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, 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 August 10, 1999 was 6,045,200.
<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............................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 17
Item 2. Changes in Securities and Use of Proceeds.................... 17
Item 3. Defaults Upon Senior Securities.............................. 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
Item 5. Other Information............................................ 17
Item 6. Exhibits and Reports on Form 8-K............................. 17
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
American Safety Insurance Group, Ltd. and Subsidiaries
<TABLE>
Consolidated Balance Sheets
<CAPTION>
December 31, June 30,
Assets 1998 1999
------ ------------ ---------
(unaudited)
<S> <C> <C>
Investments:
Securities available for sale,
at fair value:
Fixed maturities $45,308,326 $43,457,434
Common stock 3,453,123 4,514,068
Investment in real estate - 10,234,943
Short-term investments 2,286,320 2,615,268
----------- -----------
Total investments 51,047,769 60,821,713
Cash 4,737,132 535,445
Accrued investment and interest
income 2,441,857 2,318,148
Notes receivable:
Related parties 280,000 -
Other 15,939,894 11,361,494
Premiums receivable 5,838,567 10,240,048
Commissions receivable 22,569 301,505
Ceded unearned premium 1,742,021 1,758,027
Reinsurance recoverable 1,840,884 2,447,438
Due from affiliate 668,074 11,497
Income tax recoverable 277,292 360,838
Deferred income taxes 362,951 556,191
Property, plant and equipment 185,807 1,074,890
Goodwill 252,239 243,353
Fund held by reinsureds - 298,000
Other assets 510,416 653,894
----------- -----------
Total assets $86,147,472 $92,982,481
=========== ===========
Liabilities and Shareholders'
Equity
Liabilities:
Unpaid losses and loss adjustment
expenses $14,700,473 $17,591,996
Unearned premiums 3,894,568 5,131,720
Liability for deductible fees held 244,998 -
Reinsurance on paid loss and loss
adjustment expenses 380,858 850,634
Reinsurance deposits on retroactive
contract 332,430 130,402
Ceded premiums payable 4,382,922 4,699,189
Due to affiliate:
Ceded premiums payable 201,778 530,761
Reinsurance on paid loss and loss
adjustment expenses 52,151 213,891
Accounts payable and accrued expenses 2,688,001 2,193,768
Collateral held - 328,728
----------- -----------
Total liabilities 26,878,179 31,671,089
----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value;
authorized5,000,000 shares; no
shares issued andoutstanding
Common stock, $0.01 par value;
authorized 15,000,000 shares;
issued and outstanding at
December 31, 1998, 6,074,770
shares, and at June 30, 1999,
6,061,550 shares 60,747 60,777
Treasury Stock - (114,354)
Additional paid-in capital 33,809,141 33,810,387
Retained earnings 24,705,471 27,866,046
Other comprehensive income 693,934 (311,464)
----------- -----------
Total shareholders' equity 59,269,293 61,311,392
----------- -----------
Total liabilities and
shareholders' equity $86,147,472 $92,982,481
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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American Safety Insurance Group, Ltd. and Subsidiaries
<TABLE>
Consolidated Statements of Earnings
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- -------------------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Direct premiums earned $ 997,178 $1,703,655 $2,035,202 $3,113,706
Assumed premiums earned:
Affiliate 872,634 773,437 1,413,993 1,584,153
Nonaffiliates 1,501,534 2,208,279 3,040,990 3,787,280
--------- --------- --------- ---------
Total assumed
premiums earned 2,374,168 2,981,716 4,454,983 5,371,433
--------- --------- --------- ---------
Ceded premiums earned:
Affiliate 718,524 912,709 1,434,117 2,003,404
Nonaffiliates 468,104 172,281 778,520 426,570
--------- --------- --------- ---------
Total ceded premiums earned 1,186,628 1,084,990 2,212,637 2,429,974
--------- --------- --------- ---------
Net premiums earned 2,184,718 3,600,381 4,277,548 6,055,165
--------- --------- --------- ---------
Net investment income 855,121 714,430 1,481,770 1,413,765
Interest on notes receivable 427,403 581,460 695,618 1,507,562
Brokerage commission income 276,909 63,367 660,950 494,234
Management fees from affiliate 195,787 176,802 366,536 356,035
Net realized gains (losses) 57,933 98,975 95,079 97,857
Other income 4,883 382,528 11,583 461,049
--------- --------- --------- ----------
Total revenues 4,002,754 5,617,943 7,589,084 10,385,667
--------- --------- --------- ----------
Expenses:
Losses and loss adjustment expenses
incurred 1,135,975 2,100,175 2,471,152 3,419,530
Acquisition expenses 206,840 347,972 420,219 671,416
Payroll and related expenses 829,925 1,339,051 1,632,663 2,342,687
Other expenses 262,766 497,609 419,832 945,450
--------- --------- --------- ---------
Total expenses 2,435,506 4,284,807 4,943,866 7,379,083
--------- --------- --------- ---------
Earnings before income taxes 1,567,248 1,333,136 2,645,218 3,006,584
Income taxes (14,579) (108,261) 39,658 (153,991)
--------- ---------- --------- ----------
Net earnings $1,581,827 $1,441,397 $2,605,560 $3,160,575
---------- ---------- ---------- ----------
Net earnings per share:
Basic $ 0.26 $ 0.24 $ 0.50 $ 0.52
========== ========= ========== ==========
Diluted $ 0.26 $ 0.24 $ 0.49 $ 0.52
========== ========= ========== ==========
Common shares used in
computing earnings per share:
Basic $6,044,914 $6,064,010 $5,241,784 $6,070,823
========== ========== ========== ==========
Diluted $6,175,150 $6,087,809 $5,347,401 $6,099,941
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
<TABLE>
Consolidated Statements of Cash Flow
(Unaudited)
<CAPTION>
Six months ended
June 30,
--------
1998 1999
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net earnings $ 2,605,560 $ 3,160,575
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Realized losses (gains) on sale of investments (95,079) (98,975)
Amortization of deferred acquisition costs 244,180 534,709
Change in:
Accrued investment and interest income (799,684) (856,411)
Premiums receivable (552,268) (4,401,481)
Commissions receivable (41,011) (278,936)
Reinsurance recoverable and ceded unearned premiums (246,775) (622,560)
Funds held by reinsured - (298,000)
Due from affiliate (59,490) 656,577
Income taxes (31,469) (276,786)
Unpaid losses and loss adjustment expenses 1,193,359 2,891,523
Unearned premiums 1,378,934 1,237,152
Liability for deductible fees held (1,327,424) (447,026)
Ceded premiums payable (1,719,106) 316,267
Due to affiliate 438,200 490,723
Accounts payable and accrued expenses 695,539 (494,233)
Collateral - 328,728
Other, net (713,879) (12,207)
----------- -----------
Net cash provided by operating activities 1,019,587 1,829,639
---------- ----------
Cash flow from investing activities:
Purchases of fixed maturities (60,751,975) (2,773,345)
Purchases of Equity Investments (2,304,221) (787,292)
Proceeds from maturity and redemption of fixed maturities 3,941,489 1,050,645
Proceeds from sale of fixed maturities 35,103,718 2,103,289
Proceeds from sale of common stock 728,472 1,062
Increase in short-term investments (967,344) (328,948)
Decrease (increase) in notes receivable - related parties - 280,000
Decrease (increase) in notes receivable - other (7,881,016) (4,584,376)
Purchase of fixed assets, net (22,942) (879,283)
------------ -----------
Net cash used in investing activities (32,153,819) (5,918,248)
------------ -----------
Cash flow from financing activities:
Proceeds from sale of common stock 31,102,975 1,276
Purchase of treasury stock - (114,354)
---------- -----------
Net cash used in financing activities 31,102,975 (113,078)
---------- -----------
Net increase (decrease) in cash (31,257) (4,201,687)
Cash at beginning of period 2,768,831 4,737,132
---------- ----------
Cash at end of period $2,737,574 $ 535,445
========== ==========
NONCASH ITEMS Operating activities:
Change in accrued interest income - 980,120
Investing activities:
Decrease in notes receivable-other 9,162,777
Purchase of real estate - (10,142,897)
Financing activities:
No activity - -
---------- -----------
Net noncash adjustments - -
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
<TABLE>
Consolidated Statements of Comprehensive Earnings
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------- ------------------------------------------
1998 1999 1998 1999
----------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Net earnings $1,581,827 $1,441,397 $2,605,560 $3,160,575
Other comprehensive earnings before
income taxes:
Unrealized gains (losses) on securities
available for sale (4,017) (538,553) (109,013) (1,122,885)
Reclassification adjustment for
realized gains included in net
earnings 57,933 6,929 95,079 5,811
--------- ------- --------- ---------
Total other comprehensive earnings
(loss) before taxes 53,916 (531,624) (13,934) (1,117,074)
Income tax expense (benefit) related to
items of comprehensive income 17,848 (87,668) (24,435) (111,676)
--------- --------- ---------- -----------
Other comprehensive earnings (loss)
net of income taxes 71,764 (443,956) 10,501 (1,005,398)
--------- --------- --------- -----------
Total comprehensive earnings $1,653,591 $997,441 $2,616,061 $2,155,177
========= ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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<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, 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, 2000. 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 consolidated financial position and results of
operations.
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<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 consolidated 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 its Bermuda subsidiary'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
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<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.
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 June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Amount at
which shown
Gross Gross in the
Amortized unrealized unrealized Estimated balance
Cost gains losses fair value 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
========== ========= ======= ========== ==========
June 30, 1999:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies 14,227,113 35,478 385,012 13,877,579 13,877,579
Obligations of states and
political subdivisions 6,549,915 84,658 66,042 6,568,531 6,568,531
Corporate securities 17,751,445 6,508 300,728 17,457,225 17,457,225
Mortgage-backed securities 5,625,773 3,189 74,863 5,554,099 5,554,099
---------- ------- ------- ---------- ----------
Total fixed maturities 44,154,246 129,833 826,645 43,457,434 43,457,434
Equity investments - common stocks 4,140,726 373,342 - 4,514,068 4,514,068
---------- ------- ------- ---------- ----------
Total $48,294,972 503,175 826,645 47,971,502 47,971,502
========== ======= ======= ========== ==========
</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.
Effective February 1, 1999, the Company's Board of Directors
authorized a share repurchase program. During the quarter, the Company purchased
16,200 shares of its stock at a total price of $114,354. This stock was
purchased in open market transactions.
Note 6 - Notes Receivable
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
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<PAGE>
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 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 through
June 30, 1999, a total of $8,701,955 in the Project Loan and the Property. As a
result of the Developer's default on the Project Loan, the Company's operating
results for the quarter ended June 30, 1999 were reduced by approximately
$250,000 in interest on notes receivable (or $0.04 per share).
American Safety Re has entered into a contract to sell the Property
which is subject to customary real estate contract contingencies. The Property
was 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 and financial services
holding company which, through its subsidiaries, develops, underwrites, manages
and markets primary casualty insurance and reinsurance programs in the
alternative insurance market for environmental remediation risks, employee
leasing and staffing industry risks, and other specialty risks, as well as
providing a broad range of financial services and products to middle market
businesses. 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
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<PAGE>
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 consolidated 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. 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>
<CAPTION>
Three Six
Months Months
Three Months Six Months Ended Ended
Ended June 30, Ended June 30, June 30 June 30
-----------------------------------------------------------------------------
1998 to 1998 to
1998 1999 1998 1999 1999 1999
-----------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Premiums earned:
Reinsurance:
Workers' compensation $1,427 $1,807 $2,891 $3,202 26.6% 10.8%
General liability from affiliate 675 1,171 1,116 1,814 73.5 62.5
Auto Liability - 9 - 22
------ ------ ------ -----
Total reinsurance 2,102 2,987 4,007 $5,038 42.1 25.7
Primary insurance:
Surety 83 613 271 1,017 638.6 275.3
------ ------ ------ ------
Total primary insurance 83 613 271 1,017 638.6 275.3
------ ------ ------ ------
Total net premiums earned 2,185 3,600 4,278 6,055 64.8 41.5
------ ------ ------ ------
Net investment income 855 715 1,482 1,414 (16.4) (4.6)
Interest on notes receivable 428 582 696 1,508 36.0 116.7
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Commission and fee income: 277 63 661 494 (77.3) (25.3)
Brokerage commission income 195 177 366 356 (9.2) (2.7)
----- ------ ------ ------
Management fees from affiliate 472 240 1,027 850 (49.2) (17.2)
Total commission and fee income ----- ------ ------ ------
Net realized gains (losses) 58 99 95 98 70.7 3.2
Other income 5 382 11 461 7,540.0 4,090.9
------ ------ ----- ------
Total Revenues $4,003 $5,618 $7,589 $10,386 40.3% 36.9%
------ ------ ------ ------
</TABLE>
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 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Insurance operations:
Loss and loss adjustment expense ratio 51.4% 52.0% 58.3% 57.0% 57.8% 56.5%
Expense ratio 29.7 12.4 13.7 20.3 11.4 14.8
----- ----- ----- ----- ----- -----
Combined ratio 81.1% 64.4% 72.0% 77.3% 69.2% 71.3%
----- ----- ----- ----- ----- -----
</TABLE>
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Net Premiums Earned. Net premiums earned increased 64.8% from $2.2
million in the quarter ended June 30, 1998 to $3.6 million in the quarter ended
June 30, 1999. The principal factor accounting for the increase was the
Company's assumption of general liability reinsurance business from an
affiliated insurance company, which increased by 73.5% from $675,000 in the
quarter ended June 30, 1998 to $1.2 million in the quarter ended June 30, 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 638.6% from $83,000 in the quarter ended June 30,
1998 to $613,000 in the quarter ended June 30, 1999. The increase in surety is
attributable to additional premiums from new business and the Company's new
reinsurance program.
Net Investment Income. Net investment income decreased 16.4% from
$855,000 in the quarter ended June 30, 1998 to $715,000 in the quarter ended
June 30, 1999 due to a reduction in the investment portfolio, as a result of
additional investments in notes receivable. The average annual pre-tax yield on
investments was 6.0% in the quarter ended June 30, 1998 and 5.6% in the quarter
ended June 30, 1999. The average annual after-tax yield on investments was 5.6%
in the quarter ended June 30, 1998 and 5.4% in the quarter ended June 30, 1999.
Interest from Notes Receivable. Interest from notes receivable
increased 36.0% from $428,000 in the quarter ended June 30, 1998 to $582,000 in
the quarter ended June 30, 1999 as a result of increases in outstanding notes
receivable. See Note 6 to consolidated financial statements (unaudited).
Brokerage Commission Income. Income from insurance brokerage
operations decreased 77.3% from $277,000 in the quarter ended June 30, 1998 to
$63,000 in the quarter ended June 30, 1999 as a result of lower production in
our agency business resulting from a change in personnel.
Management Fees. Management fees decreased 9.2% from $195,000 in the
quarter ended June 30, 1998 to $177,000 in the quarter ended June 30, 1999 as a
result of decreased services provided by the Company to its risk retention group
affiliate.
Net Realized Gains (Losses). Net realized gains increased 70.7% from
$58,000 in the quarter ended June 30,1998 to $98,000 for the quarter ended June
30, 1999.
Other Income. Other income increased from $5,000 in the quarter ended
June 30, 1998 to $383,000 for the quarter ended June 30, 1999 as a result the
Company's new financial services subsidiary, which is engaged in the business of
arranging third-party financing for a fee.
-12-
<PAGE>
Losses and Loss Adjustment Expenses. Losses and loss adjustment
expenses increased 84.9% from $1.14 million in the quarter ended June 30, 1998
to $2.1 million in the quarter ended June 30, 1999 primarily due to an increase
in net premiums earned. Increases in workers' compensation premiums accounted
for the largest portion of the increase in the losses and loss adjustment
expenses, as that line of business has a higher loss ratio than the general
liability or surety lines of business. The Company continues to record loss and
loss adjustment expenses for workers' compensation to the aggregate stop-loss
attachment point of its reinsurance.
Acquisition Expenses. Policy acquisition expenses increased 68.2%
from $207,000 in the quarter ended June 30, 1998 to $348,000 in the quarter
ended June 30, 1999 as a result of 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
68.1% from $1.1 million in the quarter ended June 30, 1998 to $1.8 million in
the quarter ended June 30, 1999 as a result of increases in salary, benefits and
operating expense primarily due to increased staffing for new and existing
programs combined with operating expenses from the Company's new financial
services subsidiary.
Income Taxes. Federal and state income taxes decreased from a benefit
of $15,000 in the quarter ended June 30, 1998 to a benefit of $108,000 in the
quarter ended June 30, 1999 due to decreased taxable income in the Company's
U.S. insurance subsidiary.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net Premiums Earned. Net premiums earned increased 41.5% from $4.3
million in the six months ended June 30, 1998 to $6.1 million in the six months
ended June 30, 1999. The principal factor accounting for the increase was the
Company's assumption of general liability reinsurance business from an
affiliated insurance company, which increased net premiums by 62.5% from $1.1
million in the six months ended June 30, 1998 to $1.8 million in the six months
ended June 30, 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 275.3% from $271,000 in the
six months ended June 30, 1998 to $1.0 million in the six months ended June 30,
1999. This increase is attributable to additional premiums from new business and
the Company's new reinsurance program.
Net Investment Income. Net investment income decreased 4.6% from
$1.48 million in the six months ended June 30, 1998 to $1.41 million in the six
months ended June 30, 1999 due to a reduction in the investment portfolio, as a
result of additional investments in notes receivable. The average annual pre-tax
yield on investments was 7.1% in the six months ended June 30, 1998 and 5.6% in
the six months ended June 30, 1999. The average annual after-tax yield on
investments was 6.5% in the six months ended June 30, 1998 and 5.3% in the six
months ended June 30, 1999.
Interest from Notes Receivable. Interest from notes receivable
increased 116.7% from $696,000 in the six months ended June 30, 1998 to $1.5
million in the six months ended June 30, 1999 as a result of increases in
outstanding notes receivable. See Note 6 to consolidated financial statements
(unaudited).
Brokerage Commission Income. Income from insurance brokerage
operations decreased 25.3% from $661,000 in the six months ended June 30, 1998
to $494,000 in the six months ended June 30, 1999 as a result of lower
production in our agency business resulting from a change in personnel.
Management Fees. Management fees decreased 2.7% from $366, 000 in the
six months ended June 30, 1998 to $356,000 in the six months ended June 30, 1999
as a result of decreased service levels provided by the Company to its risk
retention group affiliate.
Net Realized Gains. Net realized gains (losses) increased 3.2% from a
gain of $95,000 in the six months ended June 30, 1998 to a gain of $98,000 in
the six months ended June 30, 1999.
Other Income. Other income increased from $11,000 in the six months ended
June 30, 1998 to $461,000 for the six months ended June 30, 1999 as a result of
the Company's new financial
-13-
<PAGE>
services subsidiary which is engaged in the business of arranging third-party
financing for a fee.
Losses and Loss Adjustment Expenses. Losses and loss adjustment
expenses increased 38.4% from $2.5 million in the six months ended June 30, 1998
to $3.4 million in the six months ended June 30, 1999 primarily due to an
increase in net premiums earned. Increases in workers' compensation premiums
accounted for the largest portion of the increase in the losses and loss
adjustment expenses, as that line of business has a higher loss ratio than the
general liability or surety lines of business. The Company continues to record
loss and loss adjustment expenses for workers' compensation to the aggregate
stop-loss attachment point of its reinsurance.
Acquisition Expenses. Policy acquisition expenses increased 59.8%
from $420,000 in the six months ended June 30, 1998 to $671,000 in the six
months ended June 30, 1999 as a result of 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
60.2% from $2.1 million in the six months ended June 30, 1998 to $3.3 million in
the six months ended June 30, 1999 as a result of increases in salary, benefits
and operating expense primarily due to increased staffing for new and existing
programs combined with operating expenses from the Company's new financial
services subsidiary.
Income Taxes. Federal and state income taxes decreased from $40,000
in the six months ended June 30, 1998 to a benefit of $154,000 in the six months
ended June 30, 1999 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 33,950 common shares in the open market, through August 11, 1999,
pursuant to its stock repurchase program.
On a consolidated basis, net cash provided from operations was $1.0
million for the six months ended June 30, 1998 and $1.8 million for the six
months ended June 30, 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
$93.0 million at June 30, 1999, primarily due to increases in premiums
receivable, reinsurance recoverable and real estate investments and slightly
offset by a decrease in notes receivable. Cash, invested assets and notes
receivable increased from $72.0 million at December 31, 1998 to $72.7 million at
June 30, 1999.
American Safety is an insurance and financial services 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
-14-
<PAGE>
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 June 30, 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 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.
-15-
<PAGE>
The Company anticipates that its information technology systems will
be Year 2000 compliant on or before September 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.
[The remainder of this page is intentionally left blank.]
-16-
<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.
The Annual General Meeting of Shareholders of the Company was
held on June 25, 1999 in Hamilton, Bermuda. Proxies for the
Annual General Meeting were solicited by the Board of Directors
pursuant to applicable Bermuda law. The Company's shareholders
elected Lloyd A. Fox and David V. Brueggen as directors to serve
three year terms expiring at the Annual General Meeting of
Shareholders in 2002. The votes for the directors totaled
5,819,845 and 5,780 votes withheld authority to elect the
directors. In addition, the Company's shareholders ratified the
appointment of KPMG, LLP as the independent public accountants
for the Company's fiscal year ending December 31, 1999. The votes
for such ratification totaled 5,815,668, with 2,630 votes against
and 7,330 votes abstaining.
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.
The Company filed a Form 8-K on April 19, 1999 regarding
American Safety Reinsurance, Ltd.'s obtaining a judgment and
foreclosure of a secured loan for the planned development of
condominium units, marina, yacht club, beach club and a par 3
golf course on 172 acres located in Ponce Inlet, Florida.
-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 13th day of August 1999.
American Safety Insurance Group, Ltd.
By: /s/
Lloyd A. Fox
President and Chief Executive Officer
By: /s/
Steven B. Mathis
Chief Financial Officer
(Principal Financial Officer)
-18-
<PAGE>
Exhibit 11
American Safety Insurance Group, Ltd. and subsidiaries
<TABLE>
Computation of Earnings Per Share
<CAPTION>
Three Months Ended Six Months Ended
-------------------- -----------------
June 30 June 30 June 30 June 30
1998 1999 1998 1999
------ ------ ------ -----
<S> <C> <C> <C> <C>
Basic:
Earnings Available to Common
Shareholders................................. $1,581,827 $1,441,397 $2,605,560 $3,160,575
========== ========== ========== ==========
Weighted Average Common Shares
Outstanding.................................. 6,044,914 6,064,010 5,241,784 6,070,823
Basic Earnings Per Common
Shares ...................................... $ .26 $ .24 $ .50 $ .52
========== ========== ========== ==========
Diluted:
Earnings Available to Common
Shareholders................................. $1,581,827 $1,441,397 $2,605,560 $3,160,575
========== ========== ========== ==========
Weighted Average Common Shares
Outstanding.................................. 6,044,914 6,064,010 5,241,784 6,070,823
Weighted Average Common Shares
Equivalents Associated with
Options...................................... 130,236 23,799 105,617 29,118
Total Weighted Average Common
Shares....................................... 6,175,150 6,087,809 5,347,401 6,099,941
========== ========= ========= =========
Diluted Earnings per Common
Shares....................................... $ .26 $ .24 $ .49 $ .52
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 43,457
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,514
<MORTGAGE> 0
<REAL-ESTATE> 10,235
<TOTAL-INVEST> 60,822
<CASH> 535
<RECOVER-REINSURE> 4,205
<DEFERRED-ACQUISITION> 112
<TOTAL-ASSETS> 92,982
<POLICY-LOSSES> 17,592
<UNEARNED-PREMIUMS> 5,132
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 61
<OTHER-SE> 61,251
<TOTAL-LIABILITY-AND-EQUITY> 92,982
3,600
<INVESTMENT-INCOME> 714
<INVESTMENT-GAINS> 99
<OTHER-INCOME> 383
<BENEFITS> 2,100
<UNDERWRITING-AMORTIZATION> 348
<UNDERWRITING-OTHER> 1,837
<INCOME-PRETAX> 1,333
<INCOME-TAX> (108)
<INCOME-CONTINUING> 1,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,441
<EPS-BASIC> .24
<EPS-DILUTED> .24
<RESERVE-OPEN> 13,948
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 15,145
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
