PAGI on May 9, 2001.
Net cash used by operating activities was $0.2 million for the three
months ended March 31, 2001, compared to $3.4 million provided by operating
activities for the three months ended March 31, 2000.
Net cash used by investing activities was $5.3 million for the three
months ended March 31, 2001, compared to $4.6 million for the three months ended
March 31, 2000.
Net cash used by financing activities was $0.5 million for the three
months ended March 31, 2001, compared to $3.6 million for the three months ended
March 31, 2000. In 2000, $2.6 million was used to purchase treasury stock, and
no such purchases were made in 2001.
Statutory surplus as of March 31, 2001 increased to $58.7 million from
$55.5 million as of March 31, 2000, due primarily to a $2.7 million net positive
impact of adopting the standard set of statutory accounting principles known as
"codification".
The Company believes 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 Company's fixed maturity portfolio of $148.0 million was 85.2% of
the total investment portfolio as of March 31, 2001. Approximately 95% of these
securities were rated "A" or better by Standard & Poor's or Moody's. The average
duration of the fixed maturity portfolio as of March 31, 2001 was approximately
Page 12
3.53 years. Equity securities, the majority of which consist of preferred stocks
and exchange traded funds, were $25.8 million or 14.8% of total investments as
of March 31, 2001.
As of March 31, 2001, the investment portfolio contained $46.9 million
of mortgage/asset-backed obligations, which represents 27.0% of the total
investments as of March 31, 2001. All of these securities were "AA"-rated or
better and 73.8% were "AAA"-rated by Standard & Poor's or Moody's. These
securities, which were issued by government, government-related agencies or
publicly held corporations, are publicly traded, and have market values obtained
from an independent pricing service. Changes in estimated cash flows due to
changes in prepayment assumptions from the original purchase assumptions are
revised based on current interest rates and the economic environment. The
Company had no derivative financial instruments, real estate or mortgages in the
investment portfolio as of March 31, 2001.
Page 13
PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote by Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
On April 3, 2001, the Company filed a current report on Form 8-K
announcing the availability of annual statements of its insurance
subsidiaries, Penn-America Insurance Company and Penn-Star
Insurance Company, on the Company's website, in hard copy from the
Company, or from the Pennsylvania Insurance Department. This
filing was made relative to Regulation FD requirements only.
Page 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: May 11, 2001 By: /s/ Jon S. Saltzman
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Jon S. Saltzman
President and
Chief Executive Officer
By: /s/ Joseph F. Morris
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Joseph F. Morris
Senior Vice President and
Chief Financial Officer
Page 15