<PAGE>
SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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Commission File Number 333-42749
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
44 Church Street
P.O. Box 2064
Hamilton HM HX, Bermuda
(Address, zip code of principal executive offices)
(441) 296-8560
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
The aggregate number of shares outstanding of Registrant's common stock, $.01
par value, on November 13, 1998 was 6,074,770.
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AMERICAN SAFETY INSURANCE GROUP, LTD.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks......................... 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 15
Item 2. Changes in Securities and Use of Proceeds........................................... 15
Item 3. Defaults Upon Senior Securities..................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................. 15
Item 5. Other Information................................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................................... 15
</TABLE>
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. Financial Statements
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1997 1998
------ ---- ----
(unaudited)
<S> <C> <C>
Investments:
Securities available for sale, at fair value:
Fixed maturities............................................................ $26,462,275 $47,468,356
Equity investments.......................................................... 1,054,549 3,995,367
Short-term investments.......................................................... 1,823,830 1,037,049
--------- ---------
Total investments........................................................ 29,340,654 52,500,772
Cash ................................................................... 2,768,831 6,234,933
Accrued investment and interest income............................................... 781,798 2,196,895
Notes receivable:
Related parties................................................................. 580,000 580,000
Other ................................................................... 4,697,804 13,723,188
Premiums receivable.................................................................. 6,809,436 6,390,636
Commissions receivable............................................................... 18,630 40,598
Ceded unearned premium............................................................... 649,175 1,222,833
Reinsurance recoverable.............................................................. 778,975 1,000,627
Due from affiliate................................................................... 288,951 228,371
Income tax recoverable............................................................... 152,802 205,189
Deferred income taxes................................................................ 209,795 205,533
Goodwill ................................................................... 270,010 256,681
Other assets ................................................................... 321,339 864,701
------- -------
Total assets............................................................. $47,668,200 $85,650,957
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses...................................... $11,571,539 $12,677,533
Unearned premiums............................................................... 2,331,579 4,438,636
Liability for deductible fees held.............................................. 3,539,032 2,852,353
Reinsurance on paid loss and loss adjustment expenses........................... 256,085 779,373
Reinsurance deposits on retroactive contract........................... ........ 537,500 373,444
Ceded premiums payable.......................................................... 5,990,907 3,385,783
Due to affiliate:
Ceded premiums payable...................................................... 217,062 595,649
Reinsurance on paid loss and loss adjustment expenses....................... 41,085 328,072
Accounts payable and accrued expenses........................................... 1,342,515 2,223,008
--------- ---------
Total liabilities........................................................ 25,827,304 27,653,851
========== ==========
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, 1997, 2,925,230 shares and at September 30,
1998, 6,074,770 shares.......................................................... 29,252 60,747
Additional paid-in capital...................................................... 2,751,789 33,814,677
Retained earnings............................................................... 18,751,222 22,954,963
Other comprehensive income...................................................... 308,633 1,166,719
Total shareholders' equity............................................... 21,840,896 57,997,106
---------- ----------
Total liabilities and shareholders' equity...................................... $47,668,200 $85,650,957
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues:
Direct premiums earned...................................$1,280,313 $1,051,603 $2,419,322 $3,086,805
Assumed premiums earned:
Affiliate............................................ 517,367 1,015,857 1,773,776 2,429,850
Nonaffiliates........................................1,915,436 895,562 3,830,017 3,936,552
--------- -------- --------- ---------
Total assumed premiums earned...................2,432,803 1,911,419 5,603,793 6,366,402
--------- --------- ---------- ---------
Ceded premiums earned:
Affiliate............................................ 333,647 677,600 870,369 2,111,717
Nonaffiliates........................................ 397,069 485,547 646,840 1,264,067
------- ------- ------- ---------
Total ceded premiums earned..................... 730,716 1,163,147 1,517,209 3,375,784
------- --------- --------- ---------
Net premiums earned.............................2,982,400 1,799,875 6,505,906 6,077,423
--------- ---------- --------- ---------
Net investment income.................................... 465,885 825,279 1,177,217 2,307,049
Interest on notes receivable............................. 178,939 791,060 635,504 1,486,678
Brokerage commission income.............................. 484,970 229,392 1,564,706 890,342
Management fees from affiliate........................... 157,034 183,186 443,950 549,722
Net realized gains(losses)............................... 9,357 60,529 14,243 155,608
Other income............................................. 2,081 3,900 10,748 15,483
----- ----- ------ ------
Total revenues.......................................4,280,666 3,893,221 10,352,274 11,482,305
--------- --------- ---------- ----------
Expenses:
Losses and loss adjustment expenses incurred.............1,524,045 1,150,611 3,533,048 3,621,763
Acquisition expenses.....................................1,155,052 (85,635) 1,768,834 334,584
Other expenses........................................... 854,355 1,299,582 2,445,573 3,352,077
------- --------- --------- ---------
Total expenses.......................................3,533,452 2,364,558 7,747,455 7,308,424
--------- --------- --------- ---------
Earnings before income taxes............................. 747,214 1,528,663 2,604,819 4,173,881
Income tax expense (benefit).................................. 91,444 (69,520) 382,528 (29,862)
------ -------- ------- --------
Net earnings......................................... $655,770 $1,598,183 $2,222,291 $4,203,743
======== ========== ========== ==========
Net earnings per share:
Basic ................................................ $ 0.23 $ 0.26 $0.77 $0.76
====== ======= ===== =====
Diluted ................................................ $ 0.22 $ 0.26 $0.75 $0.75
====== ======= ===== =====
Common shares used in computing earnings per share:
Basic ................................................2,872,830 6,074,770 2,872,830 5,522,497
========= ========= ========= ==========
Diluted ................................................2,974,133 6,119,089 2,974,133 5,607,457
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1998
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net earnings........................................................ $2,222,291 $ 4.203,743
Adjustments to reconcile net earnings to net cash provided by
Realized losses (gains) on sale of investments................... (14,243) (155,608)
Amortization of deferred acquisition costs....................... 485,871 343,967
Change in:
Accrued investment and interest income........................ 311,074 (1,415,097)
Premiums receivable........................................... (2,887,190) 418,800
Commissions receivable........................................ 35,666 (21,968)
Reinsurance recoverable and ceded unearned premiums........... (285,915) (795,310)
Due from affiliate............................................ 95,207 60,580
Income taxes.................................................. 57,451 (48,125)
Unpaid losses and loss adjustment expenses.................... 1,820,173 1,105,994
Unearned premiums............................................. 759,632 2,107,057
Liability for deductible fees held............................ 2,764,485 (850,735)
Ceded premiums payable ....................................... 1,641,711 (2,605,124)
Due to affiliate.............................................. 66,805 665,574
Accounts payable and accrued expenses......................... (312,317) 880,493
Other, net.................................................... (368,118) (156,138)
--------- ---------
Net cash provided by operating activities............ 6,392,583 3,738,103
---------- ---------
Cash flow from investing activities:
Purchases of fixed maturities....................................... (12,553,086) (72,086,248)
Purchases of equity investments..................................... (1,170,146) (3,527,435)
Proceeds from maturity and redemption of fixed maturities........... - 7,441,489
Proceeds from sale of fixed maturities.............................. 4,322,883 44,773,017
Proceeds from sale of equity investments............................ 712,955 330,941
Decrease (increase) in short-term investments....................... (1,124,265) 786,781
Increase in notes receivable-other.................................. (119,423) (9,025,384)
(Increase) decrease in notes receivable-related parties............. 1,292,506 -
Purchase of fixed assets, net....................................... (147,755) (68.137)
--------- --------
Net cash used in investing activities................ (8,786,331) (31,374,976)
----------- ------------
Cash flow financing activities:
Proceeds from sale of common stock.................................. 297,279 31,102,975
-
Proceeds from surplus note.......................................... 1,250,000 -
--------- -----------------
Net cash provided by financing activities............ 1,547,279 31,102,975
---------- ----------
Net increase (decrease) in cash...................... (846,469) 3,466,102
Cash at beginning of period............................................ 3,271,957 2,768,831
----------------- ---------
Cash at end of period.................................................. $2,425,488 $ 6,234,933
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE>
American Saftey Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net earnings.................................................. $ 655,769 $1,598,182 $2,222,291 $4,203,742
Other comprehensive earnings before income taxes:
Unrealized gains (losses) on securities available for sale.... 263,238 857,248 195,414 748,235
Reclassification adjustment for realized gains included in net earnings 9,357 60,529 14,243 155,608
------ ------ ------- -------
Total other comprehensive earnings before taxes............... 272,595 917,777 209,657 903,843
Income tax expense related to items of comprehensive income.. 41,714 70,192 37,686 45,757
------ ------ -------- ------
Other comprehensive earnings net of income taxes.............. 230,881 847,585 171,971 858,086
------- ------- ------- -------
Total comprehensive earnings.................................. $ 886,650 $2,445,767 $2,394,262 $5,061,828
========= =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
(unaudited).
6
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim consolidated financial statements of American
Safety Insurance Group, Ltd. ("American Safety") and its subsidiaries
(collectively, the "Company") are prepared in accordance with generally accepted
accounting principles in the United States and, in the opinion of management,
reflect all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation of the interim period presented. 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.
The results of operations for the nine months ended September 30, 1998 may not
be indicative of the results that may be expected for the full year ending
December 31, 1998. These unaudited interim consolidated financial statements and
notes should be read in conjunction with the financial statements and notes
included in the audited consolidated financial statements of American Safety and
its subsidiaries for the year ended December 31, 1997. The unaudited interim
consolidated financial statements include the accounts of American Safety and
each of its subsidiaries. All significant intercompany balances have been
eliminated.
Note 2 - Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. The Company adopted Statement 130 effective
January 1, 1998. The primary component of the differences between net income and
comprehensive income for the Company is unrealized gains on securities. Total
comprehensive income for the three months ended September 30, 1997 was $886,650
as compared to $2,445,767 for the three months ended September 30, 1998. Total
comprehensive income for the nine months ended September 30, 1997, was
$2,394,262 as compared to $5,061,828 for the nine months ended September 30,
1998.
Note 3 - Nature of Operations
The following is a description of certain risks facing 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. Regulatory initiatives designed to reduce insurer
profits or otherwise affecting the industry in which the Company operates, new
legal theories or insurance company insolvencies through guaranty fund
assessments, may create costs for the Company beyond those recorded in the
financial statements. The Company attempts to mitigate this risk by writing
insurance business in several states, thereby spreading this risk over a large
geographic area, and by obtaining reinsurance.
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Credit Risk is the risk that issuers of securities owned by the Company 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.
Note 4 - Investments
The amortized cost and estimated fair values of investments at December 31, 1997
and September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Amount
Gross Gross at which
Amortized Unrealized Unrealized Estimated Shown in the
Cost Gains Losses Fair Value Balance Sheet
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations and agencies....... 11,725,010 128,883 2,376 11,851,517 11,851,517
Obligations of states and political subdivisions.... 4,782,325 220,175 -- 5,002,500 5,002,500
Corporate securities................................ 6,545,888 51,986 13,508 6,584,366 6,584,366
Mortgage-backed securities ......................... 3,016,040 30,693 22,841 3,023,892 3,023,892
--------- ------ ------ --------- ---------
Total Fixed maturities.......................... 26,069,263 431,737 38,725 26,462,275 26,462,275
Equity investments - common stocks.................... 1,045,493 12,688 3,632 1,054,549 1,054,549
--------- ------ ----- --------- ---------
Total............................................. $27,114,756 444,425 42,357 27,516,824 27,516,824
=========== ======= ====== ========== ==========
September 30, 1998:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations and agencies...... $18,443,594 817,499 11,276 19,249,817 19,249,817
Obligations of States and political subdivisions.... 6,521,633 316,529 9,321 6,828,841 6,828,841
Corporate securities................................ 18,451,509 430,534 19,031 18,863,012 18,863,012
Mortgage-backed securities.......................... 2,464,617 63,062 993 2,526,686 2,526,686
----------- ------ --- ---------- ----------
Total Fixed maturities.......................... 45,881,353 1,627,624 40,621 47,468,356 47,468,356
Equity investments - common stocks.................... 4,253,529 4,855 263,018 3,995,366 3,995,366
--------- ----- ------- --------- ---------
Total.......................................... $50,134,882 1,632,479 303,639 51,463,722 51,463,722
=========== ========= ======= ========== ==========
</TABLE>
Note 5 - Notes Receivable
Notes receivable represent indebtedness under various secured lending
arrangements with related and unrelated parties. On May 29, 1998, the Company
made a loan to an unaffiliated borrower, which amounts to 8.2% of the Company's
total assets. The note is secured by real estate and the personal guaranties of
the principals of the borrower.
Note 6 - Shareholder Matters
On January 29, 1998, the Company effectuated a 1,310-for-one share split and
increased its authorized capital to 15,000,000 common shares and 5,000,000
preferred shares in contemplation of the Company's initial public offering which
became effective February 12, 1998. All share and per share amounts have been
retroactively adjusted to effect this split.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
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 specialty 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
or exposures, 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 insures and places risks through its U.S. insurance
subsidiary, American Safety Casualty Insurance Company, as well as its
non-subsidiary risk retention group affiliate, American Safety Risk Retention
Group, Inc., and substantial unaffiliated insurance and reinsurance companies.
The Company also reinsures and places, through its Bermuda reinsurance
subsidiary, American Safety Reinsurance, Ltd., and substantial unaffiliated
reinsurers, a portion of the risk underwritten directly by its U.S. insurance
subsidiary, American Safety Casualty Insurance Company, its risk retention group
affiliate 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. In January 1998, the Company formed American
Safety Reinsurance, Ltd., a Bermuda reinsurance subsidiary, and transferred a
substantial portion of its reinsurance business on a going forward basis to the
subsidiary.
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.
A.M. Best Company ("A.M. Best"), an independent nationally recognized insurance
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 and its
non-subsidiary risk retention group affiliate. On June 15, 1998, A.M. Best
increased American Safety's financial size rating from a VI to a VII as a result
of the Company's initial public offering on February 12, 1998. A.M. Best's
ratings are 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.
The Company's financial position and results of operations are subject to change
based on various factors, including competitive conditions in the insurance
industry, unpredictable developments in loss trends, changes in loss reserves,
market acceptance of new coverages and enhancements, and changes in levels of
general business activity and economic conditions. During this decade, the
Company has operated in a soft market cycle which is characterized by excess
insurance capacity and declining insurance premium rates. The Company's reported
combined ratio for its insurance operations may not provide an indication of the
Company's overall profitability from insurance and
9
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reinsurance programs due to the exclusion of fee and commission income and
expenses generated in related management and agency subsidiaries.
Certain of the Company's insurance policies and reinsurance assumed, including
general and pollution liability policies covering environmental remediation
risks, as well as workers' compensation policies, may be subject to claims
brought years after an incident has occurred or the policy period had ended. The
Company maintains reserves to cover its estimated liability for losses and loss
adjustment expenses with respect to reported and unreported claims incurred.
The Company 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.
Statements made in this Report that are not based on historical information are
deemed to be "forward-looking statements" under applicable federal securities
laws. Such forward-looking statements 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, including, without limitation, competitive conditions in the
insurance industry, unpredictable developments in loss trends, changes in loss
reserves, market acceptance of new coverages and enhancements, and changes in
levels of general business activity and economic conditions.
Results of Operations
The following table sets forth the Company's consolidated revenues (dollars in
thousands):
<TABLE>
<CAPTION>
Percent
Increase (Decrease)
Three Nine
Three months ended Nine Months ended months months
September 30, September 30, ended ended
1997 1998 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Net earned premium
Reinsurance:
Workers' compensation.............................. $1,857 $742 $3,794 $3,633 (60.0)% (4.2)%
General Liability from affiliate................... 402 904 1,447 2,020 124.9 39.6%
--- --- ----- ----- -------- -----
Total reinsurance.................................. 2,259 1,646 5,241 5,653 (27.1)% 7.9%
Primary insurance:
Surety............................................. 723 153 1,265 424 (78.8)% (66.5)%
------------------------------------------------------
Total primary insurance............................ 723 153 1,265 424 (78.8)% (66.5)%
Total net earned premium............................... 2,982 1,799 6,506 6,077 (39.7)% (6.6)%
Net investment income.................................. 466 825 1,177 2,307 77.0% 96.0%
Interest on notes receivable........................... 179 791 636 1,487 341.9% 133.8%
Commission and fee income:
Brokerage commission income........................ 485 229 1,565 890 (52.8)% (43.1)%
Management fees from affiliates.................... 157 183 444 550 16.6% 23.9%
-------------------------------------------------------
Total commission and fee income........................ 642 412 2,009 1,440 (35.8)% (28.3)%
Net realized gains (losses)............................ 9 61 14 156 577.8% 1014.3%
Other income........................................... 2 4 11 15 100.0% 36.4%
-----------------------------------------------------------
Total revenues................................ $4,280 $3,892 $10,353 $11,482 (9.1)% 10.9%
==========================================================
</TABLE>
10
<PAGE>
The following table sets forth the components of the Company's GAAP combined
ratio for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance operations:
Loss and loss adjustment expense ratio.................... 51.1% 63.9% 54.3% 59.6%
Expense ratio............................................. 41.1 4.1 33.7 9.2
---- --- ---- ---
Combined ratio........................................ 92.2% 68.0% 88.0% 68.8%
===== ===== ===== =====
</TABLE>
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Net Premiums Earned. Net premiums decreased 39.7% to $1.8 million for the
quarter ended September 30, 1998 from $3.0 million in the quarter ended
September 30, 1997. The primary factor accounting for this result is the
decrease of bail bond premium production from a discontinued program during
1997. Although net premiums earned decreased $1.2 million as stated above, net
income was not significantly impacted since bail bond premiums have a low
margin.
General liability reinsurance premiums increased 124.9% from $402,000 in
the quarter ended September 30, 1997 to $904,000 in the quarter ended September
30, 1998. In the Company's primary insurance business, net premiums earned from
the Company's U.S. insurance subsidiary's surety program decreased from $723,000
in the quarter ended September 30, 1997 to $153,000 in the quarter ended
September 30, 1998 primarily as a result of the discontinued bail bond program.
Net Investment Income. Net investment income increased 77.0% from $466,000
in the quarter ended September 30, 1997 to $825,000 in the quarter ended
September 30, 1998 as a result of the investment of additional cash flows from
insurance operations and from investment of the Company's initial public
offering proceeds. The average annual pre-tax yield on investments was 7.4% in
the quarter ended September 30, 1997 and 6.2% in the quarter ended September 30,
1998. The average annual after-tax yield on investments was 6.8% in the quarter
ended September 30, 1997 and 5.7% in the quarter ended September 30, 1998.
Interest from Notes Receivable. Interest from notes receivable increased
341.9% from $179,000 in the quarter ended September 30, 1997 to $791,000 in the
quarter ended September 30, 1998 as a result of increases in outstanding notes
receivable.
Brokage Commission Income. Income from insurance brokerage operations
decreased 52.8% from $485,000 in the quarter ended September 30, 1997 to
$229,000 in the quarter ended September 30, 1998 as a result of additional
premiums being directly written by the Company's U.S. insurance subsidiary in
which acquisition expenses and brokerage income are eliminated due to
consolidation.
Management Fees. Management fees increased 16.6% from $157,000 in the
quarter ended September 30, 1997 to $183,000 in the quarter ended September 30,
1998 as a result of increased service levels provided by the Company to its risk
retention group affiliate.
11
<PAGE>
Net Realized Gains (Losses). Net realized gains from the sale of
investments increased from a gain of $9,000 in the quarter ended September 30,
1997 to a gain of $61,000 in the quarter ended September 30, 1998.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
decreased 24.5% from $1.5 million in the quarter ended September 30, 1997 to
$1.2 million in the quarter ended September 30, 1998 due to the 39.7% decrease
in net premiums earned and a corresponding decrease in reserves resulting from
the decrease in the workers' compensation line of business.
Acquisition Expenses. Policy acquisition expenses decreased 107.4% from
$1.2 million in the quarter ended September 30, 1997 to $(86,000) in the quarter
ended September 30, 1998 as a result of increased premiums directly written by
the Company's U.S. insurance subsidiary where acquisition expenses and brokerage
income are eliminated due to consolidation, and the decrease in bail bond
premiums discussed above. This decrease is also attributable to the decrease in
bail bond premium discussed above.
Other Expenses. Other expenses increased 52.1% from $854,000 in the quarter
ended September 30, 1997 to $1.3 million in the quarter ended September 30, 1998
due to salary and benefit increases and increased staffing for new and existing
programs.
Income Taxes. Federal and state income taxes decreased from an expense of
$91,000 in the quarter ended September 30, 1997 to a benefit of $70,000 in the
quarter ended September 30, 1998 due to additional premiums being ceded to the
Company's Bermuda reinsurance subsidiary and investment income earned in
Bermuda.
Nine months ended September 30, 1998 Compared to Nine months ended September 30,
1997
Net Premiums Earned. Net premiums earned decreased 6.6% to $6.1 million in
the nine months ended September 30, 1998 from $6.5 million in the nine months
ended September 30, 1997. The primary factor accounting for this result is the
decrease of bail bond premium production from a discontinued program during
1997. Although net premiums earned decreased $400,000 as stated above, net
income was not significantly impacted since bail bond premiums have a low
margin.
General liability reinsurance premiums increased 39.6% from $1.4 million in
the nine months ended September 30, 1997 to $2.0 million in the nine months
ended September 30, 1998. In the Company's primary insurance business, net
premiums earned from the Company's U.S. insurance subsidiary's surety program
decreased from $1.3 million in the nine months ended September 30, 1997 to
$424,000 in the nine months ended September 30, 1998 primarily as a result of
the discontinued bail bond program.
Net Investment Income. Net investment income increased 96.0% from $1.2
million in the nine months ended September 30, 1997 to $2.3 million in the nine
months ended September 30, 1998 as a result of the investment of additional cash
flows from insurance operations and from investment of the proceeds of the
Company's initial public offering. The average annual pre-tax yield on
investments was 6.9% in the nine months ended September 30, 1997 and 7.5% in the
nine months ended September 30, 1998. The average annual after-tax yield on
investments was 6.2% in the nine months ended September 30, 1997 and 6.9% in the
nine months ended September 30, 1998.
Interest from Notes Receivable. Interest from notes receivable increased
133.8% from $636,000 in the nine months ended September 30, 1997 to $1.5 million
in the nine months ended September 30, 1998 as a result of increases in
outstanding notes receivable.
Brokerage Commission Income. Income from insurance brokerage operations
decreased 43.1% from $1.6 million in the nine months ended September 30, 1997 to
$890,000 in the nine months ended September 30, 1998.
12
<PAGE>
as a result of additional premiums being directly written by the Company's U.S.
insurance subsidiary in which acquisition expenses and brokerage income are
eliminated due to consolidation.
Management Fees. Management fees increased 23.9% from $444,000 in the nine
months ended September 30, 1997 to $550,000 in the nine months ended September
30, 1998 as a result of increased services provided by the Company to its risk
retention group affiliate.
Net Realized Gains. Net realized gains from the sale of investments
increased from $14,000 in the nine months ended September 30, 1997 to $156,000
in the nine months ended September 30, 1998.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 2.5% from $3.5 million in the nine months ended September 30, 1997 to
$3.6 million in the nine months ended September 30, 1998 which results from
changes in the net premiums earned and a corresponding increase in reserves
resulting from an increase in the general liability line of business.
Acquisition Expenses. Policy acquisition expenses decreased 81.1% from $1.8
million in the nine months ended September 30, 1997 to $335,000 in the nine
months ended September 30, 1998 as a result of increased premiums being directly
written by the Company's U.S. insurance subsidiary in which acquisition expenses
and brokerage income are eliminated due to consolidation, and the decrease in
bail bond premium discussed above.
Other Expenses. Other expenses increased 37.1% from $2.4 million in the
nine months ended September 30, 1997 to $3.4 million in the nine months ended
September 30,1998 due to salary and benefit increases and increased staffing
required to handle new and existing programs.
Income taxes. Federal and state income taxes decreased from an expense of
$383,000 in the nine months ended September 30, 1997 to a benefit of $30,000 in
the nine months ended September 30, 1998 due to additional premiums being ceded
to the Company's Bermuda reinsurance subsidiary and investment income earned in
Bermuda.
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 short-term cash requirements are primarily for claims
payments, reinsurance premiums, commissions, salaries, employee benefits and
other operating expenses, and the purchase of investment securities, which have
historically been satisfied from operating cash flows. Due to the uncertainty
regarding settlement of unpaid claims, the long-term 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. Management
believes that the Company's current cash flows are sufficient for its short-term
needs and the Company's invested assets are sufficient for its long-term needs.
The Company also purchases reinsurance to mitigate the effect of large claims.
On a consolidated basis, net cash provided from operations was $6.4 million
for the nine months ended September 30, 1997 as compared to $3.7 million for the
nine months ended September 30, 1998 due to a discontinued rent-a-captive
program. The positive cash flows for both 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 loss reserves for such
lines of business. The assets supporting the Company's reserves continue to earn
investment income until claims payments are made.
13
<PAGE>
Total assets increased from $47.7 million at December 31, 1997 to $85.7
million at September 30, 1998, primarily due to the proceeds of the Company's
initial public offering in February 1998. Cash, invested assets and notes
receivable increased from $34.9 million at September 30, 1997 to $73.0 million
at September 30, 1998.
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 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 the Company 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. Managements believes it has significant liquidity in the near term to
accomplish its business objectives.
As of September 30, 1998 the Company had no investments in derivative
financial 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 expect to be subject to direct United States income taxation. The Company's
U.S. subsidiaries are subject to taxation in the United States.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Report:
Exhibit No. Description
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
period covered by this Report.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of August 1998.
American Safety Insurance Group, Ltd.
By: /s/ Lloyd A. Fox
-------------------------------------------
Lloyd A. Fox
President and Chief Executive Officer
By: /s/ Steven B. Mathis
-------------------------------------------
Steven B. Mathis
Chief Financial Officer
(Principal Financial Officer)
Exhibit 11
American Safety Insurance Group, Ltd. and Subsidiaries
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Earnings Available to Common
Shareholders.......................................... $655,769 $1,598,183 $ 2,222,291 $4,203,743
======== ========== ========== ==========
Weighted Average Common Shares
Outstanding........................................... 2,872,830 6,074,770 2,872,830 5,522,497
Basic Earnings per Common Share....................... $.23 $.26 $.77 $.76
==== ==== ==== ====
Diluted:
Earnings Available to Common
Shareholders.......................................... $655,769 $1,598,183 $2,222,291 $4,203,743
======== ========== ========== ==========
Weighted Average Common Shares
Outstanding........................................... 2,872,830 6,074,770 2,872,830 5,522,497
Weighted Average Common Share
Equivalents Associated with Options................... 101,303 44,319 101,303 84,960
Total Weighted Average Common
Shares................................................ 2,974,133 6,119,089 2,974,133 5,607,457
========= ========= ========= =========
Diluted Earnings per Common Share..................... $.22 $.26 $.75 $.75
==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-30-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 47,642
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,822
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 52,501
<CASH> 6,235
<RECOVER-REINSURE> 2,223
<DEFERRED-ACQUISITION> 230
<TOTAL-ASSETS> 85,651
<POLICY-LOSSES> 12,678
<UNEARNED-PREMIUMS> 4,439
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 61
<OTHER-SE> 57,936
<TOTAL-LIABILITY-AND-EQUITY> 85,651
1,800
<INVESTMENT-INCOME> 825
<INVESTMENT-GAINS> 61
<OTHER-INCOME> 4
<BENEFITS> 1,151
<UNDERWRITING-AMORTIZATION> (86)
<UNDERWRITING-OTHER> 1,300
<INCOME-PRETAX> 1,529
<INCOME-TAX> (70)
<INCOME-CONTINUING> 1,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,598
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<RESERVE-OPEN> 12,765
<PROVISION-CURRENT> 2,052
<PROVISION-PRIOR> (676)
<PAYMENTS-CURRENT> 112
<PAYMENTS-PRIOR> 1,351
<RESERVE-CLOSE> 12,678
<CUMULATIVE-DEFICIENCY> 65
</TABLE>
