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 MARCH 31, 1999
Commission File Number 333-42749
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
44 Church Street
P.O. Box HM2064
Hamilton HM HX, Bermuda
(Address, zip code of principal executive offices)
(441) 296-8560
(Registrant's telephone number, including area code)
--------------
Indicate by check mark whether Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No___
The aggregate number of shares outstanding of Registrant's common stock, $.01
par value, on May 3, 1999 was 6,061,550.
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risks............................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 16
Item 2. Changes in Securities and Use of Proceeds.................... 16
Item 3. Defaults Upon Senior Securities.............................. 16
Item 4. Submission of Matters to a Vote of Security Holders.......... 16
Item 5. Other Information............................................ 16
Item 6. Exhibits and Reports on Form 8-K............................. 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Balance Sheets
December 31, March 31,
Assets 1998 1999
------ ------------ ---------
(unaudited)
<S> <C> <C>
Investments:
Securities available for sale, at fair value:
Fixed maturities $45,308,326 $43,876,878
Common stock 3,453,123 3,383,021
Short-term investments 2,286,320 2,749,335
----------- -----------
Total investments 51,047,769 50,009,234
Cash 4,737,132 2,397,550
Accrued investment and interest income 2,441,857 3,122,824
Notes receivable:
Related parties 280,000 280,000
Other 15,939,894 17,970,210
Premiums receivable 5,838,567 10,141,436
Commissions receivable 22,569 12,680
Ceded unearned premium 1,742,021 1,750,062
Reinsurance recoverable 1,840,884 2,191,859
Due from affiliate 668,074 506,945
Income tax recoverable 277,292 300,926
Deferred income taxes 362,951 410,071
Property, plant and equipment 185,807 2,285,310
Goodwill 252,239 247,796
Other assets 510,416 455,612
----------- -----------
Total assets $86,147,472 $92,082,515
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses $14,700,473 $16,139,827
Unearned premiums 3,894,568 5,039,376
Liability for deductible fees held 244,998 244,998
Reinsurance on paid loss and loss
adjustment expenses 380,858 810,878
Reinsurance deposits on retroactive
contract 332,430 291,416
Ceded premiums payable 4,382,922 4,987,781
Due to affiliate:
Ceded premiums payable 201,778 1,263,503
Reinsurance on paid loss and loss
adjustment expenses 52,151 65,914
Accounts payable and accrued expenses 2,688,001 2,287,789
Collateral held - 522,728
----------- -----------
Total liabilities 26,878,179 31,654,210
----------- -----------
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, 1998, 6,074,770 shares, and at
March 31, 1999, 6,077,750 shares 60,747 60,777
Additional paid-in capital 33,809,141 33,810,387
Retained earnings 24,705,471 26,424,649
Other comprehensive income 693,934 132,492
----------- -----------
Total shareholders' equity 59,269,293 60,428,305
Total liabilities and
shareholders' equity $86,147,472 $92,082,515
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
Three Months Ended
March 31
-----------------------------
1998 1999
<S> <C> <C>
---- ----
Revenues:
Direct premiums earned $1,038,024 $1,410,051
Assumed premiums earned:
Affiliate 541,359 810,716
Nonaffiliates 1,539,456 1,579,001
--------- ---------
Total assumed premiums earned 2,080,815 2,389,717
--------- ---------
Ceded premiums earned:
Affiliate 715,593 1,090,695
Nonaffiliates 310,416 254,289
------- ---------
Total ceded premiums earned 1,026,009 1,344,984
--------- ---------
Net premiums earned 2,092,830 2,454,784
--------- ---------
Net investment income 626,649 699,335
Interest on notes receivable 268,215 926,102
Brokerage commission income 384,041 430,867
Management fees from affiliate 170,749 179,233
Net realized gains (losses) 37,146 (1,118)
Other income 6,700 78,521
----- ------
Total revenues 3,586,330 4,767,724
--------- ---------
Expenses:
Losses and loss adjustment expenses incurred 1,335,177 1,319,355
Acquisition expenses 213,379 323,444
Payroll and related expenses 802,738 1,003,636
Other expenses 157,066 447,841
------- -------
Total expenses 2,508,360 3,094,276
--------- ---------
Earnings before income taxes 1,077,970 1,673,448
Income taxes 54,237 (45,730)
---------- ----------
Net earnings $1,023,733 $1,719,178
---------- ----------
Net earnings per share:
Basic $ 0.23 $ .28
========== ==========
Diluted $ 0.23 $ .28
========== ==========
Common shares used in computing earnings per share:
Basic 4,429,730 6,077,750
========= =========
Diluted 4,510,455 6,108,541
========= =========
</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>
Three months ended
March 31,
1998 1999
<S> <C> <C>
Cash flow from operating activities:
Net earnings $1,023,733 $1,719,178
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Realized losses (gains) on sale of investments (37,146) 1,118
Amortization of deferred acquisition costs 158,426 344,325
Change in:
Accrued investment and interest income (675,866) (680,967)
Premiums receivable 591,927 (4,302,869)
Commissions receivable (28,581) 9,889
Reinsurance recoverable and ceded unearned premiums (52,166) (359,016)
Due from affiliate 48,438 161,129
Income taxes 47,557 (70,754)
Unpaid losses and loss adjustment expenses 818,871 1,439,354
Unearned premiums 881,994 1,144,808
Liability for deductible fees held (503,596) (41,014)
Ceded premiums payable (1,107,892) 604,859
Due to affiliate (141,957) 1,075,488
Accounts payable and accrued expenses 794,595 (340,007)
Collateral - 522,728
Other, net (402,860) 163,353
------- -------
Net cash provided by operating activities 1,415,477 1,391,602
--------- ---------
Cash flow from investing activities:
Purchases of fixed maturities (39,454,936) (988,954)
Proceeds from maturity and redemption of fixed
maturities 3,390,813 80,000
Proceeds from sale of fixed maturities 4,998,332 1,786,435
Proceeds from sale of common stock 304,140 1,062
Increase in short-term investments (215,391) (463,015)
Decrease (increase) in notes receivable - other 22,070 (2,030,316)
Purchase of fixed assets, net (7,427) (2,117,672)
----- ---------
Net cash used in investing activities (30,962,399) (3,732,460)
---------- ----------
Cash flow from financing activities:
Proceeds from sale of common stock 30,837,517 1,276
---------- -----
Net cash used in financing activities 30,837,517 1,276
---------- -----
Net increase (decrease) in cash 1,290,595 (2,339,582)
Cash at beginning of period 2,768,831 4,737,132
--------- ---------
Cash at end of period $4,059,426 $2,397,550
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(Unaudited)
<TABLE>
Three months ended
March 31,
1998 1999
---- ----
<S> <C> <C>
Net earnings $1,023,733 1,719,178
Other comprehensive earnings before income taxes:
Unrealized gains (losses) on securities available
for sale (104,996) (584,332)
Reclassification adjustment for realized gains
included in net earnings 37,146 (1,118)
------ -----
Total other comprehensive earnings (loss)
before taxes (67,850) (585,450)
Income tax expense (benefit) related to
items of comprehensive income (6,587) (24,008)
----- ------
Other comprehensive earnings (loss) net
of income taxes (61,263) (561,442)
------ -------
Total comprehensive earnings $ 962,470 $1,157,736
========== ==========
</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 three months ended March 31, 1999
may not be indicative of the results that may be expected for the full year
ending December 31, 1999. These unaudited interim consolidated financial
statements and notes should be read in conjunction with the financial statements
and notes included in the audited consolidated financial statements of American
Safety and its subsidiaries for the year ended December 31, 1998.
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 March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 is effective for years
beginning after December 15, 1998. The SOP specifies the types of costs that
should be capitalized and those that should be expensed as incurred in
connection with an internal-use software project. Capitalized costs begin
amortizing when the software is ready for its intended use, regardless of when
it is placed in service. Companies are required to evaluate capitalized costs
for impairment using estimated future cash flows to determine if the asset is
impaired. The Company expects that adoption of SOP 98-1 will have an immaterial
impact on the Company's consolidated financial position and results of
operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for
years beginning after June 15, 1999. The standard requires that all derivatives
be recorded as an asset or liability, at estimated fair value, regardless of the
purpose or intent for holding the derivative. If a derivative is not utilized as
a hedge, all gains or losses from the change in the derivative's estimated fair
value are recognized in earnings. The gains or losses from the change in
estimated fair value of certain derivatives utilized as hedges are recognized in
earnings or other comprehensive income depending on the type of hedge
relationship. Due to the Company's limited use of derivatives, the Company
expects that adoption of SFAS No. 133 will have an immaterial impact on the
Company's consolidated financial position and results of operations.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." This SOP suggests
methods to determine when an entity should recognize a liability for guaranty
fund and other insurance-related assessments, how to measure that liability, and
when an asset may be recognized for the recovery of such assessments through
premium tax offsets or policy surcharges. This SOP is effective for 1999, and
the effect of initial adoption is to be reported as a cumulative catch-up
adjustment. Restatement of previously issued financial statements is not
allowed. Implementation of this statement is not expected to have a material
impact on the Company's financial position and results of operations.
7
<PAGE>
In October 1998, the AICPA issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk". This SOP provides guidance on how to account for insurance and
reinsurance contracts that do not transfer insurance risk. It applies to all
entities and all insurance and reinsurance contracts that do not transfer
insurance risk except for long-duration life and health insurance contracts. The
method used to account for insurance and reinsurance contracts that do not
transfer insurance risk is referred to in this SOP as deposit accounting. The
SOP does not address when deposit accounting should be applied. This SOP is
effective for financial statements for fiscal years beginning after June 15,
1999, with earlier adoption encouraged. Restatement of previously issued annual
financial statements would not be permitted. The effect of initially adopting
this SOP should be reported as a cumulative effect of a change in accounting
principle (in accordance with the provisions of Accounting Principles Board
Opinion No. 20, Accounting Changes). Implementation of this statement is not
expected to have a material impact on the Company's financial position and
results of operations,
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 which 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.
Potential Risk of United States Taxation of Bermuda Operations. 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 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 are 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 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, the United States subsidiaries of
American Safety are subject to U.S. Federal and state income tax.
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
8
<PAGE>
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. See Note 6.
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, 1998 and March 31, 1999 are as follows:
<TABLE>
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, 1998:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $13,365,480 332,997 50,997 13,647,480 13,647,480
Obligations of states and political
subdivisions 6,465,377 284,486 1,179 6,748,684 6,748,684
Corporate securities 19,688,443 364,650 53,841 19,999,252 19,999,252
Mortgage-backed securities 5,008,835 7,820 103,745 4,912,910 4,912,910
----------- ------- ------ ---------- ----------
Total fixed maturities 44,528,135 989,953 209,762 45,308,326 45,308,326
Equity investments - common stocks 3,439,710 23,962 10,549 3,453,123 3,453,123
----------- ------- ------ ---------- ----------
Total $47,967,845 1,013,915 220,311 48,761,449 48,761,449
=========== ========= ======= ========== ==========
March 31, 1999:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $14,528,393 128,452 197,164 14,459,681 14,459,681
Obligations of states and political
subdivisions 6,454,178 250,862 6,017 6,699,023 6,699,023
Corporate securities 18,351,464 76,599 43,348 18,384,715 18,384,715
Mortgage-backed securities 4,361,631 7,271 35,443 4,333,459 4,333,459
----------- ------- ------ ---------- ----------
Total fixed maturities 43,695,666 463,184 281,972 43,876,878 43,876,878
Equity investments - common stocks 3,356,079 32,295 5,353 3,383,021 3,383,021
----------- ------- ------ ---------- ----------
Total $47,051,745 495,479 287,325 47,259,899 47,259,899
=========== ======= ======= ========== ==========
</TABLE>
Note 5 - 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.
Note 6 - Subsequent Event
On May 29, 1998, American Safety Reinsurance, Ltd. ("American Safety
Re"), a subsidiary of Registrant, purchased an existing secured loan in the
original principal amount of $8,850,000 (the "Project Loan") from an affiliate
of Citibank Mortgage Corp., which loan was made to Ponce Marina, Inc. (the
"Developer") in connection with its planned development of 710 condominium
units, a marina with 142 condominium boat slips and a yacht club, a beach club
and a par 3 golf course on a 172 acre site located in Ponce Inlet, Florida (the
"Property"). American Safety Re purchased the Project Loan at a discount for
$5,850,082, and made additional advances to the
9
<PAGE>
Developer and incurred other Property related costs totaling $2,009,815
following its purchase of the Project Loan. The Developer was unable to obtain
construction financing for the Property and failed to make a $6,400,000 payment
on the Project Loan due March 31, 1999. Immediately following the Developer's
default, American Safety Re obtained a judgment against the Developer for
$12,117,857 (which includes accrued interest), foreclosed on the Property and
received a certificate of title to the Property on April 13, 1999. American
Safety Re has invested, to date, a total of $7,859,897 in the Project Loan and
the Property.
American Safety Re is currently marketing the Property for sale and
is evaluating a proposal from a prospective purchaser. The Property has been
recently appraised for a third party by an independent appraisal firm for an
amount substantially in excess of American Safety Re's investment in the Project
Loan.
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 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 or exposures, employee leasing and staffing, and other specialty
risks. Through its U.S. brokerage and management services subsidiaries, the
Company also provides specialized insurance program development, underwriting,
risk placement, reinsurance, program management, brokerage, loss control, claims
administration and marketing services.
The Company insures and places risks through its U.S. insurance
subsidiary, American Safety Casualty Insurance Company, as well as its
non-subsidiary risk retention group affiliate, American Safety Risk Retention
Group, Inc., and substantial unaffiliated insurance and reinsurance companies.
The Company also reinsures and places, through its Bermuda reinsurance
subsidiary, American Safety Reinsurance, Ltd., and substantial unaffiliated
reinsurers, a portion of the risk underwritten directly by its U.S. insurance
subsidiary, 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.
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.
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. 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
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<PAGE>
enhancements, and changes in levels of general business activity and economic
conditions. 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 management and agency subsidiaries.
Certain of the Company's insurance policies and reinsurance assumed,
including general and pollution liability policies covering environmental
remediation risks, as well as workers' compensation policies, may be subject to
claims brought years after an incident has occurred or the policy period has
ended. The Company is required to maintain reserves to cover its estimated
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 the ultimate payments will not materially exceed the Company's
reserves.
Statements made in this Report that are not based on historical
information are deemed to be "forward-looking statements" under applicable
federal securities laws. Such forward-looking statements are based largely on
current expectations and assumptions of management and are subject to a number
of risks and uncertainties which could cause actual results to differ materially
from those contemplated, including, without limitation, competitive conditions
in the insurance industry, unpredictable developments in loss trends, changes in
loss reserves, market acceptance of new coverages and enhancements, and changes
in levels of general business activity and economic conditions.
Results of Operations
The following table sets forth the Company's consolidated revenues:
<TABLE>
Percent
Increase
(Decrease)
Three Months Ended March 31,
1997 1998 1999 1997 1998
to 1998 to 1999
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net Premiums earned:
Reinsurance:
Workers' compensation................ $1,045 $1,464 1,395 40.1% (4.7)%
General liability from affiliate..... 451 441 643 (2.2) 45.8
Auto Liability....................... - - 13
------ ------ -----
Total reinsurance............. 1,496 1,905 2,051 27.3 7.7
Primary insurance:
Surety............................... 87 188 404 116.1 114.9
------ ------ -----
Total primary insurance....... 87 188 404 116.1 114.9
------ ------ ---
Total net premiums earned 1,583 2,093 2,455 32.2 17.3
------ ------ -----
Net investment income................... 333 627 699 88.3 11.5
Interest on notes receivable............ 278 268 926 (3.6) 245.5
Commission and fee income:
Brokerage commission income............. 617 384 431 (37.8) 12.2
Management fees from affiliate.......... 124 171 179 37.9 4.7
----- ------ -----
Total commission and fee income...... 741 555 610 (25.1) 9.9
----- ------ -----
Net realized gains (losses)............. 6 37 (1) 516.7 (102.7)
Other income............................ 6 6 79 - 1,216.7
----- ------ -----
Total Revenues...... $2,947 $3,586 4,768 21.7% 33.0%
------ ------ -----
</TABLE>
11
<PAGE>
The following table sets forth the components of the Company's GAAP
combined ratio for the periods indicated:
<TABLE>
Three months ended
March 31,
1997 1998 1999
<S> <C> <C> <C>
---- ---- ----
Insurance operations:
Loss and loss adjustment expense ratio........... 63.4% 63.8% 53.7%
Expense ratio.................................... 16.3 10.4 16.6
---- ---- ----
Combined ratio................................ 79.7% 74.2% 70.3%
----- ----- -----
</TABLE>
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
Net Premiums Earned. Net premiums earned increased 17.3% from $2.1
million in the quarter ended March 31, 1998 to $2.5 million in the quarter ended
March 31, 1999. The principal factor accounting for the increase was the
Company's assumption of general liability reinsurance business from an
affiliated insurance carrier, which increased by 45.8% from $441,000 in the
quarter ended March 31, 1998 to $643,000 in the quarter ended March 31, 1999.
This increase was a result of additional premiums from new insureds in this line
of business. Another factor accounting for the increase was an increase of the
Company's surety business by 114.9% from $188,000 in the quarter ended March 31,
1998 to $404,000 in the quarter ended March 31, 1999. This increase is
attributable to additional premiums from new business and the Company's new
reinsurance program.
Net Investment Income. Net investment income increased 11.5% from
$627,000 in the quarter ended March 31, 1998 to $699,000 in the quarter ended
March 31, 1999 as a result of the investment of additional cash flows from
insurance operations and from the timing of the investment of the Company's
initial public offering proceeds which took place in the middle of the first
quarter of 1998. The average annual pre-tax yield on investments was 5.6% in the
quarter ended March 31, 1998 and 5.5% in the quarter ended March 31, 1999. The
average annual after-tax yield on investments was 5.1% in the quarter ended
March 31, 1999 and 5.2% in the quarter ended March 31, 1999.
Interest from Notes Receivable. Interest from notes receivable
increased 245.5% from $268,000 in the quarter ended March 31, 1998 to $926,000
in the quarter ended March 31, 1999 as a result of an increase of $13.0 million
in outstanding secured notes receivable compared to the same period in 1998. The
notes bear interest rates ranging from 9% to 25% and are payable on various
dates.
Brokerage Commission Income. Income from insurance brokerage operations
increased 12.2% from $384,000 in the quarter ended March 31, 1998 to $431,000 in
the quarter ended March 31, 1999
Management Fees. Management fees increased 4.7% from $171,000 in the
quarter ended March 31, 1998 to $179,000 in the quarter ended March 31, 1999 as
a result of increased service levels provided by the Company to its risk
retention group affiliate.
Net Realized Gains (Losses). Net realized gains (losses) decreased
from a gain of $37,000 in the quarter ended March 31,1998 to a loss of $1,000
for the quarter ended 1999.
Losses and Loss Adjustment Expenses. Losses and loss adjustment
expenses decreased 1.5% from $1.34 million in the quarter ended March 31, 1998
to $1.32 million in the quarter ended March 31, 1999 primarily due to lower
retentions from the Company's new reinsurance program that was effective January
1, 1999 and the mix of premiums earned. General liability and surety, which
carry a lower loss ratio, had an increase in premiums earned while workers'
compensation, which has a higher loss ratio, had a slight decrease in premiums
earned. The Company continues to record loss and loss adjustments expense for
workers' compensation to the aggregate stop-loss attachment point of its
reinsurance.
Acquisition Expenses. Policy acquisition expenses increased 51.6% from
$213,000 in the quarter ended March 31, 1998 to $323,000 in the quarter ended
March 31, 1999 as a result of
12
<PAGE>
increased premiums production and the Company's new reinsurance program for
surety business which eliminated ceding commissions that previously reduced the
expense.
Payroll and Other Expenses. Payroll and other expenses increased
51.1% from $960,000 in the quarter ended March 31, 1998 to $1,451,000 in the
quarter ended March 31, 1999 as a result of salary and benefit and operating
expense increases primarily due to increased staffing for new and existing
programs.
Income Taxes. Federal and state income taxes decreased from $54,000
in the quarter ended March 31, 1998 to a benefit of $46,000 in the quarter ended
March 31, 1999 due to additional premiums being ceded to the Company's Bermuda
reinsurance subsidiary and investment income earned in Bermuda.
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
Net Premiums Earned. Net premiums earned increased 32.2% from $1.6
million in the quarter ended March 31, 1997 to $2.1 million in the quarter ended
March 31, 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 40.1% from $1.0 million in the quarter
ended March 31, 1997 period to $1.46 million in the quarter ended March 31,
1998. This increase was a result of additional premiums from new insureds in
this line of business.
General liability reinsurance premiums remained substantially the
same, from $451,000 in the quarter ended March 31, 1997 to $441,000 in the
quarter ended March 31, 1998. In the Company's primary insurance business, new
premiums earned from the Company's U.S. insurance subsidiary's surety program
increased 116.6% from $87,000 in the quarter ended March 31, 1997 to $188,000 in
the quarter ended March 31, 1998 as a result of new accounts written.
Net Investment Income. Net investment income increased 88.3% from
$333,000 in the quarter ended March 31, 1997 to $627,000 in the quarter ended
March 31, 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 6.6% in
the quarter ended March 31, 1997 and 5.6% in the quarter ended March 31, 1998.
The average annual after-tax yield on investments was 5.8% in the quarter ended
March 31, 1997 and 5.1% in the quarter ended March 31, 1998.
Interest from Notes Receivable. Interest from notes receivable
decreased 3.61% from $278,000 in the quarter ended March 31, 1997 to $268,000 in
the quarter ended March 31, 1998.
Brokerage Commission Income. Income from insurance brokerage
operations decreased 37.8% from $617,000 in the quarter ended March 31, 1997 to
$384,000 in the quarter ended March 31, 1998 because the Company initiated a
substantial rent-a-captive program in January 1997 for an 18 month term.
Management Fees. Management fees increased 37.9% from $124, 000 in
the quarter ended March 31, 1997 to $171,000 in the quarter ended March 31, 1998
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
increased from $6,000 in the quarter ended March 31, 1997 to $37,000 in the
quarter ended March 31, 1998.
Losses and Loss Adjustment Expenses. Losses and loss adjustment
expenses increased 31.8% from $1.0 million in the quarter ended March 31, 1997
to $1.3 million in the quarter ended March 31, 1998 due to the 32.2% increase in
net premiums earned and a corresponding increase in reserves primarily due to
the increase in the workers' compensation line of business.
Acquisition Expenses. Policy acquisition expenses increased 36.0%
from $157,000 in the quarter ended March 31, 1997 to $213,000 in the quarter
ended March 31, 1998 as a result of increased premiums.
13
<PAGE>
Payroll and Other Expenses. Payroll and other expenses increased
33.0% from $722,000 in the quarter ended March 31, 1997 to $960,000 in the
quarter ended March 31, 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 $193,000 in the
quarter ended March 31, 1997 to $54,000 in the quarter ended March 31, 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 and to stabilize demands on its liquidity. The Company has
repurchased 16,200 common shares in the open market, to date, pursuant to its
stock repurchase program.
On a consolidated basis, net cash provided from operations was $1.4
million for the quarter ended March 31, 1998 and $1.4 million for the quarter
ended March 31, 1999. 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 $86.1 million at December 31, 1998 to
$92.1 million at March 31, 1999, primarily due to increases in premiums
receivable, reinsurance recoverable and real estate investments. Cash, invested
assets and notes receivable decreased from $72.0 million at December 31, 1998 to
$70.6 million at March 31, 1999.
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.
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 March 31, 1999, 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
14
<PAGE>
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.
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.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. If not
corrected, computer applications could fail or create erroneous results by or at
the Year 2000. The Company, together with consulting outside vendors, has
reviewed its information technology systems (i.e., underwriting, insureds,
claims and accounting) and believes that the systems will process date
information accurately and without interruption when required to process dates
in the year 1999 and beyond.
In the context of Year 2000 issues, the Company has identified the
following general categories of business partners as material to the Company's
ability to conduct its operations: software, hardware and telecommunication
providers, banks and investment managers, insurance brokers, agents and
producers, reinsurers and reinsurance intermediaries and utilities. The Company
has been in contact with its material business partners to determine their state
of readiness with regard to Year 2000 compliance and the potential impact on the
Company. Based on the information available to the Company, the Company has not
currently identified a material business partner that will not be compliant with
respect to Year 2000 issues. However, there can be no assurance that such
material business partners will be Year 2000 compliant, and such noncompliance
could have a material affect on the Company's financial condition and results of
operations.
The Company has conducted a review of its underwriting guidelines and
policies, and has determined that the insurance policies issued by the Company
did not insure Year 2000 claims. However, changing social and legal trends may
create unintended coverage for claims by reinterpreting insurance contracts and
exclusions. It is impossible to predict what, if any, exposure insurance
companies may ultimately have for Year 2000 claims whether coverage for the
issue was specifically excluded or included.
The Company anticipates that its information technology systems will
be Year 2000 compliant on or before June 30, 1999. The Company's contingency
plan for any Year 2000 noncompliance of its information technology systems
involves the manual entering and outputting of business records. The Company
believes it has sufficient employees and other staff available to maintain its
current level of customer service. To date, the Company has spent less than
$100,000 on hardware and software relating to Year 2000 compliance and the
Company does not anticipate any significant additional expenditures with respect
to the Year 2000 issue.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
The Company's market risk has not changed materially since December
31, 1998.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Report:
Exhibit No. Description
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the period
covered by this Report.
16
<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 May 1999.
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)
17
Exhibit 11
American Safety Insurance Group, Ltd. and subsidiaries
Computation of Earnings Per Share
Three Months Ended
March 31 March 31
1998 1999
-------- --------
Basic:
Earnings Available to Common
Shareholders....................................... $1,023,733 $1,719,178
========== ==========
Weighted Average Common Shares
Outstanding........................................ 4,429,730 6,077,750
Basic Earnings Per Common Shares .................. $ .23 $ .28
========== ==========
Diluted:
Earnings Available to Common
Shareholders....................................... $1,023,733 $1,719,178
========== ==========
Weighted Average Common Shares
Outstanding........................................ 4,429,730 6,077,750
Weighted Average Common Shares
Equivalents Associated with Options 80,725 30,791
Total Weighted Average Common
Shares............................................. 4,510,455 6,108,541
========= =========
Diluted Earnings per Common Shares $ .23 $ .28
========== ==========
18
<PAGE>
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<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 43,878
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,383
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<TOTAL-INVEST> 50,009
<CASH> 2,398
<RECOVER-REINSURE> 3,942
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<TOTAL-ASSETS> 92,083
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<UNEARNED-PREMIUMS> 5,039
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0
0
<COMMON> 61
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<INCOME-TAX> (46)
<INCOME-CONTINUING> 1,719
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<NET-INCOME> 1,719
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<EPS-DILUTED> .28
<RESERVE-OPEN> 14,700
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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<RESERVE-CLOSE> 16,140
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</TABLE>
