<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1998
Commission File Number 333-42749
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
44 Church Street
Hamilton HM HX, Bermuda
(Address, zip code of principal executive offices)
(441) 295-5688
(Registrant's telephone number, including area code)
-------------
Indicate by check mark whether Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
--- ---
The aggregate number of shares outstanding of Registrant's common stock, $.01
par value, on August 14, 1998 was 6,074,770.
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
FORM 10-Q
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risks.................................................. 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 15
Item 2. Changes in Securities and Use of Proceeds....................... 15
Item 3. Defaults Upon Senior Securities................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............. 15
Item 5. Other Information............................................... 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
</TABLE>
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. Financial Statements
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
Assets 1997 1998
------ ------------ -----------
(unaudited)
<S> <C> <C>
Investments:
Securities available for sale, at fair value:
Fixed maturities $26,462,275 $48,242,591
Equity investments 1,054,549 2,958,287
Short-term investments 1,823,830 3,006,565
----------- -----------
Total investments 29,340,654 54,207,443
Cash 2,768,831 2,737,574
Accrued investment and interest income 781,798 1,531,482
Notes receivable:
Related parties 580,000 580,000
Other 4,697,804 12,556,750
Premiums receivable 6,809,436 7,361,704
Commissions receivable 18,630 59,641
Ceded unearned premium 649,175 800,267
Reinsurance recoverable 778,975 874,658
Due from affiliate 288,951 348,441
Income tax recoverable 152,802 141,743
Deferred income taxes 209,795 252,323
Goodwill 270,010 261,124
Other assets 321,339 371,458
----------- -----------
Total assets $47,668,200 $82,084,608
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Unpaid losses and loss adjustment expenses $11,571,539 $12,764,898
Unearned premiums 2,331,579 3,710,513
Liability for deductible fees held 3,539,032 2,334,650
Reinsurance on paid loss and loss
adjustment expenses 256,085 293,956
Reinsurance deposits on retroactive
contract 537,500 414,458
Ceded premiums payable 5,990,907 4,271,801
Due to affiliate:
Ceded premiums payable 217,062 686,802
Reinsurance on paid loss and loss
adjustment expenses 41,085 9,545
Income tax payable - -
Accounts payable and accrued expenses 1,342,515 2,038,052
----------- -----------
Total liabilities 25,827,304 26,524,675
----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value; authorized
5,000,000 shares; no shares issued and outstanding
Common stock, $0.01 par value; authorized
15,000,000 shares; issued and outstanding at
December 31, 1997, 2,925,230 shares and at
June 30, 1998, 6,074,770 shares 29,252 60,747
Additional paid-in capital 2,751,789 33,823,269
Retained earnings 18,751,222 21,356,783
Other comprehensive income 308,633 319,134
----------- -----------
Total shareholders' equity 21,840,896 55,559,933
----------- -----------
Total liabilities and
shareholders' equity $47,668,200 $82,084,608
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Direct premiums earned $ 755,244 $ 997,178 $ 1,139,009 $ 2,035,202
Assumed premiums earned:
Affiliate 692,221 872,634 1,256,409 1,413,993
Nonaffiliates 870,344 1,501,534 1,914,581 3,040,990
---------- ---------- ----------- -----------
Total assumed premiums earned 1,562,565 2,374,168 3,170,990 4,454,983
---------- ---------- ----------- -----------
Ceded premiums earned:
Affiliate 298,087 718,524 536,722 1,434,117
Nonaffiliates 79,567 468,104 249,771 778,520
---------- ---------- ----------- -----------
Total ceded premiums earned 377,654 1,186,628 786,493 2,212,637
---------- ---------- ----------- -----------
Net premiums earned 1,940,155 2,184,718 3,523,507 4,277,548
---------- ---------- ----------- -----------
Net investment income 377,857 855,121 711,332 1,481,770
Interest on notes receivable 178,981 427,403 456,565 695,618
Brokerage commission income 462,422 276,909 1,079,736 660,950
Management fees from affiliate 162,815 195,787 286,916 366,536
Net realized gains(losses) (763) 57,933 4,886 95,079
Other income 3,175 4,883 8,667 11,583
---------- ---------- ----------- -----------
Total revenues 3,124,642 4,002,754 6,071,609 7,589,084
---------- ---------- ----------- -----------
Expenses:
Losses and loss adjustment expenses incurred 996,224 1,135,975 2,009,003 2,471,152
Acquisition expenses 456,925 206,840 613,782 420,219
Other expenses 869,517 1,092,691 1,591,218 2,052,495
---------- ---------- ----------- -----------
Total expenses 2,322,666 2,435,506 4,214,003 4,943,866
---------- ---------- ----------- -----------
Earnings before income taxes 801,976 1,567,248 1,857,606 2,645,218
Income taxes 97,749 (14,579) 291,084 39,658
---------- ---------- ----------- -----------
Net earnings $ 704,227 $1,581,827 $1 ,566,522 $ 2,605,560
========== ========== =========== ===========
Net earnings per share:
Basic $ 0.25 $ 0.26 $ 0.55 $ 0.50
========== ========== =========== ===========
Diluted $ 0.24 $ 0.26 $ 0.53 $ 0.49
========== ========== =========== ===========
Common shares used in computing earnings per share:
Basic $2,872,830 $6,044,914 $ 2,872,830 $ 5,241,784
========== ========== =========== ===========
Diluted $2,963,931 $6,175,150 $ 2,963,931 $ 5,347,401
========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------
1997 1998
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net earnings $ 1,566,522 $ 2,605,560
Adjustments to reconcile net earnings to net cash provided by
Realized losses (gains) on sale of investments (4,886) (95,079)
Amortization of deferred acquisition costs 325,349 244,180
Change in:
Accrued investment and interest income 541,114 (749,684)
Premiums receivable (1,107,424) (552,268)
Commissions receivable (28,739) (41,011)
Reinsurance recoverable and ceded unearned premiums (173,786) (246,775)
Due from affiliate (4,176) (59,490)
Income taxes (25,153) (31,469)
Unpaid losses and loss adjustment expenses 855,342 1,193,359
Unearned premiums 1,137,288 1,378,934
Liability for deductible fees held 2,290,817 (1,327,424)
Ceded premiums payable 523,430 (1,719,106)
Due to affiliate 32,301 438,200
Accounts payable and accrued expenses 340,297 695,539
Other, net (285,319) (713,879)
------------------------------
Net cash provided by operating activities 5,982,977 1,019,587
------------------------------
Cash flow from investing activities:
Purchases of fixed maturities (7,680,084) (60,751,975)
Purchases of equity investments (708,560) (2,304,221)
Proceeds from maturity and redemption of fixed maturities 2,000,440 3,941,489
Proceeds from sale of fixed maturities - 35,103,718
Proceeds from sale of equity investments 241,432 728,472
Proceeds from sale of preferred stock - -
Decrease (increase) in short-term investments 102,959 (967,344)
Increase in notes receivable-other 1,605,338 (7,881,016)
(Increase) decrease in notes receivable-related parties 150,577 -
Purchase of fixed assets, net (26,412) (22,942)
------------------------------
Net cash used in investing activities (4,314,310) (32,153,819)
------------------------------
Cash flow financing activities:
Proceeds from sale of common stock - 31,102,975
------------------------------
Net cash provided by financing activities - 31,102,975
------------------------------
Net increase (decrease) in cash 1,668,667 (31,257)
Cash at beginning of period 3,271,957 2,768,831
------------------------------
Cash at end of period $ 4,940,624 $ 2,737,574
==============================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE>
American Saftey Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 704,227 $1,581,827 $1,566,522 $2,605,560
Other comprehensive earnings before income taxes:
Unrealized gains (losses) on securities available
for sale 308,179 (4,017) (67,824) (109,013)
Reclassification adjustment for realized gains
included in net earnings (763) 57,933 4,886 95,079
--------- ---------- ---------- ----------
Total other comprehensive earnings before taxes 307,416 53,916 (62,938) (13,934)
Income tax expense related to items of
comprehensive income 41,527 (17,848) (4,028) (24,435)
--------- ---------- ---------- ----------
Other comprehensive earnings net of income taxes 265,889 71,764 (58,910) 10,501
--------- ---------- ---------- ----------
Total comprehensive earnings $ 970,116 $1,653,591 $1,507,612 $2,616,061
========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
6
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim consolidated financial statements of American
Safety Insurance Group, Ltd. ("American Safety") and its subsidiaries
(collectively, the "Company") are prepared in accordance with generally accepted
accounting principles in the United States and, in the opinion of management,
reflect all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation of the interim period presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, based on the best
information available, in recording transactions resulting from business
operations. The balance sheet amounts that involve a greater extent of
accounting estimates and actuarial determinations subject to future changes are
the Company's liabilities for unpaid losses and loss adjustment expenses. As
additional information becomes available (or actual amounts are determinable),
the recorded estimates may be revised and reflected in operating results. While
management believes that the liability for unpaid losses and loss adjustment
expenses is adequate to cover the ultimate liability, such estimates may be more
or less than the amounts actually paid when claims are settled.
The results of operations for the six months ended June 30, 1998 may not be
indicative of the results that may be expected for the full year ending December
31, 1998. These unaudited interim consolidated financial statements and notes
should be read in conjunction with the financial statements and notes included
in the audited consolidated financial statements of American Safety and
subsidiaries for the year ended December 31, 1997. The unaudited interim
consolidated financial statements include the accounts of American Safety and
each of its subsidiaries. All significant intercompany balances have been
eliminated.
Note 2 - Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 establishes standard for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. The Company adopted Statement 130 effective January 1,
1998. The primary component of the differences between net income and
comprehensive income for the Company is unrealized gains on securities. Total
comprehensive income for the three months ended June 30, 1997 was $970,116 as
compared to $1,653,591 for the three months ended June 30, 1998. Total
comprehensive income for the six months ended June 30, 1997, was $1,507,612 as
compared to $2,616,061 for the six months ended June 30, 1998.
Note 3 - Nature of Operations
The following is a description of certain risks facing casualty insurers:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses
not anticipated by the insurer in pricing its products and beyond those recorded
in the financial statements. Regulatory initiatives designed to reduce insurer
profits or otherwise affecting the industry in which the Company operates, new
legal theories or insurance company insolvencies through guaranty fund
assessments, may create costs for the Company beyond those recorded in the
financial statements. The Company attempts to mitigate this risk by writing
insurance business in several states, thereby spreading this risk over a large
geographic area, and by obtaining reinsurance.
Credit Risk is the risk that issuers of securities owned by the Company or
secured notes receivable will default or that other parties, including
reinsurers that have obligations to the insurer, will not pay or perform. The
Company attempts to mitigate
7
<PAGE>
this risk by adhering to a conservative investment strategy, by obtaining
sufficient collateral for secured note obligations and by maintaining sound
reinsurance, credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company attempts to
mitigate this risk by attempting to match the maturities of its assets with the
expected payouts of its liabilities.
Note 4 - Investments
The amortized cost and estimated fair values of investments at December 31,
1997 and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Amount
Gross Gross at which
Amortized Unrealized Unrealized Estimated Shown in the
Cost gains losses fair value balance sheet
---------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations and agencies $11,725,010 128,883 2,376 11,851,517 11,851,517
Obligations of states and political subdivisions 4,782,325 220,175 -- 5,002,500 5,002,500
Corporate securities 6,545,888 51,986 13,508 6,584,366 6,584,366
Mortgage-backed securities 3,016,040 30,693 22,841 3,023,892 3,023,892
---------- ------------- ------------ ------------ -------------
Total Fixed maturities 26,069,263 431,737 38,725 26,462,275 26,462,275
Equity investments - common stocks 1,045,493 12,688 3,632 1,054,549 1,054,549
---------- ------------- ------------ ------------ -------------
Total $27,114,756 444,425 42,357 27,516,824 27,516,824
========== ============= ============ ============ =============
June 30, 1998:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations and agencies $20,676,406 120,072 20,017 20,776,461 20,776,461
Obligations of States and political subdivisions 5,304,428 187,874 906 5,491,396 5,491,396
Corporate securities 17,093,830 76,398 19,772 17,150,456 17,150,456
Mortgage-backed securities 4,826,711 7,892 10,326 4,824,277 4,824,277
---------- ------------- ------------ ------------ -------------
Total Fixed maturities 47,901,375 392,236 51,021 48,242,590 48,242,590
Equity investments - common stocks 2,869,963 90,231 1,907 2,958,287 2,958,287
---------- ------------- ------------ ------------ -------------
Total $50,771,338 482,467 52,928 51,200,877 51,200,877
========== ============= ============ ============ =============
</TABLE>
Note 5 - Notes Receivable
Notes receivable represent indebtedness under various secured lending
arrangements with related and unrelated parties. During the quarter, the Company
made a loan to an unaffiliated borrower, which amounts to 8.3% of the Company's
total assets. The note is secured by real estate and the personal guaranties of
the principals of the borrower.
8
<PAGE>
Note 6- Shareholder Matters
On January 29, 1998, the Company effectuated a 1,310-for-one share split and
increased its authorized capital to 15,000,000 common shares and 5,000,000
preferred shares in contemplation of the Company's initial public offering which
became effective February 12, 1998. All share and per share amounts have been
retroactively adjusted to effect this split.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
American Safety is a specialty insurance holding company which, through its
subsidiaries, develops, underwrites, manages and markets primary casualty
insurance and reinsurance programs in the alternative insurance market for (i)
environmental specialty risks; (ii) employee leasing and staffing industry
risks; and (iii) other specialty risks. The Company has demonstrated expertise
in developing specialty insurance coverages and custom designed risk management
programs not generally available in the standard insurance market.
The Company's specialty insurance programs include coverages for general
liability, pollution liability, professional liability, workers' compensation
and surety, as well as custom designed risk management programs (including
captive and rent-a-captive programs), for contractors, consultants and other
businesses and property owners who are involved with environmental remediation,
employee leasing and staffing, and other specialty risks. Through its U.S.
brokerage and management services subsidiaries, the Company also provides
specialized insurance program development, underwriting, risk placement,
reinsurance, program management, brokerage, loss control, claims administration
and marketing services.
The Company insures and places risks through its U.S. insurance subsidiary,
American Safety Casualty Insurance Company, as well as its non-subsidiary risk
retention group affiliate, American Safety Risk Retention Group, Inc., and
substantial unaffiliated insurance and reinsurance companies. The Company also
reinsures and places, through its Bermuda reinsurance subsidiary, American
Safety Reinsurance, Ltd., and substantial unaffiliated reinsurers, a portion of
the risk underwritten directly by its U.S. insurance subsidiary, American Safety
Casualty Insurance Company, its risk retention group affiliate and other
insurers. Substantially all of the reinsurance business that the Company
currently assumes is for primary insurance programs that the Company has
developed and underwritten. In January 1998, the Company formed American Safety
Reinsurance, Ltd., a Bermuda reinsurance subsidiary, and transferred a
substantial portion of its reinsurance business on a going forward basis to the
subsidiary.
The Company is able to select its roles as program developer, primary
underwriter, reinsurer, program manager and broker based on its assessment of
each risk profile. After determining its roles, the Company utilizes its
insurance and reinsurance subsidiaries, its insurance brokerage and management
services subsidiaries, and its risk retention group affiliate to generate risk
premium revenues, program management fees, insurance and reinsurance commissions
and investment income.
A.M. Best Company ("A.M. Best"), an independent nationally recognized insurance
rating service and publisher, has assigned a rating of "A (Excellent)" on a
group basis to American Safety, as well as its U.S. insurance subsidiary and its
non-subsidiary risk retention group affiliate. On June 15, 1998, A.M. Best
increased American Safety's financial size rating from a VI to a VII as a result
of the Company's initial public offering on February 12, 1995. A.M. Best's
ratings are an independent opinion of an insurer's ability to meet its
obligations to policyholders, which opinion is of concern primarily to
policyholders, insurance agents and brokers, and should not be considered an
investment recommendation.
The Company's financial position and results of operation are subject to change
based on various factors, including competitive conditions in the insurance
industry, unpredictable developments in loss trends, changes in loss reserves,
market acceptance of new coverages and enhancements, and changes in levels of
general business activity and economic conditions. During this decade, the
Company has operated in a soft market cycle which is characterized by excess
insurance capacity and declining insurance premium rates. The Company's reported
combined ratio for its insurance operations may not provide an indication of the
Company's overall profitability from insurance and reinsurance programs due to
the exclusion of fee and commission income and expenses generated in related
non-insurance subsidiaries.
<PAGE>
Certain of the Company's insurance policies and reinsurance assumed, including
general and pollution liability policies covering environmental remediation
risks, as well as workers' compensation policies, may be subject to claims
brought years after an incident has occurred or the policy period had ended. The
Company maintains reserves to cover its estimated liability for losses and loss
adjustment expenses with respect to reported and unreported claims incurred.
The Company has reviewed its internal business systems and believes that the
systems, primarily its computer system, will process date information accurately
and without interruption when required to process dates in the year 1999 and
beyond. The Company has not been required to expend significant resources to
address the year 2000 issue and does not anticipate any significant
expenditures.
Statements made in this Report are not based on historical information are
deemed to be "forward-looking statements" under applicable federal securities
laws. Such forward-looking statements are based largely on current expectations
and assumptions of management and are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
contemplated, including, without limitation, competitive conditions in the
insurance industry, unpredictable developments in loss trends, changes in loss
reserves, market acceptance of new coverages and enhancements, and changes in
levels of general business activity and economic conditions.
11
<PAGE>
Results of Operations
The following table sets forth the Company's consolidated revenues (dollars in
thousands):
<TABLE>
<CAPTION>
Percent
Increase
(Decrease)
-------------------------------------------------------------------------
Three Six
Three months ended Six months ended months months
June 30, June 30, ended ended
-------------------------------------------------------------------------
1997 1998 1997 1998 1997 1998
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earned premium
Reinsurance:
Workers' compensation............... $ 892 $1,427 $1,937 $2,891 60.0% 49.3%
General Liability from affiliate.... 594 675 1,045 1,116 13.6% 6.8%
------ ------ ------ ------
Total reinsurance............ 1,486 2,102 2,982 4,007 41.5% 34.4%
Primary insurance:
Surety.............................. 455 83 542 271 -81.8% -50.0%
------ ------ ------ ------
Total primary insurance...... 455 83 542 271 -81.8% -50.0%
------ ------ ------ ------
Total net earned premium 1,941 2,185 3,524 4,278 12.6% 21.4%
------ ------ ------ ------
Net investment income.................. 378 855 711 1,482 126.2% 108.4%
Interest on notes receivable........... 179 428 457 696 139.1% 52.3%
Commission and fee income:
Brokerage commission income............ 463 277 1,080 661 -40.2% -38.8%
Management fees from affiliates........ 163 195 287 366 19.6% 27.5%
------ ------ ------ ------
Total commission and fee income..... 626 472 1,367 1,027 -24.6% -24.9%
------ ------ ------ ------
Net realized gains (losses)............ (1) 58 5 95 -5900.0% 1800.0%
Other income........................... 2 5 8 11 150.0% 37.5%
------ ------ ------ ------
Total revenues..... $3,125 $4,003 $6,072 $7,589 28.1% 25.0%
====== ====== ====== ======
</TABLE>
12
<PAGE>
The following table sets forth the components of the Company's GAAP
combined ratio for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
--------------------------------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance operations:
Loss and loss adjustment expense ratio.................. 51.4% 52.0% 57.0% 57.8%
Expense ratio........................................... 29.7 12.4 20.3 11.4
---- ---- ---- ----
Combined ratio....................................... 81.1% 64.4% 77.3% 69.2%
==== ==== ==== ====
</TABLE>
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Net Premiums Earned. Net premiums earned increased 12.6% from $1.9 million
in the quarter ended June 30, 1997 to $2.2 million in the quarter ended June 30,
1998. The principal factor accounting for the increase was the Company's
assumption in 1998 of workers' compensation reinsurance business from an
unaffiliated insurance carrier, which increased net premiums earned from
workers' compensation reinsurance by 60.0% from $892,000 in the quarter ended
June 30, 1997 to $1.4 million in the quarter ended June 30, 1998. This increase
was a result of additional premiums from new insureds in this line of business.
General liability reinsurance premiums increased 13.6% from $594,000 in the
quarter ended June 30, 1997 to $675,000 in the quarter ended June 30, 1998. In
the Company's primary insurance business, net premiums earned from the Company's
U.S. insurance subsidiary's surety program decreased from $455,000 in the
quarter ended June 30, 1997 to $83,000 in the quarter ended June 30, 1998
primarily as a result of the discontinued bail bond program.
Net Investment Income. Net investment income increased 126.2% from $378,000
in the quarter ended June 30, 1997 to $855,000 in the quarter ended June 30,
1998 as a result of the investment of additional cash flows from insurance
operations and from investment of the Company's initial public offering
proceeds. The average annual pre-tax yield on investments was 6.5% in the
quarter ended June 30, 1997 and 6.0% in the quarter ended June 30, 1998. The
average annual after-tax yield on investments was 5.5% in the quarter ended June
30, 1997 and 5.6% in the quarter ended June 30, 1998.
Interest from Notes Receivable. Interest from notes receivable increased
139.1% from $179,000 in the quarter ended June 30, 1997 to $428,000 in the
quarter ended June 30, 1998 as a result of increases in outstanding notes
receivable.
Brokage Commission Income. Income from insurance brokerage operations
decreased 40.2% from $463,000 in the quarter ended June 30, 1997 to $277,000 in
the quarter ended June 30, 1998 because of additional premiums being directly
written by the Company's U.S. insurance subsidiary where acquisition expenses
and brokerage income are eliminated due to consolidation.
Management Fees. Management fees increased 19.6% from $163,000 in the
quarter ended June 30, 1997 to $195,000 in the quarter ended June 30, 1998 as a
result of increased service levels provided by the Company to its risk retention
group affiliate.
Net Realized Gains (Losses). Net realized gains from the sale of
investments increased from a loss of $763 in the quarter ended June 30, 1997 to
a gain of $58,000 in the quarter ended June 30, 1998.
13
<PAGE>
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 14.0% from $996,000 in the quarter ended June 30, 1997 to $1,136,000
in the quarter ended June 30, 1998 due to the 12.6% increase in net premiums
earned and a corresponding increase in reserves primarily due to the increase in
the workers' compensation line of business.
Acquisition Expenses. Policy acquisition expenses decreased 54.7% from
$457,000 in the quarter ended June 30, 1997 to $207,000 in the quarter ended
June 30, 1998 as a result of increased premiums directly written by the
Company's U.S. insurance subsidiary where acquisition expenses and brokerage
income are eliminated due to consolidation.
Other Expenses. Other expenses increased 33.0% from $870,000 in the quarter
ended June 30, 1997 to $1.1 million in the quarter ended June 30, 1998 due to
salary and benefit increases and increased staffing for new and existing
programs.
Income Taxes. Federal and state income taxes decreased from $98,000 in the
quarter ended June 30, 1997 to a benefit of $15,000 in the quarter ended June
30, 1998 due to decreased taxable income in the Company's U.S. insurance
subsidiary.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net Premiums Earned. Net premiums earned increased 21.4% from $3.5 million
in the six months ended June 30, 1997 to $4.3 million in the six months ended
June 30, 1998. The principal factor accounting for the increase was the
Company's assumption in 1998 of workers' compensation reinsurance business from
an unaffiliated insurance carrier, which increased net premiums earned from
workers' compensation reinsurance by 49.3% from $1.9 million in the six months
ended June 30, 1997 to $2.9 million in the six months ended June 30, 1998. This
increase was a result of additional premiums from new insureds in this line of
business.
General liability reinsurance premiums increased 6.8% from $1.0 million in
the six months ended June 30, 1997 to $1.1 million in the six months ended June
30, 1998. In the Company's primary insurance business, net premiums earned from
the Company's U.S. insurance subsidiary's surety program decreased from $542,000
in the six months ended June 30, 1997 to $271,000 in the six months ended June
30, 1998 primarily as a result of the discontinued bail bond program.
Net Investment Income. Net investment income increased 108.4% from
$711,000 in the six months ended June 30, 1997 to $1.5 million in the six months
ended June 30, 1998 as a result of the investment of additional cash flows from
insurance operations and from investment of the Company's initial public
offering proceeds. The average annual pre-tax yield on investments was 6.8% in
the six months ended June 30, 1997 and 7.1% in the six months ended June 30,
1998. The average annual after-tax yield on investments was 5.7% in the six
months ended June 30, 1997 and 6.5% in the six months ended June 30, 1998.
Interest from Notes Receivable. Interest from notes receivable increased
52.3% from $457,000 in the six months ended June 30, 1997 to $696,000 in the six
months ended June 30, 1998 as a result of increases in outstanding notes
receivable.
Brokerage Commission Income. Income from insurance brokerage operations
decreased 38.8% from $1.1 million in the six months ended June 30, 1997 to
$661,000 in the six months ended June 30, 1998 because of additional premiums
being directly written by the Company's U.S. insurance subsidiary where
acquisition expenses and brokerage income are eliminated due to consolidation.
Management Fees. Management fees increased 27.5% from $287,000 in the six
months ended June 30, 1997 to $366,000 in the six months ended June 30, 1998 as
a result of increased services provided by the Company to its risk retention
group affiliate.
Net Realized Gains. Net realized gains from the sale of investments
increased from $5,000 in the six months ended June 30, 1997 to $95,000 in the
six months ended June 30, 1998.
14
<PAGE>
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 23.0% from $2.0 million in the six months ended June 30, 1997 to $2.5
million in the six months ended June 30, 1998 due to the 21.4% increase in net
premiums earned and a corresponding increase in reserves primarily due to the
increase in the workers' compensation line of business.
Acquisition Expenses. Policy acquisition expenses decreased 31.5% from
$614,000 in the six months ended June 30, 1997 to $420,000 in the six months
ended June 30, 1998 as a result of increased premiums being directly written by
the Company's U.S. insurance subsidiary where acquisition expenses and brokerage
income are eliminated due to consolidation.
Other Expenses. Other expenses increased 29.0% from $1.6 million in the six
months ended June 30, 1997 to $2.1 million in the six months ended June 30,1998
due to salary and benefit increases and increased staffing required to handle
new and existing programs.
Income taxes. Federal and state income taxes decreased from $291,000 in
the six months ended June 30, 1997 to $40,000 in the six months ended June
30, 1998 due to decreased taxable 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.
The Company also purchases reinsurance to mitigate the effect of large claims.
On a consolidated basis, net cash provided from operations was $6.0 million
for the six months ended June 30, 1997 and $1.0 million for the six months ended
June 30, 1998. The positive cash flows for both periods were primarily
attributable to net premiums written, net earnings, and increases in reserves
for unpaid losses. Because workers' compensation and general liability claims
may be paid over an extended period of time, the company has established
relatively large loss reserves for such lines of business. The assets supporting
the Company's reserves continue to earn investment income until claims payments
are made.
Total assets increased from $47.7 million at December 31, 1997 to $82.1
million at June 30, 1998, primarily due to proceeds of the Company's initial
public offering in February 1998. Cash, invested assets and notes receivable
increased from $37.4 million at June 30, 1997 to $70.1 million at June 30, 1998.
American Safety is an insurance holding company whose principal assets are
its investment portfolio and its investment in the capital stock of its
subsidiaries. As an insurance holding company, American Safety's ability to pay
dividends to its shareholders will depend, to a significant degree on the
ability of the Company's subsidiaries to pay dividends to American Safety. The
jurisdictions in which the Company and its insurance and reinsurance
subsidiaries are domiciled place limitations on the amount of dividends or other
distributions payable by insurance companies in order to protect the solvency of
insurers. Managements believes it has significant liquidity in the near term to
accomplish its business objectives.
As of June 30, 1998 the Company had no investments in derivative financial
instruments.
15
<PAGE>
Income Taxes
American Safety is incorporated under the laws of Bermuda and, under
current Bermuda law, is not obligated to pay any taxes in Bermuda based upon
income or capital gains. American Safety has received an undertaking from the
Minister of Finance in Bermuda pursuant to the provisions of The Exempted
Undertakings Tax Protection Act 1966, which exempts American Safety and its
shareholders, other than shareholders ordinarily resident in Bermuda, from any
Bermuda taxes computed on profits, income or any capital asset, gain or
appreciation, or any tax in the nature of estate, duty or inheritance until
March 28, 2016. The Company, exclusive of its United States subsidiaries, does
not expect to be subject to direct United States income taxation. The Company's
U.S. subsidiaries are subject to taxation in the United States.
Inflation
Property and casualty insurance premiums are established before the amounts
of losses and loss adjustment expenses are known and therefore before the extent
by which inflation may affect such expenses is known. Consequently, the Company
attempts, in establishing its premiums, to anticipate the potential impact of
inflation. However, for competitive and regulatory reasons, the Company may be
limited in raising its premiums consistent with anticipated inflation, in which
event the Company, rather than its insureds, would absorb inflation costs.
Inflation also affects the rate of investment return on the Company's investment
portfolio with a corresponding effect on the Company's investment income.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 5. Other Information.
On August 11, 1998, the Company announced that Stephen F. Clarke has
resigned as the Company's chief financial officer to pursue private
business interests. Steven B. Mathis, currently the Company's
controller, has been named chief financial officer. Mr. Mathis has
worked for the Company since 1992 and has over nine years of
accounting experience in the insurance industry.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Report:
Exhibit No. Description
----------- -----------
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the period
covered by this Report.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of August 1998.
American Safety Insurance Group, Ltd.
By: /s/ Lloyd A. Fox
--------------------------------------------
Lloyd A. Fox
President and Chief Executive Officer
By: /s/ Steven B. Mathis
--------------------------------------------
Steven B. Mathis
Chief Financial Officer
(Principal Financial Officer)
18
<PAGE>
Exhibit 11
American Safety Insurance Group, Ltd. and Subsidiaries
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic:
Earnings Available to Common
Shareholders............................ $ 704,227 $1,581,827 $ 1,566,522 $2,605,560
============= ============= ============= =============
Weighted Average Common Shares
Outstanding............................. 2,872,830 6,044,914 2,872,830 5,241,784
Basic Earnings per Common Share......... $ .25 $ .26 $ .55 $ .50
============= ============= ============= =============
Diluted:
Earnings Available to Common
Shareholders............................ $ 704,227 $1,581,827 $1,566,522 $ 2,605,560
============= ============= ============= =============
Weighted Average Common Shares
Outstanding............................. 2,872,830 6,044,914 2,872,830 5,241,784
Weighted Average Common Share
Equivalents Associated with Options:.... 91,101 130,236 91,101 105,617
Total Weighted Average Common
Shares.................................. 2,963,931 6,175,150 2,963,931 5,347,401
============= ============= ============= =============
Diluted Earnings per Common Share....... $ .24 $ .26 $ .53 $ .49
============= ============= ============= =============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 48,243
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,958
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 54,207
<CASH> 2,738
<RECOVER-REINSURE> 1,675
<DEFERRED-ACQUISITION> 186
<TOTAL-ASSETS> 82,085
<POLICY-LOSSES> 12,765
<UNEARNED-PREMIUMS> 3,711
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 61
<OTHER-SE> 55,499
<TOTAL-LIABILITY-AND-EQUITY> 82,085
2,185
<INVESTMENT-INCOME> 855
<INVESTMENT-GAINS> 58
<OTHER-INCOME> 5
<BENEFITS> 1,136
<UNDERWRITING-AMORTIZATION> 207
<UNDERWRITING-OTHER> 1,093
<INCOME-PRETAX> 1,567
<INCOME-TAX> (15)
<INCOME-CONTINUING> 1,582
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,582
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<RESERVE-OPEN> 12,390
<PROVISION-CURRENT> 2,190
<PROVISION-PRIOR> (676)
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 1,139
<RESERVE-CLOSE> 12,765
<CUMULATIVE-DEFICIENCY> 65
</TABLE>
