AMERICAN SAFETY INSURANCE GROUP LTD
S-1, 1997-12-19
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<PAGE>
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 1997
                                                       REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               ----------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                               ----------------
                     AMERICAN SAFETY INSURANCE GROUP, LTD.
 
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
         BERMUDA                     6411                  NOT APPLICABLE
     (STATE OR OTHER           (PRIMARY STANDARD          (I.R.S. EMPLOYER
     JURISDICTION OF              INDUSTRIAL           IDENTIFICATION NUMBER)
    INCORPORATION OR          CLASSIFICATION CODE
      ORGANIZATION)                 NUMBER)
                               44 CHURCH STREET
                            HAMILTON HM HX, BERMUDA
                                (441) 295-5688
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                             DAVID J. DOYLE, ESQ.
                            CONYERS DILL & PEARMAN
                                CLARENDON HOUSE
                                2 CHURCH STREET
                            HAMILTON HM CX, BERMUDA
                                (441) 295-1422
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
                               ----------------
                                  COPIES TO:
 BETTY O. DERRICK, ESQ.     FRED J. PINCKNEY, ESQ.     M. HILL JEFFRIES, ESQ.
     WOMBLE CARLYLE        AMERICAN SAFETY CASUALTY       ALSTON & BIRD LLP
       SANDRIDGE &             INSURANCE COMPANY         ONE ATLANTIC CENTER
        RICE PLLC              1845 THE EXCHANGE         1201 WEST PEACHTREE
 1275 PEACHTREE STREET,            SUITE 200           STREET ATLANTA, GEORGIA
        SUITE 700           ATLANTA, GEORGIA 30339              30309
 ATLANTA, GEORGIA 30309         (770) 916-1908             (404) 881-7000
 
     (404) 872-7000
 
                               ----------------
       APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
  As soon as practicable after this Registration Statement becomes effective.
                               ----------------
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                               ----------------
                        CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
     TITLE OF EACH             AMOUNT         PROPOSED  MAXIMUM   PROPOSED MAXIMUM
  CLASS OF SECURITIES           TO BE          OFFERING PRICE    AGGREGATE OFFERING       AMOUNT OF
    TO BE REGISTERED         REGISTERED         PER SHARE(1)          PRICE(1)        REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
<S>                      <C>                 <C>                 <C>                 <C>
Common Shares,
 $0.01 par value.......       3,105,000            $13.00            $40,365,000           $11,908
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 405,000 Common Shares which the Underwriters have an option to
    purchase from the Company to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
    to Rule 457(a).
                               ----------------
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------


<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                             SUBJECT TO COMPLETION
                 PRELIMINARY PROSPECTUS DATED DECEMBER 19, 1997
 
                                2,700,000 SHARES
 
                     AMERICAN SAFETY INSURANCE GROUP, LTD.
 
            [LOGO OF AMERICAN SAFETY INSURANCE GROUP APPEARS HERE]
 
                                 COMMON SHARES
 
                            ----------------------
 
  All 2,700,000 Common Shares, $.01 par value (the "Common Shares"), are being
offered by American Safety Insurance Group, Ltd. ("American Safety" or the
"Company").
 
  Prior to this offering (the "Offering"), there has been no public market for
the Common Shares. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00 per Common Share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
 
  The Company has applied for listing of the Common Shares on the Nasdaq
National Market under the symbol "AMSF."
 
  SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE
COMMON SHARES.
 
                            ----------------------
 
THE SECURITIES  OFFERED HEREBY  HAVE NOT  BEEN APPROVED  OR DISAPPROVED  BY THE
SECURITIES AND  EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION  NOR HAS
 THE SECURITIES  AND EXCHANGE  COMMISSION OR  ANY STATE  SECURITIES COMMISSION
 PASSED UPON THE  ACCURACY OR ADEQUACY OF THIS  PROSPECTUS. ANY REPRESENTATION
 TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
                                                    UNDERWRITING
                                          PRICE TO DISCOUNTS AND   PROCEEDS TO
                                           PUBLIC  COMMISSIONS(1) THE COMPANY(2)
- --------------------------------------------------------------------------------
<S>                                       <C>      <C>            <C>
Per Share...............................    $           $              $
- --------------------------------------------------------------------------------
Total(3)..............................     $           $              $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
    certain liabilities, including liabilities under the Securities Act of
    1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
    at $   .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
    405,000 additional Common Shares on the same terms as set forth above
    solely to cover over-allotments, if any. If the Underwriters exercise such
    option in full, the total Price to Public, Underwriting Discounts and
    Commissions and Proceeds to the Company will be $   , $    and $   ,
    respectively. See "Underwriting."
 
                            ----------------------
 
  The Common Shares are offered severally by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of the certificates representing the Common Shares will be made to the
Underwriters on or about      , 1998.
 
ADVEST, INC.                   J.C. BRADFORD&CO.                 HOEFER & ARNETT
                                                                   INCORPORATED
 
                   The date of this Prospectus is      , 1998
<PAGE>
 
            [LOGO OF AMERICAN SAFETY INSURANCE GROUP APPEARS HERE]

                     AMERICAN SAFETY INSURANCE GROUP, LTD.
         How to Turn an Opportunity into a Specialty Insurance Program
 
 
                   [CHART DEPICTING INTERNAL BUSINESS FLOW]
 
 
  CONSENT UNDER THE EXCHANGE CONTROL ACT, 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND
TRANSFER OF THE COMMON SHARES BEING OFFERED PURSUANT TO THE OFFERING. IN
ADDITION, A COPY OF THIS DOCUMENT HAS BEEN DELIVERED TO THE REGISTRAR OF
COMPANIES IN BERMUDA FOR FILING PURSUANT TO THE COMPANIES ACT, 1981 OF
BERMUDA. IN GIVING SUCH CONSENT AND IN ACCEPTING THIS PROSPECTUS FOR FILING,
THE BERMUDA MONETARY AUTHORITY AND THE REGISTRAR OF COMPANIES IN BERMUDA,
RESPECTIVELY, ACCEPT NO RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF ANY
PROPOSAL OR FOR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINIONS
EXPRESSED HEREIN.
 
                               ----------------
 
  CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE THE MARKET PRICE,
PURCHASES OF THE COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
 
  The Company intends to furnish its shareholders with annual reports, which
will include consolidated financial statements audited by its independent
certified public accountants, and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.

<PAGE>
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data appearing
elsewhere in this Prospectus. Unless the context indicates otherwise, all
references to the "Company" refer to American Safety Insurance Group, Ltd., a
Bermuda company, and its subsidiaries. All information presented (i) has been
adjusted to give effect to a 1,310-for-1 split of the Common Shares effective
January  , 1998 and (ii) assumes that the Underwriters' over-allotment option
is not exercised. Certain terms which are specific to the insurance industry
are defined in "Glossary of Selected Insurance Terms," which begins on page 70
of this Prospectus. All references in this Prospectus to "dollar" and "$" are
to United States currency.
 
                                  THE COMPANY
 
  American Safety Insurance Group, Ltd. ("American Safety" or the "Company") is
a specialty insurance holding company which, through its subsidiaries,
develops, underwrites, manages and markets primary casualty insurance and
reinsurance programs in the alternative insurance market for (i) environmental
remediation risks; (ii) employee leasing and staffing industry risks; and (iii)
other specialty risks. The Company has demonstrated expertise in developing
specialty insurance coverages and custom designed risk management programs not
generally available in the standard insurance market.
 
  The Company's specialty insurance programs include coverages for general
liability, pollution liability, professional liability, workers' compensation
and surety, as well as custom designed risk management programs (including
captive and rent-a-captive programs), for contractors, consultants and other
businesses and property owners who are involved with environmental remediation,
employee leasing and staffing, and other specialty risks. Through its U.S.
brokerage and management services subsidiaries, the Company also provides
specialized insurance program development, underwriting, risk placement,
reinsurance, program management, brokerage, loss control, claims administration
and marketing services.
 
  The Company is able to select its roles as program developer, primary
underwriter, reinsurer, program manager and broker based on its assessment of
each risk profile. After determining its roles, the Company utilizes its
insurance and reinsurance subsidiaries, its insurance brokerage and management
services subsidiaries, and a risk retention group affiliate to generate risk
premium revenues, program management fees, insurance and reinsurance
commissions and investment income, as appropriate.
 
  The Company insures and places risks through its U.S. insurance subsidiary,
as well as its non-subsidiary risk retention group affiliate and substantial
unaffiliated insurance and reinsurance companies. The Company also reinsures
and places, through its Bermuda reinsurance subsidiary and substantial
unaffiliated reinsurers, a portion of the risks underwritten directly by its
U.S. insurance subsidiary, its risk retention group affiliate and other
insurers. Substantially all of the insurance business that the Company
currently assumes is for primary insurance programs that the Company has
developed and underwritten.
 
  American Safety was formed in Bermuda as a group captive insurance company in
1986 to provide stable, long term insurance protection for the asbestos
abatement and environmental remediation industry in the United States which had
suffered from disruptive market cycles in the standard insurance market. The
Company now provides insurance coverages and services in all 50 states and
principally markets its insurance programs through approximately 160
independent insurance agency and brokerage firms.
 
  For the nine months ended September 30, 1997, the Company's revenues totaled
$10.4 million, an increase of 64.8% over the same nine month period in 1996.
The Company's revenues for the nine months ended September 30, 1997 were
comprised of risk premium revenues of $6.5 million, program management fees of
$0.5 million, insurance and reinsurance brokerage commissions of $1.6 million,
and investment income of $1.8 million. For the year ended December 31, 1996,
the Company's revenues totaled $8.9 million, comprised of risk premium revenues
of $4.3 million, program management fees of $0.5 million, insurance and
reinsurance brokerage commissions of $1.9 million, and investment income of
$2.1 million.
 
                                       3

<PAGE>
 
 
  Industry Rating. A.M. Best Company ("A.M. Best"), an independent nationally
recognized insurance industry rating service and publisher, has assigned a
rating of "A (Excellent)" on a group basis to American Safety, as well as its
U.S. insurance subsidiary, American Safety Casualty Insurance Company
("American Safety Casualty"), and its non-subsidiary risk retention group
affiliate, American Safety Risk Retention Group, Inc. ("American Safety RRG").
 
  Business Strategy. The Company's business strategy is to develop insurance
programs for the environmental remediation industry and the employee leasing
and staffing industry, as well as other specialty industries and risks. The
Company targets niche insurance markets and opportunities where its expertise
is required and where competition is limited. The Company seeks to generate
underwriting profits, program management fees and brokerage commissions through
such insurance programs. The Company utilizes a flexible approach to accomplish
its strategy by combining (i) intensive underwriting, (ii) value-added
services, including quality coverage enhancements, professional risk
management, dedicated loss control and claims management, and (iii) superior
service to insurance agents, brokers and insureds. Further, the Company
differentiates itself by its ability to select its roles as program developer,
primary underwriter, reinsurer, program manager and broker based on its
assessment of each specialty risk profile.
 
  Since 1986, the Company's capacity for innovation has been demonstrated
through its development of the following specialty insurance coverages and
custom designed programs:
 
  *  1986--an insurance policy to insure the general liability risks of
     asbestos abatement contractors, and the establishment of technical loss
     control guidelines for performing such work.
 
  *  1987--an insurance policy to provide limited occurrence form coverage
     for asbestos abatement contractors, thereby protecting insureds from
     claims that might be brought over an extended period of time.
 
  *  1987--coverage for the transportation of asbestos-containing materials
     and coverage for specific technical abatement methodologies, such as
     encapsulation and enclosure of asbestos-containing materials.
 
  *  1988--the formation of American Safety RRG, one of the first U.S.
     insurance companies to provide general liability coverage for asbestos
     abatement activities.
 
  *  1990--a non-collateralized surety program for environmental remediation
     contractors.
 
  *  1991--a program to provide coverage for lead abatement and a broader
     range of environmental remediation efforts.
 
  *  1994--a workers' compensation insurance program for environmental
     remediation contractors and consultants, as well as coverage for the
     financial responsibility requirements imposed upon owners of municipal
     solid waste landfills in connection with the closure of such landfills
     and the provision of post-closure care.
 
  *  1995--workers' compensation and general liability insurance programs for
     employee leasing companies (also known as professional employer
     organizations) and employee staffing companies.
 
                                       4
<PAGE>
 
 
  Growth Strategy. The additional capital to the Company from the proceeds of
the Offering is expected to result in a higher financial size rating from A.M.
Best. Management believes that the Company's increased capital base and
financial size rating, when combined with the Company's expertise in specialty
insurance programs, should position the Company to target a broader client base
through the following strategies:
 
  *  the continued development of new insurance programs, as well as enhanced
     coverages, for clients and industries currently served by the Company.
 
  *  the continued development of insurance programs for clients, industries
     and risks not currently served by the Company.
 
  *  the acquisition or formation of an excess and surplus lines insurance
     company to enhance the Company's ability to enter additional classes of
     insurance business.
 
  *  the acquisition of agencies or insurers specializing in insurance
     program business.
 
  Offices. The Company's Bermuda offices are located at 44 Church Street,
Hamilton, Bermuda, and the telephone number is (441) 295-5688. The offices of
the Company's U.S. subsidiaries are located at 1845 The Exchange, Suite 200,
Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.
 
                                  THE OFFERING
 
Common Shares Offered by the
 Company......................  2,700,000 shares
 
Common Shares to be
 Outstanding after the                               
 Offering.....................  5,625,230 shares (1) 
 
Use of Proceeds...............  To increase the Company's capital and surplus, 
                                which should result in a higher financial size  
                                rating from A.M. Best, to fund the potential    
                                acquisition or formation of an excess and       
                                surplus lines insurance company and other       
                                strategic acquisitions, and for general         
                                corporate purposes. See "Use of Proceeds."      
 
Proposed Nasdaq National
 Market Symbol................  AMSF
- --------
(1) Excludes 169,463 Common Shares that are subject to options which are
    currently exercisable and 340,402 Common Shares that will be subject to
    outstanding but unvested stock options and restricted shares upon the
    completion of the Offering.
 
                                       5
<PAGE>
 
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                                  NINE
                                                             MONTHS ENDED
                             YEAR ENDED DECEMBER 31,         SEPTEMBER 30,
                          -------------------------------- ------------------
                            1994       1995       1996       1996      1997
                          ---------- ---------- ---------- --------  --------
                          (In thousands, except per share and ratio data)
<S>                       <C>        <C>        <C>        <C>       <C>
INCOME STATEMENT DATA:
Revenues:
  Direct and assumed
   premiums earned......  $   3,509  $   6,109  $   5,316  $  3,820  $  8,023
  Ceded premiums
   earned...............        (89)      (362)    (1,044)     (958)   (1,517)
                          ---------  ---------  ---------  --------  --------
    Net premiums
     earned.............      3,420      5,747      4,272     2,862     6,506
  Net investment
   income...............        663      1,353      2,092     1,449     1,813
  Brokerage commission
   income...............      1,706      2,145      1,881     1,457     1,565
  Management fees from
   affiliate............        464        475        479       356       444
  Net realized gains
   (losses).............       (118)       200        177       155        14
  Other income..........        --         --           5         4        10
                          ---------  ---------  ---------  --------  --------
    Total revenues......      6,135      9,920      8,906     6,283    10,352
Expenses:
  Losses and loss
   adjustment expenses
   incurred.............      1,424      2,905      2,056     1,383     3,533
  Acquisition expenses..        517      1,086        646       495     1,769
  Other expenses........      2,247      2,029      3,110     2,172     2,445
                          ---------  ---------  ---------  --------  --------
    Total expenses......      4,188      6,020      5,812     4,050     7,747
                          ---------  ---------  ---------  --------  --------
    Earnings before
     income taxes.......      1,947      3,900      3,094     2,233     2,605
Income taxes............        329        720        177       178       383
                          ---------  ---------  ---------  --------  --------
    Net earnings........  $   1,618  $   3,180  $   2,917  $  2,055  $  2,222
                          =========  =========  =========  ========  ========
Net earnings per share..  $    0.54  $    1.07  $    0.98  $   0.69  $   0.75
Common shares and common
 share equivalents used
 in computing net
 earnings per share.....      2,983      2,974      2,974     2,974     2,974
GAAP RATIOS(1):
Loss and loss adjustment
 expenses...............       41.6%      50.5%      48.1%     48.3%     54.3%
Expense ratio...........       30.7       23.4       29.4      28.6      36.4
                          ---------  ---------  ---------  --------  --------
Combined ratio..........       72.3%      73.9%      77.5%     76.9%     90.7%(2)
                          =========  =========  =========  ========  ========
Net premiums written to
 equity.................        0.3x       0.4x       0.3x      0.2x      0.3x
STATUTORY RATIOS(1):
Loss and loss adjustment
 expenses...............       41.6%      50.5%      48.1%     48.3%     54.3%
Expense ratio...........       27.9       21.9       27.4      25.1      33.7
                          ---------  ---------  ---------  --------  --------
Combined ratio..........       69.5%      72.4%      75.5%     73.4%     88.0%(2)
                          =========  =========  =========  ========  ========
</TABLE>
 
BALANCE SHEET DATA (AT END OF PERIOD):
<TABLE>
<CAPTION>
                                                            SEPTEMBER 30, 1997
                                                          ----------------------
                                                          ACTUAL  AS ADJUSTED(3)
                                                          ------- --------------
<S>                                                       <C>     <C>
Total investments........................................ $32,436    $62,268
Total assets.............................................  42,173     72,005
Unpaid losses and loss adjustment expenses...............  10,735     10,735
Total liabilities........................................  21,449     21,449(4)
Total shareholders' equity...............................  20,724     50,556
</TABLE>
- --------
(1) See "Glossary of Selected Insurance Terms."
(2) See "Management's Discussion and Analysis of Financial Condition and
    Results of Operations--Overview."
(3) As adjusted to give effect to the sale of 2.7 million Common Shares offered
    by the Company hereby and the application of the estimated net proceeds
    therefrom as if such application had occurred on September 30, 1997. See
    "Use of Proceeds."
(4) The Company repaid a $1.25 million surplus note on December 11, 1997.
 
                                       6
<PAGE>
 
                                 RISK FACTORS
 
  Prospective purchasers should consider carefully the following risk factors
in addition to the information set forth elsewhere in this Prospectus prior to
making an investment in the Common Shares offered hereby.
 
INDUSTRY CYCLICALITY; POTENTIAL FLUCTUATIONS IN FINANCIAL RESULTS
 
  The financial results of casualty insurance companies historically have been
subject to significant fluctuations and may vary significantly in the future.
Results of operations may fluctuate due to a variety of factors, including
competitive pricing pressures, unpredictable developments in loss trends,
changes in loss reserves, market acceptance of new coverages or enhancements,
competitive conditions in the industry, changes in operating expenses,
fluctuations in interest rates and other changes in investment markets which
affect market prices of investments and income from such investments, and
changes in levels of general business activity and economic conditions. In
addition, insureds are eligible for renewal of their policies on different
anniversary dates, subject to underwriting and loss control criteria applied
by the Company. If a large number of insureds were to decline to renew their
policies or if their policies were not renewed in a given calendar quarter,
the Company's results of operations could be materially adversely affected in
the renewal quarter and subsequent quarters. Due to all of the foregoing
factors, in some future quarter or quarters, the Company's operating results
may be below the expectations of public company analysts and investors. In
such event, the public trading price of the Common Shares could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
 
COMPETITION
 
  The casualty insurance and reinsurance business is highly competitive with
respect to a number of factors, including the overall financial strength of
insurers, ratings by rating agencies, premium rates, policy terms and
conditions, services offered, reputation and commission rates. The Company
faces competition from a number of insurers who have greater financial and
marketing resources and greater name recognition than the Company. Although
the Company's business strategy is to develop insurance programs for the
environmental remediation industry, the employee leasing and staffing industry
and other specialty industries and risks by targeting niche markets where its
expertise is required and where competition is limited, the Company
nevertheless encounters competition from other insurance companies engaged in
insuring risks in broader lines of business which encompass the Company's
niche markets and specialty programs, and such competition is expected to
increase as the Company expands its operations. See "Business--Competition."
 
SIGNIFICANT INDUSTRY CONCENTRATION
 
  Due to the Company's focus on insuring specialty industries, such as the
environmental remediation industry and the employee leasing and staffing
industry, its operations could be more exposed than its more diversified
competitors to the effects of claims that are more prevalent in specialty
industries, as well as economic conditions and regulatory changes affecting
such specialty industries. See "Business--Primary Insurance Operations."
 
DEPENDENCE ON CONTINUED AVAILABILITY OF REINSURANCE
 
  The availability, amount and cost of reinsurance are subject to prevailing
market conditions that are beyond the control of the Company and that affect
the Company's business, financial condition and results of operations. The
Company's business depends significantly upon the Company's ability to limit
its risk exposure by ceding (i.e., transferring to others) significant amounts
of the potential liability arising from risks insured or reinsured by the
Company. Although the Company anticipates that it will continue to be able to
obtain such reinsurance, there can be no assurance that appropriate
reinsurance will be available. If the Company were unable to maintain or
replace its reinsurance treaties upon their expiration, either its exposures
would increase or, if it were unwilling to bear such increase in exposures,
the Company would be required to reduce the level of its underwriting
commitments. Furthermore, the Company is subject to credit risk with respect
to its reinsurers, as the ceding of
 
                                       7
<PAGE>
 
risk to its reinsurers does not relieve the Company of its primary liability
to its insureds. Although the Company places its reinsurance with reinsurers
it believes to be financially stable, a significant reinsurer's inability to
make payment under the terms of a reinsurance treaty could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Reinsurance Ceded."
 
POSSIBLE INADEQUACY OF LOSS RESERVES
 
  The establishment of appropriate loss reserves is an inherently uncertain
process, particularly in the environmental remediation industry where claims
that have occurred may not be reported to an insurance company until future
periods of time, and there can be no assurance that ultimate losses will not
materially exceed the Company's loss reserves. Insurance companies are
required to maintain reserves to cover their estimated ultimate liability for
losses and loss adjustment expenses with respect to reported and unreported
claims incurred. Reserves are estimates at a given time involving actuarial
and statistical projections of what the Company expects to be the cost of the
ultimate settlement and administration of claims. These estimates are based on
facts and circumstances then known, predictions of future events, estimates of
future trends, claims frequency and severity, potential judicial expansion of
liability for environmental claims, legislative activity and other factors,
such as inflation. The Company engages an internationally recognized actuarial
consulting firm to provide reserve studies as well as rate studies. To the
extent that loss reserves prove to be inadequate in the future, the Company
would have to increase its reserves and incur charges to earnings in the
periods such reserves are increased, which would cause fluctuations in
operating results and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Reserves."
 
DEPENDENCE UPON MANAGEMENT
 
  The Company's financial success and business development depend
significantly upon the continued services of Lloyd A. Fox, the President of
the Company, and upon the efforts and abilities of certain other key
management personnel. The loss of the services of Mr. Fox could have a
material adverse effect upon the Company's operations. Mr. Fox has entered
into a new five year employment agreement with the Company which expires in
2002. In addition, the Company maintains and is the sole beneficiary of key-
man life insurance policies on the life of Mr. Fox in the aggregate amount of
$2 million.
 
  The Company's financial success and development of business also depend upon
the Company's ability to hire additional personnel as necessary to meet its
management, marketing and service needs. Although the Company believes that,
to date, it has been successful in attracting and obtaining highly qualified
professionals and other administrative personnel as required by its business,
there can be no assurance that the Company will continue to be successful in
this regard. See "Management."
 
RELIANCE ON INDEPENDENT INSURANCE AGENCIES AND BROKERS
 
  The Company principally markets its insurance programs through approximately
160 independent insurance agencies and insurance brokerage firms. Independent
insurance agencies and brokers produced approximately 91% of the Company's
gross written premium during the nine months ended September 30, 1997, and
three of these agencies accounted for approximately 31% of such premium, in
the aggregate. The remaining 9% of the Company's gross written premium was
produced by the Company. Agencies and brokers are not obligated to promote the
Company's insurance programs and may sell competitors' insurance programs. As
a result, the Company's business depends in part on the marketing efforts of
these agencies and brokers and on the Company's ability to offer insurance
programs and services that meet the requirements of the clients and customers
of these agencies and brokers. The failure or inability of independent
insurance agencies and brokers to market the Company's insurance programs
successfully could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Program
Development, Management and Administrative Operations."
 
 
                                       8
<PAGE>
 
DEPENDENCE UPON AFFILIATE
 
  The Company's financial success and business development depend, to a
degree, upon the continuation of its management relationship with American
Safety RRG, its non-subsidiary risk retention group affiliate, and the
continued ability of American Safety RRG to write liability insurance in all
50 states. The Company manages the business and reinsures risks insured by
American Safety RRG, and the Company derived approximately 42.9% of its
revenues in 1996 and approximately 28.3% of its revenues for the nine months
ended September 30, 1997 from this risk retention group. American Safety RRG
is authorized to write liability insurance in all 50 states as a result of the
Federal Liability Risk Retention Act of 1986 (the "Risk Retention Act"), its
license under the Captive Insurance Company Act of the State of Vermont (the
"Vermont Captive Act") and state filings. Any change in the Risk Retention Act
limiting American Safety RRG's ability to write liability insurance nationwide
or any adverse change in its license as a captive insurer under the applicable
insurance laws of Vermont, where American Safety RRG is domiciled, could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--American Safety Risk Retention Group,
Inc."
 
RISKS ASSOCIATED WITH GROWTH STRATEGY
 
  The Company's growth strategy includes potential strategic acquisitions, as
well as continued internal growth of its insurance program business. If the
Company were unable to implement its growth strategy effectively, the
Company's business, financial condition and results of operations could be
materially adversely affected. Although the Company is not engaged in
negotiations with respect to any acquisition, any future acquisition would be
accompanied by risks commonly encountered in acquisitions of companies. Such
risks include, among other things, the difficulty in assimilating the
operations and personnel of an acquired company; potential disruption of the
Company's ongoing business; inability to successfully integrate acquired
systems and insurance programs into the Company's operations; maintenance of
uniform standards, controls and procedures; and possible impairment of
relationships with employees and insureds of an acquired business as a result
of changes in management. There can be no assurance that the Company would be
successful in making an acquisition or overcoming the risks or any other
problems customarily encountered in connection with an acquisition. See "Use
of Proceeds" and "Business--Business Strategy."
 
IMPORTANCE OF INDUSTRY RATINGS
 
  Increased public and regulatory scrutiny of the financial stability of
insurance companies have resulted in greater emphasis by policyholders upon
insurance company ratings, with a resultant potential competitive advantage
for insurance companies with higher ratings. A.M. Best, an independent
nationally recognized insurance industry rating service and publisher, has
assigned a rating of "A (Excellent)" on a group basis to American Safety, as
well as its U.S. insurance subsidiary, American Safety Casualty, and its non-
subsidiary risk retention group affiliate, American Safety RRG. No assurance
can be given that the group will maintain this rating, and any downgrade of
such rating could adversely affect the Company's business, financial condition
and results of operations. A.M. Best's ratings involve an independent opinion
of an insurer's ability to meet its obligations to policyholders which opinion
is of concern primarily to policyholders, insurance agents and brokers and
should not be considered an investment recommendation. See "Business--Industry
Rating."
 
CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
 
  The directors, officers and founding shareholders of the Company, and their
respective affiliates, collectively will own 2,925,230 Common Shares
(exclusive of stock options), which will equal approximately 52% of the
outstanding Common Shares upon completion of the Offering. Further, the
officers and directors of the Company will own options for the purchase of and
restricted share rights to 501,132 additional Common Shares upon the
completion of the Offering, of which options for the purchase of 161,130
Common Shares will be vested as of the completion of the Offering. These
additional Common Shares subject to vested options, together with the
2,925,230 Common Shares owned by the directors, officers and founding
shareholders, and their respective affiliates, would represent beneficial
ownership of approximately 53.3% of the Common Shares upon completion
 
                                       9
<PAGE>
 
of the Offering. If these shareholders were to vote as a group, they would be
able to exercise control over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions, regardless of how the other shareholders vote. Such
concentration of ownership also may have the effect of delaying or preventing
a change in control of the Company. However, there are no agreements or
understandings in effect whereby these shareholders are bound to vote as a
group. See "Management" and "Principal Shareholders."
 
REGULATION
 
  Insurance Regulation. The Company's primary insurance and reinsurance
subsidiaries, as well as its non-subsidiary risk retention group affiliate,
are subject to regulation under applicable insurance statutes of the
jurisdictions in which they are domiciled or licensed and write insurance.
Such regulation may limit the ability or the speed of the Company to respond
to market opportunities and may require the Company to incur significant
annual regulatory compliance expenditures. Insurance regulation is intended to
provide safeguards for policyholders rather than to protect shareholders of
insurance companies or insurance holding companies. Such regulation relates to
authorized lines of business, capital and surplus requirements, types and
amounts of investments, underwriting limitations, trade practices, policy
forms, claims practices, mandated participation in shared markets, reserve
adequacy, insurer solvency, transactions with related parties, changes in
control, payment of dividends and a variety of other financial and
nonfinancial components of an insurance company's business. Any changes in
insurance laws and regulations could materially adversely affect the Company's
business, financial conditions and results of operations. The Company is
unable to predict what additional laws and regulations, if any, affecting its
business may be promulgated in the future or how they might be interpreted.
See "Regulatory Matters."
 
  Environmental Regulation. Environmental remediation activities and risks are
highly regulated by both federal and state governments. Environmental
regulation is evolving and changes in the regulatory patterns at federal and
state levels may have a significant effect upon potential claims against the
Company. Such changes may also affect the demand for the types of insurance
offered by and through the Company and the availability or cost of
reinsurance. The Company is unable to predict what additional laws and
regulations, if any, affecting environmental remediation activities and risks
may be promulgated in the future or how they might be interpreted. See
"Business--Reserves."
 
NO CURRENT INTENTION TO PAY DIVIDENDS
 
  American Safety does not intend to pay cash dividends on its Common Shares
in the foreseeable future. As an insurance holding company, American Safety's
ability to pay dividends to its shareholders will depend, to a significant
degree, on the ability of the Company's subsidiaries to pay dividends to
American Safety. The jurisdictions in which American Safety and its insurance
and reinsurance subsidiaries are domiciled place limitations on the amount of
dividends or other distributions payable by insurance companies in order to
protect the solvency of insurers. American Safety's current policy is for its
insurance and reinsurance subsidiaries to retain their capital for growth. See
"Dividend Policy" and "Regulatory Matters."
 
POTENTIAL RISK OF UNITED STATES TAXATION OF BERMUDA OPERATIONS
 
  Bermuda's tax laws are more favorable to American Safety, a Bermuda company,
and its Bermuda reinsurance subsidiary, American Safety Re, than the United
States' tax laws because these Bermuda companies are not obligated to pay any
taxes in Bermuda based upon income or capital gains. If the Company's Bermuda-
based operations were determined to be subject to United States taxation, the
Company's results of operations could be materially adversely affected. The
United States Internal Revenue Code of 1986, as amended (the "Code"), does not
contain a definitive identification of activities that constitute being
engaged in a United States trade or business, and there can be no assurance
that the Internal Revenue Service (the "Service") will not contend that the
Company's Bermuda-based operations are engaged in a United States trade or
business and therefore are subject to United States income taxation. The
Company, exclusive of its U.S. subsidiaries, does not
 
                                      10
<PAGE>
 
consider itself to be engaged in a trade or business in the United States and
accordingly does not expect to be subject to United States income taxation.
The Company's U.S. subsidiaries are subject to United States taxation. See
"Certain Tax Considerations."
 
ABSENCE OF PRIOR MARKET
 
  Prior to the Offering, there has been no public market for the Company's
securities, and there can be no assurance that the market price of the Common
Shares will not decline below the initial public offering price after the
Offering. The initial public offering price has been determined by
negotiations between the Company and representatives of the Underwriters and
may not be indicative of the market price for the Common Shares after the
Offering. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price for the Common Shares. The
stock market has from time to time experienced significant price and volume
fluctuations, which have affected the market prices of stocks in a particular
business sector (e.g., insurance companies) and which may be unrelated to the
operating performance of a specific company in such business sector. Factors
such as actual or anticipated operating results, growth rates, changes in
estimates by analysts, market conditions in the industry, announcements by
competitors, regulatory actions and general economic conditions may vary from
time to time. As a result of the foregoing, the Company's operating results
and prospects from time to time may be below the expectations of public market
analysts and investors. Any such event could have a material adverse effect on
the market price of the Common Shares.
 
ANTI-TAKEOVER CONSIDERATIONS
 
  The Company's Bye-Laws contain certain provisions that may make more
difficult the acquisition of control of the Company by means of a tender
offer, open market purchase, proxy fight or otherwise. Pursuant to the
Company's Bye-Laws, the Company's Board of Directors may by resolution
establish one or more series of preferred shares having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations as may be fixed by the Board of Directors
without any further shareholder approval. In addition, the Company's Bye-Laws
restrict certain "business combinations" between the Company and an
"interested shareholder." While these provisions are designed to encourage
persons seeking to acquire control of the Company to negotiate with the Board
of Directors, they could have the effect of impeding or discouraging a
prospective acquiror from making a tender offer or otherwise attempting to
obtain control of the Company. To the extent these provisions discourage
takeover attempts, they could deprive shareholders of opportunities to realize
takeover premiums for their shares or could depress the market price of the
shares. Other provisions of the Company's Bye-Laws will also have the effect
of rendering more difficult or discouraging unsolicited takeover bids from
third parties or the removal of incumbent management. Such provisions include
providing for a classified or "staggered" Board of Directors and limiting any
person owning more than 9.5% of the outstanding Common Shares to voting power
of 9.5%, other than Treadway Corporation, a founding shareholder of the
Company. See "Management," "Principal Shareholders," and "Description of
Capital Stock."
 
  The insurance laws of Delaware place restrictions on a change of control of
American Safety as a result of its ownership of American Safety Casualty, its
U.S. insurance subsidiary, which is domiciled in Delaware. Under Delaware law
no person may obtain 10% or more of the voting securities of American Safety
without the prior approval of the Delaware Insurance Department. See
"Regulatory Matters."
 
LIMITATIONS ON SHARE OWNERSHIP, TRANSFERS AND VOTING RIGHTS
 
  The Company's Bye-Laws provide that no United States shareholder may own
more than 9.5% of the Company's outstanding capital stock other than Treadway
Corporation, a founding shareholder of the Company. Under the Bye-Laws, the
Company's directors (or their designee) are required to decline to register
any transfer of shares of capital stock of the Company that would result in a
United States shareholder directly, indirectly or constructively owning,
within the meaning of Section 958 of the Code, shares constituting more than
9.5% of the outstanding capital stock of the Company. Similar restrictions
apply to the Company's ability to issue new
 
                                      11
<PAGE>
 
shares of capital stock. The directors (or their designee) also may, in their
absolute discretion, decline to register the transfer of any shares of capital
stock of the Company if they have reason to believe (i) that such transfer
would expose the Company, any subsidiary thereof or any shareholder to adverse
tax, legal or regulatory treatment or would be in breach of any applicable law
or regulatory requirements in any jurisdiction, or (ii) that registration of
such transfer under the Securities Act of 1933, as amended (the "Securities
Act"), or under any state securities laws or under the laws of any other
jurisdiction is required and such registration has not been duly effected. The
Company is authorized to request information from any holder or prospective
acquiror of shares as necessary to give effect to the transfer and issuance
limitations referred to above, and may decline to effect any transaction if
complete and accurate information is not received as requested.
 
  The Bye-Laws also provide that if the Board of Directors in its absolute
discretion determines that share ownership by any shareholder may result in
adverse tax, regulatory or legal consequences to the Company, any of its
subsidiaries or any other shareholder, the Company will have the option, but
not the obligation, to repurchase all or part of the shares held by such
shareholder to the extent the Board determines necessary to avoid such adverse
consequences.
 
  In addition, the Bye-Laws generally provide that if a United States
shareholder is treated as directly, indirectly or constructively owning,
within the meaning of Section 958 of the Code, shares having more than 9.5% of
the total votes of all the shares of capital stock of the Company, the voting
rights attached to the shares such person owns or is treated as owning will be
reduced to 9.5%, other than the voting rights of Treadway Corporation, a
founding shareholder of the Company. Because of the attribution provisions of
the Code, this requirement may have the effect of reducing the voting rights
of a shareholder whether or not such shareholder directly holds shares of
capital stock of the Company having more than 9.5% of the votes. Further, the
directors (or their designee) have the authority to request from any
shareholder certain information for purposes of determining whether such
shareholder's voting rights are to be reduced. Failure to respond to such
notice, or the submission of incomplete or untrue information, gives the
directors (or their designee) discretion to disregard all votes attached to
such shareholder's shares. See "Description of Capital Stock."
 
DILUTION
 
  The initial public offering price per Common Share is substantially higher
than the book value per Common Share. As a result, purchasers of the Common
Shares in the Offering will experience an immediate dilution of $3.06 per
share in the pro forma net tangible book value of their Common Shares from the
assumed initial public offering price of $12.00 per share (the mid-point of
the estimated price range set forth on the cover page of this Prospectus).
Additional dilution is likely to occur upon the exercise of outstanding stock
options which entitle certain optionholders to purchase Common Shares at
prices below the initial public offering price. See "Dilution."
 
SHARES ELIGIBLE FOR FUTURE SALE
 
  Future sales, or the availability for future sales, of substantial amounts
of the Common Shares could adversely affect the market price of the Common
Shares. Several of the Company's founders hold a significant portion of the
outstanding Common Shares, and a decision by one or more of these shareholders
to sell their shares could adversely affect the market price of the Common
Shares. All Common Shares offered hereby (including any shares issued upon
exercise of the Underwriters' over-allotment option) will have been registered
under the Securities Act and will be freely tradable without restriction or
further registration under the Securities Act, except for shares held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. Shares beneficially owned by affiliates of the Company may not
be sold except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption from registration, such as Rule
144. Similarly, all the Common Shares outstanding prior to the Offering are
"restricted securities" as that term is defined in Rule 144 and may not be
sold except in compliance with the registration requirements of the Securities
Act or pursuant to an exemption from registration, such as Rule 144. All of
these restricted securities are subject to lock-up agreements for a period of
180 days after the date of this Prospectus, and are then eligible for sale
subject to the provisions of Rule 144. See "Underwriting."
 
 
                                      12
<PAGE>
 
ENFORCEMENT OF CERTAIN CIVIL LIABILITIES
 
  American Safety is a specialty insurance holding company organized pursuant
to the laws of Bermuda. A substantial portion of the assets of American Safety
are or may be located in jurisdictions outside the United States. As a result,
it may be difficult for investors to effect service of process within the
United States upon American Safety or to realize against it upon judgments of
courts of the United States predicated upon civil liabilities under the
federal securities laws of the United States.
 
  American Safety has been informed by its Bermuda counsel, Conyers Dill &
Pearman, that the United States and Bermuda do not currently have a treaty
providing for reciprocal recognition and enforcement of judgments of United
States courts in civil and commercial matters and that a final judgment for
the payment of money rendered by any federal or state court in the United
States based on civil liability, whether or not predicated solely upon the
federal securities laws of the United States, would, therefore, not be
automatically enforceable in Bermuda. The Company has also been advised by
Conyers Dill & Pearman that a final and conclusive judgment obtained in
federal or state courts in the United States under which such a sum of money
is payable as compensatory damages (i.e., not being a sum claimed by a revenue
authority for taxes or other charges of a similar nature by a governmental
authority, or in respect of a fine or penalty or multiple or punitive damages)
may be the subject of an action on a debt in the Supreme Court of Bermuda
under the common law doctrine of obligation. Such an action should be
successful upon proof that the sum of money is due and payable, and without
having to prove the facts supporting the underlying judgment, as long as (i)
the court that gave the judgment was competent to hear the action in
accordance with international law principles as applied by the courts in
Bermuda and (ii) the judgment is not contrary to public policy in Bermuda, was
not obtained by fraud or in proceedings contrary to natural justice of Bermuda
and is not based on an error in Bermuda law. A Bermuda court may impose civil
liability on the Company or its directors or officers in a suit brought in the
Supreme Court of Bermuda against the Company or such persons with respect to a
violation of the federal securities laws of the United States, provided that
the facts surrounding such violation would constitute or give rise to a cause
of action under Bermuda law.
 
                                      13
<PAGE>
 
                          FORWARD-LOOKING STATEMENTS
 
  This Prospectus contains certain forward-looking statements including or
relating to, among other things, (i) the Company's business and growth
strategies; (ii) the Company having sufficient capital and surplus for its
operations; (iii) the Company's continued ability to provide intensive
underwriting and value-added services to clients and insureds; (iv) the
Company's continued ability to provide superior service to insurance agents,
brokers and insureds; (v) the continued adequacy of the Company's loss and
loss adjustment expense reserves; and (vi) the Company's avoidance of any
material loss on risks insured or on the collection of reinsurance
recoverables.
 
  These and other statements which are not historical facts are based largely
on current expectations and assumptions of management and are subject to a
number of risks and uncertainties which could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, the risks and uncertainties
described in "Risk Factors" above. Assumptions related to forward-looking
statements include that the Company will continue to price and market its
insurance programs competitively, reserve appropriately for losses and loss
adjustment expenses and maintain its successful handling of claims; that
competitive conditions within the casualty insurance business will not change
materially or adversely; that the demand for the Company's or its affiliate's
insurance programs will remain strong; that the market will accept specialty
insurance programs as developed by the Company; that the Company will maintain
its relationships with agents and brokers; that the Company will retain key
management personnel; that the Company's reinsurers will remain solvent; and
that there will be no material adverse change in the Company's or its risk
retention group affiliate's operations or business.
 
  Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated in the forward-looking information will be realized. Management
decisions are subjective in many respects and susceptible to interpretations
and periodic revisions based on actual experience and business developments,
the impact of which may cause the Company to alter its business strategy and
capital expenditure plans which may in turn affect the Company's results of
operations. In light of the significant uncertainties inherent in the forward-
looking information including herein, the inclusion of such information should
not be regarded as a representation by the Company or any other person that
the strategy, objectives or other plans of the Company will be achieved. The
forward-looking statements contained herein speak only as of the date hereof,
and the Company undertakes no obligation to publicly update or revise any of
these forward-looking statements.
 
                                      14
<PAGE>
 
                                  THE COMPANY
 
  American Safety is a specialty insurance holding company which, through its
subsidiaries, develops, underwrites, manages and markets primary casualty
insurance and reinsurance programs in the alternative insurance market for (i)
environmental remediation risks; (ii) employee leasing and staffing industry
risks; and (iii) other specialty risks. The Company has demonstrated expertise
in developing specialty insurance coverages and custom designed risk
management programs not generally available in the standard insurance market.
 
  American Safety insures and places risks through its U.S. insurance
subsidiary, as well as its non-subsidiary risk retention group affiliate, and
substantial unaffiliated insurance and reinsurance companies. The Company also
reinsures and places, through its Bermuda reinsurance subsidiary and
substantial unaffiliated reinsurers, a portion of the risks underwritten
directly by its U.S. insurance subsidiary, its risk retention group affiliate
and other insurers.
 
  American Safety was formed in Bermuda as a group captive insurance company
in 1986 to provide stable, long term insurance protection for the asbestos
abatement and environmental remediation industry in the United States which
had suffered from disruptive market cycles in the standard insurance market.
American Safety is able to maintain favorable tax status under Bermuda law,
although its U.S. subsidiaries are subject to taxation in the United States.
 
  Following the enactment of the Risk Retention Act, American Safety, in order
to establish a U.S. insurance company to market specialty environmental
coverages, provided financial and technical assistance in connection with the
organization of American Safety RRG in 1988. American Safety RRG is not owned
by the Company, but is managed by Synergy Insurance Services, Inc.
("Synergy"), the Company's principal U.S. program development, underwriting
and administrative services subsidiary, on a fee-for-service basis. American
Safety RRG is a liability insurer authorized to write insurance in all 50
states. In 1988, American Safety RRG replaced American Safety as the policy
issuing carrier insuring general, pollution and professional liability risks
for contractors, consultants and other businesses and property owners who are
involved with environmental remediation. American Safety then became a quota
share reinsurer of the risks transferred and subsequently underwritten by
American Safety RRG. In addition, five of American Safety RRG's directors are
also directors of the Company. See "Business--American Safety Risk Retention
Group, Inc."
 
  Synergy employs all of the Company's employees and manages the Company's
U.S. business operations, while the Company's Bermuda operations are managed
under contract by Mutual Risk Management (Bermuda), Ltd., an unaffiliated
party.
 
  In 1993, the Company acquired its U.S. property and casualty insurer,
American Safety Casualty, in order to provide coverages through a U.S.
admitted insurance company and to expand the Company's insurance program
business. American Safety Casualty is licensed as a property and casualty
insurer in 43 states.
 
  In January 1998, American Safety formed a new reinsurance subsidiary,
American Safety Reinsurance, Ltd. ("American Safety Re"), a Bermuda licensed
insurance company, and transferred its reinsurance business on a going forward
basis to the subsidiary. American Safety now serves principally as a holding
company for all of its subsidiaries' operations.
 
 
   CHART DEPICTING ORGANIZATION OF AMERICAN SAFETY AND ITS SUBSIDIARIES AND
                                  AFFILIATE]
 
                                      15
<PAGE>
 
                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of 2,700,000 Common Shares in
the Offering (after deduction of the underwriting discount and estimated
Offering expenses) are estimated to be approximately $29.8 million, assuming
an initial public offering price of $12.00 per share (the mid-point of the
estimated price range set forth on the cover page of this Prospectus).
 
  The net proceeds from the Offering will be used (i) to increase the
Company's capital and surplus, which should result in a higher financial size
rating from A.M. Best, (ii) to fund the potential acquisition or formation of
an excess and surplus lines insurance company and other strategic
acquisitions, and (iii) for general corporate purposes. Management believes
that the Company's increased capital base and financial size rating from A.M.
Best, when combined with the Company's expertise in specialty insurance
programs, should position the Company to target a broader client base. The
Company is not currently a party to any agreements, arrangements or
understandings with respect to any acquisitions.
 
  Pending such uses, the net proceeds from the Offering will be invested in
investment grade, interest bearing securities.
 
                                DIVIDEND POLICY
 
  American Safety does not anticipate paying cash dividends on its Common
Shares in the foreseeable future. As an insurance holding company, American
Safety's ability to pay cash dividends to its shareholders will depend, to a
significant degree, on the ability of the Company's subsidiaries to pay cash
dividends to American Safety. The jurisdictions in which American Safety and
its insurance and reinsurance subsidiaries are domiciled place limitations on
the amount of dividends or other distributions payable by insurance companies
in order to protect the solvency of insurers. The Company's current policy is
for its primary insurance and reinsurance subsidiaries to retain their capital
for growth. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources," "Regulatory
Matters" and Note 7 to the Company's Consolidated Financial Statements.
 
 
                                      16
<PAGE>
 
                                CAPITALIZATION
 
  The following table sets forth the capitalization of the Company at
September 30, 1997 and as adjusted to give effect to the sale of 2,700,000
Common Shares by the Company in the Offering at an assumed initial public
offering price of $12.00 per share (after deduction of the underwriting
discount and estimated Offering expenses). The information presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                       AT SEPTEMBER 30, 1997
                                                      -------------------------
                                                       ACTUAL      AS ADJUSTED
                                                      ----------- -------------
                                                      (Dollars in thousands)
<S>                                                   <C>         <C>
Short-term debt(1)................................... $     1,250   $     1,250
                                                      ===========   ===========
Long-term debt....................................... $         0   $         0
Shareholders' equity:
  Preferred stock, par value $.01 per share;
   5,000,000 shares authorized; no shares
   outstanding(2)....................................           0             0
  Common stock, par value $.01 per share; 15,000,000
   shares authorized; 2,925,230 shares
   outstanding(3)....................................          29            56
  Additional paid-in capital.........................       2,752        32,557
  Retained earnings..................................      17,763        17,763
  Unrealized gain relating to investments............         180           180
                                                      -----------   -----------
    Total shareholders' equity.......................      20,724        50,556
                                                      -----------   -----------
    Total capitalization............................. $    20,724   $    50,556
                                                      ===========   ===========
</TABLE>
- --------
(1) The Company repaid a $1.25 million surplus note on December 11, 1997.
(2) See "Description of Capital Stock."
(3) Excludes 169,463 Common Shares that are subject to options which are
    currently exercisable and 340,402 Common Shares that will be subject to
    outstanding stock options upon the completion of the Offering.
 
                                      17
<PAGE>
 
                                   DILUTION
 
  At September 30, 1997, the net tangible book value (defined as total
shareholders' equity less goodwill) of the Company was $20.4 million, or $6.99
per share. Net tangible book value per share represents the amount of total
tangible assets less total liabilities divided by the total number of Common
Shares outstanding. After giving effect to the sale by the Company of
2,700,000 Common Shares in the Offering at an assumed initial public offering
price of $12.00 per share, the pro forma net tangible book value of the
Company at September 30, 1997 would have been approximately $50.3 million or
$8.94 per share (after deducting the underwriting discount and estimated
Offering expenses). This represents an immediate increase in net tangible book
value of $1.95 per share to the existing shareholders and an immediate
dilution in net tangible book value of $3.06 per share to new investors
purchasing Common Shares in the Offering. The following table illustrates this
dilution on a per share basis:
 
<TABLE>
   <S>                                                             <C>   <C>
   Initial public offering price..................................       $12.00
     Net tangible book value before the Offering.................. $6.99
     Increase attributable to new investors.......................  1.95
                                                                   -----
   Pro forma net tangible book value after the Offering...........         8.94
                                                                         ------
   Dilution in net tangible book value to new investors(1)........       $ 3.06
                                                                         ======
</TABLE>
- --------
(1) Dilution is the difference between the initial public offering price per
    share and the pro forma net tangible book value per share after giving
    effect to the Offering and the 1,310-for-1 split of the Common Shares
    effective January  , 1998.
 
  The following table sets forth on a pro forma basis as of September 30, 1997
the number and percentage of total outstanding Common Shares purchased, the
total consideration and percentage of total consideration paid, and the
average price paid per share by existing shareholders and by purchasers of the
Common Shares in the Offering (before deducting the underwriting discount and
estimated Offering expenses):
 
<TABLE>
<CAPTION>
                                 SHARES PURCHASED  TOTAL CONSIDERATION  AVERAGE
                                 ----------------- -------------------   PRICE
                                  NUMBER   PERCENT   AMOUNT    PERCENT PER SHARE
                                 --------- ------- ----------- ------- ---------
   <S>                           <C>       <C>     <C>         <C>     <C>
   Existing shareholders........ 2,925,230   52.0% $ 2,781,041    7.9%  $ 0.95
   New investors................ 2,700,000   48.0   32,400,000   92.1   $12.00
                                 ---------  -----  -----------  -----
     Total...................... 5,625,230  100.0% $35,181,041  100.0%
</TABLE>
 
  Each of the foregoing tables assumes that outstanding stock options will not
be exercised. As of the date of this Prospectus, 509,465 Common Shares are
reserved for issuance pursuant to outstanding stock options and restricted
shares, of which 169,463 shares are subject to options currently exercisable.
To the extent that such stock options are exercised, there may be further
dilution to new investors.
 
                                      18
<PAGE>
 
                     SELECTED CONSOLIDATED FINANCIAL DATA
 
  The following table sets forth selected consolidated financial data with
respect to the Company for the periods indicated. The balance sheet data as of
December 31, 1995, December 31, 1996 and September 30, 1997, and the income
statement data for each of the three fiscal years in the period ended December
31, 1996 and for the nine month periods ended September 30, 1996 and 1997,
have been derived from the audited financial statements of the Company
included elsewhere in this Prospectus. The balance sheet data as of March 31,
1993, December 31, 1993, December 31, 1994, and September 30, 1996 and the
income statement data for the twelve months ended March 31, 1993 and the nine
months ended December 31, 1993, have been derived from audited financial
statements of the Company which are not included in this Prospectus. Operating
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for a full year. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                     NINE
                          TWELVE MONTHS NINE MONTHS                              MONTHS ENDED
                              ENDED        ENDED     YEAR ENDED DECEMBER 31,     SEPTEMBER 30,
                            MARCH 31,   DECEMBER 31, -------------------------  ----------------
                             1993(1)      1993 (1)    1994     1995     1996     1996     1997
                          ------------- ------------ -------  -------  -------  -------  -------
                                   (In thousands, except per share and ratio data)
<S>                       <C>           <C>          <C>      <C>      <C>      <C>      <C>
INCOME STATEMENT DATA:
Revenues:
 Direct and assumed
  premiums earned.......     $ 2,739      $ 2,053    $ 3,509  $ 6,109  $ 5,316  $ 3,820  $ 8,023
 Ceded premiums
  earned................        (147)        (165)       (89)    (362)  (1,044)    (958)  (1,517)
                             -------      -------    -------  -------  -------  -------  -------
   Net premiums earned..       2,592        1,888      3,420    5,747    4,272    2,862    6,506
 Net investment
  income................         739          559        663    1,353    2,092    1,449    1,813
 Brokerage commission
  income................         --         1,058      1,706    2,145    1,881    1,457    1,565
 Management fees from
  affiliate.............         --           381        464      475      479      356      444
 Net realized gains
  (losses)..............          17           63       (118)     200      177      155       14
 Other income...........         --            71        --       --         5        4       10
                             -------      -------    -------  -------  -------  -------  -------
   Total revenues.......       3,348        4,020      6,135    9,920    8,906    6,283   10,352
                             -------      -------    -------  -------  -------  -------  -------
Expenses:
 Losses and loss
  adjustment expenses
  incurred..............        (540)         828      1,424    2,905    2,056    1,383    3,533
 Acquisition expenses...       1,271        1,096        517    1,086      646      495    1,769
 Other expenses.........         266        1,543      2,247    2,029    3,110    2,172    2,445
                             -------      -------    -------  -------  -------  -------  -------
   Total expenses.......         997        3,467      4,188    6,020    5,812    4,050    7,747
                             -------      -------    -------  -------  -------  -------  -------
   Earnings before
    income taxes........       2,351          553      1,947    3,900    3,094    2,233    2,605
Income taxes............         --           126        329      720      177      178      383
                             -------      -------    -------  -------  -------  -------  -------
   Net earnings.........     $ 2,351      $   427    $ 1,618  $ 3,180  $ 2,917  $ 2,055  $ 2,222
                             =======      =======    =======  =======  =======  =======  =======
 Net earnings per
  share.................     $  0.79      $  0.14    $  0.54  $  1.07  $  0.98  $  0.69  $  0.75
Common shares and common
 share equivalents used
 in computing net
 earnings per share.....       2,983        2,983      2,983    2,974    2,974    2,974    2,974
GAAP RATIOS(2):
Loss and loss adjustment
 expense ratio..........       (20.8)%       43.9%      41.6%    50.5%    48.1%    48.3%    54.3%
Expense ratio...........        59.3         71.8       30.7     23.4     29.4     28.6     36.4
                             -------      -------    -------  -------  -------  -------  -------
Combined ratio..........        38.5 %      115.7%      72.3%    73.9%    77.5%    76.9%    90.7%(3)
                             =======      =======    =======  =======  =======  =======  =======
Net premiums written to
 equity.................         0.2x         0.2x       0.3x     0.4x     0.3x     0.2x     0.3x
STATUTORY RATIOS(2):
Loss and loss adjustment
 expense ratio..........       (20.8)%       43.9%      41.6%    50.5%    48.1%    48.3%    54.3%(3)
Expense ratio...........        59.3         71.8       27.9     21.9     27.4     25.1     33.7
                             -------      -------    -------  -------  -------  -------  -------
Combined ratio..........        38.5 %      115.7%      69.5%    72.4%    75.5%    73.4%    88.0%
                             =======      =======    =======  =======  =======  =======  =======
BALANCE SHEET DATA (AT
 END OF PERIOD):
Total investments.......     $13,220      $14,899    $17,393  $22,026  $24,023  $23,957  $32,436
Total assets............      14,931       16,761     20,344   27,143   31,299   28,889   42,173
Unpaid losses and loss
 adjustment expenses....       4,199        4,798      6,048    8,294    8,914    8,417   10,735
Total liabilities.......       4,418        6,007      8,406   10,529   13,267   11,847   21,449
Total shareholders'
 equity.................      10,513       10,754     11,938   16,614   18,032   17,043   20,724
</TABLE>
- -------
(1) American Safety changed its fiscal year end from March 31 to December 31.
(2) See "Glossary of Selected Insurance Terms."
(3) See "Management's Discussion and Analysis of Financial Condition and
    Results of Operations--Overview."
 
                                      19


<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
 
  The information in this discussion is presented on the basis of generally
accepted accounting principles ("GAAP") and should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus. All amounts and percentages are approximations.
 
OVERVIEW
 
  American Safety is a specialty insurance holding company which, through its
subsidiaries, develops, underwrites, manages and markets primary casualty
insurance and reinsurance programs in the alternative insurance market for (i)
environmental remediation risks; (ii) employee leasing and staffing industry
risks; and (iii) other specialty risks.
 
  The Company's revenues are comprised of risk premium revenues, program
management fees, insurance and reinsurance brokerage commissions, investment
income, net realized gains from the sale of investment securities, and other
income. The Company's primary revenue source has been reinsurance assumed from
its U.S. insurance subsidiary, its risk retention group affiliate and other
insurers, for which the Company has developed specialty insurance programs.
The Company and its risk retention group affiliate write only casualty
coverages and therefore do not participate in reinsuring first party property
coverages.
 
  The Company's development and structuring of programs are focused primarily
on the generation of revenues and earnings, whether attributable to
underwriting profits, fees, commissions, or a combination of these items. For
example, a profitable program may be structured to result in break-even
underwriting results in the Company's insurance subsidiaries, while at the
same time creating revenues and earnings in the Company's program management
or insurance brokerage subsidiaries.
 
  The combined ratio of an insurance company measures only the underwriting
results of insurance operations and not the profitability of the overall
Company. The Company's reported combined ratio for its insurance operations
may not provide an accurate indication of the Company's overall profitability
from insurance and reinsurance programs due to the fee and commission income
generated in related non-insurance subsidiaries.
 
  During the nine months ended September 30, 1997, the Company continued to
increase its workers' compensation business as a proportion of its total
casualty business. Although the Company's workers' compensation business has a
higher loss ratio than the Company's other lines of business, workers'
compensation continues to generate an acceptable level of profit overall.
During the same period, the Company instituted a bail bond program which was
structured to produce a higher expense ratio than the Company's other lines of
business. Although both the workers' compensation and bail bond programs
contributed to a higher combined ratio for the Company's insurance
subsidiaries, the structure of these programs did not affect the Company's
overall profitability. Depending on the Company's mix of business going
forward, the combined ratio may fluctuate from time to time and may not
reflect the overall profitability of insurance programs to the Company.
 
  In December 1997, American Safety formed a new reinsurance subsidiary,
American Safety Re, a Bermuda licensed insurance company, and transferred its
reinsurance business on a going forward basis to the subsidiary. American
Safety now serves principally as a holding company for all of the
subsidiaries' operations.
 
  The Company, both internally and by consulting outside vendors, has reviewed
its internal business systems and believes that the systems, primarily its
computer system, will process date information accurately and without
interruption when required to process dates in the year 1999 and beyond. The
Company has not been required to expend significant resources to address the
year 2000 issue and does not anticipate any significant expenditures.
 
                                      20
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table sets forth the Company's consolidated revenues:
 
<TABLE>
<CAPTION>
                                                                    PERCENT INCREASE
                                                                       (DECREASE)
                                                                 ------------------------
                                                   NINE MONTHS                     NINE
                                                      ENDED                       MONTHS
                         YEAR ENDED DECEMBER 31,  SEPTEMBER 30,    YEAR ENDED      ENDED
                         ------------------------ -------------- ---------------  -------
                                                                 1994 TO 1995 TO  1996 TO
                          1994     1995    1996    1996   1997    1995    1996     1997
                         -------  ------- ------- ------ ------- ------- -------  -------
                                 (Dollars in thousands)
<S>                      <C>      <C>     <C>     <C>    <C>     <C>     <C>      <C>
Net premiums earned:
 Reinsurance
  Workers'
   compensation......... $ 1,230  $ 3,223 $ 2,620 $1,552 $ 3,794  162.0%  (18.7)%   144.5 %
  General liability.....   2,190    2,506   1,522  1,238   1,447   14.4   (39.3)     16.9
                         -------  ------- ------- ------ -------
   Total reinsurance....   3,420    5,729   4,142  2,790   5,241   67.5   (27.7)     87.8
 Primary insurance
  Surety................       0       18     130     72   1,265     NA   622.2   1,681.7
                         -------  ------- ------- ------ -------
   Total primary
    insurance...........       0       18     130     72   1,265     NA   622.2   1,681.7
                         -------  ------- ------- ------ -------
    Total net premiums
     earned.............   3,420    5,747   4,272  2,862   6,506   68.0   (25.7)    127.4
                         -------  ------- ------- ------ -------
Net investment income...     663    1,353   2,092  1,449   1,813  104.1    54.6      25.1
Commission and fee
 income
 Brokerage commission
  income................   1,706    2,145   1,881  1,457   1,565   25.7   (12.3)      7.3
 Management fees from
  affiliate.............     464      475     479    356     444    2.4     0.8      24.7
                         -------  ------- ------- ------ -------
  Total commission and
   fee income...........   2,170    2,620   2,360  1,813   2,009   20.7    (9.9)     10.7
                         -------  ------- ------- ------ -------
Net realized gains
 (losses)...............    (118)     200     177    155      14  269.5   (11.5)    (91.0)
Other income............     --       --        5      4      10    --      --      175.0
                         -------  ------- ------- ------ -------
     Total revenues..... $ 6,135  $ 9,920 $ 8,906 $6,283 $10,352   61.7%  (10.2)%    64.8 %
                         =======  ======= ======= ====== =======
</TABLE>
 
  The following table sets forth the components of the Company's statutory
combined ratio for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                   NINE
                                              YEAR ENDED       MONTHS ENDED
                                             DECEMBER 31,     SEPTEMBER 30,
                                            ----------------  ----------------
                                            1994  1995  1996  1996    1997(1)
                                            ----  ----  ----  ------  --------
   <S>                                      <C>   <C>   <C>   <C>     <C>
   Insurance Operations
     Loss and loss adjustment expense
      ratio................................ 41.6% 50.5% 48.1%   48.3%    54.3%
     Expense ratio......................... 27.9  21.9  27.4    25.1     33.7
                                            ----  ----  ----  ------   ------
       Combined ratio...................... 69.5% 72.4% 75.5%   73.4%    88.0%
                                            ====  ====  ====  ======   ======
</TABLE>
- --------
(1) See "--Overview."
 
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
 
  Net Premiums Earned. Net premiums earned increased 127.4% from $2.9 million
for the nine months ended September 30, 1996 to $6.5 million for the same
period in 1997. The principal factor accounting for the increase was the
Company's assumption in 1997 of workers' compensation reinsurance business
from an unaffiliated insurance carrier, which increased net premiums earned
from workers' compensation reinsurance by 144.5% from $1.6 million in the 1996
period to $3.8 million in the 1997 period. The magnitude of this increase was
affected by workers' compensation premium refunds of $634,000 in the 1996
period on business that had been recorded in the prior year.
 
                                      21
<PAGE>
 
  In workers' compensation insurance, annual premium payments are generally
determined on the basis of the insured company's payroll. At the start of a
policy year, the level of payroll is unknown and must be estimated. The
insured then pays workers' compensation premiums based on this estimate of
future payroll. At policy expiration, an audit is performed to determine the
insured's actual payroll for the policy period. Then, the actual payroll is
compared to the original estimate, and either an additional workers'
compensation premium is billed or a return premium is refunded.
 
  The workers' compensation premium refunds of $634,000, which reduced the
Company's 1996 revenues, were a result of changes in the Company's estimate of
the ultimate premium, based upon audits of the insured's 1994 and 1995 payroll
estimates.
 
  General liability reinsurance premiums increased 16.9% from $1.2 million for
the nine months ended September 30, 1996 to $1.4 million for the same period
in 1997 as a result of new accounts written by both the Company's risk
retention group affiliate and its U.S. insurance subsidiary. In the Company's
primary insurance business, net premiums earned from the Company's surety
program increased from $72,000 for the nine months ended September 30, 1996 to
$1.3 million for the same period in 1997, primarily due to the initiation of a
bail bond program in 1997 which produced $1.0 million in net premiums earned
for the nine months ended September 30, 1997. The Company has discontinued its
participation in the bail bond program due to inadequate premium production.
 
  Net Investment Income. Net investment income increased 25.1% from $1.4
million for the nine months ended September 30, 1996 to $1.8 million for the
same period in 1997 as a result of the investment of additional cash flows
from insurance operations. The average annual pre-tax yield on investments was
8.4% in the 1996 period and 8.5% in the 1997 period. The average annual after-
tax yield on investments was 7.9% in both the 1996 and 1997 periods.
 
  Brokerage Commission Income. Income from insurance brokerage operations
increased 7.3% from $1.5 million for the nine months ended September 30, 1996
to $1.6 million for the same period in 1997 as a result of increased
commissions derived from insurance business produced through the Company's
risk retention group affiliate and unaffiliated insurance companies.
 
  Management Fees. Management fees increased 24.7% from $356,000 for the nine
months ended September 30, 1996 to $444,000 for the same period in 1997 as a
result of increased service levels provided by the Company to its risk
retention group affiliate.
 
  Net Realized Gains. Net realized gains from the sale of investments
decreased from $155,000 for the nine months ended September 30, 1996 to
$14,000 for the same period in 1997.
 
  Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 155.4% from $1.4 million for the nine months ended September 30,
1996 to $3.5 million for the same period in 1997 due to the 127.4% increase in
net premiums earned and a corresponding increase in reserves primarily due to
the increase in the workers' compensation line of business.
 
  Acquisition Expenses. Policy acquisition expenses increased from $495,000
for the nine months ended September 30, 1996 to $1.8 million for the same
period in 1997. This increase resulted from the initiation of the bail bond
program which was structured to have an expense ratio of approximately 96%.
 
  Other Expenses. Other expenses increased 12.6% from $2.2 million for the
nine months ended September 30, 1996 to $2.4 million for the same period in
1997 due to salary increases and increased staffing required to handle new and
existing programs.
 
  Income Taxes. Federal and state income taxes increased from $178,000 for the
nine months ended September 30, 1996 to $383,000 for the same period in 1997
due to increased taxable income in the Company's U.S. insurance subsidiary.
 
                                      22
<PAGE>
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
  Net Premiums Earned. Net premiums earned decreased 25.7% from $5.7 million
in 1995 to $4.3 million in 1996. Net premiums earned from workers'
compensation reinsurance decreased 18.7% from $3.2 million in 1995 to $2.6
million in 1996. The workers' compensation premium refunds of $782,000, which
reduced the Company's 1996 revenues, was a result of changes in the Company's
estimate of the ultimate premium, and was based upon audits of the insureds'
1994 and 1995 payroll estimates. Net premiums earned from general liability
reinsurance decreased 39.3% from $2.5 million in 1995 to $1.5 million in 1996
due to increased competition and lower premium rates charged by both the
Company's U.S. insurance subsidiary and risk retention group affiliate. Net
premiums earned from the Company's surety line of business for contract
performance and payment bonds increased from $18,000 in 1995 to $130,000 in
1996, as a result of the Company's increased emphasis on its surety business.
 
  Net Investment Income. Net investment income increased 54.6% from $1.4
million in 1995 to $2.1 million in 1996 as a result of the investment of
additional cash flows from insurance operations and increases in several above
market rate secured notes receivable. The average annual pre-tax yield on
investments was 7.2% in 1995 and 9.1% in 1996, and the average annual after-
tax yield on investments was 6.5% in 1995 and 8.5% in 1996. The increase in
yields during 1996 is attributable to income realized from several secured
notes receivable.
 
  Brokerage Commission Income. Income from brokerage operations decreased
12.3% from $2.1 million in 1995 to $1.9 million in 1996 due to lower fees on
workers' compensation accounts, certain refunds of such fees connected with
audit premium refunds, and lower commissions on general liability insurance as
a result of decreased premiums.
 
  Management Fees. Management fees increased 0.8% from $475,000 in 1995 to
$479,000 in 1996.
 
  Net Realized Gains. Net realized gains from the sale of investments
decreased 11.5% from $200,000 in 1995 to $177,000 in 1996.
 
  Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
decreased 29.2% from $2.9 million in 1995 to $2.1 million in 1996 as a result
of a reduction in the projected losses for the general liability reinsurance
business previously estimated by the Company's independent actuarial
consulting firm.
 
  Acquisition Expenses. Policy acquisition expenses decreased 40.5% from $1.1
million in 1995 to $646,000 in 1996 due to lower premium volumes.
 
  Other Expenses. Other expenses increased 53.3% from $2.0 million in 1995 to
$3.1 million in 1996 due to increased staffing to support growth, salary
increases, licensure efforts, relocation of office space and the development
of an internal insurance agency.
 
  Income Taxes. Federal and state income taxes decreased from $720,000 in 1995
to $177,000 in 1996, due to lower taxable income in the Company's U.S.
insurance subsidiary.
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
  Net Premiums Earned. Net premiums earned increased 68.0% from $3.4 million
in 1994 to $5.7 million in 1995. Net premiums earned for workers' compensation
reinsurance increased from $1.2 million in 1994 to $3.2 million in 1995 as a
result of the Company's first full year of operating the program. Net premiums
earned from general liability reinsurance increased 14.4% from $2.2 million in
1994 to $2.5 million in 1995 due to the addition of new insureds by the
Company's risk retention group affiliate. The Company began writing contract
surety bonds for environmental remediation and construction contractors in
1995.
 
  Net Investment Income. Net investment income increased 104.1% from $663,000
in 1994 to $1.4 million in 1995 as a result of the investment of additional
cash flows from insurance operations. The average annual pre-tax yield on
investments was 4.1% in 1994 and 7.2% in 1995, and the average annual after-
tax yield on investments was 3.5% in 1994 and 6.5% in 1995.
 
                                      23
<PAGE>
 
  Brokerage Commission Income. Brokerage commission income increased 25.7%
from $1.7 million in 1994 to $2.1 million in 1995 as a result of increased
commissions derived from insurance business produced through the Company's
risk retention group affiliate and unaffiliated insurance companies.
 
  Management Fees. Management fees increased 2.4% from $464,000 in 1994 to
$475,000 in 1995, as a result of increased fees charged by the Company to its
risk retention group affiliate for increased levels of service.
 
  Net Realized Gains (Losses). Net realized gains (losses) from the sale of
investments improved from a net realized loss of $118,000 in 1994 to a net
realized gain of $200,000 in 1995.
 
  Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 104.1% from $1.4 million in 1994 to $2.9 million in 1995 due to
increases in premiums from the workers' compensation program attributable to
its first full year of operations.
 
  Acquisition Expenses. Policy acquisition expenses increased from $517,000 in
1994 to $1.1 million in 1995 due to higher premium volumes for the general
liability and workers' compensation reinsurance business.
 
  Other Expenses. Other expenses decreased 9.7% from $2.2 million in 1994 to
$2.0 million in 1995.
 
  Income Taxes. Federal and state income taxes increased from $329,000 in 1994
to $720,000 in 1995 due to higher taxable net income in the Company's U.S.
insurance subsidiary.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company historically has met its cash requirements and financed its
growth principally through cash flows generated from operations. The Company's
primary sources of cash flow are proceeds from the sale or maturity of
invested assets, premiums earned, investment income, commission income and
management fees. The Company's cash requirements are primarily for claims
payments, reinsurance premiums, commissions, salaries, employee benefits and
other operating expenses, and the purchase of investment securities. Due to
the uncertainty regarding settlement of unpaid claims, the liquidity
requirements of the Company may vary, and the Company has attempted to
structure its investment portfolio to take into account the historical payout
patterns. See "Business--Investment Portfolio." The Company purchases
reinsurance to mitigate the effect of large claims and to help stabilize
demands on its liquidity. See "Business--Reinsurance."
 
  On a consolidated basis, net cash provided from operations was $3.6 million
for 1994, $5.3 million for 1995, $3.6 million for 1996 and $6.4 million for
the nine months ended September 30, 1997. The positive cash flows for all four
periods were primarily attributable to net premiums written, net earnings, and
increases in reserves for unpaid losses. Because workers' compensation and
general liability claims may be paid over an extended period of time, the
Company has established relatively large loss reserves for such lines of
business. The assets supporting the Company's reserves continue to earn
investment income until claim payments are made.
 
  Total assets increased from $27.1 million at December 31, 1995 to $31.3
million at December 31, 1996 and to $42.2 million at September 30, 1997,
primarily due to increases in cash, invested assets and notes receivable.
Cash, invested assets and notes receivable increased from $25.2 million at
December 31, 1995 to $27.3 million at December 31, 1996 and to $34.9 million
at September 30, 1997 as a result of increases in net premiums written,
investment income, and premiums held under a rent-a-captive program. The
Company expects current cash flows to be sufficient to meet operating needs
for at least the next 12 months, although the invested assets have been
categorized as available for sale in the event short term cash needs exceed
available resources.
 
  Except as otherwise set forth in "Use of Proceeds," the Company has no
present plans to make any significant capital expenditures.
 
  American Safety is an insurance holding company whose principal assets are
its investment portfolio and its investment in the capital stock of its
subsidiaries. As an insurance holding company, American Safety's ability
 
                                      24
<PAGE>
 
to pay dividends to its shareholders will depend, to a significant degree, on
the ability of the Company's subsidiaries to pay dividends to American Safety.
The jurisdictions in which American Safety and its insurance and reinsurance
subsidiaries are domiciled place limitations on the amount of dividends or
other distributions payable by insurance companies in order to protect the
solvency of insurers. See Note 7 to the Company's Consolidated Financial
Statements regarding restrictions on the payment of dividends.
 
  In January 1997, the Securities and Exchange Commission approved rule
amendments regarding disclosures concerning derivative financial instruments,
other financial instruments and derivative commodity instruments (the
"Release"). The Release requires inclusion in the footnotes to the financial
statements of extensive detail about the accounting policies followed by a
company in connection with its accounting for derivative financial instruments
and derivative commodity instruments. As of September 30, 1997, the Company
had no investments in derivative instruments.
 
INCOME TAXES
 
  American Safety is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or
capital gains. American Safety has received an undertaking from the Minister
of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings
Tax Protection Act 1966, which exempts American Safety and its shareholders,
other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes
computed on profits, income or any capital asset, gain or appreciation, or any
tax in the nature of estate, duty or inheritance until March 28, 2016. The
Company, exclusive of its United States subsidiaries, does not consider itself
to be engaged in a trade or business in the United States and accordingly does
not expect to be subject to direct United States income taxation. The
Company's U.S. subsidiaries are subject to taxation in the United States. See
"Certain Tax Considerations."
 
IMPACT OF INFLATION
 
  Property and casualty insurance premiums are established before the amounts
of losses and loss adjustment expenses are known and therefore before the
extent by which inflation may affect such expenses is known. Consequently, the
Company attempts, in establishing its premiums, to anticipate the potential
impact of inflation. However, for competitive and regulatory reasons, the
Company may be limited in raising its premiums consistent with anticipated
inflation, in which event the Company, rather than its insureds, would absorb
inflation costs. Inflation also affects the rate of investment return on the
Company's investment portfolio with a corresponding effect on the Company's
investment income.
 
                                      25
<PAGE>
 
                                   BUSINESS
 
OVERVIEW
 
  American Safety is a specialty insurance holding company which, through its
subsidiaries, develops, underwrites, manages and markets primary casualty
insurance and reinsurance programs in the alternative insurance market for (i)
environmental remediation risks; (ii) employee leasing and staffing industry
risks; and (iii) other specialty risks. The Company has demonstrated expertise
in developing specialty insurance coverages and custom designed risk
management programs not generally available in the standard insurance market.
 
  The Company's specialty insurance programs include coverages for general
liability, pollution liability, professional liability, workers' compensation
and surety, as well as custom designed risk management programs (including
captive and rent-a-captive programs), for contractors, consultants and other
businesses and property owners who are involved with environmental
remediation, employee leasing and staffing, and other specialty risks. Through
its U.S. brokerage and management services subsidiaries, the Company also
provides specialized insurance program development, underwriting, risk
placement, reinsurance, program management, brokerage, loss control, claims
administration and marketing services.
 
  The Company is able to select its roles as program developer, primary
underwriter, reinsurer, program manager and broker based on its assessment of
each risk profile. After determining its roles, the Company utilizes its
insurance and reinsurance subsidiaries, its insurance brokerage and management
services subsidiaries, and its risk retention group affiliate to generate risk
premium revenues, program management fees, insurance and reinsurance
commissions and investment income, as appropriate.
 
  The Company insures and places risks through its U.S. insurance subsidiary,
American Safety Casualty, as well as its non-subsidiary risk retention group
affiliate, American Safety RRG, and substantial unaffiliated insurance and
reinsurance companies. The Company also reinsures and places, through its
Bermuda reinsurance subsidiary, American Safety Re, a portion of the risks
underwritten directly by American Safety Casualty, American Safety RRG and
other insurers.
 
  Substantially all of the reinsurance business that the Company currently
assumes is for primary insurance programs that the Company has developed and
underwritten.
 
  The Company provides insurance coverages and services in all 50 states and
principally markets its insurance programs through approximately 160
independent insurance agency and brokerage firms.
 
INDUSTRY RATING
 
  In December 1995, A.M. Best, an independent nationally recognized insurance
industry rating service and publisher, assigned a rating of "A (Excellent)" on
a group basis to American Safety, as well as its U.S. insurance subsidiary,
American Safety Casualty, and its non-subsidiary risk retention group
affiliate, American Safety RRG.
 
ALTERNATIVE INSURANCE MARKET
 
  The alternative insurance market has developed over the past 15 years to
serve insureds whose insurance needs have not been adequately met by the
standard insurance market. According to A.M. Best, from 1990 to 1995, a period
characterized by excess insurance capacity and declining premium rates, the
alternative insurance market grew from approximately 35% to 44% of the total
U.S. commercial insurance market, and the total annual premium volume of the
alternative insurance market grew from approximately $66 billion to $104
billion.
 
  Alternative insurance programs generally involve (i) the underwriting of
risks which are characterized by the standard insurance market as difficult or
which generate too little premium for standard insurance companies; and/or
(ii) the design of specialized insurance programs, such as deductible or risk
retention programs, and captive or rent-a-captive programs, which enable
insureds to assume a portion of their own risks and share in the underwriting
profitability or losses of the program. Originally developed to respond to the
needs of insureds for adequate insurance coverage and affordable premium
rates, the alternative insurance market also responds to strategic needs of
insureds for better financial management, improved claims handling, more
effective risk management, customized insurance programs, direct access to the
worldwide reinsurance market and greater control over loss prevention. The
benefits of such alternative insurance market techniques typically include
lower
 
                                      26

<PAGE>
 
and more stable costs, greater control by the client of its risk management
program and an increased emphasis within the client's organization on loss
prevention and loss control.
 
BUSINESS STRATEGY
 
  The Company's business strategy is to develop insurance programs for the
environmental remediation industry and the employee leasing and staffing
industry, as well as other specialty industries and risks. The Company targets
niche insurance markets and opportunities where its expertise is required and
where competition is limited. The Company utilizes a flexible approach to
accomplish its strategy by combining (i) intensive underwriting, (ii) value-
added services, including quality coverage enhancements, professional risk
management, dedicated loss control and claims management, and (iii) superior
service to insurance agents, brokers and insureds.
 
  The Company differentiates itself by its ability to select its roles as
program developer, primary underwriter, reinsurer, program manager and broker
based on its assessment of each specialty risk profile. Through its ability to
assume a risk bearing role (such as primary insurance, reinsurance or both), a
production role (such as primary or reinsurance brokerage commissions), and a
service role (such as the provision of loss control, claims administration,
management and marketing services) as appropriate, the Company seeks to
generate underwriting profits, brokerage commissions and program management
fees.
 
  The following diagram describes the various services provided by the
Company:
 

    [Diagram listing the various types of services provided by the Company]
 
                                      27
<PAGE>
 
  Since 1986, the Company's capacity for innovation has been demonstrated
through its development of the following specialty insurance coverages and
custom designed programs:
 
  ^  1986--an insurance policy to insure the general liability risks of
     asbestos abatement contractors, and the establishment of technical loss
     control guidelines for performing such work.
 
  ^  1987--an insurance policy to provide limited occurrence form coverage
     for asbestos abatement contractors, thereby protecting insureds from
     claims that might be brought over an extended period of time.
 
  ^  1987--coverage for the transportation of asbestos-containing materials
     and coverage for specific technical abatement methodologies, such as
     encapsulation and enclosure of asbestos-containing materials.
 
  ^  1988--the formation of American Safety RRG, one of the first U.S.
     insurance companies to provide general liability coverage for asbestos
     abatement activities.
 
  ^  1990--a non-collateralized surety program for environmental remediation
     contractors.
 
  ^  1991--a program to provide coverage for lead abatement and a broader
     range of environmental remediation efforts.
 
  ^  1994--a workers' compensation insurance program for environmental
     remediation contractors and consultants, as well as coverage for the
     financial responsibility requirements imposed upon owners of municipal
     solid waste landfills in connection with the closure of such landfills
     and the provision of post-closure care.
 
  ^  1995--workers' compensation and general liability insurance programs for
     employee leasing companies (also known as professional employer
     organizations) and employee staffing companies.
 
GROWTH STRATEGY
 
  The additional capital to the Company from the proceeds of the Offering is
expected to result in a higher financial size rating from A.M. Best.
Management believes that the Company's increased capital base and financial
size rating, when combined with the Company's expertise in specialty risk
insurance programs, should position the Company to target a broader client
base through the following strategies:
 
  ^  the continued development of new insurance programs, as well as enhanced
     coverages, for clients and industries currently served by the Company.
 
  ^  the continued development of insurance programs for clients, industries
     and risks not currently served by the Company.
 
  ^  the acquisition or formation of an excess and surplus lines insurance
     company to enhance the Company's ability to enter additional classes of
     insurance business.
 
  ^  the acquisition of agencies or insurers specializing in insurance
     program business.
 
PROGRAM DEVELOPMENT, MANAGEMENT AND ADMINISTRATIVE OPERATIONS
 
  The Company's U.S. brokerage and management subsidiaries, in combination
with the Company's primary insurance and reinsurance companies, provide a
broad range of dedicated services in connection with the development and
implementation of specialty risk insurance programs.
 
  SYNERGY INSURANCE SERVICES. Synergy provides insurance program development,
underwriting, risk placement, reinsurance, program management, brokerage, loss
control, claims administration, marketing and administrative services to the
Company's U.S. insurance operations, its risk retention group affiliate, and
 
                                      28
<PAGE>
 
unaffiliated insurers and reinsurers. Synergy employs all the Company's
employees and manages the Company's U.S. business operations, while the
Company's Bermuda operations are managed under contract by Mutual Risk
Management (Bermuda), Ltd, an unaffiliated party.
 
  Synergy identifies and evaluates potential new program business and also
receives submissions for new programs from insurance brokers and other
intermediaries throughout the United States. When a submission for a new
program is received, Synergy identifies the resources needed to evaluate and
develop the program. In evaluating and developing a new program, Synergy
considers the following factors: whether the submitting party will bear risk
and the collateral security required therefor; the analysis of historic loss
data; the integrity and experience of the submitting party; the availability
of reinsurance; and the potential profitability of the program to the Company.
If the prospects for a new program appear favorable, Synergy designs the
structure for the new program and determines what additional services, such as
program management, brokerage, reinsurance, loss control, claims
administration, marketing, or other services will be required. Synergy
determines which entities, both affiliated and unaffiliated, are best able to
provide such services in a cost-effective manner and implements the program.
 
  Synergy has been successful in developing many of the Company's primary
insurance and reinsurance programs. Synergy has also served since 1990 as the
program manager for the Company's risk retention group affiliate, providing
it, within administrative guidelines, with program management, underwriting,
loss control, brokerage, marketing and financial services.
 
  MANAGEMENT AND ADMINISTRATIVE SERVICES. In the development and
implementation of programs, Synergy provides a number of fee and commission-
based services. Synergy provides (i) program management services for the
overall management and administration of a program; (ii) underwriting services
for evaluating individual risks or classes of risk; (iii) risk placement
services for determining the most effective means of providing particular
coverages; (iv) brokerage services for placing risks with affiliated or
unaffiliated carriers; (v) reinsurance intermediary services for placing ceded
reinsurance for a program; (vi) loss control services for evaluating the risks
posed by a particular class of risk, as well as the ability of insureds to
control their losses; (vii) claims administration services for the prompt
reporting and handling of claims, and the supervision of claims adjusters and
third party administrators; (viii) marketing services for designing and
placing advertisements and other marketing materials, as well as marketing
insurance programs to independent agents and brokers; and (ix) administrative
services, including for billing, collecting and reporting primary and
reinsurance premiums, producing financial reports on programs and paying
claims.
 
  OTHER INSURANCE SERVICE SUBSIDIARIES. The Company has four other U.S.
subsidiaries engaged, under the direction of Synergy, in various
administrative and insurance agency services. Environmental Claims Services,
Inc. operates as a specialized claims administration facility engaged in the
administration and analysis of environmental and other specialty program
claims. Sureco Bond Services, Inc. and Harbor Insurance Services, Inc. are
surety bond agencies authorized to write contract performance and payment
bonds for unaffiliated insurance carriers. American Safety Purchasing Group,
Inc. was formed to facilitate the provision of certain insurance coverages
through a purchasing group (as defined by the Risk Retention Act) by licensed
insurance companies, including the Company's U.S. insurance subsidiary,
American Safety Casualty.
 
PRIMARY INSURANCE OPERATIONS
 
  The Company, through its U.S. insurance subsidiary and its risk retention
group affiliate, provides primary casualty insurance in the alternative
insurance market for (i) environmental remediation risks; (ii) employee
leasing and staffing industry risks; and (iii) other specialty risks. The
Company's specialty insurance programs include coverages for general
liability, pollution liability, professional liability, workers' compensation
and surety, as well as custom designed risk management programs (including
captive and rent-a-captive programs), for contractors, consultants and other
businesses and property owners who are involved with environmental
remediation, employee leasing and staffing, and other specialty risks.
 
 
                                      29
<PAGE>
 
  ENVIRONMENTAL INSURANCE PROGRAMS. The Company has developed specialty
insurance programs for a broad range of environmental concerns and believes
that its intensive underwriting, dedicated loss control and claims management,
and superior service orientation will enable it to expand its insurance
program base to other environmental coverages not currently being provided.
Since 1986, the Company's insurance programs have helped asbestos abatement
and environmental remediation contractors and consultants, as well as property
owners, perform remediation work in schools, hospitals, commercial, industrial
and other facilities, thereby protecting school children, factory workers, and
numerous public and private employees from the potential threat of
environmental health hazards.
 
  The Company combines intensive loss control procedures with its expertise in
the underwriting process to currently insure, through its U.S. insurance
subsidiary and its risk retention group affiliate, nearly 1,000 insureds
throughout the United States for a broad range of coverages for asbestos and
lead abatement, hazardous materials and hazardous waste remediation,
underground storage tank removal and replacement, and "brownfields"
remediation. The Company estimates that it has insured through its insurance
and reinsurance subsidiaries and its risk retention group affiliate in excess
of 300,000 environmental remediation projects since 1986. The Environmental
Business Journal Annual Industrial Overview 1997 estimated that the United
States environmental industry, which includes contractors, consultants,
equipment manufacturers and other service firms served by the Company,
generated approximately $181 billion of revenue in 1996.
 
  The Company provides coverage for a broad range of environmental risks,
including:
 
    Asbestos Abatement. Asbestos is a fibrous mineral which has been
  commercially produced for, among other things, insulation and reduction of
  fire and heat in buildings and products. In spite of the usefulness of
  asbestos, health problems have arisen with its use. In response to the need
  for detection, abatement and removal of asbestos, the asbestos abatement
  industry developed in the mid-1980's and sought insurance for risks
  involved with its business. For the past 12 years, the Company has provided
  general, pollution and professional liability coverages for contractors,
  consultants, other businesses and property owners involved with asbestos
  abatement.
 
    Lead Abatement. The Company provides general, pollution and professional
  liability coverages for lead paint abatement contractors, consultants and
  property owners in connection with the abatement of lead paint from both
  public and private facilities, including housing authority complexes.
 
    Underground Storage Tank Removal. The Company provides general, pollution
  and professional liability coverages to contractors and consultants for the
  removal and replacement of underground storage tanks, including associated
  soil remediation activities attributed to leaking underground storage
  tanks.
 
    Other Hazardous Substances. The Company provides general, pollution and
  professional liability coverages in connection with the removal and
  remediation of other hazardous substances, including hazardous waste,
  polychlorinated biphenyls (PCBs) and various petroleum products.
 
    Other Environmental Risks. The Company provides environmental insurance
  coverages that offer protection against environmental exposures arising
  from general business operations. Environmental insurance coverage is
  offered for varied purposes such as financing real estate transactions,
  transferring real estate and protecting against the release of hazardous
  substances from disposal sites.
 
    Surety. The Company's U.S. insurance subsidiary, American Safety
  Casualty, is licensed to write surety bonds in 40 states, primarily
  providing contract performance and payment bonds to environmental and
  construction contractors. American Safety Casualty is listed as an
  acceptable surety on federal bonds, commonly known as a "Treasury Listed"
  or "T-listed" surety, enabling it to issue surety bonds for federal
  projects, as well as state and private projects that utilize such
  designation as a reference in determining the acceptability of surety
  companies. American Safety Casualty's underwriting limitation, as
  determined by
 
                                      30
<PAGE>
 
  the Department of the Treasury as of July 1, 1997, was $825,000 on a per-
  bond basis; however, this limitation does not constrain the amount of a
  bond that can be written, provided that the excess exposure is protected
  with approved reinsurance or other methods prescribed by the Department of
  the Treasury. American Safety Casualty maintains reinsurance with approved
  reinsurers for the purpose of issuing bonds in excess of its underwriting
  limitation.
 
  EMPLOYEE LEASING AND STAFFING INDUSTRY. The Company, through its U.S.
brokerage and management services subsidiaries, places and writes workers'
compensation and general liability insurance for employee leasing companies
(also known as professional employer organizations) and staffing industry
companies through custom designed captive and rent-a-captive programs. These
insurance programs were originally developed to enable employee leasing and
staffing industry companies to obtain environmental services industry clients;
subsequently, these programs have been expanded to cover non-environmental
clients as well.
 
  Employee leasing companies generally focus on small to medium size
businesses and provide their clients with integrated human resource
administration and risk management services. Although the client maintains
control of the activities of the worksite employees, the employee leasing
company legally becomes the employer of record for its client's employees. The
employee leasing company assumes substantial employer responsibilities and
risks, including payment of payroll, filing and remitting of related taxes,
provision for workers' compensation insurance coverage, management of workers'
compensation claims, provision and administration of health and other employee
benefits and offering of various risk management services in compliance with
state and federal guidelines.
 
  Staffing industry companies provide temporary employees to a broad range of
industries and businesses, with the staffing companies directly employing the
workers and remaining responsible for payroll, workers' compensation insurance
coverage and human resource functions.
 
  As the legal and regulatory environment for employers becomes increasingly
complex, resulting in higher employment costs per employee, the Company
believes that employee leasing and staffing industry companies will continue
to grow. The Company expects that such industry growth will present
significant opportunities to the Company in connection with the development of
workers' compensation and liability insurance programs, not only for the
employee leasing and staffing industry companies themselves, but also for
their clients.
 
  OTHER PROGRAMS. The Company continually evaluates and seeks to develop
insurance programs for other specialty industries and risks. The Company has
developed several other specialty programs, including liability coverage for
persons owning firearms; a prepaid legal expense program for individuals who
receive traffic citations; a bail bond program; and a program to provide
coverage for the financial responsibility requirements imposed upon owners of
municipal solid waste landfills in connection with the closure of such
landfills and the provision of post-closure care.
 
  UNDERWRITING. Synergy's underwriting staff handles all insurance
underwriting functions, with specific underwriting authority related to the
experience and knowledge level of each underwriter. Risks that are perceived
to be more difficult and complex are underwritten by experienced staff and
reviewed by management. Synergy uses management information reports to measure
risk selection and pricing in order to control underwriting performance. The
principal underwriting factors used by Synergy for underwriting liability,
workers' compensation and surety coverages, are a financially stable business,
an established operating history, favorable loss histories and a demonstrated
commitment to loss control practices.
 
  CLAIMS. Claims arising under the policies and treaties issued or reinsured
by the Company are reviewed and managed by Synergy's internal claims
department. When Synergy receives notice of a loss, its claims personnel open
a claim file and establish a reserve with respect to the loss. Synergy retains
claims settlement authority, delegating only limited settlement authority to
certain third party administrators. Synergy emphasizes prompt and fair
settlement of meritorious claims, maintenance of adequate loss reserves and
careful control of claims adjustment and legal expenses.
 
                                      31
<PAGE>
 
REINSURANCE ASSUMED
 
  Reinsurance is a contractual arrangement under which one insurer (the ceding
company) transfers to another insurer (the reinsurer) all or a portion of the
risk or risks that the ceding company has assumed under the insurance policy
or policies it has issued. A ceding company may purchase reinsurance for any
number of reasons including to obtain, through the reduction of its
liabilities, greater underwriting capacity than its own capital resources
would support, to stabilize its underwriting results, to protect against
catastrophic loss, and to enter into or withdraw from a line of business.
Reinsurance can be written on either a quota share or excess of loss basis,
under either a treaty or facultative reinsurance agreement. See "Glossary of
Selected Insurance Terms."
 
  Substantially all of the reinsurance business that the Company currently
assumes is for primary insurance coverages that the Company has developed and
underwritten. The Company, through its reinsurance subsidiary, enters into
treaties with its U.S. insurance subsidiary, its risk retention group
affiliate and unaffiliated carriers with whom the Company has developed
insurance programs. The Company reinsures, generally on an excess of loss
basis, the general liability, pollution liability, professional liability and
surety risks for contractors, consultants and other businesses and property
owners who are involved with environmental remediation, as well as programs
for the employee leasing and staffing industry and other specialty risks.
 
  Management's reinsurance underwriting strategy is to utilize the
underwriting expertise of Synergy, the Company's principal U.S. program
development, underwriting and administrative services subsidiary, to practice
discipline in selecting and retaining risks and structuring insurance programs
which the Company reinsures. The Company's reinsurance treaties with its U.S.
insurance subsidiary and risk retention group affiliate automatically cover
primary insurance programs written by such carriers. Authority to bind the
Company is limited to Synergy's senior management. The Company utilizes
Synergy to provide direct contact with reinsureds, either by underwriting or
claim audits or periodic loss control visits to the insureds and the producing
brokers, both to enhance the quality of the underwriting process and to
develop and retain business relationships.
 
SELECTED OPERATING INFORMATION
 
  NET PREMIUMS WRITTEN. The following table sets forth the Company's net
premiums written by principal lines of insurance and reinsurance for the year
ended December 31, 1996 and the nine months ended September 30, 1997:
 
<TABLE>
<CAPTION>
                                          YEAR ENDED      NINE MONTHS ENDED
                                      DECEMBER 31, 1996   SEPTEMBER 30, 1997
                                      ------------------  -------------------
                                             (Dollars in thousands)
   <S>                                <C>       <C>       <C>       <C>
   General, pollution and
    professional liability........... $   1,610     34.9% $   1,508     21.5%
   Workers' compensation.............     2,810     60.9      4,025     57.4
   Surety............................       197      4.2      1,485     21.1
                                      --------- --------  --------- --------
     Total........................... $   4,617    100.0% $   7,018    100.0%
                                      ========= ========  ========= ========
</TABLE>
 
  The following table sets forth the Company's net premiums written by
specialty industry for the year ended December 31, 1996 and the nine months
ended September 30, 1997:
 
<TABLE>
<CAPTION>
                                            YEAR ENDED      NINE MONTHS ENDED
                                        DECEMBER 31, 1996   SEPTEMBER 30, 1997
                                        ------------------  -------------------
                                               (Dollars in thousands)
   <S>                                  <C>       <C>       <C>       <C>
   Environmental insurance coverages..  $   4,351     94.2% $   5,645     80.4%
   Employee leasing and staffing
    industry..........................        261      5.7        338      4.8
   Other specialty industries.........          5      0.1      1,035     14.8
                                        --------- --------  --------- --------
     Total............................  $   4,617    100.0% $   7,018    100.0%
                                        ========= ========  ========= ========
</TABLE>
 
  GROSS PREMIUMS WRITTEN AND PRODUCED. As a result of the Company's roles in
connection with insurance program development, risk bearing on a primary and
reinsurance basis, insurance and reinsurance brokerage and
 
                                      32
<PAGE>
 
production and administration, the Company is involved in a number of
insurance and reinsurance premium and fee-generating activities. The Company
places insurance and reinsurance with its subsidiaries, and also acts as an
agency and broker with unaffiliated insurers and reinsurers. For the nine
months ended September 30, 1997, the Company was involved with the placement
of approximately $22.1 million of gross premiums through its various programs
and subsidiaries.
 
  The following table sets forth the Company's gross premiums written and
produced by specialty industries for the year ended December 31, 1996 and the
nine months ended September 30, 1997:
 
 
<TABLE>
<CAPTION>
                                           YEAR ENDED       NINE MONTHS ENDED
                                        DECEMBER 31, 1996  SEPTEMBER 30, 1997
                                        ------------------ --------------------
   <S>                                  <C>       <C>      <C>        <C>
   Environmental insurance coverages..  $  15,995    97.9% $   14,217     64.2%
   Employee leasing and staffing
    industry..........................        338     2.1       6,514     29.4
   Other specialty industries.........         11     0.0       1,403      6.4
                                        --------- -------  ---------- --------
     Total............................  $  16,344   100.0% $   22,134    100.0%
                                        ========= =======  ========== ========
</TABLE>
 
  COMMISSIONS AND FEES. The Company generates fee and commission income in
connection with the Company's program development and management, insurance
and reinsurance brokerage services, and production and other insurance related
services. Fee and commission income was $2.4 million for the year ended
December 31, 1996, and $2.0 million for the nine months ended September 30,
1997.
 
  COMBINED RATIO. The combined ratio is a standard measure of a property and
casualty insurer's performance in managing its losses and expenses.
Underwriting results are generally considered profitable when the combined
ratio is less than 100%. The following comparison of statutory combined ratios
suggests that the Company has experienced more favorable results than the
property and casualty insurance industry over the past three years.
 
                       COMBINED RATIO (STATUTORY BASIS)
 
<TABLE>
<CAPTION>
                                                           NINE MONTHS
                            YEAR ENDED DECEMBER 31,    ENDED SEPTEMBER 30,
                            -------------------------  ----------------------
                             1994     1995     1996      1996         1997
                            -------  -------  -------  ---------    ---------
<S>                         <C>      <C>      <C>      <C>          <C>
The Company(1)(2)..........    69.5%    72.4%    75.5%      73.4%        88.0%(3)
Property and casualty in-
 dustry(4)....................108.4%   106.4%   105.9%        NA(5)        NA(5)
</TABLE>
- --------
(1)Data have been derived from the consolidated financial statements of the
Company.
(2) Payments by American Safety Casualty to Synergy for management services
    are included in the combined ratio.
(3) See "Management's Discussion and Analysis of Financial Condition and
    Results of Operations--Overview."
(4)The statutory industry data are taken from the A.M. Best, Aggregates and
Averages, 1997 Edition.
(5)Not available.
 
  Although the combined ratio is the generally accepted measure for comparing
results within the property and casualty insurance industry, the combined
ratio does not distinguish between property and casualty companies based upon
their mix of business. The Company focuses primarily on long-tail liability
coverages and writes a very limited amount of short-tail liability coverages.
Long-tail liability insurance coverages often produce greater underwriting
losses than short-tail liability insurance. Long-tail liability coverages also
produce more investable cash flow for an insurance company because the losses
may not be paid out for many years. Therefore, the companies writing long-tail
insurance coverages may be able to mitigate their higher underwriting losses
by deriving investment income. Accordingly, a higher combined ratio (on a
statutory basis) for a company writing long-tail liability insurance does not
necessarily mean lower profitability.
 
  The Company at times writes insurance program business with a higher expense
ratio resulting from significant commission expense (e.g., bail bond program)
and a higher loss ratio resulting from minimum reserves that are established
on new programs (e.g. workers' compensation). As a result, the Company's
combined ratio may fluctuate over time due to the presence or absence of such
program business in any year and the initiation of new programs.
 
                                      33
<PAGE>
 
  PREMIUM AND LOSS SUMMARY. The Company is engaged in the development of
programs and underwriting of coverages as both a primary casualty insurer and
a reinsurer. The following table provides selected historical information on a
GAAP basis concerning the business written by the Company and the associated
underwriting risks. This data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and the Selected Financial
Data included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                  NINE
                            TWELVE        NINE                                MONTHS ENDED
                         MONTHS ENDED MONTHS ENDED YEAR ENDED DECEMBER 31,    SEPTEMBER 30,
                          MARCH 31,   DECEMBER 31, -------------------------  --------------
                           1993(1)      1993(1)     1994     1995     1996     1996    1997
                         ------------ ------------ -------  -------  -------  ------  ------
                                        (In thousands, except ratio data)
<S>                      <C>          <C>          <C>      <C>      <C>      <C>     <C>
REINSURANCE:
  Gross premiums
   written..............    $2,739       $2,053    $ 3,850  $ 6,260  $ 5,608  $3,722  $5,814
  Net premiums written..     2,592        1,888      3,762    6,087    4,420   3,118   5,532
  Net premiums earned...     2,592        1,888      3,420    5,729    4,142   2,790   5,241
  Loss and loss
   adjustment expense
   ratio................     (20.8%)       43.9%      41.6%    50.6%    49.2%   48.6%   66.7%
PRIMARY INSURANCE:
  Gross premiums
   written..............    $  --        $  --     $   --   $    87  $   366  $  244  $1,942
  Net premiums written..       --           --         --        43      197     137   1,485
  Net premiums earned...       --           --         --        18      130      71   1,265
  Loss and loss
   adjustment expense
   ratio................       --           --         --      33.1%    30.2%   34.8%    2.9%
COMBINED:
  Gross premiums
   written..............    $2,739       $2,053    $ 3,850  $ 6,347  $ 5,930  $3,966  $7,756
  Net premiums written..     2,592        1,888      3,762    6,130    4,617   3,299   7,018
  Net premiums earned...     2,592        1,888      3,420    5,747    4,272   2,862   6,506
  Loss and loss
   adjustment expense
   ratio................     (20.8%)       43.9%      41.6%    50.5%    48.1%   48.3%   54.3%
  Expense ratio.........      59.3%        71.8%      30.7%    23.4%    29.4%   28.6%   36.4%
  Combined ratio........      38.5%       115.7%      72.3%    73.9%    77.5%   76.9%   90.7%
</TABLE>
- --------
(1) American Safety changed its fiscal year end from March 31 to December 31.
 
  Significant fluctuations in demand for and supply of various casualty
insurance and reinsurance lines of business have led to substantial price
fluctuations over time. The Company's management seeks to expand and contract
various lines of business based on the relative favorability of the pricing
environment for its products. As a writer of both primary insurance and
reinsurance, the Company has additional flexibility to adjust its business mix
in response to price differences in these markets and to utilize its knowledge
of primary insurance markets to guide its assumption of reinsurance risks.
 
REINSURANCE CEDED
 
  The Company obtains reinsurance for its primary insurance and reinsurance
operations to protect and mitigate the exposures of the Company. The Company's
reinsurance program for general and pollution liability risks operates on an
excess of loss basis, with the Company's maximum exposure, on a per occurrence
basis, limited to $350,000. For surety business written by American Safety
Casualty, the Company maintains a 50% quota share reinsurance treaty and an
excess of loss treaty on a per principal basis, thereby limiting the Company's
maximum exposure on a per principal basis to $500,000. For workers'
compensation reinsurance business assumed by the Company, the Company's
maximum exposure is $250,000 per loss and aggregate stop loss reinsurance is
maintained for losses above a 70% loss ratio. Reinsurance treaties maintained
by the Company for its protection generally have no loss ratio maximum or
aggregate limits of liability.
 
  The Company purchases reinsurance separately for its primary insurance
business lines and its reinsurance business. Gross reinsurance premium ceded
for 1996 was $1.4 million, which constitutes 22.7% of the gross premiums
written, and for the nine months ended September 30, 1997, was $1.8 million,
which constitutes 20.1% of the gross premiums written. The amount of
reinsurance obtained by the Company varies with the line of business insured
or reinsured.
 
                                      34
<PAGE>
 
  The Company evaluates the credit quality of the U.S. reinsurers and
retrocessionaires to which it cedes business. The following table sets forth
certain information relating to the Company's unaffiliated reinsurers and
retrocessionaires as of September 30, 1997:
 
<TABLE>
<CAPTION>
                                                    PREMIUMS CEDED FOR
                                                    NINE MONTHS ENDED  A.M. BEST
                      REINSURERS                    SEPTEMBER 30, 1997 RATING(1)
                      ----------                    ------------------ ---------
                                                      (In thousands)
   <S>                                              <C>                <C>
   Underwriters Reinsurance Company................        $468           A+
   Signet Star Reinsurance Company.................          56           A
   Swiss Re America................................          15           A
   Zurich-American Insurance Group.................           8           A+
   Transatlantic Reinsurance Company...............           0           A+
</TABLE>
- --------
(1) A.M. Best rating currently assigned.
 
RESERVES
 
  The Company is required to maintain reserves to cover its estimated ultimate
liability for losses and loss adjustment expenses with respect to reported and
unreported claims incurred. The Company engages an independent internationally
recognized actuarial consulting firm to provide reserve studies, opinions and
rate studies. Reserves are estimates at a given time, which are established
from actuarial and statistical projections by the Company of the ultimate
settlement and administration costs of claims occurring on or prior to such
time, including claims that have not yet been reported to the insurer. The
establishment of appropriate loss reserves is an inherently uncertain process,
and there can be no assurance that ultimate payments will not materially
exceed the Company's reserves.
 
  With respect to reported claims, reserves are established on a case-by-case
basis. The reserve amounts on each reported claim are determined by taking
into account the circumstances surrounding each claim and policy provisions
relating to the type of loss. Loss reserves are reviewed on a regular basis,
and as new data becomes available, appropriate adjustments are made to
reserves.
 
  For incurred but not reported ("IBNR") losses, the Company uses the loss
development method for determining estimates of loss reserves. This method
uses the pattern by which reported losses emerged over time and assumes that
each accident year's experience will develop in the same pattern as the
historical loss development. The Company's independent actuarial consulting
firm also relies on industry data to provide the basis for reserve analysis on
newer lines of business. Provisions for inflation are implicitly considered in
the reserving process. For GAAP purposes, the Company's reserves are carried
at the total estimate for ultimate expected loss, without any discount to
reflect the time value of money.
 
  Reserves are computed by the Company based upon actuarial principles and
industry practices applicable to the lines of business written by the Company.
These reserve calculations are reviewed regularly by management, and as
required by applicable regulators. The Company's independent actuarial
consulting firm annually expresses an opinion on the adequacy of statutory
reserves established by management, which opinion is filed with the various
jurisdictions in which the Company's insurance and reinsurance subsidiaries
and its risk retention group affiliate are licensed. Based upon practices and
procedures employed by the Company, without regard to independent actuarial
opinions, management believes that the Company's reserves are adequate.
 
 
                                      35
<PAGE>
 
  The following table provides a reconciliation of beginning and ending
liability balances on a GAAP basis for the years indicated:
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                    -------------------------
                                                     1994     1995     1996
                                                    -------  -------  -------
                                                        (In thousands)
   <S>                                              <C>      <C>      <C>
   Gross losses and loss adjustment expense
    reserves at beginning of year.................  $ 4,798  $ 6,048  $ 8,294
   Reinsurance recoverable at beginning of year...      --       --         6
                                                    -------  -------  -------
   Net losses and loss adjustment expense reserves
    at beginning of year..........................    4,798    6,048    8,288
                                                    -------  -------  -------
   Add:
   Incurred losses related to:
     Current accident years.......................    1,569    3,099    2,862
     Prior accident years.........................     (145)    (194)    (806)
                                                    -------  -------  -------
       Total incurred losses......................    1,424    2,905    2,056
                                                    -------  -------  -------
   Less:
   Claims payments related to:
     Current accident years.......................       22      155      543
     Prior accident years.........................      152      510      932
                                                    -------  -------  -------
       Total claims paid..........................      174      665    1,475
                                                    -------  -------  -------
   Net losses and loss adjustment expense reserves
    at end of year................................    6,048    8,288    8,869
   Reinsurance recoverable at end of year.........      --         6       45
                                                    -------  -------  -------
   Gross losses and loss adjustment expense
    reserves at end of year.......................  $ 6,048  $ 8,294  $ 8,914
                                                    =======  =======  =======
</TABLE>
 
                                      36
<PAGE>
 
  The following table shows the development of the reserves for unpaid losses
and loss adjustment expenses from 1988 through 1996 for the Company's primary
insurance and reinsurance subsidiaries on a GAAP basis. The 1988 year includes
information for all years prior (1986 and 1987 only), based on Company
analyses and information provided by the Company's independent actuarial
consulting firm. The top line of the table shows the liabilities at the
balance sheet date for each of the indicated years. This reflects the
estimated amounts for losses and loss adjustment expenses for claims arising
in that year and all prior years that are unpaid at the balance sheet date,
including losses incurred but not yet reported to the Company. The upper
portion of the table shows the cumulative amounts subsequently paid as of
successive years with respect to the liability. The lower portion of the table
shows the re-estimated amount of previously recorded liability based on
experience as of the end of each succeeding year. The estimates change as more
information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the re-estimated
liability at each December 31 is less (greater) than the prior liability
estimate. The "cumulative redundancy" depicted in the table, for any
particular calendar year, represents the aggregate change in the initial
estimates over all subsequent calendar years.
 
<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                          --------------------------------------------------------------
                           1988   1989   1990   1991   1992   1993   1994   1995   1996
                          ------ ------ ------ ------ ------ ------ ------ ------ ------
                                                  (In thousands)
<S>                       <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
Reserves for unpaid
 losses and loss
 adjustment expense.....  $1,724 $2,397 $4,359 $4,552 $4,135 $4,798 $6,048 $8,288 $8,869
Reserves re-estimated at
 December 31:
   1 year later.........   1,351  2,910  2,786  3,264  4,266  4,653  5,854  7,482
   2 years later........   1,408  1,968  2,327  3,057  4,100  4,584  5,381    --
   3 years later........   1,053  1,533  2,169  2,956  4,148  3,920    --     --
   4 years later........     974  1,391  2,119  2,933  3,644    --     --     --
   5 years later........     776  1,329  1,967  2,607    --     --     --     --
   6 years later........     744  1,130  1,948    --     --     --     --     --
   7 years later........     494  1,187    --     --     --     --     --     --
   8 years later........     669    --     --     --     --     --     --     --
   9 years later........     --     --     --     --     --     --     --     --
  10 years later........     --     --     --     --     --     --     --     --
Cumulative redundancy...   1,055  1,210  2,411  1,945    491    878    667    806
Cumulative amount of
 liability paid through
 December 31:
   1 year later.........       1     54    319     99    524    152    501    931
   2 years later........      38     88    378    308    651    382    997    --
   3 years later........      38    175    554    380    872    621    --     --
   4 years later........      38    203    611    531  1,095    --     --     --
   5 years later........      38    244    693    697    --     --     --     --
   6 years later........      65    299    757    --     --     --     --     --
   7 years later........      67    325    --     --     --     --     --     --
   8 years later........      93    --     --     --     --     --     --     --
   9 years later........     --     --     --     --     --     --     --     --
  10 years later........     --     --     --     --     --     --     --
Net reserve December
 31.....................                                             6,048  8,288  8,869
Reinsurance
 recoverables...........                                               --       6     45
                                                                    ------ ------ ------
Gross reserve...........                                            $6,048 $8,294 $8,914
                                                                    ====== ====== ======
</TABLE>
 
  The Company assumes reinsurance for a number of liability risks which could
result in claims relating to environmental remediation and other specialty
risks to the extent that such liabilities are not excluded from the underlying
policies. Although the attachment points in reinsurance treaties between the
Company and the ceding companies relating to these risks are relatively low,
the Company's percentage participation in the layers of reinsurance in which
it participates is low. In addition, the Company cedes reinsurance to
substantial unaffiliated
 
                                      37
<PAGE>
 
reinsurers which would mitigate the effect of any losses under these treaties.
While there exists a possibility that the Company could suffer a material loss
in the event of a high frequency of losses under assumed reinsurance treaties,
this event is unlikely in management's judgment.
 
INVESTMENTS
 
  The Company entered into an Investment Services Agreement with Scudder
Insurance Asset Management ("Scudder") in 1995 whereby Scudder provides
investment advisory services to the Company, subject to the investment
policies and guidelines established by the Company's Board of Directors. The
Company has consistently invested primarily in investment grade fixed income
securities, with the objective of providing reasonable returns while limiting
liquidity risk and credit risk. The Company's investment strategy has been to
increase its investments in municipal bonds and other tax-exempt securities,
as opposed to equity securities, in order to avoid investment losses. The
investment portfolio consists primarily of government and governmental agency
securities and high quality marketable corporate securities which are rated at
investment grade level.
 
  At September 30, 1997, the Company's total assets of $42.2 million consisted
of the following: cash, investments and notes receivable, 82.7%; premiums
receivable and agent's balances, 9.9%; and other assets, 7.4%. At September
30, 1997, the Company held investment grade fixed income debt securities
valued at $24.8 million and secured notes receivable valued at $4.9 million.
Of the secured notes receivable, $1.3 million represented shareholder loans
from the Company, at market rates, secured by personal guarantees and Common
Shares in the Company, with the balance of $3.6 million representing secured
loans to unaffiliated parties, at or above market rates, secured by corporate
and personal guarantees, real estate and other collateral.
 
  The Company's cash and investments at September 30, 1997 totaled
approximately $34.6 million, and were classified as follows:
 
<TABLE>
<CAPTION>
                                                                     PERCENT OF
            TYPE OF INVESTMENT                          BOOK VALUE   PORTFOLIO
            ------------------                        -------------- ----------
                                                      (In thousands)
   <S>                                                <C>            <C>
   Cash and short-term investments...................    $ 4,022        11.6%
   United States government securities...............     11,113        32.1
   Mortgage-backed securities, GNMA collateral.......      2,862         8.3
   Corporate bonds...................................      5,291        15.3
   Foreign investments...............................        803         2.3
   Municipal bonds...................................      4,478        12.9
   Equity securities.................................      1,170         3.4
   Secured notes receivable..........................      4,887        14.1
                                                         -------       -----
       Total.........................................    $34,626       100.0%
                                                         =======       =====
</TABLE>
 
  The book and market values of the bond portfolio, classified by rating, as
of September 30, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                           AMOUNT
                                                MARKET  REFLECTED ON  PERCENT
   S&P'S/MOODY'S RATING(1)                       VALUE  BALANCE SHEET OF TOTAL
   -----------------------                      ------- ------------- --------
                                                    (Dollars in thousands)
   <S>                                          <C>     <C>           <C>
   AAA/Aaa (including United States Treasuries
    of $11,193)................................ $19,240    $19,240      77.7%
   AA/Aa.......................................   3,751      3,751      15.1
   A/A.........................................   1,585      1,585       6.4
   BBB/Baa.....................................     195        195       0.8
   All other...................................     --         --        --
                                                -------    -------     -----
     Total..................................... $24,771    $24,771     100.0%
                                                =======    =======     =====
</TABLE>
- --------
(1) Ratings are assigned by Standard & Poor's ("S&P") or, if no S&P rating is
    available, by Moody's Investors Service Inc. ("Moody's").
 
                                      38
<PAGE>
 
  The National Association of Insurance Commissions ("NAIC") has a bond rating
system by which it assigns securities to classes called "NAIC designations"
that are used by insurers when preparing their annual financial statements.
The NAIC assigns designations to publicly traded as well as privately placed
securities. The designations assigned by the NAIC range from class 1 to class
6, with a rating in class 1 being the highest quality. As of September 30,
1997, all of the Company's bond portfolio, measured on a statutory carrying
value basis, was invested in securities rated in class 1 or class 2 by the
NAIC, which are considered investment grade.
 
  The weighted average maturity of the Company's bond portfolio at September
30, 1997 was 4.6 years. The composition of the Company's bond portfolio,
classified by maturity, as of September 30, 1997, was as follows:
 
<TABLE>
<CAPTION>
                                                                 BOOK   MARKET
   MATURITY(1)                                                   VALUE   VALUE
   -----------                                                  ------- -------
                                                                (In thousands)
   <S>                                                          <C>     <C>
   Due in one year or less..................................... $ 1,149 $ 1,150
   Due from one to five years..................................  10,649  10,722
   Due from five to ten years..................................   7,686   7,810
   Due after ten years.........................................   2,201   2,244
   Mortgage-backed securities, GNMA's and GNMA collateral......   2,862   2,845
                                                                ------- -------
     Total..................................................... $24,547 $24,771
                                                                ======= =======
</TABLE>
- --------
(1)Based on stated maturity dates with no prepayment assumptions.
 
  The Company's investment grade fixed maturity securities included mortgage
backed bonds of $2.8 million, which are subject to risks associated with the
variable prepayments of the underlying mortgage loans. Prepayments cause those
securities to have different actual maturities than expected at the time of
purchase. Securities backed by mortgages that have an amortized cost greater
than par and are prepaid faster than expected will incur a reduction in yield,
or a loss, while other securities that have an amortized cost less than par
and are prepaid faster than expected will generate an increase in yield or a
gain. The degree to which a security is susceptible to either gains or losses
is influenced by the difference between its amortized cost and par, the
relative sensitivity of the underlying mortgages backing the assets to
prepayments and a change in the interest rate environment and the repayment
priority of the securities in the overall securitization structure.
 
  As of January 1, 1994, the Company adopted FASB Statement 115 and classified
all of its securities as "available for sale." Under this classification, the
fixed maturities classified as "available for sale" are carried at fair value
and changes in fair values net of applicable income taxes are charged or
credited directly to shareholders' equity. The Company has continued to
classify all of its fixed income securities as "available for sale."
 
AMERICAN SAFETY RISK RETENTION GROUP, INC.
 
  ORGANIZATION HISTORY. Following the enactment of the Risk Retention Act,
American Safety, in order to establish a U.S. insurance carrier to market
specialty environmental coverages, provided financial and technical assistance
in connection with the organization of American Safety RRG in 1988. American
Safety RRG is not owned by the Company but is managed by Synergy, the
Company's principal U.S. program development, underwriting and administrative
services subsidiary, on a fee-for-service basis. American Safety RRG is
authorized to write liability insurance in all 50 states as a result of the
Risk Retention Act, its license from the Vermont Department of Banking,
Insurance, Securities and Health Care Financing (the "Vermont Department")
under the Vermont Captive Act as a stock captive insurance company, and state
filings. Presently, five of the directors of American Safety RRG
(Messrs. Treadway, Brueggen, Mauldin, Mueller and Walsh) are also directors of
the Company. The directors of American Safety RRG are elected annually by the
insureds/shareholders of American Safety RRG.
 
  American Safety transferred its book of primary insurance business to
American Safety RRG in 1988 and American Safety RRG replaced American Safety
as the policy issuing carrier insuring general, pollution and
 
                                      39
<PAGE>
 
professional liability risks for contractors, consultants and other businesses
and property owners who are involved with environmental remediation. American
Safety then became the quota share reinsurer of the risks transferred and
subsequently underwritten by American Safety RRG. All reinsurers of American
Safety RRG are required to be approved as reinsurers by the Vermont
Department, and American Safety has been an authorized reinsurer of American
Safety RRG since 1988. The Company, through its insurance subsidiaries,
participates in the business of American Safety RRG as its primary reinsurer
under an excess of loss/quota share reinsurance arrangement. The Company and
American Safety RRG retain approximately 75% of the insurance business written
by American Safety RRG, with the balance reinsured with unaffiliated
substantial United States based reinsurers.
 
  REGULATION. The Risk Retention Act facilitates the establishment of risk
retention groups to insure certain liability risks of its members. The statute
applies only to "liability" insurance and does not permit coverage of personal
risk liability or workers' compensation. Membership in a risk retention group
is limited to persons engaged in businesses or activities that are similar or
related with respect to the liability to which the members are exposed by
virtue of any related, similar, or common business, trade, products, services
(including professional services), premises or operations. Ownership in a risk
retention group is limited to persons who are members of the group and who are
provided insurance by the group.
 
  The Risk Retention Act and the Vermont Captive Act require that each insured
of American Safety RRG be a shareholder. Each insured is required to purchase
one share of the American Safety RRG's common stock upon the acceptance of the
applicant as an insured. There is no trading market for the shares of common
stock of American Safety RRG and each share is restricted as to transfer. If
and when a holder of American Safety RRG common stock ceases to be an insured,
whether voluntarily or involuntarily, such person's share of common stock is
automatically canceled and such person is no longer a shareholder of American
Safety RRG. The ownership interests of members in a risk retention group are
considered to be exempt securities for purposes of the registration provisions
of the Securities Act and the Securities and Exchange Act and are likewise not
considered securities for purposes of any state securities law.
 
  Congress intended under the Risk Retention Act that the primary
responsibility for regulating the financial condition of a risk retention
group would rest on the state in which the group is licensed or chartered.
American Safety RRG is subject to regulation under the insurance laws of
Vermont and, to a lesser extent, under the laws of each state in which it is
doing business. The Risk Retention Act requires a risk retention group to
provide a notice on each insurance policy which it issues to the effect that
(i) the policy is issued by a risk retention group; (ii) the risk retention
group may not be subject to all of the insurance laws and regulations of the
state in which the policy is being issued; and (iii) the State Insurance
Insolvency Guaranty Fund is not available to the policies issued by the risk
retention group.
 
  MANAGEMENT. Since 1990, Synergy has managed the nationwide operations of
American Safety RRG from its offices in Atlanta, Georgia pursuant to a program
management agreement. The program management agreement has a term of three
years from January 1, 1997 through December 31, 1999, provided that the term
continues for successive one year periods thereafter unless the management
agreement is terminated on or before 90 days prior to the end of the initial
term or any renewal term. American Safety RRG has also entered into local
management services agreements since 1988 with captive management companies of
national insurance brokerage or insurance companies with offices located in
Burlington, Vermont to provide local administrative services.
 
  Synergy acts as the program manager for American Safety RRG pursuant to the
program management agreement and is authorized to solicit and accept
applications for insurance and to issue insurance contracts on behalf of
American Safety RRG subject to program administration rules and procedures of
American Safety RRG. In addition, Synergy provides marketing services,
administrative services, underwriting services, insurance brokerage services,
claims administration services, loss control services, financial, accounting,
billing and collection services and consulting services on behalf of American
Safety RRG. American Safety RRG pays a monthly administration fee, a
management fee, producing agent commissions, and other fees and reimbursements
 
                                      40
<PAGE>
 
to Synergy. The Company derived approximately 42.9% ($3.8 million) of its
revenues in 1996 and 28.3% ($2.9 million) of its revenues for the nine months
ended September 30, 1997 from American Safety RRG.
 
COMPETITION
 
  The casualty insurance and reinsurance business is highly competitive with
respect to a number of factors, including overall financial strength of the
insurer or reinsurer, ratings by rating agencies, premium rates, policy terms
and conditions, services offered, reputation and commission rates. The Company
faces competition from a number of insurers who have greater financial and
marketing resources and greater name recognition than the Company. Although
the Company's business strategy is to develop insurance programs for the
environmental remediation industry, the employee leasing and staffing
industry, as well as other specialty industries and risks by targeting niche
markets where its expertise is required and where competition is limited, the
Company nevertheless encounters competition from other insurance companies
engaged in insuring risks in broader lines of business which encompass the
Company's niche markets and specialty programs, and such competition is
expected to increase as the Company expands its operations.
 
LEGAL PROCEEDINGS
 
  The Company, through its subsidiaries, is routinely a party to pending or
threatened litigation in the normal course of its business. Based upon
information presently available, in view of legal and other defenses available
to the Company's subsidiaries, management does not believe that any pending or
threatened litigation or disputes will have any material adverse effect on the
Company's financial condition.
 
PROPERTIES
 
  The Company's Bermuda offices are located at 44 Church Street, Hamilton,
Bermuda. The offices of the Company's U.S. subsidiaries are located at 1845
The Exchange, Suite 200, Atlanta, Georgia 30339. See "Management--Compensation
Committee Interlocks and Insider Participation."
 
EMPLOYEES
 
  As of November 30, 1997, the Company employed 41 persons, none of whom was
represented by a labor union. The Company believes that its relationship with
its employees is good.
 
                                      41
<PAGE>
 
                              REGULATORY MATTERS
 
INSURANCE REGULATION
 
  The Company's primary insurance and reinsurance operations are subject to
regulation under applicable insurance statutes of the jurisdictions or states
in which each subsidiary is domiciled and writes insurance. Insurance
regulations intend to provide safeguards for the policyholders rather than to
protect shareholders of insurance companies or their holding companies.
 
  The nature and extent of state regulation varies from jurisdiction to
jurisdiction, but typically involves prior approval of the acquisition of
control of an insurance company or of any company controlling an insurance
company, regulation of certain transactions entered into by an insurance
company with an affiliate, approval of premium rates for lines of insurance,
standards of solvency and minimum amounts of capital and surplus which must be
maintained, limitations on types and amounts of investments, restrictions on
the size of risks which may be insured by a single company, deposits of
securities for the benefit of policyholders, and reports with respect to
financial condition and other matters. In addition, state regulatory examiners
perform periodic examinations of insurance companies.
 
  Although the federal government does not directly regulate the business of
insurance in the United States, federal initiatives often affect the insurance
business in a variety of ways. The insurance regulatory structure has also
been subject to scrutiny in recent years by the National Association of
Insurance Commissioners ("NAIC"), federal and state legislative bodies and
state regulatory authorities. Various new regulatory standards have been
adopted and proposed in recent years. The development of standards to ensure
the maintenance of appropriate levels of statutory surplus by insurers has
been a matter of particular concern to insurance regulatory authorities.
 
BERMUDA REGULATION
 
  American Safety, as a licensed Bermuda insurance company, and its Bermuda
insurance subsidiary, American Safety Re, are subject to regulation under The
Insurance Act 1978, as amended, and related regulations (the "Bermuda Act"),
which provides that no person shall conduct insurance business (including
reinsurance) in or from Bermuda unless registered as an insurer under the
Bermuda Act by the Minister of Finance (the "Minister"). In deciding whether
to grant registration, the Minister has discretion to act as he thinks fit in
the public interest. The Minister is required by the Bermuda Act to determine
whether an applicant for registration is a fit and proper body to be engaged
in insurance business and, in particular, whether it has, or has available to
it, adequate knowledge and expertise. In connection with registration, the
Minister may impose conditions relating to the writing of certain types of
insurance business.
 
  The Bermuda Act requires, among other things, Bermuda insurance companies to
meet and maintain certain standards of solvency, to file periodic reports in
accordance with the Bermuda Statutory Accounting Rules, to produce annual
audited financial statements and to maintain a minimum level of statutory
capital and surplus. In general, the regulation of insurers in Bermuda relies
heavily upon the auditors, directors and managers of the Bermuda insurer, each
of which must certify that the insurer meets the solvency capital requirements
of the Bermuda Act. Furthermore, the Minister is granted powers to supervise,
investigate and intervene in the affairs of insurance companies. Significant
aspects of the Bermuda insurance regulatory framework are set forth below:
 
  Cancellation of an Insurer's Registration. An insurer's registration may be
canceled by the Minister on certain grounds specified in the Bermuda Act
including the failure of the insurer to comply with the obligations of the
Bermuda Act or if, in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
 
  Independent Approved Auditor; Statutory Financial Statements; Statutory
Financial Return. Every registered insurer must appoint an independent auditor
approved by the Minister who will annually audit and report on the statutory
financial statements and the statutory financial return of the insurer, which
are required to be filed annually with the Registrar of Companies of Bermuda
(the "Registrar"), who is the chief administrative
 
                                      42
<PAGE>
 
officer under the Bermuda Act. The approved auditor may be the same person or
firm that audits the insurer's financial statements and reports for
presentation to its shareholders.
 
  An insurer must prepare annual statutory financial statements. The statutory
financial statements are not prepared in accordance with GAAP and are distinct
from the financial statements prepared for presentation to the insurer's
shareholders under The Companies Act 1981. The insurer is required to submit
the annual statutory financial statements as part of the annual statutory
financial return.
 
  An insurer is required to file with the Registrar a statutory financial
return that includes, among other matters, a report of the approved
independent auditor on the statutory financial statements of the insurer, a
declaration of the statutory ratios and a related solvency certificate.
 
  Minimum Solvency Margin. The Bermuda Act provides that the statutory assets
of an insurer must exceed its statutory liabilities by an amount greater than
the prescribed minimum solvency margin.
 
  Pursuant to the Insurance Amendment Act 1995, American Safety and its
Bermuda insurance subsidiary, American Safety Re, are registered as Class 3
insurers and, as such: (i) are required to maintain a minimum solvency margin
equal to the greatest of: (x) $1,000,000, (y) 20% of net premiums written up
to $6,000,000 plus 15% of net premiums written over $6,000,000, and (z) 15% of
loss reserves; (ii) are required to file annually with the Registrar a
statutory financial return together with a copy of their respective statutory
financial statements and an opinion of a loss reserve specialist in respect of
their respective loss and loss expense provisions within four months following
the end of the relevant financial year; (iii) are prohibited from declaring or
paying any dividends during any financial year if either is in breach of their
respective minimum solvency margins or minimum liquidity ratio or if the
declaration or payment of such dividends would cause either of them to fail to
meet such margin or ratio (if it fails to meet its minimum solvency margin or
minimum liquidity ratio on the last day of any financial year, the insurer
will be prohibited, without the approval of the Minister, from declaring or
paying any dividends during the next financial year); (iv) are prohibited,
without the approval of the Ministers, from reducing by 15% or more their
respective total statutory capital, as set out in their previous year's
financial statements; and (v) if it appears to the Minister that there is a
risk of the insurer becoming insolvent or that it is in breach of the Bermuda
Act or any conditions imposed upon its registration, the Minister may, in
addition to the restrictions specified above, direct the insurer not to
declare or pay any dividends or any other distributions or may restrict it
from making such payments to such extent as the Minister may think fit.
 
  Minimum Liquidity Ratio. The Bermuda Act provides a minimum liquidity ratio
for general business. An insurer engaged in general business is required to
maintain the value of its relevant assets at not less than 75% of the amount
of its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, account and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and
advances to affiliates and real estate and collateral loans. The relevant
liabilities are total general business insurance reserves and total other
liabilities less deferred income tax and sundry liabilities (by
interpretation, those not specifically defined).
 
  Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if
the Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information in relation to matters
connected with the insurer's business.
 
  If it appears to the Minister that there is a risk of the insurer becoming
insolvent, the Minister may direct the insurer not to take on any new
insurance business; not to vary any insurance contract if the effect would be
to increase the insurer's liabilities; not to make certain investments; to
realize certain investments; to maintain in Bermuda, or transfer to the
custody of a Bermuda bank, certain assets; not to declare or pay any dividends
or other distributions or to restrict the making of such payments; and/or to
limit its premium income.
 
                                      43
<PAGE>
 
  An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Bermuda Act, the principal office of American Safety and American Safety
Re is located at 44 Church Street, P.O. Box HM 2064, Hamilton, Bermuda.
Without a reason acceptable to the Minister, an insurer may not terminate the
appointment of its principal representative, and the principal representative
may not cease to act as such, unless 30 days' notice in writing to the
Minister is given of the intention to do so. It is the duty of the principal
representative, within 30 days of his reaching the view that there is a
likelihood of the insurer for which he acts becoming insolvent or its coming
to his knowledge, or his having reason to believe, that an "event" has
occurred, to make a report in writing to the Minister setting out all the
particulars of the case that are available to him. Examples of such an "event"
include failure by the insurer to comply substantially with a condition
imposed upon the insurer by the Minister relating to a solvency margin or a
liquidity or other ratio.
 
  Certain Foreign Issuer Considerations. As "exempted" companies, American
Safety and American Safety Re are exempt from Bermuda laws which restrict the
percentage of share capital that may be held by non-Bermudians, but as
exempted companies, American Safety and American Safety Re may not participate
in certain business transactions including: (i) the acquisition or holding of
land in Bermuda (except that required for its business and held by way of
lease or tenancy agreement for a term not exceeding 21 years) without the
express authorization of the Bermuda legislature; (ii) the taking of mortgages
on land in Bermuda; (iii) the acquisition of securities created or issued by,
or any interest in, any local company or business, other than certain types of
Bermuda government securities or securities of another "exempted" company,
partnership or other corporation resident in Bermuda but incorporated abroad;
or (iv) the carrying on of business of any kind in Bermuda, except in
furtherance of the business of the Company carried on outside Bermuda or under
a license granted by the Minister.
 
  The Bermuda government actively encourages foreign investment in "exempted"
entities like American Safety and American Safety Re that are based in Bermuda
but do not operate in competition with local business. As well as having no
restrictions on the degree of foreign ownership, the Company and American
Safety Re are not subject to taxes on their income or dividends or to any
foreign exchange controls in Bermuda. In addition, there is no capital gains
tax in Bermuda, and profits can be accumulated by American Safety and American
Safety Re, as required, without limitation.
 
  Neither American Safety nor American Safety Re is registered or licensed as
an insurance company in any state or jurisdiction in the United States.
 
U.S. REGULATION
 
  American Safety Casualty, a property and casualty insurer domiciled in
Delaware, was acquired by the Company in 1993. American Safety Casualty is
currently licensed as a property and casualty insurer in 43 states. The
insurer is subject to regulation by the Delaware Insurance Department and the
other states in which it is an admitted carrier. The Delaware Insurance
Department examines American Safety Casualty on a triennial basis. As reported
in its 1996 Annual Statement, the statutory capital and surplus of American
Safety Casualty was approximately $8,252,000. The maximum amount of dividends
which can be paid, without prior written approval of the Delaware Insurance
Department, is limited to the greater of 10% of surplus as regard to
policyholders or net income, excluding realized gains, of the preceding year.
Accordingly, American Safety Casualty could pay dividends of approximately
$825,200 in 1997 to the Company.
 
  The NAIC has established risk based capital ("RBC") requirements to help
state regulators monitor the financial strength and stability of property and
casualty insurers by notifying those companies that may be inadequately
capitalized. Under the NAIC's requirements, an insurer must maintain its total
capital above a calculated threshold or take corrective measures to achieve
the threshold. The threshold of adequate capital is based on a formula that
takes into account the amount of risk each company faces on its products and
investments. The RBC formula takes into consideration four major areas of
risk: (i) asset risk which primarily focuses on the quality of investments;
(ii) insurance risks which encompass coverage-related issues and
 
                                      44
<PAGE>
 
anticipated frequency and severity of losses when pricing and designing
insurance coverages; (iii) interest rate risk which involves asset/liability
matching issues; and (iv) other business risks. Management has calculated the
RBC level of American Safety Casualty and has determined that its capital and
surplus is significantly in excess of threshold requirements.
 
  Currently, prescribed or permitted statutory accounting principles ("SAP")
may vary between states and between companies. The NAIC is in the process of
recodifying SAP to promote standardization throughout the industry. Completion
of this project will result in changes in statutory accounting practices for
the Company. The impact on the Company's statutory capital and surplus is not
presently determinable.
 
  The Company's non-subsidiary affiliate, American Safety RRG, is domiciled in
Vermont and is authorized to write liability insurance in all 50 states, as
described above. See "Business--American Safety Risk Retention Group, Inc."
Synergy, the program manager, has calculated the RBC level of American Safety
RRG and has determined that its capital and surplus is significantly in excess
of threshold requirements.
 
                                      45
<PAGE>
 
                                  MANAGEMENT
 
OFFICERS AND DIRECTORS
 
  The following table provides information regarding the executive officers
and other significant employees of the Company and the directors of the
Company. Biographical information for each of such persons is set forth
immediately following the table.
 
<TABLE>
<CAPTION>
       NAME                          AGE                 OFFICE
       ----                          ---                 ------
   <S>                               <C> <C>
   Lloyd A. Fox.....................  52 President and Director
   Stephen R. Crim..................  34 Executive Vice President
   James G. Leach...................  49 Senior Vice President
   Fred J. Pinckney.................  50 General Counsel and Secretary
   Stephen F. Clarke................  39 Chief Financial Officer
   J. Jeffrey Hood..................  34 Vice President--Claims and Loss Control
   Kenneth A. Schneider.............  37 Senior Vice President--Underwriting
   Frederick C. Treadway............  45 Chairman of the Board
   Cody W. Birdwell.................  45 Director
   David V. Brueggen................  51 Director
   William O. Mauldin, Jr. .........  57 Director
   Thomas W. Mueller................  43 Director
   Timothy E. Walsh.................  47 Director
</TABLE>
 
  Lloyd A. Fox has been a director of the Company since 1996 and is President
of the Company. Since 1990, Mr. Fox has headed the management of the Company's
U.S. subsidiaries. He assisted as general legal counsel in the formation of
American Safety in 1986. Previously, Mr. Fox was an attorney for 16 years in
Atlanta, Georgia, where his practice centered on insurance, the environmental
and construction industries, as well as corporate and taxation matters. He
received a juris doctor degree from the University of Michigan Law School in
1974 and a bachelor of science degree in pharmacy from Brooklyn College of
Pharmacy in 1968. Mr. Fox is a frequent speaker at insurance seminars and
environmental training courses throughout the United States.
 
  Stephen R. Crim is Executive Vice President of the Company and Synergy and
has been responsible for all underwriting functions since joining the Company
in 1990. Previously, Mr. Crim was employed in the underwriting departments of
Aetna Casualty and Surety and The Hartford Insurance Co. between 1986 and
1990. Mr. Crim has 11 years experience in the insurance industry. Mr. Crim
received a bachelors degree in mathematics from the Indiana University in
1986.
 
  James G. Leach is Senior Vice President of the Company and of Synergy and
has been responsible for reinsurance and insurance regulatory matters since
joining the Company in 1993. Previously, Mr. Leach served as an insurance
executive for several national insurance companies and brokers. Mr. Leach has
22 years experience in the insurance industry. Mr. Leach received an associate
in science degree in physics from Gulf Coast College in 1968, a bachelor of
arts degree in economics from Duke University in 1970, a master of business
administration degree in finance and accounting from Georgia State University
in 1974, a masters in insurance degree from Georgia State University in 1976,
and a juris doctor degree from Drake University School of Law in 1989. He
holds the professional designations of Chartered Property and Casualty
Underwriter and Chartered Life Underwriter.
 
  Fred J. Pinckney became General Counsel and Secretary of the Company and of
American Safety Casualty in October 1997. Previously, Mr. Pinckney was an
attorney for 25 years in Atlanta, Georgia, where his practice centered on
securities and corporate matters. Since 1988, Mr. Pinckney was a partner in
the law firm of Parker, Johnson, Cook & Dunlevie, which merged in 1996 with
Womble Carlyle Sandridge & Rice, PLLC, where he was a member until he joined
the Company. He was involved as special legal counsel in the formation of
American Safety in 1986 and acted as outside legal counsel to the Company for
the past 12 years. Mr. Pinckney
 
                                      46
<PAGE>
 
received a juris doctor degree from the University of Michigan Law School in
1973 and a bachelor of arts degree in political science from the University of
Pittsburgh in 1969.
 
  Stephen F. Clarke is Chief Financial Officer of American Safety Casualty and
has been responsible for all accounting and treasury functions since joining
the Company in 1992. Previously, Mr. Clarke had 10 years accounting experience
in the insurance industry having held positions of corporate controller and
corporate accounting manager with Johnson & Higgins Willis Faber (U.S.A.) Inc.
and the New York Insurance Exchange. Mr. Clarke received a bachelor of science
degree in accounting from Monmouth College in 1981.
 
  J. Jeffrey Hood is Vice President--Claims and Loss Control of Synergy and of
American Safety Casualty and has been responsible for loss control and safety
matters since joining the Company in 1990. Previously, Mr. Hood had served as
a loss control and safety coordinator and claims administrator for national
technical and insurance organizations for four years. Mr. Hood received a
bachelor of science degree in petroleum engineering from Mississippi State
University in 1985.
 
  Kenneth A. Schneider is Senior Vice President--Underwriting of Synergy.
Prior to joining the Company in 1997, Mr. Schneider was a senior vice
president/managing director of Alexander & Alexander's environmental
underwriting, risk management and consulting division from 1993 to 1997, a
regional manager for marketing and underwriting for Zurich American Insurance
Company from 1990 to 1993, and an environmental business manager for AIG
Consultants from 1989 to 1990. Mr. Schneider has 15 years experience in the
insurance and environmental industry. Mr. Schneider received a masters of
business administration degree from the George Washington University in 1988
and a bachelor of science degree in geology from Beloit College in 1983.
 
  Frederick C. Treadway has served as the Chairman of the Board of Directors
of the Company since 1986. Mr. Treadway has been president of Specialty
Systems, Inc. in Indianapolis, Indiana since 1977, which is engaged in general
construction and asbestos abatement. Mr. Treadway has 24 years experience in
the construction business. Since 1996, Mr. Treadway, as owner and president of
Treadway Racing LLC, has been a team owner in the Indy Racing League.
 
  Cody W. Birdwell has served as a director of the Company since 1986. Mr.
Birdwell has been president of Sunbelt Communities, L.C. in Houston, Texas,
which is engaged in subdivision and mobile home community development and
sales, since 1993. Previously, Mr. Birdwell had 16 years experience in general
and environmental contracting.
 
  David V. Brueggen has served as a director of the Company since 1986. Mr.
Brueggen is senior vice president of finance of Anson Industries, Inc. in
Melrose Park, Illinois, which is engaged in drywall, acoustical and foam
insulation contracting. Mr. Brueggen has been employed by Anson Industries,
Inc. since 1982. Previously he was an audit manager with Arthur Andersen &
Co., an international public accounting firm, for 10 years. Mr. Brueggen is a
certified public accountant.
 
  William O. Mauldin, Jr. has served as a director of the Company since 1986.
Mr. Mauldin has been president of Midwest Materials Co. in Springfield,
Missouri since 1975, which is engaged in insulation and cold storage. Mr.
Mauldin has 31 years experience in the construction business.
 
  Thomas W. Mueller has served as a director of the Company since 1986. Mr.
Mueller has been vice president of Cardinal Industrial Insulation Co., Inc. in
Louisville, Kentucky since 1975, which is engaged in industrial insulation and
asbestos and sound abatement. Mr. Mueller has 23 years experience in the
construction business.
 
  Timothy E. Walsh has served as a director of the Company since 1986. Mr.
Walsh has been vice president of Walsh Construction Co., Inc. in Tallmadge,
Ohio since 1985, which is engaged in the general contracting, demolition,
excavation, masonry and asbestos abatement. Mr. Walsh has 23 years experience
in the construction business. Mr. Walsh is a registered civil engineer.
 
                                      47
<PAGE>
 
  The Company's Board of Directors consists of the seven persons set forth in
the table above. The Company's Bye-Laws provide for a classified Board of
Directors whereby the term of office of the directors of the first class
(Messrs. Fox and Brueggen) expires at the 1999 annual general meeting of
shareholders, the second class (Messrs. Birdwell, Mueller and Walsh) expires
at the 2000 annual general meeting of shareholders, and the third class
(Messrs. Mauldin and Treadway) expires at the 2001 annual general meeting of
shareholders. The directors elected at subsequent meetings will have a term
that expires at the third annual general meeting held after their election.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
  The Board of Directors has established four standing committees: The audit
committee, the compensation committee, the executive committee and the finance
committee.
 
  The audit committee is composed entirely of non-employee directors and
reviews the scope of the Company's audit, the engagement of independent
accountants and such accountants' reports. The members of the audit committee
are Messrs. Birdwell, Brueggen and Walsh.
 
  The compensation committee is composed entirely of non-employee directors
and has responsibility for determining executive compensation. The members of
the compensation committee are Messrs. Brueggen, Mueller and Treadway.
 
  The executive committee exercises general powers and authorities of the
Board of Directors between meetings of the full Board of Directors. The
executive committee also has responsibility for nominating directors. The
members of the executive committee are Messrs. Brueggen, Fox, Mueller and
Treadway.
 
  The finance committee is responsible for recommending portfolio allocations
to the Board of Directors, approving the Company's guidelines which provide
standards to ensure portfolio liquidity and safety and approving investment
managers and custodians for portfolio assets. The members of the finance
committee are Messrs. Birdwell, Brueggen and Mauldin.
 
DIRECTOR COMPENSATION
 
  Pursuant to the Company's Directors Stock Plan (the "Directors Plan"), non-
employee directors are awarded an annual "retainer award" in the form of
Common Shares of the Company having a fair market value of $5,000 (or a pro
rata portion thereof for less than a full year's service). The retainer award
shares are granted to the directors who are serving as directors immediately
after each annual general meeting and the fair market value of the Common
Shares is determined as of that date. The value of any fractional shares is
distributed in cash. The retainer award shares are issued and rights to such
shares vest as of the day immediately preceding the next annual general
meeting following the date of grant. All retainer award shares become fully
vested upon a "change in control" of the Company (as defined in the Directors
Plan) or if the director ceases a service as a director because of death or
disability. If a director ceases service as a director for any other reason,
all unvested retainer shares are forfeited. A total of 20,000 Common Shares
have been reserved for issuance under the Directors Plan.
 
  Directors are also paid $200 per day for attendance at each meeting of the
Board of Directors and $200 per day for attendance at each meeting of a
committee of the Board of Directors. Directors are also reimbursed for their
reasonable expenses in connection with their Board service.
 
STOCK OPTION PLAN
 
  The Company has adopted the Incentive Stock Option Plan (the "Incentive
Plan") which is intended to further the interests of the Company and its
shareholders by attracting, retaining and motivating management and other
employees. The Incentive Plan provides for the grant of stock options, which
may be non-qualified options or incentive stock options for tax purposes. A
total of 750,000 Common Shares have been reserved for issuance under the
Incentive Plan.
 
                                      48
<PAGE>
 
  The administrator of the Incentive Plan is the compensation committee of the
Company's Board of Directors. The compensation committee is authorized to
determine the terms and conditions of all option grants, subject to the
limitations set forth in the Incentive Plan. In accordance with the terms of
the Incentive Plan, the option price per share shall not be less than the fair
market value of the Common Shares on the date of grant and the term of any
option granted thereunder may be no longer than 10 years.
 
  It is anticipated that the executive officers of the Company will be granted
stock options effective as of the date of the completion of the Offering. Such
options will have an exercise price equal to the initial public offering price
of the Common Shares. It is currently expected that such grants will consist
of options to purchase 337,500 Common Shares, including grants to Messrs. Fox,
Crim and Leach of options to purchase 250,000 shares, 20,000 shares and 10,000
shares, respectively. The rights of recipients receiving these stock options,
generally, vest equally over three years, beginning with the first anniversary
date of the Offering and expire 10 years from the date of grant.
 
EXECUTIVE COMPENSATION
 
  The following table sets forth the compensation earned by the Chief
Executive Officer and the other executive officers of the Company whose salary
and bonus for the 1996 fiscal year were in excess of $100,000 (the "Named
Executive Officers"), for services rendered in all capacities to the Company
for that year:
 
<TABLE>
<CAPTION>
                                                      ANNUAL COMPENSATION
            NAME AND                                  -------------------     ALL OTHER
       PRINCIPAL POSITION                              YEAR     SALARY    COMPENSATION(1)(2)
       ------------------                             ------------------- ------------------
<S>                                                   <C>     <C>         <C>
Lloyd A. Fox, President.............................     1996 $   367,485       $4,500
Stephen R. Crim, Executive Vice President...........     1996     142,111        4,263
James G. Leach, Senior Vice President...............     1996     165,449        4,500
</TABLE>
- --------
(1) Represents the applicable amount accrued for the contribution by the
    Company with respect to its profit sharing plan.
(2) See "Certain Transactions."
 
  The following table sets forth all grants of stock options during 1997 to
Lloyd A. Fox the only Named Executive Officer who received option grants
during such year.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                                                                   POTENTIAL
                                                                                                   REALIZABLE
                                                                                                    VALUE AT
                                                                                                    ASSUMED
                                                                                                  ANNUAL RATES
                             NUMBER OF       PERCENT OF TOTAL                                    OF STOCK PRICE
                             SECURITIES     OPTIONS GRANTED TO                                    APPRECIATION
                         UNDERLYING OPTIONS    EMPLOYEES IN    EXERCISE OR BASE                    FOR OPTION
 NAME                        GRANTED(1)        FISCAL YEAR     PRICE PER SHARE  EXPIRATION DATE     TERM(2)
 ----                    ------------------ ------------------ ---------------- --------------- ----------------
<S>                      <C>                <C>                <C>              <C>             <C>     <C>
                                                                                                  5%      10%
                                                                                                ------- --------
Lloyd A. Fox(3).........       44,540              27.6%            $5.96           6/30/98     $18,261 $ 37,413
                                                                                                ------- --------
Lloyd A. Fox............       51,090              31.7%            $5.96            3/7/02     $86,342 $197,718
                                                                                                ------- --------
</TABLE>
- --------
(1) All options were granted at an exercise price per share equal to 95% of
    the book value per share of the Company at December 31, 1996.
(2) Amounts reported represent hypothetical values that may be realized upon
    exercise of the options immediately prior to the expiration of their term,
    assuming that the stock price on the date of grant appreciates at the
    specified annual rates of appreciation, compounded annually over the term
    of the option. These numbers are calculated based on rules promulgated by
    the Securities and Exchange Commission.
(3) The options were granted to Synergy Reinsurance Company, over which Mr.
    Fox exercises sole investment and voting powers.
 
                                      49
<PAGE>
 
  The following table provides information regarding the year-end value of
stock options held as of December 31, 1997 by Lloyd A. Fox, the only Named
Executive Officer holding options as of that date. No options were exercised
in 1997.
 
                            YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                              NUMBER OF SECURITIES      VALUE OF UNEXERCISED
                             UNDERLYING UNEXERCISED         IN-THE- MONEY
                               OPTIONS AT YEAR END     OPTIONS AT YEAR-END(1)
                            ------------------------- -------------------------
NAME                        EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----                        ----------- ------------- ----------- -------------
<S>                         <C>         <C>           <C>         <C>
Lloyd A. Fox...............   95,630           0       $577,605          0
</TABLE>
- --------
(1) There was no public trading market for the Common Shares as of December
    31, 1997. Accordingly, these values have been calculated by determining
    the difference between $12.00 per share (the mid-point of the estimated
    price range set forth on the cover page of this Prospectus) and the
    exercise price per share payable upon exercise of such options.
 
EMPLOYMENT AGREEMENT
 
  In December 1997, Lloyd A. Fox, President of the Company, entered into a new
five year employment agreement with the Company which provides for an annual
base salary of $375,000 and other customary executive benefits. Mr. Fox is
also entitled to receive an annual bonus to be determined by the Board of
Directors and stock options under the Incentive Plan, as described above.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  No member of the compensation committee serves as a member of the
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board or compensation committee.
 
  Currently, three of the directors of American Safety RRG (Messrs. Treadway,
Brueggen and Mueller) are also directors of the Company and the sole members
of the compensation committee of the Company. The directors of American Safety
RRG are elected annually by the insureds of American Safety RRG. The Company
derived approximately 53.0% ($3.3 million) of its revenues in 1994, 39.3%
($3.9 million) of its revenues in 1995, and 42.9% ($3.8 million) of its
revenues in 1996 from American Safety RRG. See "Business--American Safety Risk
Retention Group, Inc."
 
  In addition, Messrs. Birdwell, Fox, Mueller, Treadway and Walsh, all of whom
are directors of the Company, are owners of 1845 Tenants-In-Common (formerly
known as Windy Hill Exchange, L.L.C.), the landlord that leases approximately
13,130 square feet of office space in Atlanta, Georgia to Synergy, the
Company's principal U.S. program development, underwriting and administrative
services subsidiary. The lease commenced on March 1, 1996 and expires on
February 28, 2001. The lease provides for a base annual rent of $183,826 plus
an annual increase based on the consumer price index, with such increase not
less than 4% per annum. Synergy is also obligated to pay for an increase in
the landlord's property taxes and fire and extended insurance coverage on a
pro rata rentable floor area basis for the entire building. During 1996,
Synergy paid $160,280 to the landlord.
 
  On October 17, 1996, Frederick C. Treadway and Treadway Corporation borrowed
$1.1 million from the Company at an interest rate of 9.25% with quarterly
interest only payments and a maturity date of October 17, 1998. The largest
outstanding balance on this loan during 1996 was $1.1 million. The outstanding
balance at December 15, 1997 was $580,000. The loan is secured by Mr.
Treadway's personal guaranty and a pledge of the Common Shares owned by
Treadway Corporation. See "Certain Transactions."
 
 
                                      50
<PAGE>
 
INDEMNIFICATION
 
  The Company may exempt and indemnify its directors, officers and auditors in
their capacity as such in respect of any loss arising or liability attaching
to them by virtue of any rule in respect of any negligence, default, breach of
duty or breach of trust of which a director, officer or auditor may be guilty
in relation to the Company other than in respect of his own fraud or
dishonesty. The Company has adopted provisions in its Bye-Laws that provide
that each shareholder of the Company and the Company itself agrees to waive
any claim or right of action he or it might have, whether individually or by
or in the right of the Company, against any director on account of any action
taken by such director, or the failure of such director to take any action, in
the performance of his duties, or supposed duties, with or for the Company,
provided that such waiver shall not extend to any matter in respect of any
fraud or dishonesty which may attach to such directors. Further, the Company
has adopted provisions in its Bye-Laws that provide that the Company shall
indemnify its directors, officers and may indemnify its auditors to the
maximum extent permitted under the Companies Act.
 
                                      51
<PAGE>
 
                             CERTAIN TRANSACTIONS
 
  In 1995, the Company entered into a retrocessional excess of loss
reinsurance treaty (for policy limits in excess of reinsurance obtained from
other unaffiliated reinsurers) with Synergy Reinsurance Company ("Synergy
Re"), which is owned by Lloyd A. Fox, the President and a director of the
Company. The treaty covers certain asbestos liability and environmental
remediation liability insurance policies in force, written or renewed by
American Safety RRG or American Safety Casualty for which the Company acts as
a reinsurer. During 1995, 1996 and 1997, the Company paid reinsurance premiums
of $25,000, $451,728 and $318,773, respectively, to Synergy Re. In 1997,
Synergy Re purchased 26,200 Common Shares of the Company for an aggregate
purchase price of $156,597 and received an option to purchase 44,540 Common
Shares of the Company on or before June 30, 1998 for an aggregate purchase
price of $266,215 (both transactions were based on a per share purchase price
equal to 95% of the Company's book value at December 31, 1996).
 
  In 1996, the Company entered into a retrocessional excess of loss
reinsurance treaty (for policy limits in excess of reinsurance obtained from
other unaffiliated reinsurers) with Omega Reinsurance Company ("Omega Re"),
which is owned by Stephen R. Crim, the Executive Vice President of the
Company. The treaty covers certain asbestos liability and environmental
remediation liability insurance policies in force, written or renewed by
American Safety RRG or American Safety Casualty for which the Company acts as
a reinsurer. During 1996 the Company paid no reinsurance premiums to Omega Re,
and during 1997 the Company paid reinsurance premiums of $111,200 to Omega Re.
In 1997, Omega Re purchased 26,200 Common Shares of the Company for an
aggregate purchase price of $156,597 (based on a per share purchase price
equal to 95% of the Company's book value at December 31, 1996).
 
  In 1996, the Company had loans outstanding to Mader Construction Group,
Inc., a shareholder of the Company, and to Timothy E. Walsh, a director and
shareholder of the Company, which loans were secured by personal guarantees
and collateral, including a pledge of the Common Shares of the Company owned
by each borrower. On November 7, 1995, Mader Construction Group, Inc. borrowed
$400,000 from the Company at an interest rate of 10.75% with monthly principal
payments of $10,000 plus accrued interest and a maturity date of December 29,
1997. The loan was repaid on December 5, 1997. On July 30, 1996, Timothy E.
Walsh borrowed $250,000 from the Company at an interest rate of 9.25% based on
a five year amortization schedule with a maturity date of December 31, 1997.
The loan was repaid on December 18, 1997.
 
  Management believes the terms of the aforementioned transactions are no less
favorable to the Company than can be obtained from unaffiliated third parties.
Any future transactions between the Company and any director, officer or
principal shareholder of the Company, or any affiliate of such person, will be
on terms no less favorable to the Company than can be obtained from
unaffiliated third parties.
 
                                      52
<PAGE>
 
                            PRINCIPAL SHAREHOLDERS
 
  The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Shares as of December 15, 1997,
and as adjusted to reflect the sale of Common Shares offered by this
Prospectus, by: (i) each person known to the Company to beneficially own more
than 5% of the Common Shares; (ii) each of the Company's directors; (iii) each
of the Company's Named Executive Officers; and (iv) all directors and
executive officers of the Company as a group. Except as otherwise indicated,
each person listed below has sole voting and investment power with respect to
such Common Shares.
 
<TABLE>
<CAPTION>
                                                SHARES    PERCENTAGE PERCENTAGE
                                             BENEFICIALLY   BEFORE     AFTER
         NAME OF BENEFICIAL OWNER              OWNED(1)    OFFERING   OFFERING
         ------------------------            ------------ ---------- ----------
<S>                                          <C>          <C>        <C>
Treadway Corporation and Frederick C.
 Treadway(2)...............................     603,910     20.64%     10.74%
Lloyd A. Fox(3)............................     294,750      9.76       5.15
Vertecs Corporation and David V.
 Brueggen(4)...............................     284,270      9.72       5.05
Walsh Properties Partnership(5)............     261,345      8.93       4.65
A.R.I. Incorporated and William O. Mauldin,
 Jr.(6)....................................     230,560      7.88       4.10
Cody W. Birdwell and The Cody Birdwell
 Family Limited Partnership(7).............     196,500      6.72       3.49
Mader Construction Group, Inc.(8)..........     196,500      6.72       3.49
Thomas W. Mueller(9).......................     182,745      6.25       3.25
Mark C. Mueller(10)........................     182,745      6.25       3.25
Market Street Realty Trust(11).............     151,960      5.19       2.70
Timothy E. Walsh(12).......................     137,550      4.70       2.45
Stephen R. Crim(13)........................      26,200         *          *
James G. Leach.............................           0         *          *
All directors and executive officers as a
 group (9 persons).........................   1,956,485     64.77%     34.20%
</TABLE>
- --------
* Less than 1%.
 
(1) Shares beneficially owned include shares that may be acquired pursuant to
    the exercise of outstanding stock options that are exercisable within 60
    days of the date set forth above.
(2) Represents shares held of record by Treadway Corporation, over which Mr.
    Treadway exercises sole investment and voting power. Mr. Treadway is
    Chairman of the Board of Directors of the Company, and his business
    address is 9406 Promontory Circle, Indianapolis, Indiana 46236.
(3) Includes 52,400 shares held of record by Synergy Reinsurance Company, over
    which shares Mr. Fox exercises sole investment and voting power, 95,630
    shares subject to immediately exercisable stock options and 41,920 shares
    owned by his spouse, as to which Mr. Fox disclaims beneficial ownership.
    Mr. Fox is a director and the President of the Company, and his business
    address is 1845 The Exchange, Suite 200, Atlanta, Georgia 30339.
(4) Represents shares held of record by Vertecs Corporation. The business
    address of Vertecs Corporation is 1959 Anson Drive, Melrose Park, Illinois
    60160. David V. Brueggen, a director of the Company, is an officer of
    Vertecs Corporation and disclaims beneficial ownership of such shares.
(5) The business address of Walsh Properties Partnership is 1405 Newton St.,
    Tallmadge, Ohio 44278.
(6) Represents shares held of record by A.R.I. Incorporated, over which Mr.
    Mauldin exercises sole investment and voting power. Mr. Mauldin is a
    director of the Company, and his business address is 417 W. Mill,
    Springfield, Missouri 65801.
(7) Represents 98,250 shares held of record by Mr. Birdwell and 98,250 shares
    of record held by The Cody Birdwell Family Limited Partnership, over which
    shares Mr. Birdwell exercises sole investment and voting power. Mr.
    Birdwell is a director of the Company, and his business address is 11767
    Katy Freeway, Suite 690, Houston, Texas 77079.
(8) The business address of Mader Construction Group, Inc. is 970 Bullis Road,
    Elma, New York 14059.
(9) Thomas W. Mueller is a director of the Company, and his business address
    is 1300 West Main Street, Louisville, Kentucky 40203. Thomas W. Mueller
    disclaims beneficial ownership of the shares owned by Market Street Realty
    Trust, for which he is one of three trustees.
 
                                      53
<PAGE>
 
(10) The business address of Mark C. Mueller is 1300 Main Street, Louisville,
     Kentucky 40203. Mark C. Mueller disclaims beneficial ownership of the
     shares owned by Market Realty Trust, for which he is one of three
     trustees.
(11) The business address of Market Street Realty Trust is 1300 Main Street,
     Louisville, Kentucky 40203.
(12) Timothy E. Walsh, a director of the Company, is not affiliated with Walsh
     Properties Partnership and disclaims beneficial ownership of the shares
     owned by Walsh Properties Partnership.
(13) Represents 26,200 shares held of record by Omega Reinsurance Company, over
     which Mr. Crim exercises sole investment and voting power.
 
                                       54
<PAGE>
 
                         DESCRIPTION OF CAPITAL STOCK
 
  The following summarizes certain provisions of the Memorandum of Association
and Bye-Laws of the Company. Such summaries do not purport to be complete and
are subject to, and are qualified in their entirety by, all of the provisions
of the Memorandum of Association and Bye-Laws. Copies of the Memorandum of
Association and Bye-Laws are filed as exhibits to the Registration Statement
of which this Prospectus is a part.
 
GENERAL
 
  The authorized share capital of the Company is 20 million shares, consisting
of 15 million common shares, par value $.01 per share ("Common Shares"), and 5
million preferred shares, par value $.01 per share ("Preferred Shares").
 
COMMON SHARES
 
  The Common Shares offered hereby will be validly issued, fully paid and
nonassessable. There are no provisions of Bermuda law or the Company's Bye-
Laws which impose any limitations on the rights of shareholders to hold or
vote Common Shares by reason of such shareholders not being residents of
Bermuda.
 
  DIVIDEND RIGHTS. The Company is a holding company with no significant
operations or significant assets other than its investment portfolio and
ownership of the capital stock of its reinsurance, insurance, management
services and other subsidiaries. Therefore, the Company will rely primarily on
dividends from its subsidiaries to pay dividends on the Common Shares. The
ability of any subsidiary to pay dividends to the Company in the future is
subject to limitations imposed by the insurance laws or corporate laws and
regulations of the jurisdiction of incorporation and domicile of each entity,
and will depend on, among other things, each subsidiary's statutory surplus,
future earnings and regulatory restrictions. See "Dividend Policy."
 
  Holders of Common Shares will be entitled to receive dividends ratably when
and as declared by the Board of Directors out of funds legally available
therefor.
 
  VOTING RIGHTS. Each holder of Common Shares is entitled to one vote per
share on all matters submitted to a vote of the Company's shareholders,
subject to the 9.5% voting limitation described below. All matters, including
the election of directors, voted upon at any duly held shareholders meeting
shall be authorized by a majority of the votes cast at the meeting by
shareholders represented in person or by proxy, except (i) approval of a
merger, consolidation or amalgamation, (ii) the sale, lease or exchange of all
or substantially all of the assets of the Company, and (iii) amendment of
certain provisions of the Bye-Laws, which each require the approval of at
least 66 2/3% of the outstanding voting shares, voting together as a single
class (in addition to any regulatory or court approvals). A special resolution
requires the approval of at least 66 2/3% of the votes cast by such
shareholders represented in person or by proxy at a duly convened meeting.
 
  The Common Shares have non-cumulative voting rights, which means that the
holders of a majority of the Common Shares may elect all of the directors of
the Company and, in such event, the holders of the remaining shares will not
be able to elect any directors.
 
  The Bye-Laws contain certain provisions that limit the voting rights that
may be exercised by certain holders of Common Shares. The Bye-Laws provide
that each holder of Common Shares is entitled to one vote per share on all
matters submitted to a vote of the Company's shareholders, except that if, and
so long as, the Controlled Shares (as defined below) of any person constitute
9.5% or more of the issued and outstanding Common Shares, the voting rights
with respect to the Controlled Shares owned by such person shall be limited,
in the aggregate, to a voting power of 9.5%, pursuant to a formula specified
in the Bye-Laws. "Controlled Shares" mean (i) all shares of the Company
directly, indirectly or constructively owned by any person within the meaning
of Section 958 of the Code and (ii) all shares of the Company directly,
indirectly or beneficially owned by such person within the meaning of Section
13(d) of the Exchange Act (including any shares owned by a group of persons,
as so defined and including any shares that would otherwise be excluded by the
provisions of Section 13(d)(6) of
 
                                      55
<PAGE>
 
the Exchange Act). Under these provisions, if, and so long as, any person (as
defined below) directly, indirectly or constructively owns, within the meaning
of Section 958 of the Code, Controlled Shares having more than 9.5% of the
total number of votes exercisable in respect of all shares of voting stock of
the Company, the voting rights attributable to such shares will be limited, in
the aggregate, to 9.5% of the total number of votes.
 
  PREEMPTIVE RIGHTS. No holder of Common Shares of the Company shall, by
reason only of such holder, have any preemptive right to subscribe to any
additional issue of shares of any class or series nor to any security
convertible into such shares.
 
PREFERRED SHARES.
 
  Pursuant to the Bye-Laws, the Company's Board of Directors may by resolution
establish one or more series of preferred shares having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations as may be fixed by the Board of Directors
without any further shareholder approval. Such rights, preferences, powers and
limitations as may be established could also have the effect of impeding or
discouraging the acquisition of control of the Company.
 
ANTI-TAKEOVER EFFECTS OF BYE-LAWS
 
  The Bye-Laws contain certain provisions that may be viewed as making the
acquisition of control of the Company more difficult. These provisions are
designed to encourage persons seeking to acquire control of the Company to
negotiate with the directors. The directors believe that, in general, the
interests of the Company's shareholders would be best served if any change in
control results from negotiations with the directors. The directors would
negotiate based upon careful consideration of the proposed terms, such as the
price to be paid to shareholders, the form of consideration to be paid and the
anticipated tax effects of the transaction. However, these provisions could
have the effect of discouraging a prospective acquiror from making a tender
offer or otherwise attempting to obtain control of the Company. To the extent
these provisions discourage takeover attempts, they could deprive shareholders
of opportunities to realize takeover premiums for their shares or could
depress the market price of the Common Shares.
 
BYE-LAWS
 
  The Bye-Laws provide for the internal regulation of the Company, including,
among other things, the establishment of share rights, modification of such
rights, issuance of share certificates, imposition of a lien over shares in
respect of unpaid amounts on those shares, calls on shares which are not fully
paid, forfeiture of shares, the transfer of shares, alterations to capital,
the convening and conduct of general meetings, proxies, the appointment and
removal of directors, conduct and power of directors, dividends, the
appointment of any auditor and the winding-up of the Company.
 
  In addition to the provisions of the Bye-Laws discussed above, set forth
below is a description of other relevant provisions of the Bye-Laws. The
descriptions are intended as a summary only and are qualified in their
entirety by reference to the Bye-Laws which are filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
 
  SHAREHOLDER PROPOSALS. The Bye-Laws provide that shareholders holding not
less than one tenth of the voting shares of the Company have at all times the
right to submit a proposal for consideration at an annual general meeting or
special general meeting of shareholders or to nominate persons for election as
directors, provided that written notice of such shareholder's intent to make
such a proposal or nomination must be received by the Secretary of the Company
at the registered offices of the Company not later than two months prior to
such meeting. If the Board fails to proceed to convene a special general
meeting within 21 days of receipt by the Company of the shareholder's request
to hold such meeting, the shareholders may do so in accordance with Bermuda
law. The shareholder's request must describe the proposal or nomination in
sufficient detail for it to be summarized on the agenda for the meeting and
must set forth (i) the name and record address of the
 
                                      56
<PAGE>
 
shareholder proposing such meeting; (ii) a representation that the shareholder
is a holder of record of the shares of the Company entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to present
such proposal or nomination; (iii) the class and number of shares of the
Company which are beneficially owned by the shareholder; (iv) a brief
description of the business desired to be brought before the meeting; (v) the
reasons for conducting such proposed business at the meeting; (vi) any
material interest of the shareholder in such business. In the case of a
nomination of any person for election as a director, the shareholder's request
shall set forth: (a) the name, age, business address and residence address of
any person to be nominated; (b) the principal occupation or employment of the
person; (c) the number of Common Shares which are beneficially owned by such
person; (d) such other information regarding the nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to Regulation 14A under the Exchange Act, whether or not the Company
is then subject to such Regulation; and (e) the consent of each nominee to
serve as a director of the Company if so elected. The presiding officer of the
meeting shall, if the facts warrant, refuse to acknowledge a proposal or
nomination not made in compliance with the foregoing procedure.
 
  The advance notice requirements regulating shareholder nominations and
proposals may have the effect of precluding a contest for the election of
directors or the introduction of a shareholder proposal if the procedures
summarized above are not followed and may discourage or deter a third party
from conducting a solicitation of proxies to elect its own slate of directors
or to introduce a proposal.
 
  RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The Company's Bye-Laws
contain provisions which restrict certain "business combinations." In general,
the Bye-Laws prohibit an "interested shareholder" of the Company from either
directly or indirectly, being a party to or taking any action in connection
with any "business combination" with the Company for a period of five years
following the date such person first became an "interested shareholder,"
unless (a) the "business combination" was approved by a prior resolution of
the "continuing directors" of the Company's Board of Directors; or (b) the
"business combination" was approved by a prior resolution of at least 66 2/3%
of the outstanding voting shares of the Company other than those voting shares
beneficially held by an "interested shareholder."
 
  A "business combination" includes, among other things, (i) any arrangement,
reconstruction or amalgamation involving the Company and an "interested
shareholder," (ii) any transaction or series of transactions involving the
sale, purchase, lease, exchange, mortgage, pledge, transfer or other
disposition or encumbrance of the assets of the Company, (iii) the interest or
transfer to an "interested shareholder" or any affiliate thereof of any
securities by the Company other than an issue or distribution to all
shareholders of the Company entitled to participate therein, (iv) the adoption
of any plan or proposal for the liquidation or dissolution of the Company
unless such plan or proposal is initiated, proposed or adopted independently
of any "interested shareholder" and (v) the reclassification of any securities
or other restructuring of the capital of the Company in such a way as to
confer a benefit on the "interested shareholder."
 
  An "interested shareholder" is any shareholder of the Company who is, or has
publicly disclosed a plan or intention to become, the beneficial owner of
Common Shares representing ten percent or more of the value of the Company.
 
  A "continuing director" includes (i) any member of the Company's Board of
Directors who while a member thereof is not an "interested shareholder" and
was a member of the Company's Board of Directors prior to the time that the
"interested shareholder" became such, and (ii) any person who subsequently
becomes a member of the Company's Board of Directors and, while such person is
a member thereof, is not an "interested shareholder" or an affiliate of an
"interested shareholder," and such person's nomination for election or
election to the Company's Board of Directors is recommended or approved by a
majority of the "continuing directors" then in office.
 
  As a result of the application of this provision of the Company's Bye-Laws
potential acquirors of the Company may be discouraged from attempting to
effect an acquisition transaction with the Company, thereby
 
                                      57
<PAGE>
 
possibly depriving holders of the Company's Common Shares of certain
opportunities to sell or otherwise dispose of such securities at above-market
prices pursuant to such transaction.
 
  The affirmative vote of the holders of at least 66 2/3% of the outstanding
shares entitled to vote shall be required to amend, repeal or adopt any
provision inconsistent with the foregoing provision of the Bye-Laws.
 
TRANSFER AGENT AND REGISTRAR
 
  SunTrust Bank, Atlanta, Georgia, is the transfer agent and registrar for the
Common Shares.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of the Offering, the Company will have outstanding 5,625,230
Common Shares. The 2,700,000 Common Shares sold in the Offering will be freely
tradable without restriction or further registration under the Securities Act,
except that those shares held by "affiliates" (as defined in Rule 144
promulgated under the Securities Act) of the Company will not be freely
tradable even though they will have been registered under the Securities Act.
The other 2,925,230 Common Shares were outstanding prior to the Offering and
are treated as "restricted securities" for purposes of Rule 144 under the
Securities Act and may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. In addition, all Common Shares held by such affiliates of the Company are
subject to a lock-up agreement with the representatives of the Underwriters
that prohibits their resale prior to 180 days after the completion of the
Offering without the prior consent of the Underwriters. Upon the expiration of
such 180 day period, such holders will be entitled generally to dispose of
their shares, subject to the provisions of Rule 144.
 
  In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated), including any affiliate of the Company, who owns
Common Shares which have not been registered under the Securities Act and as
to which a minimum of one year has elapsed since the later of the date of
acquisition from and full payment to the Company or an affiliate of the
Company, and any affiliate of the Company who owns registered shares, will be
entitled to sell, within any three-month period beginning 90 days after the
date of this Prospectus (but subject to the 180 day lock-up period described
above), a number of Common Shares that does not exceed the greater of: (i) 1%
of the then outstanding Common Shares or (ii) the average weekly trading
volume in the Common Shares in the public market during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales of Common Shares pursuant to Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. In
addition, under Rule 144, any person who holds Common Shares which have not
been registered under the Securities Act as to which a minimum of two years
has elapsed since the later of the date of acquisition from and full payment
to the Company or an affiliate of the Company and who is not, and for a period
of three months prior to the sale of such Common Shares has not been, an
affiliate of the Company is free to sell such shares without regard to the
volume, manner of sale, notice and other provisions of Rule 144.
 
  In addition, 750,000 Common Shares are reserved for issuance under the
Incentive Plan and 20,000 Common Shares are reserved for issuance in
connection with the Directors Plan. The Company intends to file a registration
statement on Form S-8 under the Securities Act to register the Common Shares
reserved for issuance under the Incentive Plan and the Directors Plan after
the completion of the Offering. Common Shares issued under the Incentive Plan
and the Directors Plan to non-affiliates of the Company after the effective
date of such registration statement will be freely tradable in the public
market. Common Shares issued under the Incentive Plan and the Directors Plan
to affiliates of the Company after the effective date of such registration
statement will be eligible for sale pursuant to Rule 144.
 
  Prior to the Offering, there has been no public trading market for the
Company's Common Shares. The Company cannot predict the effect, if any, that
sales of Common Shares following the offering, pursuant to a registration
statement, Rule 144, or otherwise, or the availability of such shares for
sale, will have on the market
 
                                      58
<PAGE>
 
price prevailing from time to time. Sales, or the availability for sale, of a
substantial amount of Common Shares could adversely affect prevailing market
prices for such shares.
 
                      CERTAIN BERMUDA LAW CONSIDERATIONS
 
  The following discussion is based on the advice of Conyers Dill & Pearman,
Bermuda counsel to the Company. American Safety has been designated as a non-
resident for exchange control purposes by the Bermuda Monetary Authority,
Foreign Exchange Control, whose permission for the issue and transfer of
Common Shares has been obtained subject to the Common Shares being listed on
the Nasdaq National Market. This Prospectus has been filed with the Registrar
of Companies in Bermuda in accordance with Bermuda law.
 
  CONSENT UNDER THE EXCHANGE CONTROL ACT, 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND
TRANSFER OF THE COMMON SHARES BEING OFFERED PURSUANT TO THE OFFERING. IN
ADDITION, A COPY OF THIS DOCUMENT HAS BEEN DELIVERED TO THE REGISTRAR OF
COMPANIES IN BERMUDA PURSUANT TO THE COMPANIES ACT, 1981 OF BERMUDA.
 
  IN GIVING SUCH CONSENT AND IN ACCEPTING THIS PROSPECTUS FOR FILING, THE
BERMUDA MONETARY AUTHORITY AND THE REGISTRAR OF COMPANIES IN BERMUDA,
RESPECTIVELY, ACCEPT NO RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF ANY
PROPOSAL, OR FOR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINIONS
EXPRESSED HEREIN.
 
  The transfer of Common Shares between persons regarded as non-resident in
Bermuda for exchange control purposes and the issue of shares after the
completion of the Offering to such persons may be effected without specific
consent under the Exchange Control Act, 1972 and regulations thereunder
subject to the Common Shares being listed on the Nasdaq National Market.
Issues and transfers of shares to any person regarded as resident in Bermuda
for exchange control purposes require specific prior approval under the
Exchange Control Act, 1972.
 
  There are no limitations on the rights of persons regarded as non-resident
of Bermuda for foreign exchange control purposes owning Common Shares to hold
or vote their Common Shares. Because American Safety has been designated as a
non-resident for Bermuda exchange control purposes, there are no restrictions
on its ability to transfer funds in and out of Bermuda or to pay dividends to
United States residents or other non-residents of Bermuda who are holders of
Common Shares, other than in respect of local Bermuda currency. In addition,
because American Safety has been designated as a non-resident for Bermuda
exchange control purposes, it does not intend to maintain Bermuda dollar
deposits and, accordingly, will not pay dividends on the Common Shares in
Bermuda currency.
 
  In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may,
at the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, American
Safety is not bound to investigate or incur any responsibility in respect of
the proper administration of any such estate or trust. American Safety will
take no notice of any trust applicable to any of its Common Shares whether or
not it had notice of such trust.
 
                          CERTAIN TAX CONSIDERATIONS
 
  The following discussion of the tax treatment of the Company and its
subsidiaries, and of the shareholders of the Company, is for general
information purposes only and does not purport to be a complete analysis of
all tax considerations that may be applicable to them.
 
 
                                      59
<PAGE>
 
  For example, except as expressly described below, the following discussion
does not deal with (i) Common Shares acquired by an individual pursuant to the
exercise of employee stock options, pursuant to the terms of a stock option
plan, or otherwise as compensation, (ii) shareholders who are not citizens or
residents of the United States, (iii) Common Shares other than those acquired
by purchasers in the Offering, (iv) shareholders who directly or
constructively own 10 percent or more of the voting power or value of the
capital stock of the Company, (v) other categories of shareholders subject to
special treatment under United States income tax laws, such as dealers in
securities, banks, insurance companies and tax-exempt entities, or (vi) any
state or local taxes, or any taxes other than income taxes.
 
  The following discussion is based upon current law, and could be affected by
legislative, judicial or administrative changes. Statements made below as to
United States law and Bermuda law, respectively, are based upon the opinions
of KPMG Peat Marwick LLP, United States tax advisors to the Company, and
Conyers Dill & Pearman, Bermuda counsel to the Company, as to material tax
consequences of acquisition, ownership and disposal of Common Shares. Such
firms express no opinion as to, and have not independently confirmed, any
factual or accounting matters, determinations or conclusions, such as amounts
and computations of Subpart F Insurance Income or "related person insurance
income" or components thereof (as such terms are defined below), the tax
residence of the Company and its subsidiaries or their eligibility for the
benefits of any income tax treaty with the United States or facts relating to
the conduct of business and activities of the Company and its subsidiaries.
 
  The tax treatment of a shareholder may vary depending on such shareholder's
particular tax situation or status, and therefore, each prospective investor
is urged to consult its own tax advisors as to the particular tax consequences
of the offering for such shareholder, including the effect and applicability
of federal, state, local and foreign income and other tax laws.
 
TAXATION OF AMERICAN SAFETY AND ITS BERMUDA SUBSIDIARY
 
BERMUDA
 
  Under current Bermuda law, there is no income or capital gains tax payable
by American Safety or its Bermuda subsidiary. American Safety and its Bermuda
subsidiary have received from the Minister assurances, under The Exempted
Undertakings Tax Protection Act 1966 of Bermuda, to the effect that in the
event of there being enacted in Bermuda any legislation imposing tax computed
on profits or income, or computed on any capital asset, gain or appreciation,
or any tax in the nature of estate duty or inheritance tax, then the
imposition of any such tax shall not be applicable to them or to any of their
respective operations or to their shares, debentures or other obligations
until March 28, 2016. These assurances are subject to the proviso that they
are not to be construed so as to prevent the application of any tax or duty to
such persons as are ordinarily resident in Bermuda or to prevent the
application of any tax payable in accordance with the provisions of The Land
Tax Act 1967 of Bermuda or otherwise payable in relation to any property
leased to American Safety or its Bermuda subsidiary.
 
  American Safety and its Bermuda subsidiary are required to pay certain
annual Bermuda government fees. In addition, American Safety and American
Safety Re are required to pay certain business fees as an insurer under the
Bermuda Act. Currently, there would be no Bermuda withholding or other tax on
dividends paid by American Safety Re to American Safety.
 
UNITED STATES
 
  In general, a foreign corporation is subject to (i) United States federal
income tax at graduated rates on its taxable income that is treated as
effectively connected with its conduct of a trade or business within the
United States and (ii) the 30% United States branch profits tax on its
effectively connected earnings and profits (with certain adjustments) deemed
repatriated from the United States, unless the corporation is entitled to
relief under the provisions of a tax treaty into which the United States has
entered.
 
                                      60
<PAGE>
 
  The United States has entered into a tax treaty with Bermuda (the "Bermuda
Treaty"). The Bermuda Treaty provides that business profits derived from
carrying on the business of insurance by a Bermuda company that is an
"enterprise of insurance" may only be taxed in the United States if such
profits are attributable to the conduct of a trade or business in the United
States through a permanent establishment situated therein. However, a Bermuda
company is entitled to the Bermuda Treaty benefits described above only if (i)
more than 50% of its shares are beneficially owned, directly or indirectly, by
individuals who are United States citizens or residents or Bermuda residents,
and (ii) the Company's income is not used in substantial part to make
disproportionate distributions to, or to meet certain liabilities to, persons
who are not United States citizens or residents or Bermuda residents. The
Bermuda Treaty does not preclude the imposition of the United States branch
profits tax.
 
  Management believes that American Safety and its Bermuda subsidiary have
been operated and, in the future, will continue to be operated in a manner
that will not cause any of them to be treated as being engaged in a United
States trade or business. However, because the Internal Revenue Code of 1986,
as amended (the "Code"), the Treasury Regulations and court decisions do not
identify definitively activities that constitute being engaged in a United
States trade or business, and because of the factual nature of the
determination, there can be no assurance that the Internal Revenue Service
(the "Service") will not contend that American Safety or its Bermuda
subsidiary is engaged in a United States trade or business. If American Safety
or its Bermuda subsidiary was considered to be engaged in a United States
trade or business, that entity would be subject to United States federal
income tax on income effectively connected with that trade or business, and
would be subject to the branch profits tax as well, unless it was entitled to
relief under the Bermuda Treaty.
 
  There can be no assurance American Safety or American Safety Re is entitled,
or in the future will be entitled, to the benefits of the Bermuda Treaty.
However, if American Safety or American Safety Re were so entitled and were
considered to be engaged in a United States trade or business, application of
United States federal income tax, but not the United States branch profits
tax, would be limited to business profits attributable to a permanent
establishment. As stated above, the Company believes that American Safety Re
will not be engaged in a United States trade or business.
 
  Although American Safety or American Safety Re may not be entitled to relief
under the Bermuda Treaty, the Company believes that American Safety and
American Safety Re will not be engaged in a United States trade or business
and that therefore they will not be subject to United States federal income
tax.
 
  Foreign corporations not engaged in a trade or business in the United States
(as well as foreign corporations engaged in the conduct of a trade or business
in the United States, but only with respect to their income that is not
effectively connected with such trade or business) are subject to United
States federal withholding tax on certain "fixed or determinable annual or
periodical" income (such as dividends and interest on certain investments)
derived from sources within the United States. Such tax is generally imposed
at a rate of 30% on the gross income subject to tax. The Bermuda Treaty does
not provide for a reduction.
 
  The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located
in the United States. The rates of tax currently applicable are 4% of gross
casualty insurance premiums and 1% of gross reinsurance premiums.
 
TAX TREATMENT OF SHAREHOLDERS
 
BERMUDA
 
  Under current Bermuda law, there is no Bermuda income tax, withholding tax,
capital gains tax, capital transfer tax, estate duty or inheritance tax
payable by shareholders of American Safety with respect to an investment in
or, subsequent sale of, the Common Shares.
 
 
                                      61
<PAGE>
 
UNITED STATES
 
 Taxation of Dividends
 
  Subject to the discussion below relating to the potential application of the
controlled foreign corporation or passive foreign investment company rules to
the Company, cash distributions made with respect to the Common Shares will
constitute dividends for United States federal income tax purposes to the
extent paid out of the earnings and profits of the Company. Generally, such
dividends will not be eligible for the dividends received deduction.
Shareholders of the Company that are United States persons, including citizens
and residents of the United States and corporations organized under the laws
of any state of the United States, and non-resident aliens and foreign
corporations as to which such distributions are considered effectively
connected with the conduct of a trade or business in the United States, and
any other persons subject to United States federal income tax on a net income
basis (referred to herein as "United States Holders"), will generally be
subject to United States federal income tax on the receipt of such dividends.
Distributions in excess of earnings and profits will not be taxed to the
extent of a United States Holder's basis on its Common Shares, and will reduce
basis. Any amount in excess of basis will be treated as gain from the sale or
exchange of the Common Shares.
 
 Taxation of Capital Gains
 
  Subject to the discussion below relating to the potential application of the
controlled foreign corporation or passive foreign investment company rules to
the foreign corporation, upon the sale or exchange of Common Shares, a United
States Holder will recognize a gain or loss for United States federal income
tax purposes equal to the difference between the amount realized upon such
sale or exchange and the United States Holder's United States federal income
tax basis for the Common Shares disposed of. Gain recognized by a United
States Holder who is a United States resident generally will be United States
source income. If the United States Holder's holding period for the Common
Shares is more than one year and if the Common Shares constitute a capital
asset in the hands of the United States Holder, such gain or loss will be
subject to tax at a current maximum marginal tax rate of 20% or 28% for
individuals and 35% for corporations.
 
 Classification as a Controlled Foreign Corporation
 
  If a foreign corporation is a "controlled foreign corporation" (a "CFC") for
an uninterrupted period of 30 days or more during any taxable year, its
"United States shareholders" who own stock in such corporation, directly, or
indirectly through foreign persons, on the last day in such year on which such
corporation is a CFC must include in their gross income their respective pro
rata shares of the CFC's "subpart F Income", even if such income is not
distributed as dividends. Subpart F income includes, among other things,
"insurance income", defined as any income (including underwriting and
investment income) that is attributable to the issuing (or reinsuring) of any
insurance or annuity contract in connection with property in, liability
arising out of activity in, or in connection with the lives or health of
residents of, a country other than the country under the laws of which the CFC
is created or organized, and which would be taxed under subchapter L of the
Code if such income were the income of a U.S. insurance company ("Subpart F
Insurance Income"). However, Subpart F Insurance Income does not include any
income of a CFC from sources within the United States that is effectively
connected with the conduct of a United States trade or business, unless the
CFC is exempt from United States taxation on the income under an income tax
treaty with the United States. Subpart F income also includes, to the extent
not treated as part of Subpart F Insurance Income, passive investment income
such as interest, dividends and certain capital gains.
 
  In general, a foreign corporation is treated as a CFC if the "United States
shareholders" of such corporation collectively own or are considered to own,
directly or indirectly through foreign persons or by applying the constructive
ownership rules of Section 958(b) of the Code, more than 50% of the total
combined voting power or total value of the corporation's stock. However, for
purposes only of taking into account Subpart F Insurance Income (as defined
above), a foreign corporation will be treated as a CFC if (i) more than 25% of
the total combined voting power or total value of its stock is so owned by
United States shareholders, and (ii) the gross amount of premiums in respect
of reinsurance or the issuing of insurance or annuity contracts with respect
to
 
                                      62
<PAGE>
 
risks outside its country of organization exceeds 75% of the gross amount of
all premiums or other consideration in respect of all risks. For these
purposes, a "United States shareholder" means any United States person who
owns, or is considered to own, directly or indirectly through foreign entities
or by applying the constructive ownership rules of Section 958(b) of the Code,
10% or more of the total combined voting power of all classes of stock of the
foreign corporation (a "United States 10% shareholder").
 
  The Company believes that, because of voting limitations and transfer
restrictions on the shares designed to prevent any person from becoming a
United States 10% shareholder, neither the Company nor any of its subsidiaries
will be considered a CFC under the 25% or 50% ownership tests. See
"Description of Capital Stock." However, because of the breadth of the
constructive ownership rules, and the uncertainty under the Code as to the
effect of the voting limitations and the treatment of Controlled Shares, it is
not possible to ensure that any of the Company and its subsidiaries will not
be CFC's.
 
 Related Person Insurance Income
 
  Special rules apply to the "related person insurance income" ("RPII"), if
any, of a foreign corporation. These rules do not apply to a foreign
corporation if (i) less than 20% of the voting power and less than 20% of the
total value of the capital stock of such corporation is owned at any time
during the taxable year (directly or indirectly) by persons who are (directly
or indirectly) insured under any policy of insurance or reinsurance issued by
such corporation, or who are related persons to any such person, (ii) the RPII
of such corporation for the taxable year is less than 20% of its Subpart F
Insurance Income (as defined above but without provisions which limit
insurance income to income from countries other than the country in which the
corporation was created or organized) (the "De Minimis Exception"), (iii) such
corporation elects to treat its RPII as income effectively connected with the
conduct of a United States trade or business, or (iv)) such corporation elects
to be treated as a United States corporation. If none of the above exceptions
applies and if all United States persons, in the aggregate, own, directly or
indirectly through foreign entities or by applying the constructive ownership
rules of Section 958(b) of the Code, 25% or more of the total combined voting
power or total value of such corporation, its RPII must be included in the
gross income of such United States persons, even though not distributed, under
the rules summarized below.
 
  RPII is defined as any insurance income attributable to a policy of
insurance or reinsurance with respect to which the person (directly or
indirectly) insured is a "United States shareholder" in the foreign
corporation, or a "related person" to such shareholder. For the purposes only
of taking into account RPII, and subject to the exceptions described below,
the term "United States shareholder" means with respect to any foreign
corporation, a United States person that owns any stock (rather than 10% or
more), either directly or indirectly through foreign entities, in that
corporation (such a person is hereinafter sometimes referred to as a "RPII
Shareholder"). The term "related person" for this purpose generally means an
individual, corporation, partnership, trust or estate which has 50% control
of, or is 50% controlled by, a RPII Shareholder, or which is 50% controlled by
the same person or persons that have 50% control of the foreign corporation.
For these purposes 50% control is defined as control of more than 50% of
either the voting power of a corporation or the value of its capital stock.
 
  There can be no assurance that RPII does not, and in the future will not,
equal or exceed the 20% threshold and, as a result, the De Minimis Exception
will not apply. In addition, there can be no assurance that less than 20% of
the total value and voting of the stock of American Safety Re is or will be
owned by persons who are (directly or indirectly) insured by such entity or
who are related to such persons. The Company does not intend to cause American
Safety Re to elect to treat its RPII as effectively connected income or to be
treated as a United States corporation.
 
  If the RPII of American Safety Re equals or exceeds the 20% threshold in any
taxable year, the RPII Shareholders of American Safety, and therefore of
American Safety Re on the last day of the taxable year may be required to
include in gross income for United States federal income tax purposes their
shares of RPII of American Safety Re for the entire taxable year, whether or
not distributed. In that case, an inclusion would be required even if the RPII
Shareholders owned shares only on the last day of the taxable year.
Conversely, a
 
                                      63
<PAGE>
 
United States shareholder that owns shares during the taxable year, but not on
the last day, would not be required to include in gross income any part of
such RPII.
 
 Disposition of Shares
 
  Section 1248 of the Code applies special rules to the sale or exchange of
shares of stock of a foreign corporation by a United States person that owned,
directly or indirectly through foreign entities or by applying the
constructive ownership rules of Section 958(b) of the Code, shares possessing
10% or more of the voting power of such foreign corporation at any time during
the five-year period ending on the date of the sale or exchange when the
corporation was a CFC. Any gain recognized by such a shareholder may be
treated as ordinary income to the extent of certain earnings and profits
attributable to the shares sold or exchanged. Such a shareholder generally
will be required to report a disposition of its shares by attaching Form 5471,
Information Return of United States Persons with Respect to Certain Foreign
Corporations, to its United States federal income tax return or information
return that it would normally file for the taxable year in which the
disposition occurs.
 
  Section 1248 of the Code may also apply to the sale or exchange of capital
stock in the foreign insurance company that earns gross RPII in a taxable year
in which 25% or more of either the voting power or value of the capital stock
of the company is owned by United States persons (directly or indirectly
through foreign persons or by applying the constructive ownership rules of
Section 958(b) of the Code), regardless of whether the United States person is
a 10% shareholder or whether RPII equals or exceeds the 20% threshold or
whether 20% or more of either the voting power or value of the stock of the
corporation is owned directly or indirectly through foreign entities by
persons (directly or indirectly) insured or reinsured by such foreign insurer,
or by persons related to such insureds. Existing Treasury Regulations do not
address whether such rules apply if a foreign corporation (such as American
Safety) is not a CFC, but owns an insurance subsidiary (such as American
Safety Re) that is a CFC for purposes of requiring United States shareholders
to take into account RPII. Under proposed Treasury Regulations, however, these
provisions appear to be applicable only in the case of a disposition of shares
of a corporation directly engaged in the insurance business. Accordingly, Code
Section 1248 (and, except as discussed below in "Information Reporting,"
related reporting requirements) should not apply to the disposition of Common
Shares if American Safety is not a CFC. No assurance, however, can be given
that the Service will agree with this interpretation or that the final
Treasury Regulations when issued will not provide that Section 1248 of the
Code and the respective reporting requirements will apply to the disposition
of Common Shares.
 
 Source of Income
 
  Since it is anticipated that United States persons will own a majority of
American Safety's Common Shares, a portion of the current income inclusions
under the CFC, RPII and passive foreign investment company rules, if any, and
of the dividends paid by American Safety (including any gain from the sale of
Common Shares that is treated as a dividend under Section 1248 of the Code)
may not be treated as foreign source income for purposes of computing a
shareholder's United States foreign tax credit limitation. American Safety
will consider providing shareholders with information regarding the portion of
such amounts constituting foreign source income to the extent such information
is reasonably available. It is likely that substantially all of the RPII and
dividends that are foreign source income will constitute either "passive" or
"financial services" income for foreign tax credit limitation purposes. Thus,
it may not be possible for most United States shareholders to utilize excess
foreign tax credits to reduce United States tax on such income.
 
 Uncertainty as to Application of RPII
 
  Treasury Regulations interpreting the RPII provisions of the Code exist only
in proposed form. There can be no assurance that the regulations will be
adopted in their proposed form or as to the changes, if any, that might
ultimately be made thereto or whether any such changes, as well as any
interpretation or application of the RPII rules by the Service, the course or
otherwise, might have retroactive effect. Accordingly, the meaning of the RPII
provisions and their application to American Safety and its subsidiaries are
uncertain. In addition, there can be no assurance that the Service will not
challenge any determinations by American Safety as to the amount,
 
                                      64
<PAGE>
 
if any, of RPII that should be includible in the income of a shareholder or
that the amounts of any RPII inclusions will not be subject to adjustment
based upon subsequent examination by the Service. Each prospective investor
that is a United States person should consult its tax advisors as to the
effect of the uncertainties described above.
 
 Information Reporting
 
  A United States shareholder generally will have an independent obligation to
file a copy, for information purposes, of Form 5471 with its tax return for
any taxable year in which such holder (i) acquires 5% or more of the value of
the capital stock of the Company, (ii) acquires additional Common Shares which
cause it to own 5% or more of the value of the capital stock of the Company or
(iii) disposes of a sufficient number of Common Shares to decrease its
interest below 5% of the value of the capital stock of the Company. Form 5471
is an information return on which the holder must provide data concerning the
holder, the Company and the acquisition or disposition of Common Shares.
 
 Passive Foreign Investment Company
 
  In general, a foreign corporation will be a passive foreign investment
company (a "PFIC") if 75% or more of its gross income constitutes "passive
income" or 50% or more of its assets produce "passive income" or are held for
the production of "passive income."
 
  The United States shareholders of a PFIC are subject to a special tax and an
interest charge at the time of the sale of (or receipt of an "excess
distribution" with respect to) their capital stock in the PFIC, unless such
shareholders elect to be currently taxable on their pro rata share of the
PFIC's earnings, whether or not distributed. In general, a shareholder is
treated as having received an "excess distribution" if the amount of the
distribution was more than 125% of the average distribution with respect to
its capital stock during the three preceding taxable years (or shorter period
during which the taxpayer held the shares). The special tax is computed by
assuming that the excess distribution or, in the case of a sale, the gain with
respect to the capital stock was earned in equal portions throughout the
holder's period of ownership. The portion allocable to each year prior to the
year of sale is taxed at the maximum marginal tax rate applicable for each
such period. The interest charge is determined based on the applicable rate
imposed on underpayments of United States federal income tax for such period.
 
  For the above purposes, "passive income" is defined to include income of the
kind which would be foreign personal holding company income under Section
954(c) of the Code, and generally includes interest, dividends, annuities and
other investment income. However, passive income does not include interest
income or dividends received from controlled subsidiaries or certain other
related persons, to the extent properly allocable to income of such related
person that is not passive income. In addition, the PFIC provisions
specifically exclude from the definition of "passive income" any income
"derived in the active conduct of an insurance business by a corporation which
is predominantly engaged in an insurance business and which would be subject
to tax under Subchapter L if it were a domestic corporation." This exception
is intended to ensure that income derived by a bona fide insurance company is
not treated as passive income. Thus, to the extent that income is attributable
to financial reserves in excess of the reasonable needs of the insurance
business, it will be treated as passive income. The PFIC provisions also
provide that for purposes of determining whether a foreign corporation is a
PFIC, such foreign corporation is treated as if it "held its proportionate
share of the assets and received directly its proportionate share of the
income" of any corporation of which it owns (directly or indirectly) at least
25% of the value of the capital stock.
 
  Management believes that American Safety and American Safety Re are, and
will be, predominantly engaged in an insurance business and does not, and will
not, have financial reserves in excess of the reasonable needs of their
insurance business. Accordingly, the income and assets of American Safety and
American Safety Re should not be passive income and passive assets. As
American Safety should be treated as holding all the assets and receiving all
the income of its subsidiaries, including American Safety Re, and as it is not
anticipated that 75% or more of the gross income that American Safety is
thereby deemed to receive or actually receives
 
                                      65
<PAGE>
 
will be passive income, or that 50% or more of the assets that American Safety
is thereby deemed to hold or actually holds will be passive assets, the risk
of American Safety being classified as a PFIC should be minimized.
 
  Since there are no final Treasury Regulations interpreting the PFIC
provisions, substantial uncertainty exists with respect to their application
to American Safety and its subsidiaries. Therefore, each potential investor in
the Company should consult its own tax advisor as to the effect of these
rules. Moreover, even if PFIC classification is avoided in the first instance,
it is possible that as the business of American Safety and its subsidiaries
evolves American Safety or one of its subsidiaries may be treated as a PFIC in
the future. This could occur, for example, if the Company or one of its
subsidiaries generates, from underwriting profits or otherwise, additional
funds that it devotes to passive investments in amounts that would cause the
passive income or passive asset thresholds for PFIC status to be reached. The
Company will endeavor to inform its shareholders of any anticipated changes in
PFIC status.
 
 Miscellaneous
 
  Except as discussed below with respect to backup withholding, dividends paid
by American Safety will not be subject to a United States withholding tax.
 
  Information reporting to the Service by paying agents and custodians located
in the United States will be required with respect to payments of dividends to
United States persons. A holder of Common Shares may be subject to backup
withholding at the rate of 31% with respect to dividends paid by such persons
unless the holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. Backup withholding is not an additional tax, and may
be credited against the holder's federal income tax liability.
 
                                      66
<PAGE>
 
                                 UNDERWRITING
 
  Under the terms and subject to the conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among the Company and Advest, Inc.,
J.C. Bradford & Co. and Hoefer & Arnett, Incorporated (the "Underwriters"),
each of the Underwriters has severally agreed to purchase and the Company has
agreed to sell to each of the Underwriters, the respective number of Common
Shares set forth opposite the name of each of the Underwriters below.
 
<TABLE>
<CAPTION>
                                                                       NUMBER OF
                                                                        SHARES
   UNDERWRITER                                                         ---------
<S>                                                                    <C>
Advest, Inc. .........................................................
J.C. Bradford & Co. ..................................................
Hoefer & Arnett, Incorporated.........................................
                                                                       ---------
  Total............................................................... 2,700,000
                                                                       =========
</TABLE>
 
  The Underwriting Agreement provides that the obligations of the Underwriters
are subject to approval of certain matters by their counsel and to various
other conditions precedent. The Underwriters are committed to purchase and pay
for all of the Common Shares offered hereby, if any are purchased.
 
  The Underwriters have advised the Company that they propose to offer the
Common Shares initially to the public at the offering price set forth on the
cover page of this Prospectus and to certain selected dealers at such price
less a concession not in excess of $    per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $    per share to
certain other dealers. After the public offering of the Common Shares, the
public offering price, concession and reallowance to dealers may be changed by
the Underwriters. The Common Shares are offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
 
  The Company has granted to the Underwriters an option exercisable during the
30-day period beginning on the date of this Prospectus, to purchase up to
405,000 additional Common Shares (the "Option Shares"), solely to cover over-
allotments, if any, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. If this option is
exercised in part, the number of Option Shares to be delivered by the Company
will be determined by Advest, Inc. after consultation with the Company. To the
extent that this option to purchase is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of Option Shares as the number set forth next to such Underwriter's
name in the preceding table bears to the sum of the total number of Common
Shares in such table.
 
  The Company, the executive officers and directors of the Company and certain
of the existing shareholders of the Company have agreed that for a period of
180 days after the date of this Prospectus, subject to certain exceptions,
they will not directly or indirectly offer, sell, announce an intention to
sell, contract to sell or otherwise dispose of, or, with respect to the
Company, file with the Commission a registration statement under the
Securities Act relating to, any Common Shares or securities convertible into
or exchangeable or exercisable for any Common Shares without the prior written
consent of Advest, Inc. See "Shares Eligible for Future Sale."
 
  Subject to certain limitations, the Company has agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act.
 
  The Underwriters have advised the Company that they do not intend to confirm
sales to any account over which they exercise discretionary authority.
 
  The Underwriters have advised the Company that, pursuant to Regulation M
promulgated under the Exchange Act, certain persons participating in this
Offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Shares at
a level above that which might otherwise prevail in
 
                                      67
<PAGE>
 
the open market. A "stabilizing bid" is a bid for or the purchase of the
Common Shares on behalf of the Underwriters for the purpose of fixing or
maintaining the price of the Common Shares. A "syndicate covering transaction"
is the bid for or the purchase of the Common Shares on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with this Offering. A "penalty bid" is an arrangement permitting
the Underwriters to reclaim the selling concession otherwise accruing to a
selling group member in connection with this Offering if the Common Shares
originally sold by such selling group member are purchased by the Underwriters
in a syndicate covering transaction and has therefore not been effectively
placed by such selling group member. The Underwriters have advised the Company
that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
 
  Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price for the Common Shares will be
determined by negotiation between the Company and the Underwriters. In
determining such price, consideration will be given to various factors,
including market conditions for initial public offerings, the history of and
the prospects for the Company's business, the Company's past and present
operations, its past and present earnings and current financial position, an
assessment of the Company's management, the market for securities of companies
in businesses similar to those of the Company, the general condition of the
securities markets and other relevant factors. There can be no assurance that
the initial public offering price will correspond to the price at which the
Common Shares will trade in the public market subsequent to this Offering or
that an active trading market for Common Shares will develop and continue
after this Offering.
 
                                 LEGAL MATTERS
 
  The validity under Bermuda laws of the Common Shares offered hereby will be
passed upon for the Company by Conyers Dill & Pearman, Hamilton, Bermuda.
Certain legal matters with respect to the Offering will be passed upon for the
Company by Womble Carlyle Sandridge & Rice, PLLC, Atlanta, Georgia, and for
the Underwriters by Alston & Bird LLP, Atlanta, Georgia. In connection
therewith, Womble Carlyle Sandridge & Rice, PLLC and Alston & Bird LLP may
rely with respect to certain matters of Bermuda law on the opinion of Conyers
Dill & Pearman.
 
                                    EXPERTS
 
  The Consolidated Financial Statements and schedules of the Company and its
subsidiaries as of December 31, 1995 and 1996 and September 30, 1997, and for
each of the years in the three-year period ended December 31, 1996 and for the
nine-month periods ended September 30, 1996 and 1997 included herein and
elsewhere in the Registration Statement have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing.
 
                            ADDITIONAL INFORMATION
 
  The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto, as permitted by the rules and
regulations of the Commission. For further information, reference is made to
the Registration Statement and to the exhibits filed therewith. Statements
contained in this Prospectus as to the contents of any contract or other
document which has been filed as an exhibit to the Registration Statement are
qualified in their entirety by reference to such exhibits for a complete
statement of their terms and conditions. The Registration Statement and the
exhibits thereto may be inspected without charge at the offices of the
Commission, and copies or all or any part thereof may be obtained from the
 
                                      68
<PAGE>
 
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549 or at certain of the regional offices of the Commission located at 7
World Trade Center, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees
prescribed by the Commission. The Commission also maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Such
reports, proxy and information statements and other information may be found
on the Commission's Internet site address, which is http://www.sec.gov.
 
  The Company is not currently subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As a result of the Offering, the Company will become subject to the
information reporting requirements of the Exchange Act. The Company intends to
furnish its shareholders with annual reports, which will include consolidated
financial statements audited by its independent certified public accountants,
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
 
                                      69
<PAGE>
 
                     GLOSSARY OF SELECTED INSURANCE TERMS
 
  The following terms when used in this Prospectus have the following meaning:
 
Actuarial analysis.............  Evaluation of risks in order to attempt to
                                 assure that premiums and loss reserves
                                 adequately reflect expected future loss
                                 experience and claims payments; in evaluating
                                 risks, mathematical models are used to
                                 predict future loss experience and claims
                                 payments based on past loss ratios, loss
                                 development patterns and other relevant data
                                 and assumptions.
 
Assume.........................  To accept from the primary insurer or
                                 reinsurer all or a portion of the liability
                                 underwritten by such primary insurer or
                                 reinsurer.
 
Alternative insurance market...  An insurance market which has developed over
                                 the past 15 years to respond to the needs of
                                 insureds for adequate insurance coverage and
                                 affordable premium rates through (i) the
                                 underwriting of risks which are characterized
                                 by the standard insurance market as difficult
                                 or which generate too little premium for
                                 standard insurance companies; and/or (ii) the
                                 design of specialized insurance programs,
                                 such as deductible or risk retention
                                 programs, and captive or rent-a-captive
                                 programs.
 
Broker; intermediary...........  One who negotiates contracts of insurance or
                                 reinsurance on behalf of an insured party,
                                 receiving a commission from the insurer or
                                 reinsurer for placement and other services
                                 rendered.
 
Capacity.......................  The percentage of surplus, or the dollar
                                 amount of exposure, that an insurer or
                                 reinsurer is willing to place at risk.
                                 Capacity may apply to a single risk, a
                                 program, a line of business or an entire book
                                 of business.
 
Captive........................  A company formed to insure the risks of a
                                 group of insureds or of a parent company or
                                 affiliated group of companies.
 
Case reserves..................  Recorded estimates of unpaid liabilities
                                 associated with specific reported claims.
                                 Case reserves may pertain to losses and loss
                                 adjustment expenses.
 
Casualty insurance.............  Insurance which is primarily concerned with
                                 the losses caused by injuries to third
                                 persons or their property (i.e., not the
                                 policyholder) and the legal liability imposed
                                 on the insured resulting therefrom. It
                                 includes, but is not limited to, general
                                 liability, employers' liability, workers'
                                 compensation, professional liability, public
                                 liability and automobile liability insurance.
                                 It excludes certain types of losses that by
                                 law or custom are considered as being
                                 exclusively within the scope of other types
                                 of insurance, such as fire or marine.
 
Cede; ceding company...........  When an insurance company reinsures its risk
                                 with another insurance company in
                                 consideration of a premium, it "cedes" (i.e.
                                 transfers) business and is referred to as the
                                 "ceding company."
 
Claims-made coverage...........
                                 A policy that provides insurance for claims
                                 reported during the policy period.
 
                                      70
<PAGE>
 
Combined ratio.................  The sum of the loss and loss adjustment
                                 exposure ratio and the underwriting expense
                                 ratio, expressed as a percentage, determined
                                 in accordance with either SAP or GAAP. SAP
                                 calculates the expense ratio as a percentage
                                 of net written premium and GAAP uses net
                                 earned premium. Both methods use earned
                                 premium to calculate the loss and loss
                                 adjustment expense ratio. A combined ratio
                                 below 100% generally indicates profitable
                                 underwriting results. A combined ratio over
                                 100% generally indicates unprofitable
                                 underwriting results.
 
Commercial lines...............  Types of insurance written for businesses
                                 instead of individuals.
 
Direct premiums written........  Insurance premiums written (less return
                                 premiums) without any allowance for premiums
                                 assumed or ceded reinsurance.
 
Earned surplus.................  The cumulative amount of retained net profits
                                 from insurance operations, including
                                 investment income, as determined under SAP.
 
Excess and surplus lines.......  A term used to describe any risk or part
                                 thereof for which insurance is not available
                                 through a company licensed in the applicant's
                                 state (an "admitted" insurer). The business,
                                 therefore, is placed with insurers not
                                 licensed in the state ("non-admitted"
                                 insurers) in accordance with surplus lines or
                                 excess lines provisions of state insurance
                                 laws. Under these provisions, the non-
                                 admitted insurer is not subject to the same
                                 rate or coverage requirements which apply to
                                 an admitted insurer.
 
Excess of loss reinsurance.....  A form of reinsurance in which the reinsurer
                                 indemnifies the ceding company against all or
                                 a portion of the amount of loss in excess of
                                 a specified dollar amount, called a "layer"
                                 or "retention."
 
Expense ratio; underwriting      The ratio of underwriting expenses to net
 expense ratio.................  premiums written, if determined in accordance
                                 with SAP, or the ratio of underwriting
                                 expenses (adjusted by deferred policy
                                 acquisition costs) to earned premiums, if
                                 determined in accordance with GAAP.
 
Facultative reinsurance........  The reinsurance of all or a portion of the
                                 insurance coverage provided by a single
                                 policy. Reinsurance for each policy reinsured
                                 is separately negotiated.
 
Frequency......................  The number of claims occurring under a given
                                 coverage divided by the number of exposures
                                 for the given coverage.
 
Generally accepted accounting
 principles ("GAAP")...........
                                 Accounting principles as set forth in
                                 opinions of the Accounting Principles Board
                                 of the American Institute of Certified Public
                                 Accountants and/or in statements of the
                                 Financial Accounting Standards Board and/or
                                 their respective successors and which are
                                 applicable in the circumstances as of the
                                 date in question.
 
 
                                      71
<PAGE>
 
Gross premiums written.........  Total premiums for primary insurance written
                                 and reinsurance assumed during a given
                                 period.
 
Incurred but not reported
 ("IBNR") reserves.............
                                 Loss reserves for estimated losses and loss
                                 adjustment expenses which have been incurred
                                 but not yet reported to the insurer
                                 (including future developments on losses that
                                 are known to the insurer).
 
Insurance regulatory
 information system ("IRIS")...
                                 A system developed by the NAIC primarily
                                 intended to assist state insurance
                                 departments in executing their statutory
                                 mandates to oversee the financial condition
                                 of insurance companies operating in their
                                 respective states.
 
Incurred losses................  For a given period, the total losses
                                 sustained by an insurance company under a
                                 policy or policies, whether paid or unpaid.
                                 Incurred losses include a provision for
                                 claims that have occurred but have not yet
                                 been reported to the insurer.
 
Loss adjustment expenses         The expenses of settling claims, including
 ("LAE").......................  legal and other fees, and general expenses of
                                 administering the claims adjustment process.
 
Loss ratio.....................  For SAP and GAAP, net losses and loss
                                 adjustment expenses incurred, divided by net
                                 premiums earned, expressed as a percentage.
 
Loss reserves..................  Liabilities established by insurers and
                                 reinsurers to reflect, as of a given date,
                                 the estimated cost of claims payments that
                                 the insurer or reinsurer will ultimately be
                                 required to pay in respect of insurance or
                                 reinsurance it has written. Reserves are
                                 established for losses and for loss
                                 adjustment expenses, and consist of case
                                 reserves and IBNR reserves.
 
The National Association of
 Insurance Commissioners
 ("NAIC")......................
                                 An association of state insurance regulatory
                                 officials organized to promote consistency of
                                 regulatory practice and statutory accounting
                                 standards for insurance companies throughout
                                 the United States.
 
Net premiums earned............  The portion of net premiums written which
                                 applies to the expired portion of the policy
                                 period.
 
Net premiums written...........  Gross premiums written less premiums ceded to
                                 reinsurers.
 
Premiums.......................  Payments and consideration for insurance,
                                 surety bonds or reinsurance coverage under
                                 insurance policies, surety bonds or
                                 reinsurance agreements.
 
Primary insurance..............  Insurance policies issued to insureds
                                 generally.
 
Property insurance.............  Insurance that provides coverage to a person
                                 with an insurable interest in tangible
                                 property for that person's property loss,
                                 damage or loss of use.
 
                                      72
<PAGE>
 
Occurrence coverage............  A policy that provides insurance for events
                                 occurring during the policy period but
                                 without regard to when the claim is reported.
 
Quota share reinsurance........  A generic term describing all forms of
                                 reinsurance in which the reinsurer shares a
                                 proportional part of both the original
                                 premiums and the losses of the reinsured.
                                 Also known as proportional reinsurance, pro
                                 rata reinsurance and participating
                                 reinsurance.
 
Reinsurance....................  The practice whereby one party, called the
                                 reinsurer, in consideration of a premium paid
                                 to it, agrees to indemnify another party,
                                 called the ceding party, for part or all of
                                 the liability assumed by the ceding party
                                 under a policy or policies of insurance which
                                 it has issued. The reinsured may be referred
                                 to as the original or primary insurer, the
                                 direct writing company or the ceding company.
                                 Reinsurance does not legally discharge the
                                 primary insurer from its liability to the
                                 insured.
 
Reinsurer......................  The insurer that assumes all or part of the
                                 insurance or reinsurance liability written by
                                 another insurer. The term includes
                                 retrocessionaires, which are insurers that
                                 assume reinsurance from a reinsurer.
 
Rent-a-captive.................  A program under which a captive insures the
                                 risk of an unrelated insured who bears the
                                 risk of its own loss experience without the
                                 administrative costs and capital commitment
                                 necessary to establish and operate its own
                                 captive insurance company.
 
Reserves.......................  Liabilities established by insurers and
                                 reinsurers to reflect the estimated costs of
                                 claims payments and the related expenses that
                                 the insurer or reinsurer will ultimately be
                                 required to pay in accordance with the
                                 insurance or reinsurance it has written.
 
Retention......................  The amount or portion of risk which an
                                 insurer or reinsurer retains for its own
                                 account. Losses in excess of the retention
                                 level are paid by the reinsurer or
                                 retrocessionaire. In quota share treaties,
                                 the retention may be a percentage of the
                                 original policy's limit. In excess of loss
                                 reinsurance, the retention is a dollar amount
                                 of loss, a loss ratio or a percentage of
                                 loss.
 
Retrocession;                    A transaction whereby a reinsurer cedes to
 retrocessionaire..............  another reinsurer (the "retrocessionaire")
                                 all or part of the reinsurance risk it has
                                 assumed. Retrocessions do not legally
                                 discharge the ceding reinsurer from its
                                 liability with respect to its obligations to
                                 the reinsured.
 
Risk based capital ("RBC").....  A measure adopted by the NAIC for assessing
                                 the minimum statutory capital requirements of
                                 insurers.
 
Severity.......................
                                 The cost of a claim under an insurance
                                 policy.
 
Statutory Accounting Practices
 or "SAP"......................
                                 The rules and procedures prescribed or
                                 permitted by state insurance regulatory
                                 authorities for recording transactions and
 
                                      73
<PAGE>
 
                                 preparing financial statements. Statutory
                                 accounting principles generally reflect a
                                 liquidating, rather than a going concern,
                                 concept of accounting. The principal
                                 differences between SAP and GAAP are as
                                 follows: (a) under SAP, certain assets
                                 (nonadmitted assets) are eliminated from the
                                 balance sheet; (b) under SAP, policy
                                 acquisition costs are expensed upon policy
                                 inception, while under GAAP they are deferred
                                 and amortized over the term of the policies;
                                 (c) under SAP, no provision is made for
                                 deferred income taxes; and (d) under SAP,
                                 certain reserves are recognized which are not
                                 recognized under GAAP.
 
Statutory reserves.............  Reserves established to provide for future
                                 obligations with respect to all insurance
                                 policies as determined in accordance with
                                 SAP.
 
 
Statutory surplus..............  The amount remaining after all liabilities,
                                 including loss reserves, are subtracted from
                                 all admitted assets as determined in
                                 accordance with SAP. Admitted assets of an
                                 insurer are assets permitted by a state to be
                                 taken into account in determining the
                                 insurer's financial condition for statutory
                                 purposes.
 
Surety bond....................  A contract under which a party guarantees
                                 certain obligations of a second party to a
                                 third party.
 
Tail...........................  The period of time that elapses between the
                                 expiration of the applicable insurance policy
                                 and the loss event (or the insurer's
                                 knowledge of the loss event) or the payment
                                 in respect thereof. A "short-tail" insurance
                                 product is one where ultimate losses are
                                 known comparatively quickly; ultimate losses
                                 under a "long-tail" insurance product are
                                 sometimes not known for years.
 
Treaty reinsurance.............  The reinsurance of a specified type or
                                 category of risks defined in a reinsurance
                                 agreement (a "treaty") between a primary
                                 insurer or other reinsured and a reinsurer.
                                 In treaty reinsurance, the primary insurer or
                                 reinsured may be obligated to offer and the
                                 reinsurer is obligated to accept a specified
                                 portion of all such type or category of risks
                                 originally underwritten by the primary
                                 insurer or reinsured.
 
Underwriting...................  The insurer's or reinsurer's process of
                                 reviewing applications submitted for
                                 insurance coverage, deciding whether to
                                 provide all or part of the coverage requested
                                 and determining the applicable premiums.
 
Underwriting cycle.............  A pattern in which property and casualty
                                 insurance premiums, profits and availability
                                 of coverage rise and fall over time.
 
Underwriting expense ratio.....  The ratio of operating expenses to net
                                 premiums earned (for purposes of GAAP) or to
                                 net premiums written (for purposes of SAP).
 
Underwriting expenses..........  The aggregate of policy acquisition costs,
                                 including commissions, and the portion of
                                 administrative, general and other expenses
                                 attributable to underwriting operations.
 
                                      74
<PAGE>
 
Underwriting profit (loss).....  The amount of pretax income (loss) from
                                 insurance operations, exclusive of net
                                 investment income and capital gains or
                                 losses.
 
Unearned premiums..............  The portion of a premium representing the
                                 unexpired portion of the contract term as of
                                 a certain date.
 
Workers' compensation..........  A system, established under state laws, under
                                 which employers provide insurance for benefit
                                 payments to their employees for work-related
                                 injuries.
 
Written premiums...............  Premiums written, whether or not earned,
                                 during a given period.
 
                                      75
<PAGE>
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                          <C>
Report of Independent Certified Public Accountants.........................  F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September
 30, 1997..................................................................  F-3
Consolidated Statements of Earnings for the years ended December 31, 1994,
 1995 and 1996 and the nine months ended September 30, 1996 and 1997.......  F-4
Consolidated Statements of Shareholders' Equity for the years ended
 December 31, 1994, 1995 and 1996 and the nine months ended September 30,
 1996 and 1997.............................................................  F-5
Consolidated Statements of Cash Flow for the years ended December 31, 1994,
 1995 and 1996 and the nine months ended September 30, 1996 and 1997.......  F-6
Notes to Consolidated Financial Statements.................................  F-7
</TABLE>
 
                                      F-1
<PAGE>
 
WHEN THE TRANSACTION REFERRED TO IN NOTE 13 OF THE NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING REPORT.
 
The Board of Directors
American Safety Insurance Group, Ltd.:
 
  We have audited the accompanying consolidated balance sheets of American
Safety Insurance Group, Ltd. and subsidiaries as of December 31, 1995 and
1996, and September 30, 1997, and the related consolidated statements of
earnings, shareholders' equity, and cash flow for each of the years in the
three-year period ended December 31, 1996 and for the nine-month periods ended
September 30, 1996 and 1997. These consolidated 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 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 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 American
Safety Insurance Group, Ltd. and subsidiaries as of December 31, 1995 and
1996, and September 30, 1997, and the results of their operations and their
cash flow for each of the years in the three-year period ended December 31,
1996 and for the nine-month periods ended September 30, 1996 and 1997, in
conformity with accounting principles generally accepted in the United States.
 
Atlanta, Georgia
November 18, 1997, except as to Notes 11 and 13, which are as of
 
                                      F-2
<PAGE>
 
             AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                           DECEMBER 31, 1995 AND 1996
                             AND SEPTEMBER 30, 1997
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                               -----------------------  SEPTEMBER 30,
                                                  1995        1996          1997
                                               ----------- -----------  -------------
<S>                                            <C>         <C>          <C>
                    ASSETS
Investments:
  Securities available for sale, at fair
   value:
    Fixed maturities.......................... $19,851,279 $16,775,657   $24,771,227
    Preferred stock...........................     132,000         --            --
    Common stock..............................     314,349     715,590     1,181,023
  Notes receivable:
    Related parties...........................     390,000   1,146,841     1,266,264
    Other.....................................     988,195   4,912,865     3,620,359
  Short-term investments......................     350,000     472,417     1,596,682
                                               ----------- -----------   -----------
      Total investments.......................  22,025,823  24,023,370    32,435,555
Cash..........................................   3,197,510   3,271,957     2,425,488
Accrued investment income.....................     264,783   1,030,037       718,963
Premiums receivable...........................     657,595   1,242,060     4,129,250
Commissions receivable........................      72,846      64,216        28,550
Ceded unearned premium........................      25,986     305,341       552,575
Reinsurance recoverable.......................       6,158      45,475        84,156
Due from affiliate............................     266,565     356,844       261,637
Income tax recoverable........................      12,853     121,006        24,714
Deferred income taxes.........................      97,983     179,320       200,419
Goodwill......................................     316,059     297,698       274,452
Other assets..................................     199,043     362,048     1,036,799
                                               ----------- -----------   -----------
      Total assets............................ $27,143,204 $31,299,372   $42,172,558
                                               =========== ===========   ===========
     LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Unpaid losses and loss adjustment expenses.. $ 8,293,655 $ 8,914,460   $10,734,633
  Unearned premiums...........................     753,064   1,364,459     2,124,091
  Liability for deductible fees held..........         --          --      2,764,485
  Reinsurance on paid loss and loss adjustment
   expenses...................................      86,094      80,139       289,037
  Ceded premiums payable......................     646,010   1,179,467     2,821,178
  Due to affiliate:
    Ceded premiums payable....................      75,358         --         49,400
    Reinsurance on paid loss and loss
     adjustment expenses......................       1,932      (1,045)       16,360
  Income tax payable..........................     146,797      17,742           --
  Accounts payable and accrued expenses.......     526,262   1,712,043     1,399,726
  Surplus note................................         --          --      1,250,000
                                               ----------- -----------   -----------
      Total liabilities.......................  10,529,172  13,267,265    21,448,910
                                               ----------- -----------   -----------
Shareholders' equity:
  Preferred stock, $0.01 par value; authorized
   5,000,000 shares; no shares issued and
   outstanding................................         --          --            --
  Common stock, $0.01 par value; authorized
   15,000,000 shares; issued and outstanding
   at December 31, 1995 and 1996, 2,872,830
   shares, and at September 30, 1997,
   2,925,230 shares ..........................      28,728      28,728        29,252
  Additional paid-in capital..................   2,455,034   2,455,034     2,751,789
  Retained earnings...........................  13,394,948  15,540,208    17,762,499
  Unrealized gain relating to investments.....     735,322       8,137       180,108
                                               ----------- -----------   -----------
      Total shareholders' equity..............  16,614,032  18,032,107    20,723,648
                                               ----------- -----------   -----------
      Total liabilities and shareholders' eq-
       uity................................... $27,143,204 $31,299,372   $42,172,558
                                               =========== ===========   ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
             AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
 
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
               AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                     YEARS ENDED                  NINE MONTHS ENDED
                                    DECEMBER 31,                   SEPTEMBER 30,
                          -----------------------------------  -----------------------
                             1994        1995        1996         1996        1997
                          ----------  ----------  -----------  ----------  -----------
<S>                       <C>         <C>         <C>          <C>         <C>
Revenues:
  Direct and assumed
   premiums earned......  $3,508,496  $6,108,585  $ 5,316,409  $3,819,650  $ 8,023,115
  Ceded premiums
   earned...............     (89,034)   (361,813)  (1,043,987)   (958,356)  (1,517,209)
                          ----------  ----------  -----------  ----------  -----------
    Net premiums
     earned.............   3,419,462   5,746,772    4,272,422   2,861,294    6,505,906
  Net investment
   income...............     663,295   1,352,909    2,091,629   1,449,236    1,812,721
  Brokerage commission
   income...............   1,706,424   2,145,076    1,880,732   1,457,985    1,564,706
  Management fees from
   affiliate............     463,512     474,822      478,963     355,844      443,950
  Net realized gains
   (losses).............    (118,440)    200,625      177,321     155,153       14,243
  Other income..........         228         126        4,800       3,505       10,748
                          ----------  ----------  -----------  ----------  -----------
    Total revenues......   6,134,481   9,920,330    8,905,867   6,283,017   10,352,274
                          ----------  ----------  -----------  ----------  -----------
Expenses:
  Losses and loss
   adjustment expenses
   incurred.............   1,423,867   2,905,477    2,055,558   1,383,476    3,533,048
  Acquisition expenses..     517,252   1,085,929      645,980     494,544    1,768,834
  Other expenses........   2,246,586   2,029,291    3,110,085   2,172,112    2,445,573
                          ----------  ----------  -----------  ----------  -----------
    Total expenses......   4,187,705   6,020,697    5,811,623   4,050,132    7,747,455
                          ----------  ----------  -----------  ----------  -----------
    Earnings before
     income taxes.......   1,946,776   3,899,633    3,094,244   2,232,885    2,604,819
Income taxes............     328,988     719,688      176,509     178,121      382,528
                          ----------  ----------  -----------  ----------  -----------
    Net earnings........  $1,617,788  $3,179,945  $ 2,917,735  $2,054,764  $ 2,222,291
                          ==========  ==========  ===========  ==========  ===========
Net earnings per share..  $     0.54  $     1.07  $      0.98  $     0.69  $      0.75
                          ==========  ==========  ===========  ==========  ===========
Common shares and common
 share equivalents used
 in computing net
 earnings per share.....   2,983,303   2,974,133    2,974,133   2,974,133    2,974,133
                          ==========  ==========  ===========  ==========  ===========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
             AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
               AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                    DECEMBER 31,                     SEPTEMBER 30,
                         -------------------------------------  ------------------------
                            1994         1995         1996         1996         1997
                         -----------  -----------  -----------  -----------  -----------
<S>                      <C>          <C>          <C>          <C>          <C>
Common stock--number of
 shares:
  Balance at beginning
   of period............   2,882,000    2,882,000    2,872,830    2,872,830    2,872,830
  Shares redeemed and
   canceled.............         --      (140,170)         --           --           --
  Shares issued in
   connection with
   purchase of minority
   interest.............         --       131,000          --           --           --
  Issuance of common
   shares...............         --           --           --           --        52,400
                         -----------  -----------  -----------  -----------  -----------
  Balance at end of
   period...............   2,882,000    2,872,830    2,872,830    2,872,830    2,925,230
                         ===========  ===========  ===========  ===========  ===========
Common stock:
  Balance at beginning
   of period............ $    28,820  $    28,820  $    28,728  $    28,728  $    28,728
  Shares redeemed and
   canceled.............         --        (1,402)         --           --           --
  Shares issued in
   connection with
   purchase of minority
   interest.............         --         1,310          --           --           --
  Issuance of common
   shares...............         --           --           --           --           524
                         -----------  -----------  -----------  -----------  -----------
  Balance at end of
   period...............      28,820       28,728       28,728       28,728       29,252
                         -----------  -----------  -----------  -----------  -----------
Additional paid-in
 capital:
  Balance at beginning
   of period............   2,171,180    2,171,180    2,455,034    2,455,034    2,455,034
  Shares redeemed and
   canceled.............         --      (255,398)         --           --           --
  Shares issued in
   connection with
   purchase of minority
   interest.............         --       539,252          --           --           --
  Issuance of common
   shares...............         --           --           --           --       296,755
                         -----------  -----------  -----------  -----------  -----------
  Balance at end of
   period...............   2,171,180    2,455,034    2,455,034    2,455,034    2,751,789
                         -----------  -----------  -----------  -----------  -----------
Retained earnings:
  Balance at beginning
   of period............   8,597,215   10,215,003   13,394,948   13,394,948   15,540,208
  Net earnings..........   1,617,788    3,179,945    2,917,735    2,054,764    2,222,291
  Dividends declared and
   paid.................         --           --      (772,475)    (772,475)         --
                         -----------  -----------  -----------  -----------  -----------
  Balance at end of
   period...............  10,215,003   13,394,948   15,540,208   14,677,237   17,762,499
                         -----------  -----------  -----------  -----------  -----------
Unrealized gain (loss)
 relating to
 investments:
  Balance at beginning
   of period............     (43,265)    (476,745)     735,322      735,322        8,137
  Unrealized gain (loss)
   during the period
   (net of deferred tax
   benefit (expense) of
   $121,938, $(167,365),
   $26,759, $48,435, and
   $(37,958),
   respectively)........    (433,480)   1,212,067     (727,185)    (853,623)     171,971
                         -----------  -----------  -----------  -----------  -----------
  Balance at end of
   period...............    (476,745)     735,322        8,137     (118,301)     180,108
                         -----------  -----------  -----------  -----------  -----------
    Total shareholders'
     equity............. $11,938,258  $16,614,032  $18,032,107  $17,042,698  $20,723,648
                         ===========  ===========  ===========  ===========  ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
             AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF CASH FLOW
 
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
               AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                      YEARS ENDED                   NINE MONTHS ENDED
                                     DECEMBER 31,                     SEPTEMBER 30,
                          -------------------------------------  ------------------------
                             1994         1995         1996         1996         1997
                          -----------  -----------  -----------  -----------  -----------
<S>                       <C>          <C>          <C>          <C>          <C>
Cash flow from operating
 activities:
 Net earnings...........  $ 1,617,788  $ 3,179,945  $ 2,917,735  $ 2,054,764  $ 2,222,291
 Adjustments to
  reconcile net earnings
  to net cash provided
  by operating
  activities:
  Realized gains on
   sale of
   investments..........      118,440     (139,382)    (177,321)    (155,153)     (14,243)
  Change in:
   Accrued investment
    income..............      (26,455)     (89,100)    (765,254)    (423,278)     311,074
   Premiums receivable..      (57,633)    (449,596)    (584,465)    (895,627)  (2,887,190)
   Reinsurance
    recoverable and
    ceded unearned
    premiums............          --           --      (318,672)     (91,048)    (285,915)
   Commissions
    receivable..........      (75,098)      59,723        8,630      (38,386)      35,666
   Due from affiliate...     (133,838)     286,390      (90,279)    (249,601)      95,207
   Income taxes
    recoverable and
    deferred............     (153,208)      80,892     (318,545)    (255,819)      57,451
   Unpaid losses and
    loss adjustment
    expenses............    1,249,841    2,245,922      620,805      123,086    1,820,173
   Liability for
    deductible fees
    held................          --           --           --           --     2,764,485
   Unearned premiums....      343,997      409,067      611,395      347,700      759,632
   Due to affiliate.....      486,800      108,324      455,122      568,615    1,708,516
   Accounts payable and
    accrued expenses....      170,811     (255,701)   1,185,781      173,480     (312,317)
   Other, net...........       22,305     (142,770)      53,216      230,295      117,753
                          -----------  -----------  -----------  -----------  -----------
    Net cash provided by
     operating
     activities.........  $ 3,563,750  $ 5,293,714  $ 3,598,148  $ 1,389,028  $ 6,392,583
                          -----------  -----------  -----------  -----------  -----------
Cash flow from investing
 activities:
 Purchases of fixed
  maturities............  (37,144,055) (22,396,837) (20,967,644) (14,822,233) (12,553,086)
 Purchase of common
  stocks................     (306,888)     (16,061)    (968,383)  (1,882,100)  (1,170,146)
 Proceeds from maturity
  and redemption of
  fixed maturities......    1,688,952    2,908,241    2,817,810    4,375,331          --
 Proceeds from sale of
  fixed maturities......   29,482,382   16,861,879   20,622,008   15,233,477    4,322,883
 Proceeds from sale of
  common stock..........          --           --       584,563      308,727      712,955
 Proceeds from sale of
  preferred stock.......          --           --       132,319          --           --
 Decrease (increase) in
  short-term
  investments...........    3,373,145    1,019,470     (122,417)  (2,037,641)  (1,124,265)
 Shareholder loan.......          --      (390,000)    (756,841)    (157,313)    (119,423)
 Purchase of secured
  note receivable.......          --      (988,195)  (3,924,670)  (3,704,005)   1,292,506
 Purchase of fixed
  assets, net...........      (35,445)     (67,098)    (167,971)    (233,989)    (147,755)
                          -----------  -----------  -----------  -----------  -----------
   Net cash used in
    investing
    activities..........  $(2,941,909) $(3,068,601) $(2,751,226) $(2,919,746) $(8,786,331)
                          -----------  -----------  -----------  -----------  -----------
Cash flow from financing
 activities:
 Proceeds from sale of
  common stock..........          --           --           --           --       297,279
 Proceeds from surplus
  note..................          --           --           --           --     1,250,000
 Dividends paid.........          --           --      (772,475)    (772,475)         --
 Treasury stock
  buyback...............          --      (256,800)         --           --           --
                          -----------  -----------  -----------  -----------  -----------
   Net cash used in
    financing
    activities..........          --      (256,800)    (772,475)    (772,475)   1,547,279
                          -----------  -----------  -----------  -----------  -----------
   Net increase
    (decrease) in cash..      621,841    1,968,313       74,447   (2,303,193)    (846,469)
Cash at beginning of
 period.................      607,356    1,229,197    3,197,510    3,197,510    3,271,957
                          -----------  -----------  -----------  -----------  -----------
Cash at end of period...  $ 1,229,197  $ 3,197,510  $ 3,271,957  $   894,317  $ 2,425,488
                          ===========  ===========  ===========  ===========  ===========
Supplemental disclosure
 of cash flow
 information:
 Income taxes paid......  $   223,000  $   629,000  $   293,000  $   200,000  $   350,000
                          ===========  ===========  ===========  ===========  ===========
 Interest paid..........  $       --   $       --   $       --   $       --   $    27,083
                          ===========  ===========  ===========  ===========  ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
              DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a) Basis of Presentation
 
  The accompanying consolidated financial statements of American Safety
Insurance Group, Ltd. ("American Safety") and its subsidiaries, as described
below (collectively, the "Company") are prepared in accordance with generally
accepted accounting principles in the United States. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates, based on the best
information available, in recording transactions resulting from business
operations. The balance sheet amounts that involve a greater extent of
accounting estimates and actuarial determinations subject to future changes
are the Company's liabilities for unpaid losses and loss adjustment expenses.
As additional information becomes available (or actual amounts are
determinable), the recorded estimates may be revised and reflected in
operating results. While management believes that the liability for unpaid
losses and loss adjustment expenses is adequate to cover the ultimate
liability, such estimates may be more or less than the amounts actually paid
when claims are settled.
 
 (b) Principles of Consolidation
 
  The consolidated financial statements include the accounts of American
Safety Insurance Group, Ltd. a Bermuda corporation, American Safety
Reinsurance, Ltd. ("American Safety Re"--formed December 1997 to serve as the
successor for the reinsurance business of American Safety), a 100%-owned
licensed Bermuda insurance company, and American Safety Casualty Insurance
Company ("American Safety Casualty"), a 100%-owned property and casualty
insurance company. American Safety Casualty in turn wholly owns Synergy
Insurance Services, Inc. ("Synergy"), an insurance management and brokerage
company. Synergy wholly owns the following subsidiaries: SURECO Bond Services,
Inc. ("SURECO"), a bonding agency; Environmental Claims Services, Inc., a
claims consulting firm; Harbor Insurance Services, Inc., a bonding agency; and
American Safety Purchasing Group, Inc., which acts as a purchasing group for
the placement of business with American Safety Casualty. All significant
intercompany balances have been eliminated in consolidation.
 
 (c) Nature of Operations
 
  The following is a description of certain risks facing property and casualty
insurers:
 
    Legal/Regulatory Risk is the risk that changes in the legal or regulatory
  environment in which an insurer operates will create additional expenses
  not anticipated by the insurer in pricing its products and beyond those
  recorded in the financial statements. That is, regulatory initiatives
  designed to reduce insurer profits or otherwise affecting the industry in
  which the insurer operates, new legal theories or insurance company
  insolvencies through guaranty fund assessments, may create costs for the
  insurer beyond those recorded in the financial statements. The Company also
  mitigates this risk because it is licensed and actively writes insurance
  business in several states, thereby spreading this risk over a large
  geographic area.
 
    Credit Risk is the risk that issuers of securities owned by the insurer
  or secured notes receivable will default or that other parties, including
  reinsurers that have obligations to the insurer, will not pay or perform.
  The Company attempts to mitigate this risk by adhering to a conservative
  investment strategy, by obtaining sufficient collateral for secured note
  obligations and by maintaining sound reinsurance, credit and collection
  policies.
 
    Interest Rate Risk is the risk that interest rates will change and cause
  a decrease in the value of an insurer's investments. The Company attempts
  to mitigate this risk by attempting to match the maturities of its assets
  with the expected payouts of its liabilities.
 
                                      F-7
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 (d) Investments
 
  Under Statement of Financial Accounting Standards ("SFAS") No. 115, fixed
maturity securities for which a company has the positive intent and ability to
hold to maturity are classified as "held to maturity" and are reported at
amortized cost. Fixed maturity and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
"trading" and are reported at fair value, with unrealized gains and losses
included in earnings. Fixed maturity and equity securities not classified as
either held to maturity or trading are classified as "available for sale" and
are reported at fair value, with unrealized gains and losses (net of deferred
taxes) charged or credited as a separate component of shareholders' equity.
 
  While it is the Company's intent to hold fixed maturity securities until the
foreseeable future or until maturity, it may sell such securities in response
to, among other things, market conditions, liquidity needs, or interest rate
fluctuations. At December 31, 1995 and 1996, and September 30, 1997, the
Company considered all of its fixed maturity and equity securities as
available for sale.
 
  Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts relating to investments
acquired at other than par value. Realized gains or losses on disposal of
investments are determined on a specific identification basis and are included
in revenues.
 
  The Company owns no on-balance sheet or off-balance sheet derivative
instruments.
 
 (e) Recognition of Premium Income
 
  General liability premiums are primarily assumed from American Safety Risk
Retention Group, Inc. ("American Safety RRG"), an affiliate. Due to the unique
class of business (environmental remediation), minimum initial estimates of
general liability insurance premiums are recorded as earned at the policy
inception date. Premium adjustments above the minimum initial estimates of
premium are billed and earned as additional contract revenues are reported by
policyholders. Workers' compensation premiums are recorded ratably over the
policy period with unearned premium calculated on a daily pro rata basis.
 
 (f) Brokerage Commission Income
 
  Brokerage commissions on business produced by SURECO are recognized as
income when the related insurance policies are underwritten. Commissions on
business produced by Synergy are recognized as the related insurance premiums
are written. For Synergy-produced business which remains in the consolidated
group, any commissions recognized are eliminated in consolidation or otherwise
recognized in revenue consistent with the recognition of premiums earned.
 
 (g) Deferred Policy Acquisition Costs
 
  The costs of acquiring business, primarily commissions and underwriting
expenses, are deferred (to the extent they are recoverable from future premium
income) and amortized to earnings in relation to the amount of premiums
earned. If necessary, investment income is considered in the determination of
the recoverability of deferred policy acquisition costs.
 
                                      F-8
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  An analysis of deferred policy acquisition costs follows:
 
<TABLE>
<CAPTION>
                                   YEARS ENDED              NINE MONTHS ENDED
                                  DECEMBER 31,                SEPTEMBER 30,
                          -------------------------------  --------------------
                            1994       1995       1996       1996       1997
                          ---------  ---------  ---------  ---------  ---------
<S>                       <C>        <C>        <C>        <C>        <C>
Balance, beginning of
 period.................  $     247  $  48,292  $  91,340  $  91,340  $ 121,671
Acquisition costs
 deferred...............    198,580    468,207    401,903    276,664    510,589
Amortized to expense
 during the period......   (150,535)  (425,159)  (371,572)  (240,251)  (485,871)
                          ---------  ---------  ---------  ---------  ---------
Balance, end of period..  $  48,292  $  91,340  $ 121,671  $ 127,753  $ 146,389
                          =========  =========  =========  =========  =========
</TABLE>
 
 (h) Unpaid Losses and Loss Adjustment Expenses
 
  The Company provides a liability for unpaid losses and loss adjustment
expenses based upon aggregate case estimates for reported claims and estimates
for incurred but not reported losses. Because of the length of time required
for the ultimate liability for losses and loss adjustment expenses to be
determined for certain lines of business underwritten, the Company has limited
experience upon which to base an estimate of the ultimate liability. For this
business, management has established loss and loss adjustment expense reserves
based on an independent actuarial valuation that it believes is reasonable and
representative of anticipated ultimate experience. For these lines, the
Bornhuetter-Ferguson method was used for the ultimate liability for loss and
loss adjustment expenses. The method entailed developing an initial expected
loss ratio based upon gross ultimate losses from the December 31, 1995
ultimate losses, estimating the portion of ultimate losses expected to be
reported and unreported, and adding the actual reported losses to the expected
unreported losses to derive the indicated ultimate losses. However, the net
amounts that will ultimately be paid to settle the liability may be more or
less than the estimated amounts provided.
 
 (i) Income Taxes
 
  For subsidiaries subject to taxation, 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.
 
 (j) Reinsurance
 
  Reinsurance contracts do not relieve the Company from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentration of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
 
 (k) Goodwill
 
  Goodwill is being amortized ratably over 20 years. Accumulated amortization
was $51,448 at December 31, 1995; $69,809 at December 31, 1996; and $83,580 at
September 30, 1997.
 
 (l) Net Earnings Per Share
 
  Net earnings per share have been calculated using the weighted average
number of common shares outstanding during each reporting period adjusted as
appropriate to reflect the dilutive effects of option and share
 
                                      F-9
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
issuances since September 30, 1996 for a per share consideration of less than
the assumed offering price of $12.00 (Note 13).
 
 (m) Accounting Pronouncements
 
  In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share. Effective December 31, 1997, SFAS No. 128
will require the presentation of two earnings per share ("EPS") numbers, basic
EPS and diluted EPS, in the statements of earnings. Basic EPS is computed by
dividing net earnings by the weighted average number of shares outstanding for
the period. Diluted EPS is computed by dividing net earnings by the weighted
average number of shares outstanding for the period plus shares subject to
stock options and other common stock equivalents. Net EPS calculated under the
new statement would be as follows:
 
<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                    YEARS ENDED SEPTEMBER 30,    SEPTEMBER 30,
                                    -------------------------- -----------------
                                      1994     1995     1996     1996     1997
                                    -------- -------- -------- -------- --------
<S>                                 <C>      <C>      <C>      <C>      <C>
Basic EPS.......................... $   0.56 $   1.11 $   1.02 $   0.72 $   0.76
Diluted EPS........................     0.54     1.07     0.98     0.69     0.75
</TABLE>
 
  As all options were issued within a one-year period of the offering
described in Note 13, in accordance with Staff Accounting Bulletin Topic 4D,
the option shares have been treated as being outstanding for all reported
periods using the treasury stock method for diluted EPS shown above.
 
  SFAS No. 129, Disclosures of Information about Capital Structure, was also
issued in February 1997 and is also effective December 31, 1997. This
statement establishes standards for disclosing information about an entity's
capital structure.
 
  On June 30, 1997, the FASB released SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial statements.
SFAS No. 130 requires that all components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. Examples of items that will be included in the Company's
presentation of comprehensive income, in addition to net earnings, are
unrealized gains and losses on securities available for sale. This statement
is effective beginning in 1998.
 
  Also on June 30, 1997, the FASB released SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This statement requires
that companies disclose segment data on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. This statement requires that a company report a measure of segment
profit or loss, certain specific revenue and expense items, and segment
assets. It also requires various reconciliations of total segment information
to amounts in the consolidated financial statements. This statement is
effective for 1998. The Company is currently evaluating the necessary changes
in its reporting and disclosures.
 
  Management believes that there will be no significant impact on the
Company's financial reporting or disclosures as a result of these
pronouncements.
 
 (n) Reclassifications
 
  Certain items in the prior periods' financial statements have been
reclassified to conform with the 1997 presentation.
 
                                     F-10
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 (2) Investments
 
  Net investment income is summarized as follows:
 
<TABLE>
<CAPTION>
                                     YEARS ENDED             NINE MONTHS ENDED
                                     DECEMBER 31,              SEPTEMBER 30,
                            ------------------------------ ---------------------
                              1994      1995       1996       1996       1997
                            -------- ---------- ---------- ---------- ----------
<S>                         <C>      <C>        <C>        <C>        <C>
Fixed maturities..........  $560,880 $1,253,201 $1,113,876 $  870,454 $1,038,915
Equity securities.........    23,340     25,002     31,128     11,898     30,876
Short-term and cash.......   132,158    111,399    124,285    110,589    159,804
Notes receivable..........       --       6,555    885,436    505,692    635,504
                            -------- ---------- ---------- ---------- ----------
                             716,378  1,396,157  2,154,725  1,498,633  1,865,099
Less investment expenses..    53,083     43,248     63,096     49,397     52,378
                            -------- ---------- ---------- ---------- ----------
    Net investment
     income...............  $663,295 $1,352,909 $2,091,629 $1,449,236 $1,812,721
                            ======== ========== ========== ========== ==========
</TABLE>
 
  Realized and unrealized investment gains and losses were as follows:
 
<TABLE>
<CAPTION>
                                  YEARS ENDED               NINE MONTHS ENDED
                                  DECEMBER 31,               SEPTEMBER 30,
                         --------------------------------  -------------------
                           1994        1995       1996       1996       1997
                         ---------  ----------  ---------  ---------  --------
<S>                      <C>        <C>         <C>        <C>        <C>
Realized gains:
  Fixed maturities...... $     --   $  300,596  $ 340,811  $ 320,938  $ 18,692
  Equity securities.....       --          --      20,454        --        --
                         ---------  ----------  ---------  ---------  --------
    Total gains.........       --      300,596    361,265    320,938    18,692
                         ---------  ----------  ---------  ---------  --------
Realized losses:
  Fixed maturities......   (84,518)    (99,971)  (153,215)  (149,518)   (4,449)
  Equity securities.....   (33,922)        --     (30,729)   (16,267)      --
                         ---------  ----------  ---------  ---------  --------
    Total losses........  (118,440)    (99,971)  (183,944)  (165,785)   (4,449)
                         ---------  ----------  ---------  ---------  --------
    Net realized gains
     (losses)........... $(118,440)    200,625    177,321    155,153    14,243
                         ---------  ----------  ---------  ---------  --------
Changes in unrealized
 gains (losses):
  Fixed maturities...... $(513,636)  1,363,624   (779,918)  (925,223)  199,052
  Equity securities.....   (41,782)     15,808     25,974     23,165    10,877
                         ---------  ----------  ---------  ---------  --------
    Net unrealized gains
     (losses)........... $(555,418) $1,379,432  $(753,944) $(902,058) $209,929
                         =========  ==========  =========  =========  ========
</TABLE>
 
  At December 31, 1995 and 1996 and September 30, 1997, the Company did not
hold fixed-maturity securities which individually exceeded 10% of
shareholders' equity except U.S. government and government agency securities.
 
                                     F-11

<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The amortized cost and estimated fair values of investments at December 31,
1995 and 1996 and September 30, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                          AMOUNT
                                       GROSS      GROSS     ESTIMATED    AT WHICH
                          AMORTIZED  UNREALIZED UNREALIZED    FAIR     SHOWN IN THE
                            COST       GAINS      LOSSES      VALUE    BALANCE SHEET
                         ----------- ---------- ---------- ----------- -------------
<S>                      <C>         <C>        <C>        <C>         <C>
December 31, 1995:
 Securities available
  for sale:
  Fixed maturities:
   U.S. Treasury
    securities and
    obligations of U.S.
    Government
    corporations and
    agencies............ $ 9,707,093  $659,177   $   592   $10,365,678  $10,365,678
   Obligations of states
    and political
    subdivisions........   3,730,535    94,953       --      3,825,488    3,825,488
   Corporate securi-
    ties................   3,407,620    61,904     1,037     3,468,487    3,468,487
   Mortgage-backed secu-
    rities..............   2,200,699    22,568    31,641     2,191,626    2,191,626
                         -----------  --------   -------   -----------  -----------
     Total fixed maturi-
      ties..............  19,045,947   838,602    33,270    19,851,279   19,851,279
 Equity investments:
  Preferred stocks......     147,375       --     15,375       132,000      132,000
  Common stocks.........     324,948       --     10,599       314,349      314,349
                         -----------  --------   -------   -----------  -----------
     Total.............. $19,518,270  $838,602   $59,244   $20,297,628  $20,297,628
                         ===========  ========   =======   ===========  ===========
December 31, 1996:
 Securities available
  for sale:
  Fixed maturities:
   U.S. Treasury
    securities and
    obligations of U.S.
    Government
    corporations and
    agencies............ $ 6,591,470  $ 33,120   $ 1,456   $ 6,623,134  $ 6,623,134
   Obligations of states
    and political
    subdivisions........   3,414,859    60,191     5,385     3,469,665    3,469,665
   Corporate securi-
    ties................   3,982,763    14,278    25,131     3,971,910    3,971,910
   Mortgage-backed secu-
    rities..............   2,761,151       838    51,041     2,710,948    2,710,948
                         -----------  --------   -------   -----------  -----------
     Total fixed maturi-
      ties..............  16,750,243   108,427    83,013    16,775,657   16,775,657
 Equity investments--
  common stocks.........     715,590       --        --        715,590      715,590
                         -----------  --------   -------   -----------  -----------
     Total.............. $17,465,833  $108,427   $83,013   $17,491,247  $17,491,247
                         ===========  ========   =======   ===========  ===========
September 30, 1997:
 Securities available
  for sale:
  Fixed maturities:
   U.S. Treasury
    securities and
    obligations of U.S.
    Government
    corporations and
    agencies............ $11,112,998  $102,990   $21,817   $11,194,171  $11,194,171
   Obligations of states
    and political
    subdivisions........   4,477,687   140,883       --      4,618,570    4,618,570
   Corporate securi-
    ties................   6,093,909    40,704    21,207     6,113,406    6,113,406
   Mortgage-backed secu-
    rities..............   2,862,440     9,496    26,856     2,845,080    2,845,080
                         -----------  --------   -------   -----------  -----------
     Total fixed maturi-
      ties..............  24,547,034   294,073    69,880    24,771,227   24,771,227
 Equity investments--
  common stocks.........   1,170,146    10,877       --      1,181,023    1,181,023
                         -----------  --------   -------   -----------  -----------
   Total................ $25,717,180  $304,950   $69,880   $25,952,250  $25,952,250
                         ===========  ========   =======   ===========  ===========
</TABLE>
 
 
                                     F-12
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The amortized cost and estimated fair values of fixed maturities at
September 30, 1997, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities as certain borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalty.
 
<TABLE>
<CAPTION>
                                                                     ESTIMATED
                                                         AMORTIZED     FAIR
                                                           COST        VALUE
                                                        ----------- -----------
<S>                                                     <C>         <C>
  Due in one year or less.............................. $ 1,148,781 $ 1,150,496
  Due after one year through five years................  10,649,508  10,722,151
  Due after five years through ten years...............   7,685,670   7,809,753
  Due after ten years..................................   2,200,635   2,243,747
  Mortgage-backed securities...........................   2,862,440   2,845,080
                                                        ----------- -----------
                                                        $24,547,034 $24,771,227
                                                        =========== ===========
</TABLE>
 
  Bonds with an amortized cost of $3,355,061, $4,198,368 and $4,300,052 were
on deposit with insurance regulatory authorities at December 31, 1995 and 1996
and September 30, 1997, respectively, in accordance with statutory
requirements.
 
(3) NOTES RECEIVABLE
 
  As of September 30, 1997, the notes receivable from related parties consists
of three notes which are secured by common shares of the Company with a book
value of approximately $7,100,000. The notes bear interest rates ranging from
9.25% to 10.25% and are payable in 1997.
 
  The other notes receivable consists of six notes which are fully secured by
real and personal property and various corporate and personal guarantees.
These notes bear interest rates ranging from 10.75% to 25.0% and are payable
on various dates.
 
  As of September 30, 1997, there are no delinquent note payments and no
losses have been incurred on the Company's notes receivable for any period
presented herein.
 
(4) FINANCIAL INSTRUMENTS
 
  The carrying amounts for short-term investments, cash, premiums receivable,
commissions receivable, accrued investment income, and accounts payable and
accrued expenses approximate their fair values due to the short-term nature of
these instruments.
 
  Estimated fair values for fixed maturities were provided by outside
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics.
 
  The estimated fair values for equity securities were determined by using
market quotations as of December 31, 1995 and 1996 and September 30, 1997,
respectively, on the principal public exchange markets for which such
securities are traded.
 
  Notes receivable are with affiliated individuals and unaffiliated entities.
Of the nine notes receivable at September 30, 1997, eight have fair values
which approximate market values. These notes have maturity dates late in 1997
or early in 1998 or have minimal outstanding principal balances at September
30, 1997. The carrying value and approximate fair value of the remaining loan
at September 30, 1997, assuming a fair market interest rate of prime plus 1%
(9 1/2%), are $1,526,579 and $1,695,936, respectively.
 
                                     F-13
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(5) REINSURANCE
 
 General Liability
 
  Effective January 1, 1997, the Company entered into two Excess of Loss
Reinsurance treaties with Signet Star Reinsurance Company, Underwriters
Reinsurance Company, Swiss Re America Corp. and Zurich-American Insurance
Group (the "Reinsurers") for the Company's general liability lines of
business. The treaties provide $500,000 excess $500,000 and $5 million excess
$1 million of coverage to the Company on a 100% basis. The treaties also
provide reinsurance coverage beginning at $100,000 for occupational disease,
cumulative trauma, employers' liability and "action over" claims.
 
 Workers' Compensation
 
  The Company assumes workers' compensation business from Legion Insurance
Company. This business is produced by Synergy, which bills and collects the
premiums on behalf of Legion and remits net of its agent's commissions. Legion
then deducts its expenses for the program as well as 10% of the premium to
deposit in its loss fund. The balance of the premium is ceded to the Company's
reinsurance subsidiary, American Safety Re. Legion uses the 10% loss fund to
pay claims, and when this fund is extinguished, Legion cedes to American
Safety Re. American Safety Re has a 50% quota share arrangement between itself
and American Safety Casualty. Pursuant to the arrangement with Legion
Insurance Company, the Company's exposure is limited to $250,000 per
occurrence and a 70% aggregate stop-loss ratio percentage. As discussed above
in "General Liability", the general liability treaties also provide
occupational disease, cumulative trauma, and employers' liability coverage up
to $100,000 for this program as well.
 
 Surety
 
  For surety business written by the Company's insurance subsidiary, American
Safety Casualty, the Company has in place a 50% quota share arrangement with
Underwriters Reinsurance Company. American Safety Casualty cedes 50% of all
premiums collected less a 55% ceding commission on the first $500,000 of
reinsurance premium and 25% commission thereafter, as well as ceding 50% of
all losses to Underwriters Re. American Safety Casualty also has an
arrangement with American Safety Re to cede 25% of all premiums and all losses
to them. To date, the Company has no reported claims for the surety line of
business.
 
                                     F-14

<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The approximate effect of reinsurance on the financial statement accounts
listed below is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                 YEARS ENDED          NINE MONTHS ENDED
                                 DECEMBER 31,           SEPTEMBER 30,
                            ------------------------  -------------------
                             1994     1995    1996      1996      1997
                            -------  ------  -------  --------  ---------
<S>                         <C>      <C>     <C>      <C>       <C>        <C>
Written premiums:
  Direct................... $    30  $   98  $ 1,149  $    775  $   2,929
  Assumed..................   3,820   6,249    4,825     3,191      5,855
  Ceded....................     (88)   (217)  (1,357)     (667)    (1,766)
                            -------  ------  -------  --------  ---------
    Net.................... $ 3,762  $6,130  $ 4,617  $  3,299  $   7,018
                            =======  ======  =======  ========  =========
Earned premiums:
  Direct................... $    31  $   51  $   811  $    662  $   2,419
  Assumed..................   3,477   6,058    4,505     3,157      5,604
  Ceded....................     (89)   (362)  (1,044)     (958)    (1,517)
                            -------  ------  -------  --------  ---------
    Net.................... $ 3,419  $5,747  $ 4,272  $  2,861  $   6,506
                            =======  ======  =======  ========  =========
Losses and loss adjustment
 expenses incurred:
  Direct................... $   (10) $   10  $   227  $    129  $     429
  Assumed..................   1,434   2,901    1,868     1,279      3,143
  Ceded....................     --       (6)     (39)      (25)       (39)
                            -------  ------  -------  --------  ---------
    Net.................... $ 1,424  $2,905  $ 2,056  $  1,383  $   3,533
                            =======  ======  =======  ========  =========  ===
Unpaid loss and loss
 adjustment expenses:
  Direct................... $    10  $   10  $   237  $     56  $     303
  Assumed..................   6,038   8,284    8,677     8,361     10,432
  Ceded....................     --       (6)     (45)      (31)       (84)
                            -------  ------  -------  --------  ---------
    Net.................... $ 6,048  $8,288  $ 8,869  $  8,386  $  10,651
                            =======  ======  =======  ========  =========
</TABLE>
 
(6) INCOME TAXES
 
  Under current Bermuda law, American Safety is not required to pay any taxes
in Bermuda on either income or capital gains. American Safety has received an
undertaking from the Minister of Finance in Bermuda that will exempt American
Safety from taxation until the year 2016 in the event of any such taxes being
imposed.
 
  American Safety does not consider itself to be engaged in a trade or
business in the United States and, accordingly, does not expect to be subject
to United States income taxes. However, certain subsidiaries of American
Safety are subject to U.S. Federal and state income tax.
 
  U.S. Federal and state income tax expense consists of the following
components:
 
<TABLE>
<CAPTION>
                                                     CURRENT  DEFERRED   TOTAL
                                                     -------- --------  --------
   <S>                                               <C>      <C>       <C>
   December 31, 1994................................ $368,466 $(39,478) $328,988
   December 31, 1995................................  792,060  (72,372)  719,688
   December 31, 1996................................  232,221  (55,712)  176,509
   September 30, 1996...............................  204,843  (26,722)  178,121
   September 30, 1997...............................  441,313  (58,785)  382,528
</TABLE>
 
  State income tax aggregated $19,410, $52,663 and $(6,595) for the years
ended December 31, 1994, 1995 and 1996, respectively, and $(567) and $19,918
for the nine months ended September 30, 1996 and 1997, respectively.
 
                                     F-15
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Income tax expense for the years ended December 31, 1994, 1995 and 1996, and
the nine months ended September 30, 1996 and 1997 differed from the amount
computed by applying the U.S. Federal income tax rate of 34% to earnings
before Federal income taxes as a result of the following:
 
<TABLE>
<CAPTION>
                                   YEARS ENDED              NINE MONTHS ENDED
                                  DECEMBER 31,                SEPTEMBER 30,
                         ---------------------------------  ------------------
                           1994        1995        1996       1996      1997
                         ---------  ----------  ----------  --------  --------
<S>                      <C>        <C>         <C>         <C>       <C>
Expected income tax
 expense................ $ 661,904  $1,325,875  $1,052,043  $759,181  $885,639
Foreign earned income
 not subject to direct
 taxation...............  (346,475)   (590,470)   (798,094) (525,230) (520,837)
Tax-exempt interest.....   (13,602)    (36,555)    (52,632)  (48,518)  (43,789)
Other, net..............    27,161      20,838     (24,808)   (7,312)   61,515
                         ---------  ----------  ----------  --------  --------
                         $ 328,988  $  719,688  $  176,509  $178,121  $382,528
                         =========  ==========  ==========  ========  ========
</TABLE>
 
  Deferred income taxes are based upon temporary differences between the
financial statement and tax bases of assets and liabilities. The following
deferred taxes are recorded:
 
<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                                 ----------------- SEPTEMBER 30,
                                                   1995     1996       1997
                                                 -------- -------- -------------
<S>                                              <C>      <C>      <C>
Deferred tax assets:
  Loss reserve discounting...................... $132,767 $174,130   $220,459
  Unearned premium reserves.....................   24,524   35,521     54,054
  Unrealized losses.............................      --       --         --
  Capital loss carryforward.....................      --     8,764        --
  Other, net....................................      256      --       8,265
                                                 -------- --------   --------
    Gross deferred tax assets...................  157,547  218,415    282,778
                                                 -------- --------   --------
Deferred tax liabilities:
  Deferred acquisition costs....................   15,528   20,684     26,761
  Unrealized gains..............................   44,036   17,277     54,962
  Other.........................................      --     1,134        636
                                                 -------- --------   --------
    Gross deferred tax liabilities..............   59,564   39,095     82,359
                                                 -------- --------   --------
  Net deferred tax asset........................ $ 97,983 $179,320   $200,419
                                                 ======== ========   ========
</TABLE>
 
  A valuation allowance has not been established as the Company believes it is
more likely than not that the deferred tax asset will be realized.
 
(7) INSURANCE ACCOUNTING
 
  The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles which vary in certain respects, for
the Company and American Safety Casualty, from statutory accounting practices
prescribed or permitted by regulatory authorities.
 
  The Bermuda Insurance Act of 1978 and related regulations (the "Act")
requires the Company to meet a minimum solvency margin. Statutory capital and
surplus as of December 31, 1995 and 1996, and September 30, 1997 were
$16,614,032, $18,075,611 and $20,723,648, respectively, and the amounts
required to be maintained by the Company were $1,149,354, $886,899 and
$1,250,591, respectively. In addition, a minimum liquidity ratio must be
maintained whereby relevant assets, as defined by the Act, must exceed 75% of
relevant liabilities. Once these requirements have been met, there is no
restriction on the retained earnings available for distribution. At September
30, 1997, the Company was in compliance with this requirement.
 
                                     F-16
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  As reported in American Safety Casualty's 1996 annual statement, the
statutory capital and surplus of American Safety Casualty approximated
$8,252,000. The maximum amount of dividends which can be paid, without prior
written approval of the Commissioner of Insurance of the State of Delaware, is
limited to the greater of 10% of surplus as regards policyholders or net
income, excluding realized capital gains, of the preceding year. Accordingly,
American Safety Casualty can pay dividends in 1997 of approximately $825,200.
 
  The National Association of Insurance Commissioners (the "NAIC") has
established risk-based capital ("RBC") requirements to help state regulators
monitor the financial strength and stability of property and casualty insurers
by identifying those companies that may be inadequately capitalized. Under the
NAIC's requirements, each insurer must maintain its total capital above a
calculated threshold or take corrective measures to achieve the threshold. The
threshold of adequate capital is based on a formula that takes into account
the amount of risk each company faces on its products and investments. The RBC
formula takes into consideration four major areas of risk: (i) asset risk
which primarily focuses on the quality of investments; (ii) insurance risk
which encompasses coverage-related issues and anticipated frequency and
severity of losses when pricing and designing insurance coverages; (iii)
interest rate risk which involves asset/liability matching issues; and (iv)
other business risks.
 
  American Safety Casualty has calculated its RBC level and has determined
that its capital and surplus is significantly in excess of threshold
requirements.
 
(8) RELATED PARTY AND AFFILIATE TRANSACTIONS
 
  As of September 30, 1997, the Company had three separate loans to
shareholders outstanding, which totaled $1.27 million. These loans bear
effective interest rates from 9.25% to 10.25% and are all payable in the
fourth quarter of 1997. See Note 3.
 
  The Company has entered into reinsurance agreements with two companies,
Synergy Reinsurance Company ("Synergy Re") and Omega Reinsurance Company
("Omega Re"), both of which are owned and controlled by certain officers of
the Company in order to provide limits of coverage not readily available in
the commercial marketplace. Reinsurance premiums ceded and earned aggregated
$25,000, $451,728, and $322,480, for the years ended December 31, 1995, and
1996 and for the nine month period ended September 30, 1997, respectively.
Additionally, Synergy Re was granted an option to purchase common shares of
American Safety at an option price approximating fair value at the date of the
grants. See Note 13.
 
  Synergy Insurance Services, American Safety's underwriting and
administrative services subsidiary, leases office space from an entity which
is owned by certain directors and shareholders of the Company. The lease
commenced on March 1, 1996 and expires on February 28, 2001. The Company pays
base annual rent of $183,820 plus an annual increase based on the consumer
price index of at least 4%.
 
  For the years ended December 31, 1994, 1995 and 1996, Synergy received
management fees from American Safety RRG in the amount of $390,000 for risk
management, claims administration and other management services. For the nine
month periods ended September 30, 1996 and 1997, Synergy received $292,500 and
$372,500, respectively. Synergy also recognized brokerage commissions from
American Safety RRG in the amount of $740,544 for the nine month period ended
September 30, 1997.
 
(9) ACQUISITION
 
  On January 1, 1995, pursuant to a share purchase agreement, the Company
purchased the minority interest in American Safety Casualty for 100 shares of
the Company's common shares. The fair value of the minority interest as of the
acquisition date approximated the value of the exchanged common shares.
 
                                     F-17
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(10) COMMITMENTS AND CONTINGENCIES
 
  At December 31, 1995 and 1996 and September 30, 1997, the Company had
aggregate outstanding irrevocable letters of credit which had not been drawn
amounting to $1,000,000 in favor of the Vermont Commissioner of Banking,
Insurance and Securities. Investments in the amount of $1,000,000 have been
pledged as collateral to the issuing bank. Additionally, Legion Insurance
Company had $2,000,000 of aggregate outstanding letters of credit which had
not been drawn in favor of the Company at December 31, 1995 and 1996 and
September 30, 1997.
 
(11) SURPLUS NOTE
 
  On May 30, 1997, the Company issued a $1,250,000 surplus note. The note
bears interest at a rate of 6.5% and matures on December 31, 1997. Given the
short maturity of the note, fair value approximates book value. The Company
repaid the surplus note on December 11, 1997.
 
(12) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
 
  Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                         YEARS ENDED         NINE MONTHS ENDED
                                         DECEMBER 31,          SEPTEMBER 30,
                                     ----------------------  -------------------
                                      1994    1995    1996     1996      1997
                                     ------  ------  ------  --------  ---------
<S>                                  <C>     <C>     <C>     <C>       <C>
Unpaid loss and loss adjustment
 expenses, January 1...............  $4,798  $6,048  $8,294  $  8,294  $   8,914
Reinsurance recoverable on unpaid
 losses and loss adjustment expense
 reserves at end of period.........     --      --        6         6         45
                                     ------  ------  ------  --------  ---------
    Net unpaid loss and loss
     adjustment expenses, January
     1.............................   4,798   6,048   8,288     8,288      8,869
                                     ------  ------  ------  --------  ---------
Incurred related to:
  Current year accident losses.....   1,569   3,099   2,862     1,925      3,342
  Prior year accident losses.......    (145)   (194)   (806)     (542)       191
                                     ------  ------  ------  --------  ---------
    Total incurred.................   1,424   2,905   2,056     1,383      3,533
                                     ------  ------  ------  --------  ---------
Paid related to:
  Current year accident losses.....      22     155     543       473        386
  Prior year accident losses.......     152     510     932       812      1,365
                                     ------  ------  ------  --------  ---------
    Total paid.....................     174     665   1,475     1,285      1,751
                                     ------  ------  ------  --------  ---------
    Net unpaid losses and loss
     adjustment expenses at end of
     period........................   6,048   8,288   8,869     8,386     10,651
Reinsurance recoverable on unpaid
 losses and loss adjustment
 expenses at end of period.........     --        6      45        31         84
                                     ------  ------  ------  --------  ---------
    Unpaid loss and loss adjustment
     expenses at end of period.....  $6,048  $8,294  $8,914  $  8,417  $  10,735
                                     ======  ======  ======  ========  =========
</TABLE>
 
(13) SHAREHOLDERS' EQUITY
 
  The Company intends to file a Form S-1 Registration Statement with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, to register for public sale its common stock. Prior to the
effectiveness of the aforementioned Registration Statement (expected in the
first calendar quarter of 1998), the Company will effectuate a 1,310-for-one
share split. All share and per share amounts have been retroactively adjusted
to effect this split. Additionally, the Company's Board of Directors
authorized 5,000,000 shares of $0.01 par value preferred stock.
 
                                     F-18
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table summarizes stock option activity:
 
<TABLE>
<CAPTION>
                                                        OPTION  WEIGHTED AVERAGE
                                                        SHARES   EXERCISE PRICE
                                                        ------- ----------------
<S>                                                     <C>     <C>
1997 Activity:
  Granted.............................................. 169,463      $6.69
  Exercised............................................     --         --
                                                        -------      -----
Outstanding at September 30, 1997...................... 169,463      $6.69
                                                        =======      =====
</TABLE>
 
  All of the 169,463 outstanding options at September 30, 1997 were
exercisable. The Company had no options outstanding prior to 1997.
 
  The following table summarizes information about stock options outstanding
at September 30, 1997:
 
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING          OPTIONS EXERCISABLE
                               --------------------------   --------------------------
                                WEIGHTED
                                 AVERAGE       WEIGHTED                     WEIGHTED
 RANGE OF                       REMAINING      AVERAGE                      AVERAGE
 EXERCISE        NUMBER        CONTRACTUAL     EXERCISE       NUMBER        EXERCISE
  PRICES       OUTSTANDING        LIFE          PRICE       EXERCISABLE      PRICE
- -----------    -----------     -----------     --------     -----------     --------
<S>            <C>             <C>             <C>          <C>             <C>
$      5.96       44,540          0.75          $ 5.96         44,540        $ 5.96
       5.96       51,090          4.43            5.96         51,090          5.96
       7.08       65,500           2.5            7.08         65,500          7.08
      12.00        8,333           5.0           12.00          8,333         12.00
                 -------                                      -------
$5.96-12.00      169,463          3.59          $ 6.69        169,463        $ 6.69
===========      =======          ====          ======        =======        ======
</TABLE>
 
  Had compensation cost for the Company's stock options granted in 1997 been
determined using the fair-value-based method as described in SFAS No. 123, the
Company's net earnings and earnings per share would approximate the pro forma
amounts indicated below:
 
<TABLE>
<CAPTION>
                                                            SEPTEMBER 30, 1997
                                                           ---------------------
                                                           (In thousands, except
                                                            per share amounts)
<S>                                                        <C>
Net earnings:
  As reported.............................................        $2,222
  Effect of stock options.................................            36
                                                                  ------
    Pro forma net earnings................................        $2,186
                                                                  ======
Net earnings per share:
  As reported.............................................        $ 0.75
  Effect of stock options.................................          0.01
                                                                  ------
    Pro forma net earnings per share......................        $ 0.74
                                                                  ======
</TABLE>
 
  The fair value of each option granted during 1997 was estimated on the date
of grant using the Black-Scholes multiple option approach with the following
assumptions: dividend yield of 0.0%; expected volatility of 0.0%; risk-free
interest rate of 5.44%; and expected life from the vesting dates ranging from
0.75 years to 5.0 years.
 
  The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. The provisions of SFAS No. 123 are applicable
prospectively. The Company expects to grant additional awards
 
                                     F-19
<PAGE>
 
            AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
in future years. The Company granted options in 1997 at an amount deemed to be
fair market value at the date of grant.
 
(14) LITIGATION
 
  The Company is a defendant in various litigation matters considered to be in
the normal course of business. While the outcome of these matters cannot be
estimated with certainty, it is the opinion of management (after consultation
with legal counsel) that the resolution of such litigation will not have a
material adverse effect on the Company's financial statements.
 
                                     F-20
<PAGE>
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON SHARES IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
 
                                ---------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................
Risk Factors.............................................................
Forward-Looking Statements...............................................
The Company..............................................................
Use of Proceeds..........................................................
Dividend Policy..........................................................
Capitalization...........................................................
Dilution.................................................................
Selected Consolidated Financial Data.....................................
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................
Business.................................................................
Regulatory Matters.......................................................
Management...............................................................
Certain Transactions.....................................................
Principal Shareholders...................................................
Description of Capital Stock.............................................
Shares Eligible for Future Sale..........................................
Certain Bermuda Law Considerations.......................................
Certain Tax Considerations...............................................
Underwriting.............................................................
Legal Matters............................................................
Experts..................................................................
Additional Information...................................................
Glossary of Selected Insurance Terms.....................................
Index to Consolidated Financial Statements...............................
</TABLE>
 
                                ---------------
 
UNTIL    , 1998, ALL DEALERS EFFECTING TRANSACATIONS IN THE COMMON SHARES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                               2,700,000 SHARES
 
            [LOGO OF AMERICAN SAFETY INSURANCE GROUP APPEARS HERE]
 
                                AMERICAN SAFETY
                             INSURANCE GROUP, LTD.
 
                                 COMMON SHARES
 
 
                                ---------------
 
                                  PROSPECTUS
 
                                ---------------
 
 
                                 ADVEST, INC.
 
                               J.C. BRADFORD&CO.
 
                         HOEFER & ARNETT, INCORPORATED
 
                                      , 1998
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
<TABLE>
   <S>                                                                 <C>
   Securities and Exchange Commission ("SEC") Registration Fee........ $11,908
   National Association of Securities Dealers, Inc. ("NASD") Filing
    Fee...............................................................   4,537
   National Association of Securities Dealers Automated Quotation
    ("Nasdaq") National Market System Listing Fee.....................  25,000
   Accountants' Fees and Expenses.....................................    *
   Legal Fees.........................................................    *
   Blue Sky Fees and Expenses.........................................    *
   Transfer Agent's and Registrar's Fees..............................    *
   Printing and Engraving Fees and Expenses...........................    *
   Miscellaneous......................................................    *
                                                                       -------
     Total............................................................ $
</TABLE>
- --------
*To be completed by amendment.
 
  The foregoing items, except for the SEC registration fee, the NASD filing
fee and the Nasdaq listing fee, are estimated.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  Section 98 of the Companies Act provides generally that a Bermuda company
may indemnify its directors, officers and auditors against any liability which
by virtue of Bermuda law otherwise would be imposed on them, except in cases
where such liability arises from the fraud or dishonesty of which such
director, officer or auditor may be guilty in relation to the company. Section
98 further provides that a Bermudian company may indemnify its directors,
officers and auditors against liability incurred by them in defending any
proceedings, whether civil or criminal, in which judgment is awarded in their
favor or they are acquitted or in which they are acquitted or granted relief
by the Supreme Court of Bermuda in certain proceedings arising under Section
281 of the Companies Act.
 
  The Company has adopted provisions in its Bye-Laws that provide that the
Company shall indemnify its officers and directors to the maximum extent
permitted under the Companies Act. The Company has also adopted provisions in
its Bye-Laws that provide that each shareholder of the Company and the Company
itself agrees to waive any claim or right of action he or it might have,
whether individually or by or in the right of the Company, against any
director on account of any action taken by such director, or the failure of
such director to take any action, in the performance of his duties, or
supposed duties, with or for the Company, provided that such waiver shall not
extend to any matter in respect of any fraud or dishonesty which may attach to
such director.
 
  The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection
with the Offering, including liabilities under the Securities Act of 1933.
Reference is made to the form Underwriting Agreement filed herewith as Exhibit
1.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
  On April 2, 1997, the Company sold 26,200 Common Shares to Synergy
Reinsurance Company (which is owned by Lloyd A. Fox, the President and a
director of the Company) at an aggregate price of $156,597.20 as a private
sale of securities not involving a public offering under applicable Bermuda
law and under Section 4(2) of the Securities Act of 1933.
 
  On, April 2, 1997, the Company sold 26,200 Common Shares to Omega
Reinsurance Company (which is owned by Stephen R. Crim, the Executive Vice
President of the Company) at an aggregate price of $156,597.20 as a private
sale of securities not involving a public offering under applicable Bermuda
law and under Section 4(2) of the Securities Act of 1933.
 
                                     II-1
<PAGE>
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
  (a) Exhibits filed pursuant to Item 601 of Regulation S-K
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                   TITLE
 -------                                  -----
  <S>                                     <C> 
   1*    --Underwriting Agreement
   3.1*  --Memorandum of Association of the Registrant
   3.2*  --Bye-Laws of the Registrant
   4*    --Common Share Certificate
   5*    --Opinion of Conyers Dill & Pearman
  10.1*  --Employment Contract between the Registrant and Lloyd A. Fox
  10.2*  --Incentive Stock Option Plan
  10.3*  --Directors Stock Plan
  10.4   --Lease Agreement between 1845 Tenants-In-Common (formerly known as
          Windy Hill Exchange, L.L.C.) and Synergy Insurance Services, Inc.
          (formerly known as Environmental Management Services, Inc.) for
          office space in Atlanta, Georgia
  10.5*  --Management Agreement between Synergy Insurance Services, Inc.
          (formerly known as Environmental Management Services, Inc.) and
          American Safety Risk Retention Group, Inc.
  11     --Statement Re Computation of per Share Earnings
  21     --List of Subsidiaries
  23.1   --Consent of KPMG Peat Marwick LLP (set forth on page S-1 of this
          Registration Statement)
  23.2*  --Consent of Conyers Dill & Pearman (to be included in opinion filed
          as Exhibit 5)
  24     --Power of Attorney (see signature page to this Registration Statement)
  27     --Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment
 
  (b) Financial Statement Schedules
 
  The following financial statement schedules of the Registrant are included
hereafter beginning on page S-1:
 
    Schedule II--Condensed Financial Information of Registrant
 
    Schedule IV--Reinsurance
 
  Schedules not listed above have been omitted because they are not applicable
or the required information is included in the financial statements or notes
thereto.
 
ITEM 17. UNDERTAKINGS
 
  The Registrant undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement stock certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
 
                                     II-2
<PAGE>
 
  The Registrant hereby undertakes that:
 
    (1) For the purpose of determining any liability under the Securities
  Act, the information omitted from the form of Prospectus and filed as a
  part of this Registration Statement in reliance upon Rule 430A and
  contained in a form of prospectus filed by the Registrant pursuant to Rule
  424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a
  part of this Registration Statement as of the time it was declared
  effective.
 
    (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of prospectus shall
  be deemed to be a new registration statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.
 
                                     II-3
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THE 18TH DAY OF DECEMBER 1997.
 
                                          American Safety Insurance Group,
                                           Ltd.
 
                                                     /s/ Lloyd A. Fox
                                          By: _________________________________
                                                  LLOYD A. FOX PRESIDENT
 
                               POWER OF ATTORNEY
 
  Each person whose signature appears below hereby constitutes and appoints
each of Lloyd A. Fox, Stephen R. Crim, and Fred J. Pinckney, individually, as
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, (i) to sign any and all amendments (including post-
effective amendments) to this Registration Statement, (ii) to sign any
registration statement to be filed pursuant to Rule 462(b) under the
Securities Act for the purpose of registering additional Common Shares for the
same offering covered by this Registration Statement, and (iii) to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, each acting alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON THE 18TH DAY OF DECEMBER 1997.
 
              SIGNATURE                           TITLE
 
          /s/ Lloyd A. Fox                President and Director (Principal
- -------------------------------------      Executive Officer)
            LLOYD A. FOX
 
        /s/ Stephen F. Clarke             Chief Financial Officer (Principal
- -------------------------------------      Financial Officer and Principal
          STEPHEN F. CLARKE                Accounting Officer)
 
      /s/ Frederick C. Treadway           Chairman of the Board of Directors
- -------------------------------------
        FREDERICK C. TREADWAY
 
                                     II-4

<PAGE>
 
              SIGNATURE                                   TITLE
              ---------                                   -----
 
        /s/ David V. Brueggan                           Director
- -------------------------------------
          DAVID V. BRUEGGAN
 
        /s/ Cody W. Birdwell                            Director
- -------------------------------------
          CODY W. BIRDWELL
 
     /s/ William O. Mauldin, Jr.                        Director
- -------------------------------------
       WILLIAM O. MAULDIN, JR.
 
        /s/ Thomas W. Mueller                           Director
- -------------------------------------
          THOMAS W. MUELLER
 
        /s/ Timothy E. Walsh                            Director
- -------------------------------------
          TIMOTHY E. WALSH
 
                                      II-5
<PAGE>
 
The Board of Directors
American Safety Insurance Group, Ltd.:
 
  The audits referred to in our report dated November 18, 1997, except as to
Notes 11 and 13 which are as of      , included the related financial
statement schedules as of December 31, 1995 and 1996 and September 30, 1997,
and for each of the years in the three-year period ended December 31, 1996 and
for the nine-month periods ended September 30, 1996 and 1997, included in the
Registration Statement. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
 
  We consent to the use of our reports included herein and to the reference of
our firm under the heading "Experts" in the prospectus.
 
                                          KPMG PEAT MARWICK LLP
 
Atlanta, Georgia
December 19, 1997
 
                                      S-1
<PAGE>
 
                     AMERICAN SAFETY INSURANCE GROUP, LTD.
 
                     SCHEDULE II--CONDENSED BALANCE SHEETS
 
               DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
 
<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                          ----------------------- SEPTEMBER 30,
                                             1995        1996         1997
                                          ----------- ----------- -------------
<S>                                       <C>         <C>         <C>
                 ASSETS
Investments--investment in subsidiary.... $ 8,522,771 $ 9,038,875  $ 9,801,453
Other investments:
  Bonds..................................  12,098,904   7,056,342   13,412,998
  Common stock...........................         --          --       360,877
  Short-term investments.................     300,000         --           --
  Cash...................................     909,835   1,358,557    2,010,456
  Notes receivable:
    Related parties......................     390,000   1,146,841    1,266,264
    Other................................     988,195   4,912,865    3,620,359
Invested income due and accrued..........     163,669     895,452      549,921
                                          ----------- -----------  -----------
      Total investments..................  23,373,374  24,408,932   31,022,328
Premiums receivable......................     166,232     398,381    1,150,432
Ceded unearned premium--ASCIC............     343,844     438,949      554,163
Ceded loss reserves......................     300,519     905,562    2,255,539
Other assets.............................      51,350      71,811      719,465
                                          ----------- -----------  -----------
      Total assets....................... $24,235,319 $26,223,635  $35,701,927
                                          =========== ===========  ===========
  LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Unpaid losses and loss adjustment
   expenses.............................. $ 6,551,825 $ 6,990,870  $ 9,076,851
  Unearned premiums......................     708,724     975,706    1,330,769
  Ceded premium payable..................     268,811     184,768      236,977
  Liability for deductible fees held.....         --          --     2,764,485
  Surplus note...........................         --          --     1,250,000
  Accounts payable and accrued expenses..      91,927      40,184      319,196
                                          ----------- -----------  -----------
      Total liabilities..................   7,621,287   8,191,528   14,978,278
                                          ----------- -----------  -----------
Shareholders' equity:
  Common stock, par value................      28,728      28,728       29,252
  Additional paid-in capital.............   2,455,034   2,455,034    2,751,789
  Unrealized gain--investments...........     735,322       8,137      180,108
  Retained earnings......................  13,394,948  15,540,208   17,762,500
                                          ----------- -----------  -----------
      Total shareholders' equity.........  16,614,032  18,032,107   20,723,649
                                          ----------- -----------  -----------
      Total liabilities and shareholders'
       equity............................ $24,235,319 $26,223,635  $35,701,927
                                          =========== ===========  ===========
</TABLE>
 
           See accompanying notes to condensed financial statements.
 
                                      S-2
<PAGE>
 
                     AMERICAN SAFETY INSURANCE GROUP, LTD.
 
                 SCHEDULE II--CONDENSED STATEMENTS OF EARNINGS
 
                 YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
               AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                   DECEMBER 31,                    SEPTEMBER 30,
                         -----------------------------------  ------------------------
                            1994        1995        1996         1996         1997
                         ----------  ----------  -----------  -----------  -----------
<S>                      <C>         <C>         <C>          <C>          <C>
Revenues:
  Direct and assumed
   premiums earned...... $1,971,044  $3,506,966  $ 4,120,549  $ 2,747,089  $ 4,998,578
  Ceded premiums
   earned...............    (44,608)   (390,429)  (2,037,942)  (1,369,233)  (2,237,870)
                         ----------  ----------  -----------  -----------  -----------
  Net premiums earned...  1,926,436   3,116,537    2,082,607    1,377,856    2,760,708
                         ----------  ----------  -----------  -----------  -----------
  Net investment
   income...............    241,216     856,144    1,505,354    1,007,436    1,283,272
  Realized gains on sale
   of investments.......        --      139,382      203,097      168,498       14,979
  Other income..........        --        1,770          --         1,005          --
                         ----------  ----------  -----------  -----------  -----------
    Total revenues......  2,167,652   4,113,833    3,791,058    2,554,795    4,058,959
                         ----------  ----------  -----------  -----------  -----------
Expenses:
  Losses and loss
   adjustment expenses
   incurred.............    724,751   1,658,690      683,253      566,990    1,707,439
  Acquisition expenses..    403,332     544,849      358,256      264,879      531,483
  Other expenses........     20,524     173,617      402,216      178,132      288,164
                         ----------  ----------  -----------  -----------  -----------
    Total expenses......  1,148,607   2,377,156    1,443,725    1,010,001    2,527,086
                         ----------  ----------  -----------  -----------  -----------
    Earnings before
     income taxes.......  1,019,045   1,736,677    2,347,333    1,544,794    1,531,873
Income taxes............        --          --           --           --           --
                         ----------  ----------  -----------  -----------  -----------
    Earnings before
     equity in earnings
     of subsidiary......  1,019,045   1,736,677    2,347,333    1,544,794    1,531,873
Equity in net earnings
 of subsidiary..........    398,053   1,308,904      570,402      509,970      690,418
                         ----------  ----------  -----------  -----------  -----------
    Consolidated net
     earnings........... $1,417,098  $3,045,581  $ 2,917,735  $ 2,054,764  $ 2,222,291
                         ==========  ==========  ===========  ===========  ===========
</TABLE>
 
           See accompanying notes to condensed financial statements.
 
                                      S-3
<PAGE>
 
                     AMERICAN SAFETY INSURANCE GROUP, LTD.
 
                 SCHEDULE II--CONDENSED STATEMENTS OF CASH FLOW
 
                 YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
               AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
 
 
<TABLE>
<CAPTION>
                                    DECEMBER 31,                  SEPTEMBER 30,
                          ----------------------------------  ----------------------
                             1994        1995        1996        1996        1997
                          ----------  ----------  ----------  ----------  ----------
<S>                       <C>         <C>         <C>         <C>         <C>
Cash flow from operating
 activities:
 Net earnings before eq-
  uity in earnings of
  subsidiary............  $1,019,045  $1,736,677  $2,347,333  $1,544,794  $1,531,873
 Adjustments to
  reconcile net earnings
  to net cash provided
  from operating
  activities:
   Change in:
    Accounts payable and
     accrued expenses...      13,711      58,267     (51,743)    (56,277)    279,012
    Unpaid losses and
     loss adjustment
     expenses...........     571,815   1,212,274    (165,998)   (199,342)    736,004
    Increase in unearned
     premiums...........     174,617     190,263     171,877      84,405     239,849
    Accrued investment
     income.............     (41,079)    (73,283)   (731,783)   (400,200)    345,531
    Liability for
     deductible fees
     held...............         --          --          --          --    2,764,485
    Premiums
     receivable.........     (53,814)    (49,815)   (232,149)   (559,537)   (752,051)
    Other assets........         --      (51,350)    (20,461)     45,795    (647,654)
    Other, net..........      66,010     157,607     (29,745)     92,896     (19,950)
                          ----------  ----------  ----------  ----------  ----------
    Net cash provided by
     operating
     activities.........   1,750,305   3,180,640   1,287,331     552,534   4,477,099
                          ----------  ----------  ----------  ----------  ----------
Cash flow from investing
 activities--decrease
 (increase) in invested
 cash...................  (1,751,857) (2,014,711)    (66,134)   (687,299) (5,372,479)
                          ----------  ----------  ----------  ----------  ----------
Cash flow from financing
 activities:
  Proceeds from surplus
   note.................         --          --          --          --    1,250,000
  Proceeds from sale of
   common stock.........         --          --          --          --      297,279
  Dividends paid........         --          --     (772,475)  (772,475)         --
  Treasury stock
   buyback..............         --     (256,800)        --          --          --
                          ----------  ----------  ----------  ----------  ----------
    Net cash provided by
     financing
     activities.........         --     (256,800)   (772,475)   (772,475)  1,547,279
                          ----------  ----------  ----------  ----------  ----------
  Net increase (de-
   crease) in cash......      (1,552)    909,129     448,722    (907,240)    651,899
  Cash at beginning of
   year.................       2,258         706     909,835     909,835   1,358,557
                          ----------  ----------  ----------  ----------  ----------
  Cash at end of year...  $      706  $  909,835  $1,358,557  $    2,595  $2,010,456
                          ==========  ==========  ==========  ==========  ==========
Supplemental disclosure
 of noncash financing
 activities--retirement
 of treasury stock......  $      --   $      --   $      --   $      --   $  297,279
                          ==========  ==========  ==========  ==========  ==========
</TABLE>
 
                  See notes to condensed financial statements.
 
                                      S-4
<PAGE>
 
                     AMERICAN SAFETY INSURANCE GROUP, LTD.
 
                            SCHEDULE IV--REINSURANCE
 
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
               AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
    PROPERTY--
     LIABILITY                       CEDED TO                             PERCENTAGE OF
 ISURANCE PREMIUMSN          GROSS     OTHER    ASSUMED FROM      NET     AMOUNT ASSUMED
      EARNED                AMOUNT   COMPANIES OTHER COMPANIES   AMOUNT       TO NET
- ------------------         --------- --------- --------------- ---------- --------------
  <S>                      <C>       <C>       <C>             <C>        <C>
  December 31, 1994....... $  31,000 $  89,000   $3,477,000    $3,419,000     101.7%
  December 31, 1995.......    51,000   362,000    6,058,000     5,747,000     105.4%
  December 31, 1996.......   811,000 1,044,000    4,505,000     4,272,000     105.5%
  September 30, 1996......   662,000   958,000    3,157,000     2,861,000     110.3%
  September 30, 1997...... 2,419,000 1,517,000    5,604,000     6,506,000      86.1%
</TABLE>
 
                                      S-6

<PAGE>
 
                                                                    Exhibit 10.4

                          COMMERCIAL LEASE AGREEMENT
                                    May 1994
                                        
THIS LEASE is made by and among Windy Hill Exchange, L.L.C. (hereinafter called
"Landlord", and Environmental Management Insurance Services, Inc. (hereinafter
called "Tenant").

                                  WITNESSETH:
                                        
PREMISES
     1.  Landlord, for and in consideration of the rents, covenants, agreements,
and stipulations hereinafter mentioned, provided for and contained herein to be
paid, kept and performed by Tenant, leases and rents unto Tenant, and Tenant
hereby leases and takes upon the terms and conditions which hereinafter appear,
the following described property (hereinafter called the "premises), to wit:
13,130 sq. ft. of office located on the second floor of 1845 The Exchange, Cobb
County, Georgia and being known as Suite 200, 1845 The Exchange. No easement for
light or air is included in the Premises.

TERM
     2.  The Tenant shall have and hold the Premises for a term of Sixty (60)
Months, beginning on the 1st day of March, 1996, and ending on the 28th day of
February, 2001, at midnight, unless sooner terminated as hereinafter provided.

RENTAL
     3.  Tenant agrees to pay to Landlord at the address of Landlord as stated
in this lease, without demand, deduction or setoff, an annual rental of "See
Exhibit A"" payable in equal monthly installments of "See Exhibit "A"" in
advance on the first day of each calendar month during the term hereof. Upon
execution of this Lease, Tenant shall pay to Landlord the first full month's
rent due hereunder. Rental for any period during the term hereof which is for
less than one month shall be a prorated portion of the monthly rental due.

LATE CHARGES
     4.  If Landlord fails to receive all or any portion of a rent payment
within ten (10) days after it becomes due, Tenant shall pay Landlord, as
additional rental, a late charge equal to ten percent (10%) of the overdue
amount.  The parties agree that such late charge represents a fair and
reasonable estimate of the costs Landlord will incur by reason of such late
payment.

SECURITY DEPOSIT
     5.  Tenant shall deposit with Landlord upon execution of this Lease
$30,636.66 as a security deposit which shall be held by Landlord, without
liability to Tenant for any interest thereon, as security for the full and
faithful performance by Tenant of each and every term, covenant and condition of
this Lease of Tenant.  if any of the rents or other charges or sums payable by
Tenant to Landlord shall be overdue and unpaid or should Landlord make payments
on behalf of Tenant, or should Tenant fail to perform any of the terms of this
Lease, then Landlord may, at its option, appropriate and apply the security
deposit, or so much thereof as 

                                                                               1
<PAGE>
 
may be necessary to compensate Landlord toward the payment of the rents, charges
or other sums due from Tenant, or towards any loss, damage or expense sustained
by Landlord resulting from such default on the part of Tenant; and in such event
Tenant shall upon demand restore the security deposit to the original sum
deposited. In the event Tenant furnishes Landlord with proof that all utility
bills have been paid through the date of Lease termination, and performs all of
Tenant's other obligations under this Lease, the security deposit shall be
returned in full to Tenant within thirty (30) days after the date of the
expiration or sooner termination of the term of this Lease and the surrender of
the Premises by Tenant in compliance with the provisions of this Lease.

UTILITY BILLS
     6.  Landlord shall pay all utility bills, including, but not limited to
water, sewer, electricity, fuel, light and heat bills for the Premises, and
Landlord shall pay all charges for garbage collection or other sanitary
services.

COMMON AREA COSTS; RULES AND REGULATIONS
     7.  If the Premises are part of a larger building or group of buildings,
Tenant shall pay as additional rental monthly, in advance, its pro rata share of
common area maintenance costs as hereinafter more particularly set forth in the
Special Stipulations.  The Rules and Regulations attached hereto are made a part
of this lease.  Tenant agrees to perform and abide by those Rules and
Regulations and such other Rules and Regulations as may be made from time to
time by Landlord.

USE OF PREMISES
     8.  The Premises shall be used for general office purposes only and no
other.  The Premises shall not be used for any illegal purposes, nor in any
manner to create any nuisance or trespass, nor in any manner to vitiate the
insurance or increase the rate of insurance on the Premises.

ABANDONMENT OF THE PREMISES
     9.  Tenant agrees not to abandon or vacate the Premises during the term of
this Lease and agrees to use the Premises for the purposes herein leased until
the expiration hereof.

TAX AND INSURANCE ESCALATION
     10.  Tenant shall pay upon demand by Landlord as additional rental during
the term of this Lease, and any extension or renewal thereof, the amount by
which all taxes (including but not limited to, ad valorem taxes, special
assessments and any other governmental charges) on the Premises for each tax
year exceed all taxes on the Premises for the tax year 1995.  In the event the
Premises are less than the entire property assessed for such taxes in any such
tax year, then the tax, for any such year applicable to the Premises shall be
determined by proration on the basis that the rentable floor area of the
Premises bears to the rentable floor area of the entire property assessed.  If
the final year of the Lease term fails to coincide with the tax year, then any
excess for the tax year during which the term ends shall be reduced by the pro
rata part of such tax year beyond the Lease term.  If such taxes for the year in
which the Lease terminates are not ascertainable before payment of the last
month's rental, then the amount of such taxes assessed 

                                                                               2
<PAGE>
 
against the Property for the previous tax year shall be used as a basis for
determining the pro rata share, if any, to be paid by Tenant for that portion of
the last Lease year. Tenant shall further pay, upon demand, its pro rata share
of the excess cost of fire and extended coverage insurance including any and all
public liability insurance on the building over the cost for the first year of
the Lease term for each subsequent year during the term of this Lease. Tenant's
pro rata portion of increased taxes or share of excess cost of fire and extended
coverage and liability insurance, as provided herein, shall be payable within
fifteen (15) days after receipt of notice from Landlord as to the amount due.

INDEMNITY; INSURANCE
     11.  Tenant agrees to and hereby does indemnify and save Landlord harmless
against all claims for damages to persons or property by reason of Tenant's use
or occupancy of the Premises, and all expenses incurred by Landlord because
thereof, including attorney's fees and court costs.  Supplementing the foregoing
and in addition thereto, Tenant shall during the term of this Lease and any
extension or renewal thereof, and at Tenant's expense, maintain in full force
and effect comprehensive general liability insurance with limits of $500,000.00
per person and $1,000,000.00 per incident, and property damage limits of
$100,000.00 which insurance shall contain a special endorsement recognizing and
insuring any liability accruing to Tenant under the first sentence of this
paragraph 11, and naming Landlord as additional insured.  Tenant shall provide
evidence of such insurance to Landlord prior to the commencement of the term of
this Lease.  Landlord and Tenant each hereby release and relieve the other and
waive its right of recovery, for loss or damage arising out of or incident to
the perils insured against which perils occur in, on or about the Premises,
whether due to the negligence of Landlord or Tenant or their Brokers, employees,
contractors and/or invitees, to the extent that such loss or damage is within
the policy limits of said comprehensive general liability insurance.  Landlord
or Tenant shall, upon obtaining the policies of insurance required, give notice
to the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease.

REPAIRS BY LANDLORD
     12.  Landlord agrees to keep in good repair the roof, foundations and
exterior walls of the Premises (inclusive of all glass and exclusive of all
exterior doors) and underground utility and sewer pipes outside the exterior
walls of the building, except repairs rendered necessary by the negligence or
intentional wrongful acts of Tenant, its brokers, employees or invitees.  If the
Premises are part of a larger building or group of buildings, then to the extent
that the grounds are common areas, Landlord shall maintain the grounds
surrounding the building, including paving, the mowing of grass, care of shrubs
and general landscaping.  Tenant shall promptly report in writing to Landlord
any defective condition known to it which Landlord is required to repair and
failure so to report such conditions shall make Tenant responsible to Landlord
for any liability incurred by Landlord by reason of such conditions.

REPAIRS BY TENANT
     13.  Tenant accepts the Premises in their present condition and as suited
for the uses intended by Tenant.  Tenant shall, throughout the initial term of
this Lease, and any extension or renewal thereof, at its expense, maintain in
good order and repair the Premises, including the building, and other
improvements located thereon, except those repairs expressly required to be 

                                                                               3
<PAGE>
 
made by Landlord hereunder. Tenant agrees to return the Premises to Landlord at
the expiration, or prior to termination of this Lease, in as good condition and
repair as when first received, natural wear and tar, damage by storm, fire,
lightning, earthquake or other casualty alone excepted.

ALTERATIONS
     14.  Tenant shall not make any alterations, additions, or improvements to
the Premises without Landlord's prior written consent.  Tenant shall promptly
remove any alterations, additions, or improvements constructed in violation of
this Paragraph 14 upon Landlord's written request.  All approved alterations,
additions, and improvements will be accomplished in a good and workmanlike
manner, in conformity with all applicable laws and regulations, and by a
contractor approved by Landlord, free of any licus or encumbrances.  Landlord
may require Tenant to remove any alterations, additions or improvements (whether
or not made with Landlord's consent) at the termination of this Lease, except
that Tenant may remove any of Tenant's machinery or equipment which can be
removed without material damage to the Premises.  Tenant shall repair, at
Tenant's expense, any damage to the Premises caused by the removal of any such
machinery or equipment.

REMOVAL OF FIXTURES
     15.  Tenant may (if not in default hereunder) prior to the expiration of
this Lease, or any extension or renewal thereof, remove all fixtures and
equipment which it has placed in the Premises, provided Tenant repairs all
damage to the Premises caused by such removal.

DESTRUCTION OF OR DAMAGE TO PREMISES
     16.  If the Premises are totally destroyed by storm, fire, lightning,
earthquake or other casualty, this Lease shall terminate as of the date of such
destruction and rental shall be accounted for as between Landlord and Tenant as
of that date.  If the Premises are damaged but not wholly destroyed by any such
casualties, rental shall abate in such proportion as use of the Premises has
been destroyed and Landlord shall restore the Premises to substantially the same
condition as before damage as speedily as is practicable, whereupon full rental
shall recommence.

GOVERNMENTAL ORDERS
     17.  Tenant agrees, at its own expense, to comply promptly with all
requirements of any legally constituted public authority made necessary by
reason of Tenant's occupancy of the Premises.  Landlord agrees to comply
promptly with any such requirements if not made necessary by reason of Tenant's
occupancy.  It is mutually agreed, however, between Landlord and Tenant, that if
in order to comply with such requirements, the cost to Landlord or Tenant, as
the case may be, shall exceed a sum equal to one year's rent, then Landlord or
Tenant who is obligated to comply with such requirements may terminate this
Lease by giving written notice of termination to the other party by certified
mail, which termination shall become effective sixty (60) days after receipt of
such notice and which notice shall eliminate the necessity of compliance with
such requirements by giving such notice unless the party giving such notice of
termination shall, before termination becomes effective, pay to the party giving
notice all cost of 

                                                                               4
<PAGE>
 
compliance in excess of one year's rent, or secure payment of said sum in manner
satisfactory to the party giving notice.

CONDEMNATION
     18.  If the whole of the Premises, or such portion thereof as will make the
Premises unusable for the purposes herein leased, are condemned b any legally
constituted authority for any public use or purposes, then in either of said
events the term hereby granted shall cease from the date when possession thereof
is taken by public authorities, and rental shall be accounted for as between
Landlord and Tenant as of said date.  Such termination, however, shall be
without prejudice to the rights of either Landlord or Tenant to recover
compensation and damage caused by condemnation from the condemnor.  It is
further understood and agreed that neither the Tenant nor Landlord shall have
any rights in any award made to the other by any condemnation authority
notwithstanding the termination of the Lease as herein provided.  Broker may
become a party to the condemnation proceeding for the purpose of enforcing his
rights under this paragraph.

ASSIGNMENT AND SUBLETTING
     19.  Tenant shall not, without the prior written consent of Landlord, which
shall not be unreasonably withheld, assign this Lease or any interest hereunder,
or sublet the Premises or any part thereof, or permit the use of the Premises by
any party other than the Tenant.  Consent to any assignment or sublease shall
not impair this provision and all later assignments or subleases shall be made
likewise only on the prior written consent of Landlord.  The assignee of Tenant,
at the option of Landlord, shall become liable to Landlord for all obligations
of Tenant hereunder, but no sublease or assignment by Tenant shall relieve
Tenant of any liability hereunder.

EVENTS OF DEFAULT
     20.  The happening of any one or more the following events (hereinafter any
one of which may be referred to as an "Event of Default") during the term of
this Lease, or any renewal or extension thereof, shall constitute a breach of
this Lease on the part of the Tenant: (A) Tenant fails to pay the rental as
provided for herein; (B) Tenant abandons or vacates the Premises; (C) Tenant
fails to comply with or abide by and perform any other obligation imposed upon
Tenant under this Lease; (D) Tenant is adjudicated bankrupt; (E) a permanent
receiver is appointed for Tenant's property and such receiver is not removed
within sixty (60) days after written notice from Landlord to Tenant to obtain
such removal; (F) Tenant either voluntarily or involuntarily, takes advantage of
any debt or relief proceedings under the present or future law, whereby the rent
or any part thereof, is or is proposed to be reduced or payment thereof
deferred; (G) Tenant makes an assignment for benefit of creditors; or (H)
Tenant's effects are levied upon or attached under process against Tenant, which
is not satisfied or dissolved within thirty (30) days after written notice from
Landlord to Tenant to obtain satisfaction thereof.

REMEDIES UPON DEFAULT
     21.  Upon the occurrence of an Event of Default, Landlord, in addition to
any and all other rights or remedies it may have at law or in equity, shall have
the option of pursuing any one or more the following remedies:

                                                                               5
<PAGE>
 
     (A) Landlord may terminate this Lease by giving notice of termination in
which event this Lease shall expire and terminate on the date specified in such
notice of termination, with the same force and effect as though the date so
specified were the date herein originally fixed as the termination date of the
term of this Lease, and all rights of Tenant under this Lease and in and to the
Premises shall expire and terminate, and Tenant shall remain liable for all
obligations under this Lease arising up to the date of such termination and
Tenant shall surrender the Premises to Landlord on the date specified in such
notice;
     (B) Landlord may terminate this Lease as provided in paragraph 21(A) hereof
and recover from Tenant all damages Landlord may incur by reason of Tenant's
default, including, without limitation, a sum which, at the date of such
termination, represents the then value of the excess, if any, of (i) the monthly
rental and additional rent for the period commencing with the day following the
date of such termination and ending with the date hereinbefore set for the
expiration of the full term hereby granted, or (ii) the aggregate reasonable
rental value of the Premises (less reasonable brokerage commissions, attorneys'
fees and other costs relating to the reletting of the Premises) for the same
period, all of which excess sum shall be deemed immediately due and payable;
     (C) Landlord may, without terminating this Lease, declare immediately due
and payable all monthly rental and additional rent due and coming due under this
Lease for the entire remaining term hereof, together with all other amounts
previously due, at once; provided, however that such payment shall not be deemed
a penalty or liquidated damages but shall merely constitute payment in advance
of rent for the remainder of said term; upon making such payment, Tenant shall
be entitled to receive from Landlord all rents received by Landlord from other
assignees, tenants, and subtenants on account of the Premises during the term of
this Lease, provided that the monies to which Tenant shall so become entitled
shall in no event exceed the entire amount actually paid by Tenant to Landlord
pursuant to this clause (c) less all costs, expense and attorneys' fees of
Landlord incurred in connection with the reletting of the Premises; or
     (D) Landlord may, from time to time without terminating this Lease, and
without releasing Tenant in whole or in part from Tenant's obligation to pay
monthly rental and additional rent and perform all of the covenants, conditions
and agreements to be performed by Tenant as provided in this Lease, make such
alterations and repairs as may be necessary in order to relet the Premises, and,
after making such alterations and repairs, Landlord may, but shall not be
obligated to, relet the Premises or any part thereof for such term or terms
(which may be for a term extending beyond the term of this Lease) at such rental
or rentals and upon such other terms and conditions as Landlord in its sole
discretion may deem advisable or acceptable; upon each reletting, all rentals
received by Landlord from such reletting shall be applied first, to the payment
of any indebtedness other than rent due hereunder from Tenant to Landlord,
second, to the payment of any costs and expenses of such reletting, including
brokerage fees and attorneys' fees, and of costs of such alterations and
repairs, third, to the payment of the monthly rental and additional rent due and
unpaid hereunder, and the residue, if any, shall be held by Landlord and applied
against payments of future monthly rental and additional rent as the same may
become due and payable hereunder; in no event shall Tenant be entitled to any
excess rental received by Landlord over and above charges that Tenant is
obligated to pay hereunder, including monthly rental and additional rent; if
such rentals received from such reletting during any month are less than those
to be paid during the month by Tenant hereunder, including monthly rental and

                                                                               6
<PAGE>
 
additional rent, Tenant shall pay any such deficiency to Landlord, which
deficiency shall be calculated and paid monthly; Tenant shall also pay Landlord
as soon as ascertained and upon demand all costs and expenses incurred by
Landlord in connection with such reletting and in making any alterations and
repairs which are not covered by the rentals received from such reletting;
notwithstanding any such reletting without termination, Landlord may at any time
thereafter elect to terminate this Lease for such previous breach.

Tenant acknowledges that the Premises are to be used for commercial purposes,
and Tenant expressly waives the protections and rights set forth in Official
Code of Georgia Annotated Section 44-7-52.

EXTERIOR SIGNS

     22.  Tenant shall place no signs upon the outside walls or roof of the
Premises except with the written consent of the Landlord.  Any and all signs
placed on the Premises by Tenant shall be maintained in compliance with
governmental rules and regulations governing such signs, and Tenant shall be
responsible to Landlord for any damage caused by installation, use or
maintenance of said signs, and all damage incident to such removal.

LANDLORD'S ENTRY OF PREMISES

     23.  Landlord may card the Premises "For Rent" or "For Sale" ninety (90)
days before the termination of this Lease.  Landlord may enter the Premises at
reasonable hours to exhibit the Premises to prospective purchasers or tenants,
to inspect the Premises to see that Tenant is complying with all of its
obligations hereunder, and to make repairs required of Landlord under the terms
hereof or to make repairs to Landlord's adjoining property, if any.

EFFECT OF TERMINATION OF LEASE

     24.  No termination of the Lease prior to the normal ending thereof, by
lapse of time or otherwise, shall affect Landlord's right to collect rent for
the period prior to termination thereof.

SUBORDINATION

     25.  At the option of Landlord, Tenant agrees that this Lease shall remain
subject and subordinate to all present and future mortgages, deeds to secure
debt or other security instruments (the "Security Deeds") affecting the Building
or the Premises, and Tenant shall promptly execute and deliver to Landlord such
certificate or certificates in writing as Landlord may request, showing the
subordination of the Lease to such Security Deeds, and in default of Tenant so
doing, Landlord shall be and is hereby authorized and empowered to execute such
certificate in the name of and as the act and deed of Tenant, this authority
being hereby declared to be coupled with an interest and to be irrevocable.
Tenant shall upon request from Landlord at any time and from time to time
execute, acknowledge and deliver to Landlord a written statement certifying as
follows: (A) that this Lease is unmodified and in full force and effect (or if
there has been modification thereof, that the same is in full force and effect
as modified and the specific nature and extent thereof); (B) that to the bet of
its knowledge there are no uncured defaults on the part of Landlord (or if any
such default exists, the specific nature and extent thereof); (C) the date to
which any rent and other charges have been paid in advance, if any; and (D) such
other matters as Landlord may reasonably request.  Tenant irrevocably appoints
Landlord as its 

                                                                               7
<PAGE>
 
attorney-in-fact, coupled with an interest, to execute and deliver, for and in
the name of Tenant, any document or instrument provided for in this paragraph.

QUIET ENJOYMENT

     26.  So long as Tenant observes and performs the covenants and agreements
contained herein, it shall at all times during the Lease term peacefully and
quietly have and enjoy possession of the Premises, but always subject to the
terms hereof.

NO ESTATE IN LAND

     27.  This Lease shall create the relationship of Landlord and Tenant
between the parties hereto.  No estate shall pass out of Landlord.  Tenant has
only a susfruct not subject to levy and sale, and not assignable by Tenant
except by Landlord's consent.

HOLDING OVER

     28.  If Tenant remains in possession of the Premises after expiration of
the term hereof, with Landlord's acquiescence and without any express agreement
of the parties, Tenant shall be a tenant at will at the rental rate which is in
effect at end of this Lease and there shall be no renewal of this Lease by
operation of law.  If Tenant remains in possession of the Premises after
expiration of the term hereof without Landlord's acquiescence, Tenant shall be a
tenant at sufferance and commencing on the date following the date of such
expiration, the monthly rental payable under Paragraph 3 above shall for each
month, or fraction thereof during which Tenant so remains in possession of the
Premises, be twice the monthly rental otherwise payable under Paragraph 3 above.

ATTORNEYS' FEES

     29.  In the event that any action or proceeding is brought to enforce any
term, covenant or condition of this Lease on the part of Landlord or Tenant, the
prevailing party in such litigation shall be entitled to recover reasonable
attorney's fees to be fixed by the court in such action or proceeding, in an
amount at least equal to fifteen percent of any damages due from the non-
prevailing party.  Furthermore, Landlord and Tenant agree to pay the attorney's
fees and expenses of (A) the other party to this Lease (either Landlord or
Tenant) if it is made a party to litigation because of its being a party to this
Lease and when it has not engaged in any wrongful conduct itself.

RIGHTS CUMULATIVE

     30.  All rights, powers and privileges conferred hereunder upon parties
hereto shall be cumulative and not restrictive of those given by law.

WAIVER OF RIGHTS

     31.  No failure of Landlord to exercise any power given Landlord hereunder
or to insist upon strict compliances by Tenant of its obligations hereunder and
no custom or practice of the parties at variance with the terms hereof shall
constitute a waiver of Landlord's right to demand exact compliance with the
terms hereof.

                                                                               8
<PAGE>
 
ENVIRONMENTAL LAWS

     32.  Landlord represents to the best of its knowledge and belief, (A) the
Premises are in compliance with all applicable environmental laws, and (B) there
are not excessive levels (as defined by the Environmental Protection Agency) of
radon, toxic waste or hazardous substances on the Premises.  Tenant represents
and warrants that Tenant shall comply with all applicable environmental laws and
that Tenant shall not permit any of his employees, brokers, contractors or
subcontractors, or any person present on the Premises to generate, manufacture,
store, dispose or release on, about, or under the Premises any toxic waste or
hazardous substances which would result in the Premises not complying with any
applicable environmental laws.

TIME OF ESSENCE

     33.  Time is of the essence of this Lease.

DEFINITIONS

     34.  "Landlord" as used in this Lease shall include the undersigned, its
heirs, representatives, assigns and successors in title to the Premises.
"Tenant" shall include the undersigned and its heirs, representatives, assigns
and successors, and if this Lease shall be validly assigned or sublet, shall
include also "Tenant's assignees or subtenants as to the Premises covered by
such assignment or sublease.  "Landlord", "Tenant" and "Broker" include male and
female, singular and plural, corporation, partnership or individual, as may fit
the particular parties.

NOTICES

     35.  All notices required or permitted under this Lease shall be in writing
and shall be personally delivered or sent by U.S. Certified Mail, return receipt
requested, postage prepaid.  Broker shall be copied with all required or
permitted notices.  Notice to Tenant shall be delivered or sent to the address
shown below, except that upon Tenant's taking possession of the Premises, then
the Premises shall be Tenant's address for notice purposes.  notices to Landlord
and Broker shall be delivered or sent to the addresses hereinafter stated, to
wit:

Landlord:  Windy Hill Exchange, L.L.C.
           1845 The Exchange
           Atlanta, GA  30339
Tenant:    Environmental Management Insurance Services, Inc.
           1845 The Exchange, Suite 200
           Atlanta, GA  30339

All notices shall be effective upon delivery.  Any party may change his notice
address upon written notice to the other parties.

ENTIRE AGREEMENT

     36.  This Lease contains the entire agreement of the parties hereto, and no
representations, inducements, promises or agreement, oral or otherwise, between
the parties, not embodied herein, shall be of any force or effect.  No
subsequent alteration, amendment, change or addition to this Lease, except as to
changes or additions to the Rules

                                                                               9
<PAGE>
 
and Regulations described in paragraph 7, shall be binding upon Landlord or
Tenant unless reduced to writing and signed by Landlord and Tenant.

SPECIAL STIPULATIONS

     37.  Any special stipulations are sent forth in the attached Exhibit ___.
Insofar as said Special Stipulations conflict with any of the foregoing
provisions, said Special Stipulations shall control.

     38.  Landlord agrees to construct the improvements shown on Exhibit "B" in
accordance with building standard construction.  The Tenant improvement
allowance shall be $100,000 for Suite 200.  Any additional expenses incurred
shall be paid by Tenant upon receipt of invoice from Landlord.  The improvements
will be prosecuted diligently by Landlord, and Tenant will take occupancy five
(5) days after completion of same.  In the event the date of occupancy varies
from the date shown in Paragraph 2, the rent shall be adjusted accordingly.

     39.  Upon each anniversary of this Lease, the rent shall be increased by
the increase in the Consumer Price Index (CPI) as compared to 1995, but not less
than 4% per annum.

     40.  In the event Tenant requires additional space for its operations,
Landlord will use its best efforts to provide such space on the First Floor of
the Building.  The Lease rate for the additional space shall be the rate then
being paid by Tenant for Suite 200.

     41.  At the end of the initial terms, Tenant shall have the right to renew
this Lease for a like term, with rental rates and terms mutually agreeable to
Landlord and Tenant.

Tenant acknowledges that Tenant has read and understands the terms of this Lease
and has received a copy of it.

IN WITNESS WHEREOF, the parties herein have hereunto set their hands and seals,
in triplicate.

                   LANDLORD:
                   Windy Hill Exchange, L.L.C.                        (SEAL)
                   -------------------------------------------------
 

                By:                                                   (SEAL)
                   -------------------------------------------------  

                   Date and time executed by Landlord:______________
                   -------------------------------------------------
                             
 
                   TENANT:
                   Environmental Management Insurance Services, Inc.  (SEAL)
                   -------------------------------------------------          
 
 
                By:                                                   (SEAL)
                   -------------------------------------------------
 
                   Date and time executed by Tenant:________________

                                                                              10
<PAGE>
 
                                  EXHIBIT "A"

                                BASE RENTAL RATE


<TABLE>
<CAPTION>

=========================================================================
          YEAR            MINIMUM BASE RATE        BASE RENT/1/
          ----            -----------------        ------------
=========================================================================
    <S>                   <C>                      <C>
    3/1/96 - 2/28/97            $14.00              $183,820
- --------------------------------------------------------------------------
    3/1/97 - 2/28/98            $14.56              $191,173
- --------------------------------------------------------------------------
    3/1/98 - 2/28/99            $15.14              $198,788
- -------------------------------------------------------------------------- 
    3/1/98 - 2/28/2000          $15.75              $206,798
    3/1/99 - 2/28/01            $16.38              $215,069
==========================================================================
</TABLE>

/1/  Plus adjustments per paragraphs 10 (Tax and Insurance Escalation) and 43
(CPI Escalation).

                                                                              11

<PAGE>
 
                                                                     EXHIBIT 11
 
                     AMERICAN SAFETY INSURANCE GROUP, LTD.
 
                STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
 
                 YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
               AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                     DECEMBER 31,             SEPTEMBER 30,
                            ------------------------------ -------------------
                               1994      1995      1996      1996      1997
                            ---------- --------- --------- --------- ---------
<S>                         <C>        <C>       <C>       <C>       <C>
Outstanding shares.........  2,882,000 2,872,830 2,872,830 2,872,830 2,872,830
Add-back of option
 shares(1) and shares
 issued at prices below the
 assumed IPO price of
 $12.00 within 1 year of
 the IPO...................    101,303   101,303   101,303   101,303   101,303
                            ---------- --------- --------- --------- ---------
Number of total shares
 outstanding...............  2,983,303 2,974,133 2,974,133 2,974,133 2,974,133
                            ---------- --------- --------- --------- ---------
Weighted average number of
 shares and share
 equivalents outstanding...  2,983,303 2,974,133 2,974,133 2,974,133 2,974,133
                            ---------- --------- --------- --------- ---------
Net earnings............... $1,617,788 3,179,945 2,917,735 2,054,764 2,222,291
                            ========== ========= ========= ========= =========
Net earnings per share..... $     0.54      1.07      0.98      0.69      0.75
                            ========== ========= ========= ========= =========
</TABLE>
- --------
(1) As all of the Company's options were issued within a one-year period of
    the offering, in accordance with Staff Accounting Bulletin Topic 4D, the
    option shares have been treated as being outstanding for all reported
    periods under the application of the treasury stock method at an assumed
    initial public offering price of $12.00 per share.

<PAGE>
 
                                                                      EXHIBIT 21

The Company's Subsidiaries are:

AMERICAN SAFETY CASUALTY INSURANCE COMPANY, A DELAWARE CORPORATION

AMERICAN SAFETY REINSURANCE, LTD., A BERMUDA COMPANY

SYNERGY INSURANCE SERVICES, INC., A GEORGIA CORPORATION

SURECO BOND SERVICES, INC., A GEORGIA CORPORATION

HARBOR INSURANCE SERVICES, INC., A GEORGIA CORPORATION

ENVIRONMENTAL CLAIMS SERVICES, INC., A GEORGIA CORPORATION

AMERICAN SAFETY RISK PURCHASING GROUP, INC., A GEORGIA CORPORATION




<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 12-31-1996 AND
9-30-1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                           <C>                      <C>                     
<PERIOD-TYPE>                 12-MOS                   9-MOS                   
<FISCAL-YEAR-END>                        DEC-31-1996              DEC-31-1997  
<PERIOD-START>                           JAN-01-1996              JAN-01-1997  
<PERIOD-END>                             DEC-31-1996              SEP-30-1997  
<DEBT-HELD-FOR-SALE>                          16,776                   24,771  
<DEBT-CARRYING-VALUE>                         16,776                   24,771  
<DEBT-MARKET-VALUE>                           16,776                   24,771  
<EQUITIES>                                       716                    1,181  
<MORTGAGE>                                         0                        0  
<REAL-ESTATE>                                      0                        0  
<TOTAL-INVEST>                                24,023                   32,436  
<CASH>                                         3,272                    2,425  
<RECOVER-REINSURE>                                45                       84  
<DEFERRED-ACQUISITION>                           122                      146  
<TOTAL-ASSETS>                                31,299                   42,173  
<POLICY-LOSSES>                                8,914                   10,735  
<UNEARNED-PREMIUMS>                            1,364                    2,124  
<POLICY-OTHER>                                     0                        0  
<POLICY-HOLDER-FUNDS>                              0                        0  
<NOTES-PAYABLE>                                    0                    1,250  
                              0                        0  
                                        0                        0  
<COMMON>                                          29                       29  
<OTHER-SE>                                    18,003                   20,694  
<TOTAL-LIABILITY-AND-EQUITY>                  31,299                   42,173  
                                     4,272                    6,506  
<INVESTMENT-INCOME>                            2,092                    1,813  
<INVESTMENT-GAINS>                               177                       14  
<OTHER-INCOME>                                     5                       11  
<BENEFITS>                                     2,056                    3,533  
<UNDERWRITING-AMORTIZATION>                      372                      486  
<UNDERWRITING-OTHER>                           3,384                    3,729  
<INCOME-PRETAX>                                3,094                    2,605  
<INCOME-TAX>                                     177                      383  
<INCOME-CONTINUING>                            2,918                    2,222  
<DISCONTINUED>                                     0                        0  
<EXTRAORDINARY>                                    0                        0  
<CHANGES>                                          0                        0  
<NET-INCOME>                                   2,918                    2,222  
<EPS-PRIMARY>                                   1.02                      .76  
<EPS-DILUTED>                                    .98                      .75  
<RESERVE-OPEN>                                 8,294                    8,914  
<PROVISION-CURRENT>                            2,862                    3,342  
<PROVISION-PRIOR>                               (806)                     191  
<PAYMENTS-CURRENT>                               543                      386  
<PAYMENTS-PRIOR>                                 932                    1,365  
<RESERVE-CLOSE>                                8,914                   10,735  
<CUMULATIVE-DEFICIENCY>                        (806)                       191  
        

</TABLE>


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