AMERICAN SAFETY INSURANCE GROUP LTD, 424B4, 1998-02-13

AMERICAN SAFETY INSURANCE GROUP LTD
424B4, 1998-02-13
INSURANCE AGENTS, BROKERS & SERVICE

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<PAGE>

2,700,000 SHARES

AMERICAN SAFETY INSURANCE GROUP, LTD.

LOGO

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. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.

The Common Shares have been approved for quotation on the Nasdaq National
Market under the symbol "AMSFF."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 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............................. $11.00 $0.77 $10.23
- ----------------------------------------------------------------------------------
Total(3).............................. $29,700,000 $2,079,000 $27,621,000
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</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 $424,000.
(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 $34,155,000, $2,390,850
and $31,764,150, 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 February 19, 1998.

ADVEST, INC.
J.C. BRADFORD&CO.
HOEFER & ARNETT
INCORPORATED

The date of this Prospectus is February 12, 1998

<PAGE>

LOGO
AMERICAN SAFETY INSURANCE GROUP, LTD.
Turning 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 29, 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 72
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 reinsurance 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 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, investment
income of $1.2 million and interest on notes receivable of $0.6 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,
investment income of $1.2 million and interest on notes receivable of $0.9
million.

<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").
A rating of "A (Excellent)" is the third highest of A.M. Best's 16 letter
ratings. 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.

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.

<PAGE>

Growth Strategy. A.M. Best has confirmed to the Company that as a result of
the additional capital to the Company from the net proceeds of the Offering,
the Company will receive 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 5,625,230 shares (1)
Offering.....................

Use of Proceeds...............
To increase the Company's capital and surplus,
which will 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."

Nasdaq National Market AMSFF
Symbol.......................
- --------
(1) Excludes 169,463 Common Shares that are subject to options which are
currently exercisable and 340,000 Common Shares that will be subject to
outstanding but unvested stock options and restricted shares upon the
completion of the Offering.

<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 1,346 1,207 944 1,177
Interest on notes
receivable........... -- 7 885 505 636
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 29.3 28.6 36.4
--------- --------- --------- -------- --------
Combined ratio.......... 72.3% 73.9% 77.4% 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 27.1 24.8 33.7
--------- --------- --------- -------- --------
Combined ratio.......... 69.5% 72.4% 75.2% 73.1% 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........................................ $27,549 $54,746
Total assets............................................. 42,173 69,370
Unpaid losses and loss adjustment expenses............... 10,735 10,735
Total liabilities........................................ 21,449 21,449(4)
Total shareholders' equity............................... 20,724 47,921
</TABLE>
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(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. The
Company has experienced increased competitive pricing pressures in its
environmental lines of business during the past three fiscal years. 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; SPECIALTY INDUSTRY RISKS

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 changes in economic conditions and regulations
affecting such specialty industries. These changes may include economic
downturns that may adversely impact the building and real estate development
industry, as well as small to medium-size businesses served by employee
leasing and staffing companies; the degree of enactment and enforcement of
federal and state environmental regulations that encourage or require
environmental remediation efforts; and the adoption of state regulations
governing the licensing and operation of employee leasing and staffing
companies. See "Business--Primary Insurance Operations."

The Company insures and places general, pollution and professional liability
coverages for the specialty risks of contractors, consultants and other
businesses and property owners involved with the remediation and removal of
asbestos, lead, underground storage tanks and other hazardous substances and
environmental exposures. These insurance policies are issued for specific
environmental remediation risks, have limited (rather than absolute) pollution
exclusions and contain aggregate limits of liability. The Company also
provides workers' compensation coverage (i) for contractors involved in
environmental remediation, which may include risks such as occupational
diseases from exposure to hazardous substances, as well as (ii) for the
diverse work forces of employee leasing and staffing companies, which involve
risks such as injuries related to the workplace. See "Business--Primary
Insurance Operations."

7
<PAGE>

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 since 1990 has been able to obtain appropriate
reinsurance and 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 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 Stephen R. Crim, Executive
Vice President, and James G. Leach, Senior Vice President. The loss of the
services of Messrs. Fox, Crim or Leach 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 $1 million. The
Company does not have employment agreements with Messrs. Crim or Leach.

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 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. The Company principally markets its insurance programs through
approximately 160 independent insurance agencies and insurance brokerage
firms. Independent insurance agencies and brokers

8
<PAGE>

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. See
"Business--Program Development, Management and Administrative Operations."

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 of and reinsures risks insured by
American Safety RRG, and the Company derived approximately 37.2% of its
revenues in 1996 and approximately 20.9% of its revenues for the nine months
ended September 30, 1997 from this risk retention group. The Company has
entered into a management agreement with American Safety RRG with a three-year
term that expires on December 31, 1999. 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, particularly of its specialty insurance
program business, and development of new insurance programs. If the Company is
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. In
addition, there can be no assurance that the Company will be able to
successfully implement its strategy for continued internal growth. A.M. Best
has confirmed to the Company that as a result of the additional capital to the
Company from the net proceeds of the Offering, the Company will receive a
higher financial size rating from A.M. Best. However, any failure to receive a
higher financial size rating may inhibit the Company's ability to market its
specialty insurance products and services to potential clients who consider
financial size ratings when purchasing insurance products and services.
Furthermore, the Company has in the past discontinued a specialty insurance
program due to inadequate production of premium in the program. There can be
no assurance that the Company would be successful in making an acquisition,
overcoming the risks or any other problems customarily encountered in
connection with an acquisition, or achieving growth in or development of new
insurance programs. 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

9
<PAGE>

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 501,130 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 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. On one occasion, the Company experienced difficulty in
implementing a new program due to the lack of regulatory enforcement of
certain landfill regulations. 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

10
<PAGE>

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 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 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, international hostilities or the threat
thereof, 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 capital stock of the Company
to voting power of 9.5%, other than Frederick C. Treadway or Treadway
Associates, L.P., affiliates of a founding shareholder of the Company. See
"Management," "Principal Shareholders," and "Description of Capital Stock."

11
<PAGE>

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 VOTING RIGHTS BASED ON SHARE OWNERSHIP

The Company's Bye-Laws generally provide that if a shareholder is treated as
directly, indirectly or constructively owning 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 Frederick C. Treadway or
Treadway Associates, L.P., affiliates of a founding shareholder of the
Company. 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 $2.53 per
share in the pro forma net tangible book value of their Common Shares from the
initial public offering price of $11.00 per share. 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) have been registered
under the Securities Act of 1933, as amended (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."

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

12
<PAGE>

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.

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's 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 included 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.

13
<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 currently licensed as a property and
casualty insurer in 44 states.

14
<PAGE>

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]

<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 $27.2 million.

The net proceeds from the Offering will increase the Company's capital and
surplus, which A.M. Best has confirmed will result in a higher financial size
rating from A.M. Best. Of these net proceeds, the Company intends to use
approximately $10 to $12 million to acquire and capitalize, or to form and
capitalize, an excess or surplus lines insurance company. Net proceeds that
are not used for such purposes will be used for general corporate purposes,
including other possible strategic acquisitions. The Company is not currently
engaged in any discussions or activities related to the formation of an excess
and surplus lines insurance company or any acquisitions. 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.

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 the initial public offering
price of $11.00 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
---------- -------------
(In thousands)
<S> <C> <C>
Short-term debt(1)..................................... $ 1,250 $ 1,250
Long-term debt......................................... 0 0
---------- ----------
Total debt......................................... 1,250 1,250
---------- ----------
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 29,922
Retained earnings.................................... 17,763 17,763
Unrealized gain relating to investments.............. 180 180
---------- ----------
Total shareholders' equity......................... 20,724 47,921
---------- ----------
Total capitalization............................... $ 21,974 $ 49,171
========== ==========
</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 340,000 Common Shares that will be subject to
outstanding but unvested stock options and restricted shares 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 the initial public offering price
of $11.00 per share, the pro forma net tangible book value of the Company at
September 30, 1997 would have been approximately $47.6 million or $8.47 per
share (after deducting the underwriting discount and estimated Offering
expenses). This represents an immediate increase in net tangible book value of
$1.48 per share to the existing shareholders and an immediate dilution in net
tangible book value of $2.53 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.................................. $11.00
Net tangible book value before the Offering.................. $6.99
Increase attributable to new investors....................... 1.48
-----
Pro forma net tangible book value after the Offering........... 8.47
------
Dilution in net tangible book value to new investors(1)........ $ 2.53
======
</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 29, 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 8.6% $ 0.95
New investors................ 2,700,000 48.0 29,700,000 91.4 $11.00
--------- ----- ----------- -----
Total...................... 5,625,230 100.0% $32,481,041 100.0%
</TABLE>

Each of the foregoing tables assumes that outstanding stock options will not
be exercised. As of the date of this Prospectus, 509,463 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 1,346 1,207 944 1,177
Interest on notes
receivable............ -- -- -- 7 885 505 636
Brokerage commission
income(2)............. -- 1,058 1,706 2,145 1,881 1,457 1,565
Management fees from
affiliate(2).......... -- 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(3):
Loss and loss adjustment
expense ratio.......... (20.8)%(4) 43.9% 41.6% 50.5% 48.1% 48.3% 54.3%
Expense ratio........... 59.3 (5) 71.7 (5) 30.7 23.4 29.3 28.6 36.4
------- ------- ------- ------- ------- ------- -------
Combined ratio.......... 38.5 % 115.6% 72.3% 73.9% 77.4% 76.9% 90.7%(6)
======= ======= ======= ======= ======= ======= =======
Net premiums written to
equity................. 0.2x 0.2x 0.3x 0.4x 0.3x 0.2x 0.3x
STATUTORY RATIOS(3):
Loss and loss adjustment
expense ratio.......... (20.8)%(4) 43.9% 41.6% 50.5% 48.1% 48.3% 54.3%
Expense ratio........... 59.3 (5) 71.7 (5) 27.9 21.9 27.1 24.8 33.7
------- ------- ------- ------- ------- ------- -------
Combined ratio.......... 38.5 % 115.6% 69.5% 72.4% 75.2% 73.1% 88.0%(6)
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT
END OF PERIOD):
Total investments....... $13,220 $14,899 $17,393 $20,648 $17,964 $18,717 $27,549
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) Reflects operations of Synergy Insurance Services, Inc. and Sureco Bond
Services, Inc. which were acquired on April 2, 1993.
(3) See "Glossary of Selected Insurance Terms."
(4) Reflects a benefit from a downward adjustment in ultimate loss and loss
adjustment expenses for prior accident years of $1.587 million.
(5) Reflects expenses incurred in connection with the acquisition of American
Safety Casualty, the Company's U.S. insurance subsidiary.
(6) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."

<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

The Company's general, pollution, and professional liability, workers'
compensation, and surety (other than bail bonds) lines of business are written
primarily for environmental remediation contractors, consultants and property
owners involved with environmental risks. Environmental remediation
contractors are involved in the removal or abatement of hazardous materials
and conditions such as asbestos, lead, underground storage tanks and other
environmental risks. Environmental consultants and similar professional firms
engage in the detection and analysis of hazardous materials and the design and
monitoring of remediation projects. The general, pollution, and professional
liability policies written and reinsured by the Company are issued for
specific environmental remediation risks, have limited (rather than absolute)
pollution exclusions and contain aggregate limits of liability. The workers'
compensation coverage for contractors involved in environmental remediation
includes coverage for risks which may include occupational diseases from
exposure to hazardous substances. Surety bonds issued by the Company guarantee
the performance of environmental and other contractors on environmental
remediation and construction projects, and the payment of sums due to
laborers, materialmen and suppliers. See "Risk Factors--Significant Industry
Concentration; Specialty Industry Risks."

The Company's revenues are comprised of risk premium revenues, program
management fees, insurance and reinsurance brokerage commissions, investment
income, interest on notes receivable, 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.

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
has ended. The Company

20
<PAGE>

maintains reserves to cover its estimated liability for losses and loss
adjustment expenses with respect to reported and unreported claims incurred.
See "Business--Reserves."

In January 1998, 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.

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 from
affiliate............ 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 -- 622.2 1,681.7
------- ------- ------- ------ -------
Total primary
insurance........... 0 18 130 72 1,265 -- 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 1,346 1,207 944 1,177 103.0 (10.3) 24.7
Interest on notes
receivable 0 7 885 505 636 -- 12,543 25.9
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 27.1 24.8 33.7
---- ---- ---- ------ ------
Combined ratio...................... 69.5% 72.4% 75.2% 73.1% 88.0%
==== ==== ==== ====== ======
</TABLE>
- --------
(1) See "--Overview."

21
<PAGE>

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.

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 the Company's risk retention
group affiliate. In the Company's primary insurance business, net premiums
earned from the Company's U.S. insurance subsidiary'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 24.7% from $944,000
for the nine months ended September 30, 1996 to $1.2 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 6.4%
in the 1996 period and 6.9% in the 1997 period. The average annual after-tax
yield on investments was 5.8% for the nine months ended September 30, 1996 and
6.2% for the same period in 1997.

Interest from Notes Receivable. Interest from notes receivable increased
25.9% from $505,000 for the nine months ended September 30, 1996 to $636,000
for the same period in 1997. This increase resulted primarily from an increase
in the outstanding notes receivable.

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.

22
<PAGE>

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.

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. Workers' compensation premium refunds of $782,000, which
reduced the Company's 1996 revenues, were a result of changes in the ultimate
premium, based upon subsequent audits of the insureds' 1994 and 1995 payrolls
as compared to the insureds' 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 the Company's risk retention group affiliate. Net premiums earned
from the Company's U.S. insurance subsidiary'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 decreased 10.3% from $1.3
million in 1995 to $1.2 million in 1996 as a result of a decrease in
investment yields and a reduction in average invested assets. Invested assets
declined in 1996, as the Company shifted a portion of its investment
portfolio, as well as current operating cash flow, from invested assets to
notes receivable. The average annual pre-tax yield on investments was 7.1% in
1995 and 6.2% in 1996, and the average annual after-tax yield on investments
was 6.4% in 1995 and 5.6% in 1996.

Interest from Notes Receivable. Interest from notes receivable increased
from $7,000 in 1995 to $885,000 in 1996. This increase resulted primarily from
an increase in the outstanding 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, licensing 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.

23
<PAGE>

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's U.S. insurance
subsidiary began writing contract surety bonds for environmental remediation
and construction contractors in 1995.

Net Investment Income. Net investment income increased 103.0% from $663,000
in 1994 to $1.3 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 7.1% in 1995, and the average annual after-
tax yield on investments was 3.5% in 1994 and 6.4% in 1995.

Interest from Notes Receivable. Interest from notes receivable increased
from $0 in 1994 to $7,000 in 1995. This increase resulted from a note
receivable obtained in the last quarter of 1995.

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 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. See "Business--Investment Portfolio." The
Company also 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.

24
<PAGE>

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.

A rent-a-captive program is an insurance program under which the insured
assumes a portion of the risk of loss, generally in the form of a deductible
or self-insured retention. See "Glossary of Selected Insurance Terms." In such
programs, the insurer may agree to pay losses within the deductible or self-
insured retention layer. A premium is charged and held by the insurer to pay
such losses of the insured within such layers of risk. To the extent that the
premium exceeds paid claims and reserves for reported claims and claims
incurred but not reported, the insured generally is entitled to the benefit of
such excess.

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 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

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. For the nine months ended
September 30, 1997, approximately 51% of the gross premiums written for the
Company's principal lines of insurance and reinsurance were produced from
California (14.1%), New York (9.1%), Texas (8.4%), Florida (7.7%), South
Carolina (6.5%) and Georgia (5.2%). In 1996, approximately 49% of the gross
premiums written for the Company's principal lines of insurance and
reinsurance were produced from California (16.0%), New York (9.3%), Florida
(8.3%), Texas (7.3%), New Jersey (4.3%) and Georgia (4.1%). See "--Primary
Insurance Operations--Environmental Programs--Surety" and "Regulatory
Matters--U.S. Regulation."

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

<PAGE>

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 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.

. 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.

. 1995--workers' compensation and general liability insurance programs for
employee leasing companies (also known as professional employer
organizations) and employee staffing companies.

GROWTH STRATEGY

A.M. Best has confirmed to the Company that as a result of the additional
capital to the Company from the net proceeds of the Offering, the Company will
receive 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 placement, program management,
brokerage, loss control, claims administration, marketing and administrative
services to the Company's U.S. insurance operations, its risk retention group

<PAGE>

affiliate, and 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 other 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's in-house underwriting department consists of trained
environmental and other specialty risk underwriters, many of whom have been
with the Company for several years. The underwriting staff analyzes loss
histories of prospective insureds, as well as the insureds' technical
capabilities and experience with similar projects to those for which insurance
is being requested. The underwriting staff may also request references and
financial information. Some of the underwriters have technical backgrounds and
experience in various environmental fields. The Company's in-house loss
control department is also involved in the underwriting process, in reviewing
technical work guidelines provided by insureds, such as safety and health
practices and procedures, as well as inspecting contractor insureds'
environmental remediation project sites and recordkeeping throughout the
United States. The loss control professionals have backgrounds in engineering
or environmental fields.

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's Annual Industry 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's general and pollution liability policies for environmental
risks cover bodily injury and property damage to third parties arising out of
the operations of insureds, which may include losses arising from exposure to
specific hazardous substances that are released during a remediation project.
Coverages provided for professional liability protect insureds against claims
arising out of errors and omissions committed in the performance of
professional consulting, testing, laboratory and similar services, such as the
failure to detect hazardous materials in connection with assessments for same,
or the failure to properly design or monitor performance on remediation
projects in accordance with contracts entered into by such insureds. The
Company also provides workers' compensation coverage for contractors involved
in environmental remediation, which may include risks such as occupational
diseases from exposure to hazardous substances.

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 as well as workers'
compensation coverage for contractors, consultants, other businesses and
property owners involved with asbestos abatement.

Lead Abatement. The Company provides general, pollution and professional
liability coverages and workers' compensation coverage 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 as well as workers' compensation
coverage to contractors and consultants for the removal

30
<PAGE>

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, and workers' compensation coverage 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 42 states (other than
Connecticut, Maine, Massachusetts, Michigan, New Hampshire, North Carolina,
Oregon and Wyoming), 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 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.

General liability policies written for employee leasing and staffing
companies protect such companies from claims arising out of bodily injury or
property damage arising from their operations, which may include claims
brought against the employee leasing and staffing company as a result of
performance of activities by their employees, although such employees are
under the direction and control of the employee leasing and staffing company's
clients. Employee leasing and staffing companies generally require their
clients to independently maintain general liability coverage to protect the
client against such claims. Substantially all of the premiums assumed by the
Company from this line of business are attributable to workers' compensation
coverage provided.

31
<PAGE>

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 (which was subsequently
discontinued); 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.

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 transfer of a portion 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,
workers' compensation 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.

For the year ended December 31, 1996, of the $4.8 million of gross
reinsurance premiums written by the Company, approximately $2.0 million was
assumed from its risk retention group affiliate, with the balance of
approximately $2.8 million assumed from unaffiliated insurers. For the nine
months ended September 30, 1997, of the $5.9 million of gross reinsurance
premiums written by the Company, approximately $1.7 million was assumed from
its risk retention group affiliate, with the balance of approximately $4.2
million assumed from unaffiliated reinsurers.

32
<PAGE>

The Company's assumed reinsurance business for general liability, pollution,
and professional liability is written under excess of loss treaties primarily
with its risk retention group affiliate. In the layer of the first $500,000 of
loss per occurrence, the Company assumes 70% of the losses arising from claims
covered under the policies written after the reinsured pays the first $100,000
of claims in the aggregate on an annual basis; and the reinsured retains 30%
of the risk after payment of the aggregate amount. The Company also assumes
workers' compensation reinsurance from Legion Insurance Company ("Legion").
After a retention of the first 10% of premium by Legion for payment of claims,
the Company reinsures Legion for the next $250,000 per occurrence, subject to
a 70% aggregate stop-loss ratio percentage. The Company assumes a 50% quota
share of loss from Underwriters Reinsurance Company for surety bonds written
by such carrier under the Company's surety program.

The Company's U.S. insurance subsidiary cedes certain risks on a quota share
basis to the Company's reinsurance subsidiary in order to provide for a spread
of risk among the respective companies as well as to increase the capacity of
the Company's U.S. insurance subsidiary to write insurance and reinsurance
business. There is no material effect on the Company's operating results or on
the risk-based capital or other regulatory ratios of the Company's U.S.
insurance subsidiary.

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

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 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 its non-subsidiary
affiliate, and also acts as an agency and broker for its non-subsidiary
affiliate, unaffiliated insurers and reinsurers for which the Company receives
brokerage commissions of 10-20% of gross premiums written and produced. 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 premiums written and produced
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
---------------------- ----------------------
GROSS CEDED NET GROSS CEDED NET
------- ------ ------ ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
The Company..................... $ 6,128 $1,511 $4,617 $ 8,783 $1,765 $7,018
====== ====== ====== ======
American Safety RRG (1)......... 9,386 6,005
Other Insurers and Reinsurers
(2)............................ 2,872 9,086
Less: Ceded from American Safety
RRG to the Company (3)......... (2,042) (1,740)
------- -------
$16,344 $22,134
======= =======
</TABLE>
- --------
(1) Represents premiums written by American Safety RRG, the Company's non-
subsidiary affiliate.
(2) Represents premiums produced by the Company, as an agency and broker, for
unaffiliated insurers and reinsurers.
(3) Represents premiums ceded to the Company from American Safety RRG.

33
<PAGE>

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% $ 1,523 21.7%
Workers' compensation............. 2,810 60.9 4,010 57.1
Surety............................ 197 4.2 1,485 21.2
--------- -------- --------- --------
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>

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% 75.2% 73.1% 88.0%(3)
Property and casualty
industry(4).............. 108.4 106.4 105.9 106.0 101.1
</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 and BestWeek.

34
<PAGE>

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.

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 $ 3,820 $ 6,249 $ 4,936 $3,733 $5,855
Net premiums written.. 2,592 1,888 3,760 6,076 4,417 3,154 5,533
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% 41.9% 50.6% 48.9% 48.9% 66.8%
PRIMARY INSURANCE:
Gross premiums
written.............. $ -- $ -- $ 30 $ 98 $ 1,192 $ 812 $2,928
Net premiums written.. -- -- 2 54 200 145 1,485
Net premiums earned... -- -- -- 18 130 72 1,265
Loss and loss
adjustment expense
ratio................ -- -- -- 22.2% 24.6% 27.8% 2.5%
COMBINED:
Gross premiums
written.............. $2,739 $2,053 $ 3,850 $ 6,347 $ 6,128 $4,545 $8,783
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% 71.7% 30.7% 23.4% 29.3% 28.6% 36.4%
Combined ratio........ 38.5% 115.6% 72.3% 73.9% 77.4% 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 insurance and
reinsurance risks.

35
<PAGE>

REINSURANCE CEDED

The Company obtains reinsurance for its primary insurance and reinsurance
operations from unaffiliated reinsurers to protect and mitigate the exposures
of the Company. The Company's primary reinsurer is Underwriters Reinsurance
Company, which has an A.M. Best rating of "A+ (Superior)". 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 restrictions 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.

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.

Approximately 56% of the Company's net reserves relate to liability
associated with its asbestos abatement and other environmental general
liability insurance programs. Another 42% of net reserves are attributable to
the workers' compensation insurance program. The 2% balance of reserves is
spread among surety and other coverages.

36
<PAGE>

In establishing reserves for its general liability insurance program, the
Company uses paid and reported Bornhuetter-Ferguson methods which are based in
part on developing paid and reported losses and an initial expected loss
level. Initial expected losses reflect an expected loss ratio estimated from
the ten-year experience of the Company and a loss cost model applied to
premium by coverage year. This loss indication and paid/reported losses are
assigned respective weights to obtain estimates of ultimate losses which are
considered in establishing ultimate loss levels.

In establishing reserves for its workers' compensation insurance program,
several methods are employed in determining ultimate losses: a pure premium
method; two Bornhuetter-Ferguson methods -- paid and incurred; and two loss
development methods -- paid and incurred. The first three methods use industry
expected losses adjusted for the Company's experience while the last two
methods rely on industry payment and reporting patterns to develop the
Company's actual losses. The Company reviews all methods each coverage year in
determining ultimate losses.

In establishing reserves for its surety and other coverages, the Company
uses an expected loss ratio method due to the limited amount of exposure
assumed and the lack of historical Company specific information available.

All the methods used are generally accepted actuarial methods and, with the
exception of the pure premium method, rely in part on loss reporting and
payment patterns while considering the long tail nature of the coverages and
inherent variability in projection results from year-to-year. The patterns
used are generally based on industry data with supplemental consideration
given to Company experience as deemed warranted.

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. Reserve calculations are reviewed regularly by management and
periodically by 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.

37
<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>

38
<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). 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 re-estimated
amount of previously recorded liability based on experience as of the end of
each succeeding year. The lower portion of the table shows the cumulative
amounts subsequently paid as of successive years with respect to the
liability. 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
unaffiliated 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.

39
<PAGE>

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 $29.7 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 13.5%
United States government securities............... 11,113 37.4
Mortgage-backed securities, GNMA collateral....... 2,862 9.6
Corporate bonds................................... 5,291 17.8
Foreign investments............................... 803 2.7
Municipal bonds................................... 4,478 15.1
Equity securities................................. 1,170 3.9
------- -----
Total......................................... $29,739 100.0%
======= =====
</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").

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.

40
<PAGE>

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 Administration (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 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

41
<PAGE>

arrangement. For policies written by American Safety RRG, the Company receives
44.1% of the premium and assumes 70% of the risk in the layer of the first
$500,000 of loss per occurrence, subject to American Safety RRG's retention of
the first $100,000 of loss in the aggregate each year. American Safety RRG
also cedes 100% of the risk in the layer of $500,000 in excess of $500,000 per
occurrence, and 100% of the risk in the layer of $5.0 million in excess of
$1.0 million, to unaffiliated reinsurers. In the event that the unaffiliated
reinsurers fail to pay claims covered by their reinsurance treaties, American
Safety RRG would be obligated to pay such claims without the benefit of
reinsurance recoveries within the specified layers.

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 registration 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 as a captive insurer 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) no
state insurance insolvency guaranty fund is 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. The program management agreement between American Safety
RRG and Synergy provides for payment of a monthly program management fee of
$45,000 and a managing general agency commission of 10-25% of premium,
depending on the amount of premium paid by the insured. Synergy is also
compensated for direct

42
<PAGE>

production of business, and is reimbursed for marketing expenses actually
incurred, and for loss control expenses actually incurred plus a 20% fee. The
Company's recognized revenues from American Safety RRG during 1996 and the
nine months ended September 30, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Assumed premiums earned from American
Safety RRG............................. $ 1,982,290 $1,773,776
Ceded premiums to American Safety RRG... 541,129 870,369
------------ ----------
Net premiums earned..................... 1,441,161 903,407
------------ ----------
Management fees......................... 478,963 443,950
Brokerage commission income............. 1,341,026 777,400
Loss control fee........................ 49,373 42,091
</TABLE>

In the table above assumed premiums earned represent the assumption of a
portion of liability risks by the Company from American Safety RRG, and ceded
premiums represent the transfer of a portion of liability risks from the
Company to American Safety RRG. Management fees include administrative
services, underwriting services, claims administration services, financial,
accounting, billing and collection services and consulting services.

The Company derived approximately 37.2% ($3.3 million) of its revenues in
1996 and 20.9% ($2.2 million) of its revenues for the nine months ended
September 30, 1997 from American Safety RRG for administrative and management
fees, producing agent commissions, a loss control fee, reinsurance
intermediary fees and reinsurance premiums.

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 December 31, 1997, the Company employed 42 persons, none of whom was
represented by a labor union. The Company believes that its relationship with
its employees is good.

43
<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 are intended 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. Neither
American Safety nor American Safety Re has ever failed to meet the minimum
solvency margin or the minimum liquidity ratios. 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

44
<PAGE>

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 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 of Bermuda (the "Companies Act").
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 Bermuda Act, 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.

45
<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, 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, as a specialty insurance holding company, does not itself
do business in the United States. The Company, through its U.S. subsidiaries,
does business in the United States. The Company's U.S. insurance subsidiary's
operations are subject to state regulation where it is domiciled and where it
writes insurance.

American Safety Casualty, the Company's U.S. 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 44 states
(other than Connecticut, Maine, Michigan, New Hampshire, North Carolina and
Wyoming). The insurer is subject to regulation and examination 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. No other state has examined American Safety Casualty since it
was acquired by the Company. 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 insurance laws of Delaware place restrictions on a change of control of
American Safety as result of its ownership of American Safety Casualty. 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.

46
<PAGE>

American Safety Casualty, as a licensed carrier, is subject to state
regulation of rates and policy forms in the various states in which direct
premiums are written for its general liability and workers' compensation lines
of business. Under such regulations, a licensed carrier may be required to
file and obtain prior approval of its policy form and the rates that are
charged to insureds. While American Safety Casualty is licensed to write
workers' compensation insurance in a number of states, it presently does not
produce direct premiums from such line of business, and is therefore not
subject to such regulations with respect to this line of business. If American
Safety Casualty, in the future, directly writes workers' compensation
insurance, it would become subject to such regulations. American Safety
Casualty, as a licensed carrier, is also required to participate in state
insolvency funds, or shared markets, which are designed to protect insureds of
insurance carriers which become unable to pay claims due to an insurer's
insolvency. Assessments made against insurers participating in such funds are
based on direct premiums written by participating insurers, as a percentage of
total direct written premiums of all participating insurers. See "Risk
Factors--Regulation."

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 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. Regulatory compliance is determined by
the ratio of the carrier's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC.
Companies below specific trigger points or ratios are classified within
certain levels, each of which requires specific corrective action. The levels
and ratios are as follows:

<TABLE>
<CAPTION>
RATIO OF TOTAL ADJUSTED CAPITAL TO
AUTHORIZED CONTROL LEVEL RBC
REGULATORY EVENT (LESS THAN OR EQUAL TO)
---------------- ----------------------------------
<S> <C>
Company action level 2.0 (or 2.5 with negative trend)
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
</TABLE>

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 of American Safety RRG, has calculated the RBC
level of American Safety RRG and has determined that its capital and surplus
is significantly in excess of threshold requirements.

The NAIC has developed an insurance regulatory information system ("IRIS")
which is primarily intended to assist state insurance departments in
overseeing the financial condition of insurance companies operating in their
respective states. IRIS identifies 12 industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more ratios
generally leads to inquiries from individual state insurance commissioners.
Management has calculated the IRIS ratios for American Safety Casualty and has
determined that as of December 31, 1996 all ratios were within "usual values,"
and currently believes that all ratios are within "usual values." Synergy, the
program manager of American Safety RRG, has calculated the IRIS ratios for
American Safety RRG and has determined that as of December 31, 1996 all ratios
were within "usual values," and currently believes that all ratios are within
"usual values."

47
<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

48
<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 The ERIC Group 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 Houston 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 president of Environmental Construction, Inc. in Tallmadge,
Ohio since 1985, which is engaged in the general contracting, demolition,
excavation, asbestos abatement and environmental remediation. Mr. Walsh has 24
years experience in the construction business. Mr. Walsh is a registered civil
engineer.

49
<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 or
"staggered" 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. 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 retainer award
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 award shares are forfeited. A total of 30,000 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.

50
<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, 25,000 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 1997 and 1996 fiscal years were in excess of $100,000 (the
"Named Executive Officers") for services rendered in all capacities to the
Company for those years:

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND ------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY COMPENSATION(1)
------------------ ------------------- ---------------
<S> <C> <C> <C>
Lloyd A. Fox, President............................. 1997 $ 367,485 $4,800
1996 367,485 4,500
Stephen R. Crim, Executive Vice President........... 1997 105,057 3,180
1996 142,111 4,263
James G. Leach, Senior Vice President............... 1997 171,187 4,800
1996 165,449 4,500
</TABLE>
- --------
(1) Represents amounts accrued for contributions by the Company with respect
to its profit sharing plan.

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 -- --
Lloyd A. Fox(3)......... 51,090 31.7% $5.96 3/7/02 -- $30,387
</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 Intersure Reinsurance Company, over which Mr.
Fox exercises sole investment and voting powers.

51
<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 March 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 65.2% ($4.0 million) of its revenues in 1994, 46.3%
($4.6 million) of its revenues in 1995, and 37.2% ($3.3 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 $183,820 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 and for any tenant
improvements. During 1996, Synergy paid to the landlord $153,183 for rent,
$30,637 as a security deposit and $57,379 for tenant improvements.

On October 17, 1996, Frederick C. Treadway and Treadway Corporation borrowed
$700,000 (which was increased by $300,000 on August 6, 1997) 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 1997 was $1.0 million. The outstanding balance at January 31, 1998
was $580,000. The loan is secured by Mr. Treadway's personal guaranty and a
pledge of Common Shares. See "Certain Transactions."

52
<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 or officer 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 and officers to the maximum extent permitted under the
Companies Act.

53
<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 Intersure Reinsurance Company ("Intersure
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 Intersure Re. In 1997,
Intersure 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 $265,458 (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 Common Shares 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. On October 17, 1996, Frederick C.
Treadway, Chairman of the Company, and Treadway Corporation borrowed $700,000
(which was increased by $300,000 on August 6, 1997) 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
1997 was $1.0 million. The outstanding balance at January 31, 1998 was
$580,000. The loan is secured by Mr. Treadway's personal guaranty and a pledge
of Common Shares.

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.

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<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 Associates, L.P. 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 Trust(9)................. 182,745 6.25 3.25
Mark C. Mueller Trust(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 Associates, L.P., 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 Intersure 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) Represents shares held of record by the Mark C. Mueller Trust, over which
Thomas W. Mueller exercises sole investment and voting power as the sole
trustee. Thomas W. Mueller is a director of the Company, and his

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<PAGE>

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.
(10) Represents shares held of record by the Thomas W. Mueller Trust, over
which Mark E. Mueller exercises sole investment and voting power as the
sole trustee. 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.

<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 (in addition to any regulatory
or court approvals).

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%, other than the voting rights of
Frederick C. Treadway or Treadway Associates, L.P., affiliates of a founding
shareholder of the Company. "Controlled Shares" mean (i) all shares of the
Company directly, indirectly or constructively owned by any person 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

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<PAGE>

the provisions of Section 13(d)(6) of the Exchange Act). Under these
provisions, if, and so long as, any person directly, indirectly or
constructively owns 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, 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, and the appointment of any auditor.

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 have 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 60 days prior to such
meeting. 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 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

58
<PAGE>

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.

In addition, under the Bye-Laws and the Companies Act, shareholders holding
not less than one tenth of the paid in capital of the Company carrying the
right to vote at a general meeting may require the Board to convene a special
general meeting of the Company. If the Board fails to proceed to convene a
special general meeting within 21 days of receipt by the Company of the
shareholders' request to hold such a meeting, the shareholders may do so
themselves in accordance with the Companies Act.

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.

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<PAGE>

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 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 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 of the Common Shares that were outstanding prior to the
Offering are subject to a lock-up agreement with the representatives of the
Underwriters that prohibits their resale prior to 180 days after the date of
this Prospectus without the prior consent of Advest, Inc. 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 30,000 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.

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<PAGE>

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 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.

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-residents
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.

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<PAGE>

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.

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 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 all material tax consequences
of the 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 Re. American
Safety and its Bermuda subsidiary have received from the Minister of Finance
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 provision 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 its Bermuda
subsidiary are required to pay certain business fees as insurers under the
Bermuda Act. Currently, there would be no Bermuda withholding or other tax on
dividends paid by the Bermuda subsidiary 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

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<PAGE>

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.

Whether a foreign corporation is engaged in a United States trade or
business or is carrying on an insurance business in the United States depends
upon the level of activities conducted in the United States either directly by
the foreign corporation's officers or employees or by other agents. For
example, if the activities carried on in the United States or on behalf of a
foreign company are "continuous, regular, and considerable" the foreign
company will be deemed to be engaged in a United States trade or business. Due
to the fact that American Safety will continue to maintain an office in
Bermuda and American Safety and American Safety Re's sole business is
reinsuring contracts via treaty reinsurance agreements, which are all signed
outside of the United States, 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 were
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.

Management believes that American Safety and its Bermuda subsidiary,
American Safety Re, will be entitled to the benefits of the Bermuda Treaty. If
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,
management believes that American Safety and American Safety Re will not be
engaged in a United States trade or business. If American Safety or American
Safety Re are not engaged in a United States trade or business, there will be
no need to claim benefits under the Bermuda Treaty.

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 of the tax rate.

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.

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. In order for a
United States permanent establishment to exist, there generally must be
continuity of business activity conducted through facilities equipped to carry
on such activity. Generally, an insurance company would avoid having a
permanent establishment if it maintains no office and owns no tangible or real
property in the United States and acts in the United States only through
independent agents who would be acting in the ordinary course of their
business and who would not be acting in such capacity exclusively for the
company and other companies related to it. 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 and 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.

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In general, dividends paid by a United States corporation to a foreign
entity are subject to a 30% withholding tax. Accordingly, any dividends paid
to the Company by its U.S. subsidiaries will be subject to a 30% withholding
tax.

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.

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 in 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 disposition of shares and the
potential application of the 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 generally
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.

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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 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").

As a result of voting limitations on the stock of the Company designed to
prevent any person other than Frederick C. Treadway or Treadway Associates,
L.P. from becoming a United States 10% voting shareholder (directly,
indirectly or constructively) neither the Company nor any of its subsidiaries
will be considered a CFC under the 25% or 50% ownership tests. Even if the
Company were to become a CFC, none of its shareholders unrelated to Frederick
C. Treadway or Treadway Associates, L.P. would be deemed to be a United States
10% voting shareholder subject to current United States income taxation on
Subpart F income of the Company or any of its subsidiaries unless the related
person insurance income rules apply. See discussion below regarding special
considerations with respect to "related person insurance income." See also
"Description of Capital Stock."

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, determined on a gross basis, (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"). Hence, for purposes of determining if the Company is a RPII CFC
and allocating RPII, all United States shareholders are included for purposes
of the 25% ownership test and the inclusion of RPII in taxable income; the 10%
threshold for shareholders is not applicable for this determination. The term
"related person" for this purpose generally means an individual, corporation,
partnership, trust or estate which has control of, or is controlled by, a RPII
Shareholder, or which is controlled by the same person or persons that have
control of the foreign corporation. For these purposes control is generally
defined as control of more than 50% of either the voting power of a
corporation or the value of its capital stock.

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<PAGE>

RPII does not, and in the future should not, based on representations of
management, equal or exceed the 20% threshold and, as a result, the De Minimis
Exception will apply. In addition, less than 20% of the total value and voting
power of the stock of American Safety Re is or will be, based on the
representations of management, owned by persons who are (directly or
indirectly) insured by such entity or who are related to such persons. If
either such exception applies (the De Minimis Exception, or the exception from
the RPII rules based on less than 20% ownership by insureds and related
persons), then the special rules concerning RPII of a foreign corporation will
be inapplicable. 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 special rules concerning RPII of a foreign corporation were
applicable the RPII Shareholders of American Safety, and therefore of American
Safety Re on the last day of the taxable year might be required to include in
gross income for United States federal income tax purposes all the 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 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. As explained above, neither the Company nor any of its
subsidiaries will be a CFC. Accordingly, management believes that none of the
special rules noted in this paragraph will become applicable to any
shareholder of American Safety.

Section 1248 of the Code may also apply to the sale or exchange of capital
stock in a foreign insurance company 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 to United States persons that own stock of a foreign insurance company,
such as American Safety. Accordingly, Code Section 1248 (and, except as
discussed below in "Information Reporting," related reporting requirements)
should not apply to the disposition of Common Shares. There is no certainty,
however, 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

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<PAGE>

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.

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
itself, 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 taxed 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.

Based on representations of management, American Safety and American Safety
Re are, and will be, predominantly engaged in an insurance business and do
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

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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 management
does not anticipate that 75% or more of the gross income that American Safety
is thereby deemed to receive or actually receives 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.

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.

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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. ......................................................... 902,500
J.C. Bradford & Co. .................................................. 902,500
Hoefer & Arnett, Incorporated......................................... 575,000
Chatsworth Securities, Llc............................................ 40,000
Conning & Company..................................................... 40,000
EVEREN Securities, Inc................................................ 40,000
Friedman, Billings, Ramsey & Co., Inc................................. 40,000
Interstate/Johnson Lane Corporation................................... 40,000
Legg Mason Wood Walker, Incorporated.................................. 40,000
McDonald & Company Securities, Inc.................................... 40,000
The Robinson-Humphrey Company, LLC.................................... 40,000
---------
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 $0.46 per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $0.10 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.

Pursuant to the Underwriting Agreement, the Underwriters have agreed to
reserve up to 135,000 Common Shares for sale to the Company's employees,
officers, directors and their affiliates at the offering price per share set
forth on the cover page of this Prospectus (the "directed sales"). Because no
such offers have yet been solicited by the Underwriters and no contracts for
the purchase and sale of such Common Shares have been executed, the number of
Common Shares that will be sold in directed sales cannot presently be
determined. Any of such shares not orally confirmed for purchase in directed
sales by the end of the first business day after the date of execution of the
Underwriting Agreement will be offered to the public by the Underwriters as
set forth in this Prospectus.

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.

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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 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 was determined
by negotiation between the Company and the Underwriters. In determining such
price, consideration was 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 law 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.

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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
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.

Prior to the effective date of the Registration Statement under the
Securities Act, the Company was not subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). On the effective date of the Registration Statement (which is the date
of this Prospectus), the Company became 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.

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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."

<PAGE>

Claims-made coverage........... A policy that provides insurance for claims
reported during the policy period.

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.

<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
("LAE")....................... The expenses of settling claims, including
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.

74
<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;
retrocessionaire.............. A transaction whereby a reinsurer cedes to
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.

75
<PAGE>

Statutory accounting practices
("SAP")....................... The rules and procedures prescribed or
permitted by state insurance regulatory
authorities for recording transactions and
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).

76
<PAGE>

Underwriting expenses.......... The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.

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.

77
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report............................................... 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>

INDEPENDENT AUDITORS' 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.

KPMG Peat Marwick LLP

Atlanta, Georgia
February 9, 1998

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
Short-term investments...................... 350,000 472,417 1,596,682
----------- ----------- -----------
Total investments....................... 20,647,628 17,963,664 27,548,932
Cash.......................................... 3,197,510 3,271,957 2,425,488
Accrued investment and interest income........ 264,783 1,030,037 718,963
Notes receivable:
Related parties............................. 390,000 1,146,841 1,266,264
Other....................................... 988,195 4,912,865 3,620,359
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 premiums
earned............... $ 30,808 $ 51,337 $ 810,921 $ 662,064 $2,419,322
Assumed premiums
earned
Affiliate............ 2,194,136 2,494,765 1,982,290 1,612,775 1,773,776
Non-affiliates....... 1,283,552 3,562,483 2,523,198 1,544,811 3,830,017
---------- ---------- ---------- ---------- ----------
Total assumed
premiums earned.... 3,477,688 6,057,248 4,505,488 3,157,586 5,603,793
Ceded premiums earned
Affiliate............ 16,003 12,097 541,129 488,953 870,369
Non-affiliates....... 73,031 349,716 502,858 469,403 646,840
---------- ---------- ---------- ---------- ----------
Total 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 1,346,354 1,206,193 943,544 1,177,217
Interest on notes
receivable........... -- 6,555 885,436 505,692 635,504
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
$(37,685),
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 losses
(gains) on sale of
investments.......... 118,440 (200,625) (177,321) (155,153) (14,243)
Amortization of
deferred acquisition
costs................ 150,535 425,159 371,572 240,251 485,871
Change in:
Accrued investment
and interest
income.............. (26,455) (89,100) (765,254) (423,278) 311,074
Premiums receivable.. (57,633) (449,596) (584,465) (895,627) (2,887,190)
Commissions
receivable.......... (75,098) 59,723 8,630 (38,386) 35,666
Reinsurance
recoverable and
ceded unearned
premiums............ -- (32,144) (318,672) (91,048) (285,915)
Due from affiliate... (133,838) 286,390 (90,279) (249,601) 95,207
Income taxes......... (76,830) 151,311 (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
Unearned premiums.... 343,997 409,067 611,395 347,700 759,632
Liability for
deductible fees
held................ -- -- -- -- 2,764,485
Ceded premiums
payable............. 563,402 82,608 533,457 482,341 1,641,711
Due to affiliate..... (76,602) 25,716 (78,335) 86,274 66,805
Accounts payable and
accrued expenses.... 170,811 (255,701) 1,185,781 173,480 (312,317)
Other, net........... (204,608) (544,961) (318,356) (9,956) (368,118)
----------- ----------- ----------- ----------- -----------
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)
Increase in notes
receivable--other .... -- (390,000) (756,841) (157,313) (119,423)
(Increase) decrease in
notes receivable--
related parties ...... -- (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) --
Shares redeemed and
canceled.............. -- (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 January 1998 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.
("ECSI"), 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.

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) Notes Receivable
Notes receivable represent indebtedness under various secured lending
arrangements with related and unrelated parties. Interest income is recognized
on an effective yield basis over the life of the loan giving consideration to
loan fees and expenses under the provisions of SFAS No. 91. The allowance for
possible loan losses has been determined giving consideration to the
provisions of SFAS No. 114. At December 31, 1995 and 1996, and September 30,
1997, no allowance was deemed necessary by Company management. Additionally,
no loan losses were recognized for the periods then ended.

(f) Recognition of Premium Income
General liability premiums are primarily assumed from American Safety Risk
Retention Group, Inc. ("American Safety RRG"), a non-subsidiary affiliate.
General liability premiums are estimated based upon the annual revenues of the
underlying insureds. Additional or return premiums are recognized for
differences between provisional premiums billed and estimated ultimate general
liability premiums due. General liability and workers' compensation premiums
are recorded ratably over the policy period with unearned premium calculated
on a daily pro rata basis. Surety premiums are recorded ratably over a twelve
month period with unearned premium calculated using a half month convention.

(g) 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.

(h) Management Fees from Affiliate

The program management agreement between American Safety RRG and Synergy
provides for payment of a monthly program management fee, a managing general
agency commission, producing agent commissions, reimbursement for marketing
expenses actually incurred, and reimbursement for loss control expenses
actually incurred plus a 20% fee. The level of program management fees are
designed to reimburse the Company for the allocable share of expenses incurred
in managing the American Safety RRG program.

(i) 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

F-8
<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

premiums earned. If necessary, investment income is considered in the
determination of the recoverability of deferred policy acquisition costs. The
deferred acquisition costs are included in the caption Other Assets in the
accompanying Consolidated Balance Sheets due to their immateriality in
relation to Total Assets.

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>

(j) 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. Prior to 1996, the
Company's independent actuarial consultant determined the estimate of ultimate
loss and loss expense primarily upon industry loss data without explicit
consideration of the Company's loss reporting and settlement patterns.
Beginning in 1996, the Company's consultant refined the estimation process for
the determination of ultimate loss and loss adjustment expense to begin to
recognize differences between the Company's reporting and settlement patterns
and industry patterns as sufficient Company specific data (10 years of Company
specific actuarial data) was then available. This method (Bornhuetter-
Ferguson) entails developing an initial expected loss ratio based upon gross
ultimate losses from prior accident years, 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.

(k) Liability for Deductible Fees Held

Deductible fees held represent deposits held by the Company in its capacity
as administrator for self-insured programs. Such deposits will be extinguished
by the payment of claims on behalf of the self-insured or by refund of excess
deposits to the self-insured.

(l) 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.

(m) 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.

F-9
<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(n) Goodwill

On April 2, 1993, American Safety Casualty exchanged 8% of its common shares
for 100% of the common stock of Synergy. The goodwill created in this
transaction 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.

(o) 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 issuances
since September 30, 1996 for a per share consideration of less than the
assumed offering price of $12.00 (Note 14).

(p) 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 and diluted EPS
are 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.......................... $ 0.54 $ 1.07 $ 0.98 $ 0.69 $ 0.75
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 16, 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 basic and diluted EPS shown above.

Diluted EPS as presented above and as reflected on the accompanying
Consolidated Statements of Earnings did not differ as a result of the
application of SFAS No. 128 for any period presented.

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. An example of an item that will be included in the
Company's presentation of comprehensive income, in addition to net earnings,
is unrealized gains and losses on securities available for sale. This
statement is effective beginning in 1998.

F-10
<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Management believes that there will be no significant impact on the
Company's financial reporting or disclosures as a result of these
pronouncements.

(q) Reclassifications

Certain items in the prior periods' financial statements have been
reclassified to conform with the 1997 presentation.

(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 investments and
cash...................... 132,158 111,399 124,285 110,589 159,804
-------- ---------- ---------- -------- ----------
716,378 1,389,602 1,269,289 992,941 1,229,595
Less investment expenses... 53,083 43,248 63,096 49,397 52,378
-------- ---------- ---------- -------- ----------
Net investment income.. $663,295 $1,346,354 $1,206,193 $943,544 $1,177,217
======== ========== ========== ======== ==========
</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) 198,779
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) $209,656
========= ========== ========= ========= ========
</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 $6,600,000. The notes bear interest rates ranging from
9.25% to 10.25% and are payable in 1997 and 1998.

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 9.00% to 25.0% and are payable on
various dates.

The Company recognized $6,555 and $885,436 of interest income on the notes
receivable in 1995 and 1996, respectively, and $505,692 and $635,504 for the
nine month periods ended September 30, 1996 and 1997, respectively.

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 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.

<TABLE>
<S> <C>
COVERAGE LAYER--$5,000,000 X $1,000,000
Signet Star Reinsurance Company......................................... 40%
Swiss Re America Corp................................................... 25
Underwriters Reinsurance Company........................................ 10
Zurich-American Insurance Group......................................... 25
---
100%
===
COVERAGE LAYER--$500,000 X $500,000
Signet Star Reinsurance Company......................................... 55%
Swiss Re America Corp................................................... 10
Underwriters Reinsurance Company........................................ 35
---
100%
===
COVERAGE LAYER--$0--$500,000 (1)
American Safety......................................................... 42%
American Safety Casualty................................................ 28
American Safety RRG..................................................... 30
---
100%
===
</TABLE>
- --------
(1)The above percentages are after American Safety RRG retains the first
$100,000 in the aggregate.

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 American
Safety. Legion uses the 10% loss fund to pay claims, and when this fund is
extinguished, Legion cedes to American Safety. American Safety 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.

F-14

<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table depicts the income statement effects to the Company from
Legion Insurance Company:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
----------- -----------------
1995 1996 1997
----- ----- -----------------
(In thousands)
<S> <C> <C> <C>
Premiums assumed.................................. 3,372 2,804 3,830
Premiums ceded.................................... 149 184 36
Net premiums--earned.............................. 3,223 2,620 3,794
Loss and LAE incurred............................. 2,048 1,851 2,801
Commissions....................................... 834 587 867
Loss control...................................... 140 -- 1
</TABLE>

The following table depicts the balance sheet effects to the Company from
Legion Insurance Company:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1997
------ ------ -------------
(In thousands)
<S> <C> <C> <C>
ASSETS
Premium receivable.................................. $ 208 459 1,576
LIABILITIES
Unpaid loss and LAE................................. 2,532 2,983 4,503
Unearned premiums................................... 688 878 1,108
Reinsurance payable on paid loss and LAE............ 86 80 289
</TABLE>

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. The ceding commission percentage is based on
the recovery of 50% of the commissions, premium taxes and other expenses. The
rate adjusts down after fixed expenses are recovered. 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-15

<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:

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1994 1995 1996 1996 1997
------- ------ ------ -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Written premiums:
Direct.................... $ 30 $ 98 $1,192 $ 812 $ 2,928
Assumed................... 3,820 6,249 4,936 3,733 5,855
Ceded..................... (88) (217) (1,511) (1,246) (1,765)
------- ------ ------ -------- ---------
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 2,024 1,363 3,501
Ceded..................... -- (6) (195) (109) (397)
------- ------ ------ -------- ---------
Net..................... $ 1,424 $2,905 $2,056 $ 1,383 $ 3,533
======= ====== ====== ======== ========= ===
Unpaid loss and loss
adjustment expenses:
Direct.................... $ 10 $ 10 $ 237 $ 139 $ 303
Assumed................... 6,038 8,284 8,833 8,361 10,588
Ceded..................... -- (6) (201) (114) (240)
------- ------ ------ -------- ---------
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.

Whether a foreign corporation is engaged in a United States trade or
business or is carrying on an insurance business in the United States depends
upon the level of activities conducted in the United States. If the activities
of a foreign company are "continuous, regular, and considerable" the foreign
company will be deemed to be engaged in a United States trade or business. Due
to the fact that American Safety will continue to maintain an office in
Bermuda and American Safety and American Safety Re's sole business is
reinsuring contracts via treaty reinsurance agreements, which are all signed
outside of the United States, 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. This position is
consistent with the position taken by various other entities that have the
same operational structure as American Safety.

However, because the Internal Revenue Code of 1986, as amended, the Treasury
Regulations and court decisions do not definitively identify 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 will not contend that American Safety or its Bermuda
subsidiary is engaged in a United States trade or business. In general, if
American Safety or its Bermuda subsidiary are considered to be engaged in a
United

F-16
<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

States trade or business, it would be subject to (i) United States Federal
income tax on its taxable income that is effectively connected with a United
States trade or business at graduated rates and (ii) the 30 percent branch
profits tax on its effectively connected earnings and profits deemed
repatriated from the United States. 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.

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>

F-17
<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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, $18,032,107 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.

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 payable in 1997 and
1998. See Note 3.

The Company has entered into reinsurance agreements with two companies,
Intersure Reinsurance Company ("Intersure 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, Intersure 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 14.

Synergy, 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%.

F-18

<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following tables reconcile the income statement effects to the Company
from American Safety RRG:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------ -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
General liability premiums from
affiliate........................ $2,190 $2,506 $1,522 $ 1,238 $ 1,447
General liability premiums from
consolidated subsidiary.......... (12) (23) (532) (453) (866)
Ceded general liability premiums--
other............................ -- -- 451 339 322
------ ------ ------ -------- --------
Net premiums earned............. $2,178 $2,483 $1,441 $ 1,124 $ 903
====== ====== ====== ======== ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assumed premiums from
American Safety RRG.... $2,194,136 $2,494,765 $1,982,290 $1,612,775 $1,773,776
Ceded premiums to
American Safety RRG.... 16,003 12,097 541,129 488,953 870,369
---------- ---------- ---------- ---------- ----------
Net premiums earned..... 2,178,133 2,482,668 1,441,161 1,123,822 903,407
Management fee.......... 463,512 474,822 478,963 355,844 443,950
Loss control............ 35,997 33,229 49,373 37,033 42,091
Brokerage commission
income................. 1,189,501 1,534,952 1,341,026 1,070,851 777,400
---------- ---------- ---------- ---------- ----------
Total revenues.......... $3,867,143 $4,525,671 $3,310,523 $2,587,550 $2,166,848
========== ========== ========== ========== ==========
Loss and LAE incurred... $ 637,611 $ 851,228 $ 165,670 $ 876,829 $ 697,719
========== ========== ========== ========== ==========
</TABLE>

For the years ended December 31, 1994, 1995 and 1996 and for the nine month
periods ended September 30, 1996 and 1997, Synergy and ECSI received fees from
American Safety RRG for risk management, claims administration and other
management services. Synergy also recognized brokerage commission income from
American Safety RRG.

The following table depicts the balance sheet effects to the Company from
American Safety RRG:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
ASSETS
Due from affiliate........................... $ 266,565 $ 356,844 $ 261,637
LIABILITIES
Unpaid loss and LAE.......................... 5,964,237 5,737,373 5,854,972
Unearned premium............................. -- 91,997 118,126
Ceded premiums payable....................... 75,358 -- 49,400
Reinsurance payable on paid loss and LAE..... 1,932 -- 16,360
</TABLE>

(9) SEGMENT INFORMATION

a) Factors used to identify the Company's reportable segments:

The Company's United States and Bermuda operating segments were identified
by management as separate operating segments based upon the unique regulatory
environments each of these countries exhibit. Significant differences exist
under United States and Bermuda law concerning the regulation of insurance
entities including differences in: types of permissible investments, minimum
capital requirements, solvency monitoring, pricing, corporate taxation, etc.

F-19
<PAGE>

b) Products and services from each reportable segment:

The Company is a specialty insurance holding company which, through its
United States and Bermuda operating segments, 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 United States operating segment's specialty insurance programs provide
insurance and reinsurance for general, pollution and professional liability
exposures, for workers' compensation and surety, as well as custom designed
risk management programs for contractors, consultants and other business and
property owners who are involved with environmental remediation, employee
leasing and staffing, and other specialty risks.

Through its United States brokerage and management services subsidiaries,
the Company also provides specialized insurance program development,
underwriting, risk and reinsurance placement, program management, brokerage,
loss control, claims administration and marketing services. The Company also
insures and places risks through its United States insurance subsidiary, as
well as its non-subsidiary risk retention group affiliate and other
unaffiliated insurance and reinsurance companies.

Through its Bermuda operating segment, the Company places and reinsures a
portion of the risks underwritten directly by its United States segment, its
risk retention group affiliate and other insurers.

c) Information about segment profit or loss and assets:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
UNITED STATES
Net premiums earned--All Other........... $2,147 $3,977 $ 88 $ 22 $1,600
Net premiums earned--Intersegment........ (655) (1,347) 2,101 1,461 2,145
Net investment income and interest on
notes receivable........................ 422 497 587 442 530
Other revenues........................... 2,083 2,924 2,471 1,908 2,232
Total revenues........................... 3,997 6,051 5,247 3,833 6,507
Interest expense......................... -- -- -- -- --
Depreciation and amortization expense.... 59 69 85 66 78
Equity in net earnings of subsidiaries .. -- -- -- -- --
Income taxes............................. 329 720 177 178 383
Significant noncash items other than
depreciation and amortization........... -- -- -- -- --
Property, plant and equipment............ 68 86 187 197 159
Total investments........................ 6,606 8,249 10,908 10,346 13,775
Total assets............................. 10,398 13,385 16,666 15,538 21,796
Total policy and contract liabilities.... 2,213 3,741 4,865 4,277 6,674
Total liabilities........................ 3,641 4,862 7,627 6,623 11,994
</TABLE>

F-20
<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ ----------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
BERMUDA
Net premiums earned--All Other.... $1,272 $ 1,770 $ 4,184 $ 2,839 $ 4,906
Net premiums earned--
Intersegment..................... 655 1,347 (2,101) (1,461) (2,145)
Net investment income and interest
on notes receivable.............. 241 856 1,505 1,007 1,283
Other revenues.................... -- 141 203 170 15
Total revenues.................... 2,168 4,114 3,791 2,555 4,059
Interest expense.................. -- -- -- -- 27
Depreciation and amortization
expense.......................... -- -- -- -- --
Equity in net earnings of
subsidiaries..................... 569 1,443 570 510 690
Income taxes...................... -- -- -- -- --
Significant noncash items other
than depreciation and
amortization..................... -- -- -- -- --
Property, plant and equipment..... -- -- -- -- --
Total investments................. 17,040 20,922 16,095 17,287 23,575
Total assets...................... 17,278 24,235 26,224 25,214 35,702
Total policy and contract
liabilities...................... 5,214 7,261 7,967 7,827 13,172
Total liabilities................. 5,303 7,621 8,192 8,172 14,978
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ ----------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
INTERSEGMENT ELIMINATIONS
Net premiums earned--All Other.... $ -- $ -- $ -- $ -- $ --
Net premiums earned--
Intersegment..................... -- -- -- -- --
Net investment income and interest
on notes receivable.............. -- -- -- -- --
Other revenues.................... (31) (245) (132) (105) (214)
Total revenues.................... (31) (245) (132) (105) (214)
Interest expense.................. -- -- -- -- --
Depreciation and amortization ex-
pense............................ -- -- -- -- --
Equity in net earnings of subsidi-
aries............................ (569) (1,443) (570) (510) (690)
Income taxes...................... -- -- -- -- --
Significant noncash items other
than depreciation and
amortization..................... -- -- -- -- --
Property, plant and equipment..... -- -- -- -- --
Total investments................. (6,253) (8,523) (9,039) (8,916) (9,801)
Total assets...................... (7,331) (10,477) (11,591) (11,863) (15,325)
Total policy and contract liabili-
ties............................. (1,035) (1,955) (2,553) (2,586) (4,223)
Total liabilities................. (1,079) (1,955) (2,552) (2,948) (5,523)
</TABLE>

F-21
<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
TOTAL
Net premiums earned--All Other............. $3,419 $5,747 $4,272 $2,861 $6,506
Net premiums earned--Intersegment.......... -- -- -- -- --
Net investment income and interest on notes
receivable................................ 663 1,353 2,092 1,449 1,813
Other revenues............................. 2,052 2,820 2,542 1,973 2,033
Total revenues............................. 6,134 9,920 8,906 6,283 10,352
Interest expense........................... -- -- -- -- 27
Depreciation and amortization expense...... 59 69 85 66 78
Equity in net earnings of subsidiaries..... -- -- -- -- --
Income taxes............................... 329 720 177 178 383
Significant noncash items other than depre-
ciation and
amortization.............................. -- -- -- -- --
Property, plant and equipment.............. 68 86 187 197 159
Total investments.......................... 17,393 20,648 17,964 18,717 27,549
Total assets............................... 20,345 27,143 31,299 28,889 42,173
Total policy and contract liabilities...... 6,392 9,047 10,279 9,518 15,623
Total liabilities.......................... 7,865 10,528 13,267 11,847 21,449
</TABLE>

(10) ACQUISITION

On January 1, 1995, pursuant to a share purchase agreement, the Company
purchased the minority interest in American Safety Casualty with a book value
at the date of purchase of $540,562 for 131,000 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. No goodwill or other
identifiable intangible assets were created in this transaction as the Company
and minority interest holder mutually agreed that book value of each
respective entity approximated fair values as of the acquisition date.

(11) 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.

(12) 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.

F-22
<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(13) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------------
1994 1995 1996 1996 1997
------ ------ ------ -------- ---------
(In thousands)
<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>

(14) STOCK OPTIONS

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.

F-23

<PAGE>

AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 5.0 7.08 65,500 7.08
12.00 8,333 2.5 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................................. 41
------
Pro forma net earnings................................ $2,181
======
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 in future years.
The Company granted options in 1997 at an amount deemed to be fair market
value at the date of grant.

(15) 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.

(16) 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. All share and per share amounts have been retroactively
adjusted to effect this split. The Company has filed a registration statement
on Form S-1 with the Securities and Exchange Commission for an initial public
offering of 2.7 million common shares. Such registration is anticipated to
become effective in the first calendar quarter of 1998.

F-24
<PAGE>

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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.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 13
The Company.............................................................. 14
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 26
Regulatory Matters....................................................... 44
Management............................................................... 48
Certain Transactions..................................................... 54
Principal Shareholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
Certain Bermuda Law Considerations....................................... 61
Certain Tax Considerations............................................... 62
Underwriting............................................................. 69
Legal Matters............................................................ 70
Experts.................................................................. 70
Additional Information................................................... 71
Glossary of Selected Insurance Terms..................................... 72
Index to Consolidated Financial Statements............................... F-1
</TABLE>

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UNTIL MARCH 9, 1998, ALL DEALERS EFFECTING TRANSACTIONS 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.

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2,700,000 SHARES

LOGO
[LOGO APPEARS HERE]

AMERICAN SAFETY
INSURANCE GROUP, LTD.

COMMON SHARES

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PROSPECTUS

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ADVEST, INC.

J.C. BRADFORD&CO.

HOEFER & ARNETT
INCORPORATED

FEBRUARY 12, 1998

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