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, 2000
Commission File Number 1-14795
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other (I.R.S. Employer
jurisdiction Identification
of incorporation) 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 11, 2000 was 5,381,386.
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..........................................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................15
Item 3. Quantitative and Qualitative Disclosures About
Market Risks................................................24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................25
Item 2. Changes in Securities and Use of Proceeds.....................25
Item 3. Defaults Upon Senior Securities...............................25
Item 4. Submission of Matters to a Vote of Security Holders...........25
Item 5. Other Information.............................................25
Item 6. Exhibits and Reports on Form 8-K..............................26
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31, June 30,
1999 2000
------ -----
Assets (unaudited)
Investments:
Securities available for sale, at fair value:
<S> <C> <C>
Fixed maturities $40,694,556 $39,664,373
Common stock 163,968 821,511
Investment in real estate 12,039,842 13,355,385
Short-term investments 6,679,791 4,769,232
----------- -----------
Total investments 59,648,157 58,610,501
Cash 427,154 6,609,421
Accrued investment and interest income 2,783,663 3,371,782
Notes receivable:
Related parties 1,700,000 -
Other 11,255,264 12,264,630
Premiums receivable 12,239,544 19,119,757
Commissions receivable 5,948 22,792
Funds on deposit 353,407 352,663
Ceded unearned premium 4,591,075 8,315,405
Reinsurance recoverable 6,065,502 8,522,684
Due from affiliate 2,088,748 760,647
Income tax recoverable - 113,850
Deferred income taxes 733,227 2,383,766
Deferred acquisition costs 274,701 1,183,148
Property, plant and equipment 1,234,294 1,457,510
Prepaid Items 604,537 2,270,917
Goodwill 234,467 1,597,481
Other as 113,846 1,620,981
---------- -----------
Total assets $104,353,534 $128,577,935
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Unpaid loss and loss adjustment expenses $ 20,413,236 $ 24,903,442
Unearned premiums 9,496,342 18,164,095
Reinsurance on paid loss and loss adjustment expenses 1,419,536 -
Reinsurance deposits on retroactive contract 48,375 -
Ceded premiums payable 6,739,068 15,238,897
Due to affiliate:
Ceded premiums payable 1,636,207 42,000
Reinsurance on paid loss and loss adjustment
expenses 79,198 135,235
Deposits - 4,294,839
Accounts payable and accrued expenses 1,893,470 4,905,968
Funds held 357,509 939,256
Loan payable - 1,375,584
Collateral held 1,208,976 1,412,961
Income tax payable 22,857 -
----------- -----------
Total liabilities 43,314,774 71,412,277
---------- -----------
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
Assets December 31, June 30,
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 5,000,000 shares; no
<S> <C> <C>
shares issued and outstanding - -
Common stock, $0.01 par value; authorized 15,000,000 shares;
issued and outstanding at December 31, 1999, 6,077,750
shares, and at June 30, 2000, 6,281,386 shares 60,777 62,814
Additional paid-in capital 33,810,387 35,148,577
Retained earnings 30,625,739 28,184,889
Accumulated other comprehensive income, net (1,288,804) (877,350)
Treasury Stock, 300,000 shares at December 31, 1999 and 900,000
shares at June 30, 2000 (2,169,339) (5,353,272)
----------- -----------
Total shareholders' equity 61,038,760 57,165,658
----------- -----------
Total liabilities and
shareholders' equity $104,353,534 $128,577,935
============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
-2-
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Direct premiums earned $ 1,703,655 $ 5,217,079 $ 3,113,706 $ 9,372,912
Assumed premiums earned:
Affiliate 773,437 1,232,805 1,584,153 2,228,541
Nonaffiliates 2,208,279 3,016,536 3,787,280 5,671,582
----------- ----------- ----------- -----------
Total assumed premiums earned 2,981,716 4,249,341 5,371,433 7,900,123
----------- ----------- ----------- -----------
Ceded premiums earned:
Affiliate 912,709 1,203,557 2,003,404 2,049,645
Nonaffiliates 172,281 2,206,330 426,570 3,864,279
------------ ----------- ----------- -----------
Total ceded premiums earned 1,084,990 3,409,887 2,429,974 5,913,924
----------- ----------- ----------- -----------
Net premiums earned 3,600,381 6,056,533 6,055,165 11,359,111
----------- ----------- ----------- ----------
Net investment income 714,430 604,905 1,413,765 1,334,007
Interest on notes receivable 581,460 440,375 1,507,562 874,969
Brokerage commission income 63,367 722,128 494,234 952,638
Management fees from affiliate 384,454 351,346 725,588 718,346
Net realized gains (losses) 98,975 (79,664) 97,857 (205,711)
Other income 382,528 42,244 461,049 698,406
----------- ------------ ---------- ----------
Total revenues 5,825,595 8,137,867 10,755,220 15,731,766
----------- ----------- ---------- ----------
Expenses:
Loss and loss adjustment expenses
incurred 2,100,175 4,023,727 3,419,530 6,820,826
Acquisition expenses 347,972 1,247,401 671,416 2,782,831
Payroll and related expenses 1,339,051 1,953,834 2,342,687 3,582,058
Other expenses 705,261 1,696,065 1,315,003 2,806,375
Expense due to rescission - - - 3,541,848
----------- ------------ ------------ -----------
Total expenses 4,492,459 8,921,027 7,748,636 19,533,938
----------- ------------ ----------- ----------
Earnings before income taxes 1,333,136 (783,160) 3,006,584 (3,802,172)
Income taxes (108,261) (291,063) (153,991) (1,361,322)
----------- ------------- ----------- -----------
Net earnings (loss) $1,441,397 $(492,097) $3,160,575 $(2,440,850)
----------- ------------- ---------- ------------
Net earnings per share:
Basic $ 0.24 $ (0.09) $ 0.52 $ (0.43)
========= =========== ========== ===========
Diluted $ 0.24 $ (0.09) $ 0.52 $ (0.43)
========= =========== ========== ===========
Common shares used in computing
earnings per share:
Basic 6,064,010 5,525,804 6,070,823 5,726,229
========= ========= ========= =========
Diluted 6,087,809 5,525,804 6,099,941 5,728,900
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
-3-
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 2000
---- ----
Cash flow from operating activities:
<S> <C> <C>
Net earnings $ 3,160,575 $(2,440,850)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Realized losses on sale of investments (98,975) 205,711
Amortization (deferral) of acquisition costs 534,709 (908,447)
Change in:
Accrued investment and interest income (856,411) (588,119)
Premiums receivable (4,401,481) (6,880,213)
Commissions receivable (278,936) (16,844)
Escrow Deposits - 4,294,839
Reinsurance recoverable and ceded unearned premiums (622,560) (7,601,048)
Funds held by reinsured (298,000) 581,747
Due from affiliate 656,577 1,328,101
Income taxes (276,786) (1,787,246)
Unpaid losses and loss adjustment expenses 2,891,523 4,490,206
Unearned premiums 1,237,152 8,667,753
Liability for deductible fees held (447,026) (48,375)
Ceded premiums payable 316,267 8,499,829
Due to affiliate 490,723 (1,538,170)
Accounts payable and accrued expenses (494,233) 3,012,498
Collateral 328,728 203,985
Prepaid items - (1,496,380)
Other, net (12,207) 285,430
---------- -----------
Net cash provided by operating activities 1,829,639 8,264,407
---------- -----------
Cash flow from investing activities:
Purchases of fixed maturities (2,773,345) (47,267)
Purchases of Equity Investments (787,292) (5,350,818)
Proceeds from maturity and redemption of fixed
maturities 1,050,645 150,242
Proceeds from sale of fixed maturities 2,103,289 6,531,178
Proceeds of sale of common stock 1,062 4,601,317
Purchase of Trafalgar Insurance Company - (7,050,877)
Decrease (increase) in short-term investments (328,948) 1,910,559
Proceeds from notes receivable - related parties 280,000 1,530,000
Advances in notes receivable - other (4,584,376) (1,009,366)
Increase in investment in real estate - (1,315,543)
Purchase of fixed assets, net (879,283) (223,216)
----------- -----------
Net cash used in investing activities (5,918,248) (273,791)
----------- -----------
Cash flow from financing activities:
Proceeds from sale of common stock 1,276 -
Purchase of treasury stock (114,354) (3,183,933)
Loan Payable - 1,375,584
---------- ----------
Net cash used in financing activities (113,078 (1,808,349)
---------- -----------
Net increase (decrease) in cash (4,201,687) 6,182,267
Cash at beginning of period 4,737,132 427,154
---------- ----------
Cash at end of period $ 535,445 $6,609,421
========== ==========
Noncash items operating activities:
Change in accrued interest income 980,120 -
Recoverable due to rescission in other assets - (1,323,000)
Change in prepaid items - (170,000)
Investing activities:
Decrease in notes receivable-other 9,162,777 -
Purchase of real estate (10,142,897) -
Financing activities:
Issuance of common stock - 1,323,000
Notes Receivable related parties - 170,000
------------- ---------
Net noncash adjustments - -
============= =========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
-4-
<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,
------------------------------- -------------------------------
1999 2000 1999 2000
--------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
Net earnings $1,441,397 $ (492,097) $3,160,575 $(2,440,850)
Other comprehensive earnings before income taxes:
Unrealized gains (losses) on securities
available for sale (538,553) 172,712 (1,122,885) 441,719
Reclassification adjustment for
realized gains (loss) included in net
earnings 6,929 (79,664) 5,811 (205,711)
------------- ------------ ------------- ---------
Total other comprehensive earnings (loss)
before taxes (531,624) 93,048 (1,117,074) 236,008
Income tax benefit related to
items of comprehensive income (87,668) (58,817) (111,676) (175,446)
------------- ------------- ------------ ---------
Other comprehensive earnings (loss) net of
income taxes 443,956 34,231 (1,005,398) 411,454
------------ ----------- ----------- -----------
Total comprehensive earnings (loss) $ 997,441 $ (457,866) $2,155,177 $(2,029,396)
============ ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
-5-
<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 of 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, 2000 may not be
indicative of the results that may be expected for the full year ending December
31, 2000. 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 the Company for the year
ended December 31, 1999.
The unaudited interim consolidated financial statements include the
accounts of American Safety and each of its subsidiaries. All significant
intercompany balances have been eliminated.
Note 2 - Accounting Pronouncements
In June 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, as amended, 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. The Company expects that adoption of SFAS No. 133, as amended by
statement 138, will have an immaterial impact on the Company's consolidated
financial position and results of operations.
-6-
<PAGE>
Note 3 - Nature of Operations
The following is a description of certain risks facing the Company:
(a) 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.
(b) 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. 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.
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 a similar 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.
-7-
<PAGE>
(c) Credit Risk is the risk that issuers of securities owned by the Company
or secured notes receivable will default or that other parties, including
reinsurers that have obligations to the insurer, will not pay or perform. The
Company attempts to mitigate this risk by adhering to a conservative investment
strategy, by obtaining sufficient collateral for secured note obligations and by
maintaining sound reinsurance, credit and collection policies.
(d) 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,
1999 and June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Gross Gross Amount at
Amortized unrealized unrealized Estimated which shown in
Cost gains losses fair value the balance sheet
----------- ----------- ------------- ------------- -----------------
December 31, 1999:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations of
<S> <C> <C> <C> <C> <C>
U.S.Government corporations and agencies $17,475,473 $ - $ 624,997 $16,850,476 $16,850,476
Obligations of states and political
subdivision 6,526,137 38,835 104,972 6,460,000 6,460,000
Corporate securities 14,623,165 2,427 519,015 14,106,577 14,106,577
Mortgage-backed securities 3,433,949 209 156,655 3,277,503 3,277,503
------------ ------- --------- ----------- -----------
Total fixed maturities 42,058,724 41,471 1,405,639 40,694,556 40,694,556
Equity investments - common stocks 169,448 - 5,480 163,968 163,968
----------- ------- --------- ----------- ------------
Total $42,228,172 $ 41,471 $1,411,119 $40,858,524 $40,858,524
========== ======== ========= ========== ==========
June 30, 2000:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $18,960,066 $ 15,145 $ 527,953 $18,447,258 $18,447,258
Obligations of states and political
subdivisions 11,547,322 81,980 79,495 11,549,807 11,549,807
Corporate securities 9,712,680 - 612,571 9,100,109 9,100,109
Mortgage-backed securities 577,945 577 11,323 567,199 567,199
----------- ------- --------- ----------- -----------
Total fixed maturities 40,798,013 97,702 1,231,342 39,664,373 39,664,373
Equity investments - common stocks 821,511 - - 821,511 821,511
------------ ------- --------- ----------- -----------
Total $41,619,524 $ 97,702 $1,231,342 $40,485,884 $40,485,884
========== ======= ========= ===========
</TABLE>
-8-
<PAGE>
Note 5 - Segment Information
(a) Factors used to identify the Company's reportable segments:
The Company's United States and Bermuda operating segments were identified
by management as separate operating segments based upon the regulatory
environments of each of these countries. Significant differences exist
under United States and Bermuda law concerning the regulation of insurance
entities including differences in: types of permissible investments,
minimum capital requirements, solvency monitoring, pricing, corporate
taxation, etc.
(b) Products and services from each reportable segment:
The Company's United States and Bermuda operating segments, develop,
underwrite, manage and market 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. The Company has expertise in developing specialty insurance
coverages and custom designed risk management programs not generally
available in the standard insurance market.
The Company is also involved in the development of the Harbour Village Golf
and Yacht Club in Ponce Inlet, Florida, as discussed in Note 7, and this
item is reflected in the segment United States-Real Estate.
The United States operating segment's specialty insurance programs provide
insurance and reinsurance for general, pollution and professional liability
exposures, for workers' compensation and surety, as well as custom designed
risk management programs for contractors, consultants and other business
and property owners who are involved with environmental remediation,
employee leasing and staffing, and other specialty risks.
Through its United States brokerage and management services subsidiaries,
the Company provides specialized insurance program development,
underwriting, risk and reinsurance placement, program management,
brokerage, loss control, claims administration and marketing services. The
Company also insures and places risks through its United States insurance
subsidiary, as well as its non-subsidiary risk retention group affiliate
and other unaffiliated insurance and reinsurance companies.
Through its Bermuda operating segment, the Company places and reinsures a
portion of the risks underwritten directly by its United States segment,
its risk retention group affiliate and other insurers.
-9-
<PAGE>
(c) Information about segment profit or loss and assets:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
---- ----
United States - Insurance
<S> <C> <C>
Net Premiums Earned - All Other 4,645,659 10,183,517
Net Premiums Earned - Intersegment (1,748,609) (3,457,748)
Net investment income and interest on notes
receivable 365,582 787,127
Other revenues 1,635,712 2,036,113
--------- ----------
Total Revenues 4,898,344 9,549,009
Depreciation and amortization expense 46,397 79,746
Equity in net loss of subsidiaries (584,498) (1,362,271)
Income taxes (153,991) (1,296,417)
Segment loss (283,867) (2,321,284)
Significant noncash items other than
depreciation and amortization - -
Property, plant and equipment 221,169 555,992
Total investments 13,721,473 38,158,198
Total assets 35,637,228 88,698,731
Total policy and contract liabilities 16,324,038 35,812,150
Total liabilities 26,213,971 62,063,640
United States - Real Estate
Net Premiums Earned - All Other - -
Net Premiums Earned - Intersegment - -
Net investment income and interest on Notes - -
Other revenues - -
--------- ----------
Total revenues - -
Depreciation and amortization - -
Equity in net loss of subsidiaries - -
Income Taxes - (64,905)
Segment loss - (120,538)
Significant noncash items - -
Property, plant and equipment - 70,721
Total investments - -
Total assets - 13,885,759
Total policy and contract liabilities - -
Total liabilities - 4,341,611
Bermuda
Net Premiums Earned - All Other 1,409,506 1,175,594
Net Premiums Earned - Intersegment 1,748,609 3,457,748
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
---- ----
Net investment income and interest on notes
<S> <C> <C>
receivable 2,555,745 1,421,849
Other revenues 9,679 558,963
----------- ---------
Total revenues 5,723,539 6,614,154
Depreciation and amortization expense - 10,063
Equity in net loss of subsidiaries 1,399,159 (1,695,369)
Income Taxes - -
Segment profit 3,444,442 972
Significant noncash items other than
depreciation and amortization - -
Property, plant and equipment - 830,797
Total investments - 52,231,003
Total assets 62,070,289 83,935,949
Total policy and contract liabilities 12,224,831 14,871,557
Total liabilities 16,000,494 17,815,445
Intersegment Eliminations
Net Premiums Earned - All Other - -
Net Premiums Earned - Intersegment - -
Net investment income and interest on notes - -
receivable
Other revenues (236,216) (431,397)
--------- ---------
Total revenues (236,216) (431,397)
Depreciation and amortization expense - -
Equity in net earnings of subsidiaries (814,661) 3,067,640
Income taxes - -
Segment profit (loss) - -
Significant noncash items other than
depreciation and amortization - -
Property, plant and equipment - -
Total investments (25,204,992) (45,134,085)
Total assets (34,895,147) (57,942,504)
Total policy and contract liabilities (5,825,153) (7,616,170)
Total liabilities (10,543,376) (12,808,419)
Total
Net Premiums Earned - All Other 6,055,165 11,359,111
Net Premiums Earned - Intersegment - -
Net investment income and interest on notes
receivable 2,921,327 2,208,976
Other revenues 1,409,175 2,163,679
---------- ---------
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
---- ----
<S> <C> <C>
Total revenues 10,385,667 15,731,766
Depreciation and amortization expense - 89,809
Equity in net earnings of subsidiaries - -
Income taxes (153,991) (1,361,322)
Segment profit (loss) 3,160,575 (2,440,850)
Significant noncash items other than
depreciation and amortization - -
Property, plant and equipment 221,169 1,457,510
Total investments 50,586,770 45,255,116
Total assets 92,982,481 128,577,935
Total policy and contract liabilities 22,723,716 43,067,537
Total liabilities 31,671,089 71,412,277
</TABLE>
Note 6 - Shareholder Matters
During the quarter ended June 30, 2000, the Company repurchased 498,775
common shares at a total price of $2,518,814 in open market transactions
pursuant to its share repurchase program.
Note 7 - Investment in Real Estate
The Company's investment in the development of the Harbour Village Golf and
Yacht Club ("Harbour Village") project is comprised of 173 acres of
property in Ponce Inlet, Florida which was acquired through foreclosure on
April 13, 1999. At the date of foreclosure, the Company evaluated the
carrying value of its investment in real estate by comparing the fair value
of the foreclosed collateral to the book value of the underlying loan and
accrued interest. As the book value of the loan and accrued interest was
less than the fair value of the collateral, no loss was recognized on
foreclosure and the book balance of the loan and accrued interest became
the basis of the real estate. The Company has incurred additional
capitalizable development costs of approximately $4.5 million during 1999
and 2000.
The Company announced on March 10, 2000, its plans to complete development
of the Harbour Village project through its subsidiary, Ponce Lighthouse
Properties, Inc.
Note 8 - Acquisitions
On March 24, 2000, the Company purchased Trafalgar Insurance Company, an
Oklahoma licensed insurance company, which has authority to operate as an excess
and surplus lines insurance company in 34 states and the District of Columbia.
Trafalgar Insurance Company's stock was acquired from Houston Casualty Company
for a purchase price of $16.3 million cash, and Trafalgar had, at closing, cash
of $9.3 million and investments of $5.7 million creating $1.3 million of
goodwill. The net cash outlay for this acquisition was $7.0 million. Prior to
closing, Trafalgar entered into a bulk assumption reinsurance agreement with
Houston Casualty, under which
-12-
<PAGE>
Houston Casualty assumed all of Trafalgar's prior and existing insurance
business. Trafalgar has been renamed American Safety Indemnity Company.
On January 6, 2000, the Company acquired (i) the stock of L&W Holdings,
Inc. and its wholly-owned subsidiary, RCA Syndicate #1, Ltd., an Illinois
licensed insurance carrier operating on the INEX (formerly the Illinois
Insurance Exchange), (ii) the stock of Principal Management, Inc., an insurance
program development and management company headquartered in Okemos, Michigan,
and in a related transaction, the Company also acquired (iii) the stock of
Pegasus Insurance, a Cayman Islands licensed insurance carrier. The transactions
were structured as stock acquisitions, with the purchase price paid by the
Company consisting of $3,500,000 plus 200,000 American Safety common shares and
earnout provisions for up to an additional 254,000 American Safety common shares
over a five-year period. Of the purchase price, $1,000,000 of cash and 109,086
shares of stock are held in escrow to secure the obligations of the sellers. The
Company also obtained a security interest in a real estate condominium in the
Cayman Islands with an estimated value of $600,000 to secure the obligations of
the sellers. On April 21, 2000, the Company filed a lawsuit to rescind these
acquisitions based upon the sellers' misrepresentations as to the business
affairs and financial condition of the acquired companies, and recognized an
expense, net of recoverables, of $3.5 million for such rescission.
Note 9 - Income Taxes
Total income tax (benefit) for the six months ended June 30, 1999 and 2000
were allocated as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
---- ----
Tax benefit attributable to:
<S> <C> <C>
Income from continuing operations $(153,991) $(1,361,322)
Unrealized losses on
securities available for sale (82,996) (222,781)
-------- ------------
Total $(236,987) $ (1,584,103)
========= ============
</TABLE>
U.S. Federal and state income tax expense from continuing operations
consists of the following components:
<TABLE>
<CAPTION>
Current Deferred Total
<S> <C> <C> <C>
June 30, 1999 (264,235) 110,244 (153,991)
June 30, 2000 (1,379,755) 18,433 (1,361,322)
</TABLE>
-13-
<PAGE>
The state income tax components aggregated $94,803 and $(17,750) for the
six months ended June 30, 1999 and 2000, respectively.
Income tax expense for the period ended June 30, 1999 and 2000 differed
from the amount computed by applying the U.S. Federal income tax rate of 34% to
earnings before Federal income taxes as a result of the following:
<TABLE>
<CAPTION>
June 30,
1999 2000
---- ----
<S> <C> <C>
Expected income tax expense $1,022,238 $(1,292,738)
Foreign earned income not subject to U.S.
taxation (1,171,110) (330)
Tax-exempt interest (47,738) (59,599)
State taxes and other 42,619 (8,655)
------------ ------------
$ (153,991) $(1,361,322)
=========== ===========
</TABLE>
Deferred income taxes are based upon temporary differences between the
financial statement and tax bases of assets and liabilities. The following
deferred taxes are recorded:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
Deferred tax assets:
<S> <C> <C>
Loss reserve discounting $ 509,011 $ 602,991
Unearned premium reserves 185,459 429,251
Unrealized loss on securities 80,844 303,625
Net operating loss carry forward - 1,409,325
------- ----------
Gross deferred tax assets 775,314 2,745,192
------- ----------
Deferred tax liabilities:
Deferred acquisition costs 42,087 361,426
-------- ----------
Gross Deferred tax liabilities 42,087 361,426
-------- ---------
Net deferred tax asset $ 733,227 $2,383,766
======= =========
</TABLE>
A valuation allowance has not been established as the Company believes it
is more likely than not that the deferred tax asset will be realized. The
Company believes it will have sufficient future income to offset the net
operating loss carry forward.
-14-
<PAGE>
Note 10. Notes Receivable
American Safety, as the lender, entered into two term loan agreements
in 1997 and 1999 with American Darico, L.L.C. for the borrower to
purchase dairy cattle herds. The loans were secured by payment
guaranty bonds from Acceptance Insurance Company, an affiliate of the
St. Paul Insurance Companies, and the dairy herds. The borrower
defaulted under the loans on June 30, 2000 after filing for bankruptcy
following the death of the borrower's principal owner, Raymond
McAnally. At the time of the default, the borrower owed $750,000 and
$970,000, respectively, and American Safety holds $1,800,000 in
payment guaranty bonds and a security interest in 36 herds of cattle.
American Safety has made claims against the payment guaranty bonds and
has filed a claim in the bankruptcy court as well as a claim against
the estate of Raymond McAnally. The Company believes it should not
experience a loss from the default.
Note 11. Related Party Transaction.
During the second quarter of 2000, the Company capitalized $246,301 of
a loan and other advances previously made by the Company to an
employee of its financial services subsidiary in connection with the
restructuring of the employee's compensation arrangment.
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
provides a broad range of financial services and products to middle market
businesses.
During the past ten years, the Company has operated in a soft market cycle
which is characterized by excess insurance capacity and declining insurance
premium rates. The Company's reported combined ratio for its insurance
operations may not provide an indication of the Company's overall
profitability from insurance and reinsurance programs due to the exclusion
of fee and commission income and expenses generated in related management
and agency subsidiaries.
Forward Looking Statements
This Report contains certain forward-looking statements within the meaning
of United States' securities laws which are intended to be covered by the
safe harbors created thereby. Forward-looking statements involve risks and
uncertainties which may cause actual results to differ, and are subject to
change based on various factors, including the outcome of the Company's
lawsuit
-15-
<PAGE>
for rescission of the acquisition of an insurance agency and two related
insurance companies, competitive conditions in the insurance industry,
unpredictable developments in loss trends, adequacy and changes in loss
reserves, market acceptance of new coverages and enhancements, changes in
insurance regulatory requirements and tax statutes, changes in levels of
general business activity and economic conditions, and the Company's
ability to integrate and operate acquired businesses and the risks
associated with such businesses. With respect to the development of the
Harbour Village Golf and Yacht Club project, such forward-looking
statements involve risks and uncertainties which may cause actual results
to differ, and are subject to change based on various real estate
development industry factors, including competitive housing conditions in
the local market area, risks inherent in new construction, changes in
interest rates and the availability of mortgage financing for prospective
purchasers of condominium units and boat slips, and changes in local and
national levels of general business activity and economic conditions. All
statements, other than statements of historical facts, included or
incorporated by reference in this Report that address activities, events or
developments that the Company expects or anticipates will or may occur in
the future constitute forward-looking statements. Although the Company
believes that the assumptions underlying the forward-looking statements
contained in this Report are reasonable, any of the assumptions could over
time prove to be inaccurate and therefore, there can be no assurance that
the forward-looking statements included in this Report will themselves
prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included in this Report, the inclusion of
such information should not be regarded as a representation by the Company
or any other person that the objectives and plans of the Company will be
achieved.
-16-
<PAGE>
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,
---------------------------- --------------------------- ------------- --------------
1999 to 1999 to
1999 2000 1999 2000 2000 2000
------------- ------------- ------------- ------------- ------------- --------------
(Dollars in thousands)
--------------------------------------------------------------------------------------
Net Premiums earned:
Reinsurance:
<S> <C> <C> <C> <C> <C> <C>
Workers' compensation $1,807 $3,024 $3,202 $5,631 67.3% 75.9%
General liability and excess and
surplus from affiliate 1,171 1,043 1,814 1,787 (10.9) (1.5)
Auto Liability 9 - 22 - (100.0) (100.0)
--------- --------- ------- ---------- ----- -----
Total reinsurance 2,987 4,067 5,038 7,418 36.2 47.2
Primary insurance:
Prepaid Legal - - - 8 - -
Excess and Surplus - 28 - 28 - -
Commercial Line - 547 - 825 - -
Workers' compensation - 92 - 162 - -
Surety 613 1,323 1,017 2,918 115.8 186.9
------- ----- ------- -------
Total primary insurance 613 1,990 1,017 3,941 224.6 287.5
------- ----- ------- ------- ------- -----
Total net premiums earned 3,600 6,057 6,055 11,359 68.3 87.6
------ ----- ------- ------ ------- ----
Net investment income 715 605 1,414 1,334 (15.4) (5.7)
Interest on notes receivable 582 440 1,508 875 (24.4) (42.0)
Commission and fee income:
Brokerage commission income 63 722 494 953 1,046.0 92.9
Management fees from affiliate 385 352 726 719 (8.6) (1.0)
------- ------- ------- -------- ------- -----
Total commission and fee income 448 1,073 1,022 1,672 139.7 37.0
------- ------ ------- ------- ------- -----
Net realized gains (losses) 99 (80) 98 (206) (180.8) (310.2)
Other income 382 42 461 698 (89.0) 51.4
------- -------- ------- -------- ------- ----
Total Revenues $5,826 $8,138 $10,756 $15,732 39.7% 46.3%
------- -------- ------- ------ -------- -----
</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,
-------- --------
1998 1999 2000 1998 1999 2000
---- ---- ---- ---- ---- ----
Insurance operations:
<S> <C> <C> <C> <C> <C> <C>
Loss and loss adjustment expense ratio 52.0% 58.3% 66.4% 57.8% 56.5% 60.0%
Expense ratio 12.4 13.7 23.6 11.4 14.8 33.3
---- ---- ---- ---- ---- ----
Combined ratio 64.4 72.0% 90.0% 69.2% 71.3% 93.3%
---- ---- ---- ---- ---- ----
</TABLE>
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Net Premiums Earned. Net premiums earned increased 68.3% from $3.6 million
in the quarter ended June 30, 1999 to $6.1 million in the quarter ended June 30,
2000. The principal factor contributing to the increase was the Company's
assumption of workers' compensation reinsurance business from an unaffiliated
insurance carrier, which increased from $1.8 million in the quarter ended June
30, 1999 to $3.0 million in the quarter ended June 30, 2000. This increase was a
result of new business generated from employee leasing and staffing industry
risks as well as an increase in the Company's surety business by 115.8% from
$613,000 in the quarter ended June 30, 1999 to $1.3 million in the quarter ended
June 30, 2000. The increase in surety business is attributable to new business
from increased marketing efforts and the Company's bail bond program. Also
contributing to the increase is the Company's new commercial lines and excess
and surplus lines business which generated net earned premiums of $547,000 and
$253,000, respectively, in the quarter ending June 30, 2000.
Net Investment Income. Net investment income decreased 15.3% from $714,000
in the quarter ended June 30, 1999 to $604,000 in the quarter ended June 30,
2000 due to a decrease in the Company's bond portfolio which was caused by
expenditures on acquisitions, real estate and treasury stock. The average
pre-tax yield on investments was 5.3% in the quarter ended June 30, 1999 and
5.3% in the quarter ended June 30, 2000. The average after-tax yield on
investments was 5.4% in the quarter ended June 30, 1999 and 4.2% in the quarter
ended June 30, 2000. The reduction in the after tax yield is primarily due to
the acquisition of Trafalgar Insurance Company which resulted in a substantial
portion of the Company's bond portfolio being held by a United States
subsidiary.
Interest from Notes Receivable. Interest from notes receivable decreased
24.3% from $581,000 in the quarter ended June 30, 1999 to $440,375 in the
quarter ended June 30, 2000 as a result of lower yields on the notes and lower
average outstanding balances as well.
Brokerage Commission Income. Brokerage commission income increased 1,040%
from $63,000 in the quarter ended June 30, 1999 to $722,000 in the quarter ended
June 30, 2000 as a result of increased commissions from excess and surplus lines
revenue production.
Management Fees. Management fees decreased 8.6% from $384,000 in the
quarter ended June 30, 1999 to $351,000 in the quarter ended June 30, 2000.
These fees are derived from services provided by the Company to its risk
retention group affiliate, which services remained consistent as compared to the
prior period.
Net Realized Gains. Net realized gains decreased from $99,000 in the
quarter ended June 30, 1999 to a loss of $80,000 for the quarter ended June 30,
2000 due to additional sale of bonds for the purchase of Trafalgar Insurance
Company.
-17-
<PAGE>
Other Income. Other income decreased from $383,000 in the quarter ended
June 30, 1999 to $42,000 for the quarter ended June 30, 2000 as a result of
lower fees generated by the Company's financial service subsidiary.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 91.6% from $2.1 million in the quarter ended June 30, 1999 to $4.0
million in the quarter ended June 30, 2000 . The increase in loss and loss
adjustment expense was primarily due to increased premium volume over the prior
period and loss and loss and adjustment expense on the Company's commercial
lines and excess and surplus lines business. Workers' compensation contributed
approximately $1.0 million to the increase and the Company recorded additional
surety case reserves of approximately $600,000 in the second quarter.
Acquisition Expenses. Policy acquisition expenses increased 258.5% from
$348,000 in the quarter ended June 30, 1999 to $1.2 million in the quarter ended
June 30, 2000 primarily as a result of increased premium production. Surety
earned premiums increased 115.8% which have approximately 30% acquisition
expense. Workers' compensation and bail acquisition expenses increased
approximately $414,000 and $155,000, respectively, for the quarter.
Payroll and Other Expenses. Payroll and other expenses increased 78.5% from
$2.0 million in the quarter ended June 30, 1999 to $3.6 million in the quarter
ended June 30, 2000 as a result of increases in salary, benefits and operating
expense primarily due to increased staffing for new and existing programs,
increased premium tax expense on new insurance business, and expenses related to
the development of the Harbour Village project.
Income Taxes. Federal and state income taxes decreased from a benefit of
$108,000 in the quarter ended June 30, 1999 to a benefit of $291,000 in the
quarter ended June 30, 2000 due to decreased taxable income in the Company's
U.S. subsidiaries. The decrease in taxable income was primarily due to increased
non-deferrable expenses associated with the production of new insurance
business.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Net Premiums Earned. Net premiums earned increased 87.6% from $6.1 million
in the six months ended June 30, 1999 to $11.4 million in the six months ended
June 30, 2000. The principal factor contributing to the increase was the
Company's assumption of workers' compensation reinsurance business from an
unaffiliated insurance company, which increased net premiums by 75.9% from $3.2
million in the six months ended June 30, 1999 to $5.6 million in the six months
ended June 30, 2000. Another factor contributing to the increase was an increase
of the Company's surety business by 186.9% from $1.0 million in the six months
ended June 30, 1999 to $2.9 million in the six months ended June 30, 2000, which
was attributable to increased marketing efforts and increased bail bond
production. Also contributing to the increase was the Company's new commercial
lines and excess and surplus lines business which generated net earned premiums
of $825,000 and $360,000, respectively, in the six months ended June 30, 2000.
-18-
<PAGE>
Net Investment Income. Net investment income decreased 5.6% from $1.41
million in the six months ended June 30, 1999 to $1.33 million in the six months
ended June 30, 2000 due to a reduction in the investment portfolio, as a result
of expenditures on acquisitions, real estate and treasury stock. The average
annual pre-tax yield on investments was 5.6% in the six months ended June 30,
1999 and 5.7% in the six months ended June 30, 2000. The average annual
after-tax yield on investments was 5.3% in the six months ended June 30, 1999
and 4.8% in the six months ended June 30, 2000. The decrease in the after tax
yield is related to the sale of bonds for the purchase of Trafalgar Insurance
Company.
Interest from Notes Receivable. Interest from notes receivable decreased
42.0% from $1.5 million in the six months ended June 30, 1999 to $875,000 in the
six months ended June 30, 2000 as a result of lower yields on the notes and the
loss of interest income as a result of the acquisition by foreclosure on the
Harbour Village project.
Brokerage Commission Income. Income from insurance brokerage operations
increased 92.8% from $494,000 in the six months ended June 30, 1999 to $953,000
in the six months ended June 30, 2000 as a result of increased commissions from
excess and surplus lines premium production.
Management Fees. Management fees decreased 1.0% from $726, 000 in the six
months ended June 30, 1999 to $718,000 in the six months ended June 30, 2000.
These fees are derived from services provided by the Company to its risk
retention group affiliate, which services remained consistent as compared to the
prior period.
Net Realized Gains. Net realized gains decreased 310.2% from a gain of
$98,000 in the six months ended June 30, 1999 to a loss of $206,000 in the six
months ended June 30, 2000. The decrease is related to the sale of bonds for the
purchase of Trafalgar Insurance Company.
Other Income. Other income increased from $466,000 in the six months ended
June 30, 1999 to $698,000 for the six months ended June 30, 2000. The increase
principally relates to a commitment fee from the proposed sale of the Harbour
Village project.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 91.6% from $2.1 million in the quarter ended June 30, 1999 to $4.0
million in the quarter ended June 30, 2000 . The increase in loss and loss
adjustment expense was primarily due to increased premium volume over the prior
period and loss and loss and adjustment expense on the Company's commercial
lines and excess and surplus lines business. Workers' compensation contributed
approximately $1.0 million to the increase and the Company recorded additional
surety case reserves for prior periods of approximately $600,000 in the second
quarter.
Acquisition Expenses. Policy acquisition expenses increased 314.5% from
$671,000 in the six months ended June 30, 1999 to $2.8 million in the six months
ended June 30, 2000 as a result of increased premium production. Surety earned
premiums increased 186.9% and carry
-19-
<PAGE>
approximately 30% acquisition expense. Workers' compensation and bond
acquisition expenses increased approximately $634,000 and $1.0 million,
respectively, for the six months ended June 30, 2000.
Expense Due to Rescission. Expense due to rescission was $3.5 million and
relates to the rescission of the acquisition of a group of companies. See Note
8.
Payroll and Other Expenses. Payroll and other expenses increased 74.7% from
$3.7 million in the six months ended June 30, 1999 to $6.4 million in the six
months ended June 30, 2000 as a result of increases in salary, benefits and
operating expense primarily due to increased staffing for new and existing
programs, increased premium tax expense on new business, and expenses related to
the development of the Harbour Village project.
Income Taxes. Federal and state income taxes decreased from a benefit of
$154,000 in the six months ended June 30, 1999 to a benefit of $1.4 million in
the six months ended June 30, 2000 due to decreased taxable income in the
Company's U.S. subsidiaries. The decrease in taxable income was primarily due to
expenses relating to rescission of the acquisition of a group of companies and
non-deferrable expenses associated with the production of new business. The
Company has not set up a valuation allowance as it believes it will generate
sufficient future taxable income to recover the net operating loss carryforward.
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 expects that net operating losses will continue through the end
of the current fiscal year or through the first quarter of fiscal year 2001 as a
result of general administrative expenses relating to the Company's investment
in new operating units exceeding revenue production, and non-capitalizable
expenses incurred in the development and construction of the Harbour Village
project.
During the quarter ended June 30, 2000, the Company repurchased 498,775
common shares in open market transactions pursuant to its share repurchase
program.
-20-
<PAGE>
On a consolidated basis, net cash provided from operations was $1.8 million
for the six months ended June 30, 1999 and $8.3 million for the six months ended
June 30, 2000. The positive cash flows for both periods were primarily
attributable to net premiums written, and increases in reserves for unpaid
losses. For the period ended June 30, 2000 additional cash flows came from
increases in accrued expenses and escrow deposits. Because workers' compensation
and general liability claims may be paid over an extended period of time, the
Company has established loss reserves for such lines of business. The assets
supporting the Company's loss reserves continue to earn investment income until
claims payments are made.
Total assets increased from $104.4 million at December 31, 1999 to $128.6
million at June 30, 2000, primarily due to increases in premiums receivable,
reinsurance recoverables, deferred income tax, real estate investments and
goodwill from the purchase of Trafalgar Insurance Company. Cash, invested assets
and notes receivable were $73.0 million at December 31, 1999 and $77.5 million
at June 30, 2000. The increase in cash, invested assets and notes receivable was
primarily due to receipt of escrow deposits. Other assets increased from
$114,000 at December 31, 1999 to $1.6 million at June 30, 2000 as a result of
$1.3 million collateral held which lowered the expense due to the Company's
rescission of the acquisition of a group of companies.
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 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, 2000, the Company had no
investments in derivative instruments.
Harbour Village Development. The Company announced in March 2000 its plans
to complete development of the Harbour Village Golf and Yacht Club ("Harbour
Village"), located in Ponce Inlet, Florida, consisting of 786 residential
condominium units, a marina containing 142 boat slips, a par 3 golf course and
beach club. The project acquired by the Company through foreclosure in April
1999, has been under development through its Ponce Lighthouse Properties, Inc.
subsidiary. As of June 30, 2000, the Company's marketing efforts had generated
in excess of $51 million of pre- construction sales.
It is anticipated that Harbour Village will be developed in three phases
over the next three to five years, depending on future sales activities and
economic conditions that may impact the
-21-
<PAGE>
marketing of the condominium units. In July 2000, the Company closed a $37
million acquisition, development and construction loan facility in order to
commence construction of Phase I of three phases of the Harbour Village project.
The anticipated construction cost for the entire Harbour Village project is in
excess of $160 million over a three to five year period. Phase I of the
development consists of construction of all site work including a 142-boat slip
marina, 372 residential units, and amenities. No assurance can be given,
however, as to either future sales activities of the condominium units or the
impact of local and national economic conditions on the Company's marketing
efforts for the development of the Harbour Village project.
Management believes that the bank credit facility, together with
anticipated cash flows from marketing and sales operations, will meet the
liquidity needs for the construction and development of Phase I of the Harbour
Village project during the first 24 months of development. There can be no
assurance, however, that the amounts available from the Company's sources of
liquidity will be sufficient to meet the Company's future capital needs.
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.
-22-
<PAGE>
Combined Ratio
The combined ratio of an insurance company measures only the underwriting
results of insurance operations and not the profitability of the overall
company. The Company's reported combined ratio for its insurance operations may
not provide an accurate indication of the Company's overall profitability from
insurance and reinsurance programs due to the exclusion of fee and commission
income and expenses generated in related management and agency subsidiaries.
Depending on the Company's mix of business going forward, the combined ratio may
fluctuate from time to time and may not reflect the overall profitability of
insurance programs to the Company.
Reserves
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
The Company's market risk has not changed materially since December 31,
1999.
[The remainder of this page is intentionally left blank]
-23-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Item 6(b) of this Part II.
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 23, 2000 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 (1) elected
Cody W. Birdwell, Thomas W. Mueller and Timothy E. Walsh as
directors to serve three year terms expiring at the Annual General
Meeting of Shareholders in 2003 and (2) approved an amendment to
increase the number of common shares authorized for issuance under
the 1998 Incentive Stock Option Plan. The votes for the directors
totaled 4,511,627 and 105,288 votes withheld authority to elect
the directors. The votes for the amendment to the 1998 Incentive
Stock Option Plan totaled 2,896,392, with ]891,387 votes against,
1,997 votes abstaining and 827,139 broker non-votes. 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, 2000. The votes for such ratification
totaled 4,528,724, with 29,191 votes against and 59,000 votes
abstaining.
Item 5. Other Information.
Not applicable.
-24-
<PAGE>
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 28, 2000 regarding the
Company's filing of a lawsuit to rescind the previously
announced (see the Company's Form 8-K filed on January 17,
2000) acquisition of a Michigan insurance agency and two
related insurance companies specializing in insurance
program business. The Company's lawsuit was filed in the
United States District Court for the Northern District of
Georgia to rescind the acquisitions based upon the sellers'
breach of representations and warranties made concerning the
business affairs and financial condition of the acquired
companies.
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 14th day of August 2000.
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)
-26-
<PAGE>
Exhibit 11
American Safety Insurance Group, Ltd. and subsidiaries
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- -----------------
June 30 June 30 June 30 June 30
1999 2000 1999 2000
---- ---- ---- ----
Basic:
Earnings Available to Common
<S> <C> <C> <C> <C>
Shareholders.................... $1,441,397 $(492,097) $3,160,575 $(2,440,850)
========== ========== ========== ============
Weighted Average Common Shares
Outstanding..................... 6,064,010 5,525,804 6,070,823 5,726,229
Basic Earnings (Loss)Per Common
Shares ......................... $ .24 $ (.09) $ 52 $ (.43)
========= ========== ========== ==========
Diluted:
Earnings Available to Common
Shareholders.................... $1,441,397 $(492,097) $3,160,575 $(2,440,850)
========== ========== ========== ===========
Weighted Average Common Shares
Outstanding..................... 6,064 5,525,804 6,070,823 5,726,229
Weighted Average Common Shares
Equivalents Associated with
Options......................... 23,799 - 29,118 2,671
Total Weighted Average Common
Shares.......................... 6,087,809 5,525,804 6,099,941 5,728,900
========= ========= ========= =========
Diluted Earnings per Common
Shares.......................... $ .24 $ ( .09) $ .52 $ ( .43)
========= ========== ========= ==========
</TABLE>
-27-
