SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1999 Commission File Number 1-14795
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not applicable
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
44 Church Street
P.O. Box HM 2064
Hamilton, Bermuda
(Address of principal HM HX
executive offices) (Zip Code)
Registrant's telephone number: (441) 296-8560
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.01 par value New York Stock Exchange, Inc.
Securities to be registered pursuant to Section 12(g) of the Act: None
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Registrant's voting common stock held by
non-affiliates on February 2, 2000 was $27,637,659. For the purposes of this
computation shares held by directors (and shares held by entities in which they
serve as officers) and executive officers of the Registrant have been excluded.
Such exclusion is not intended, nor shall it be deemed to be an admission that
such persons are affiliates of Registrant.
<PAGE>
The number of outstanding shares of Registrant's common stock on February 2,
2000 was 5,960,100.
Documents Incorporated by Reference: Part III of this Form 10-K incorporates by
reference certain information from the Registrant's Proxy Statement for the 2000
Annual General Meeting of the Shareholders (the "2000 Proxy Statement").
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
Table of Contents
Page
PART I
Item 1. Business.............................................................. 1
Item 2. Properties............................................................25
Item 3. Legal Proceedings.................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.................. 25
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters....................................28
Item 6. Selected Financial Data..............................................29
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition.........................31
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................................39
Item 8. Financial Statements and Supplementary Data..........................41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................41
PART III
Item 10. Directors and Executive Officers of the Registrant...................42
Item 11. Executive Compensation...............................................42
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................................42
Item 13. Certain Relationships and Related Transactions.......................42
PART IV
Item 14. Exhibits, Financial Statements Schedules, and
Reports on Form 8 K.............................................43
<PAGE>
PART I
Item 1. Business
General
American Safety Insurance Group, Ltd. (the "Company" or "American Safety")
is a specialty insurance and financial services holding company organized under
the laws of Bermuda which, through its subsidiaries, develops, underwrites,
manages and markets primary casualty insurance and reinsurance programs in the
alternative insurance market in all 50 states for environmental remediation
risks, employee leasing and staffing industry risks, and other specialty risks.
The Company also provides a broad range of financial services and products to
middle market businesses throughout the United States. Unless the context
indicates otherwise, all references to the "Company" or "American Safety" refer
to American Safety Insurance Group, Ltd. and its subsidiaries.
The Company develops 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,
commercial auto and surety, as well as custom designed risk management programs
(including captive and rent-a-captive programs), for contractors, consultants
and other businesses and property owners who are involved with environmental
remediation, employee leasing and staffing, and other specialty risks.
The Company insures and places risks through its U.S.
insurance subsidiary, American Safety Casualty Insurance Company ("American
Safety Casualty"), as well as its U.S. non-subsidiary risk retention group
affiliate, American Safety Risk Retention Group, Inc. ("American Safety RRG")
and substantial unaffiliated insurance and reinsurance companies. The Company
also reinsures and places, through its Bermuda reinsurance subsidiary, American
Safety Reinsurance, Ltd. ("American Safety Re"), and substantial unaffiliated
reinsurers, a portion of the risks underwritten directly by its U.S. insurance
subsidiary, its risk retention group affiliate and other insurers. Substantially
all of the reinsurance business that the Company currently assumes is for
primary insurance programs that the Company has developed and underwritten.
The Company also provides specialized insurance program development,
underwriting, risk placement, reinsurance, program management, brokerage, loss
control, claims administration and marketing services through American Safety
Insurance Services, Inc. ("ASI Services"), its principal U.S. program
development, underwriting, brokerage and administrative services subsidiary. The
Company selects 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
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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.
American Safety was formed in Bermuda as a group captive insurance company
in 1986 to provide stable, long term insurance protection for the asbestos
abatement and environmental remediation industry in the United States which had
suffered from disruptive market cycles in the standard insurance market. The
Company now provides insurance coverages and services in all 50 states and
principally markets its insurance programs through approximately 275 independent
insurance agency and brokerage firms.
The Company's financial services subsidiary, American Safety Financial
Corp. ("American Safety Financial"), arranges debt and equity financing for
middle market businesses, and provides integrated insurance and financial
programs to a broad range of industries.
Industry Ratings
In December 1995, A.M. Best Company ("A.M. Best"), an independent
nationally recognized insurance industry rating service and publisher, assigned
a rating of "A (Excellent)" on a group basis to American Safety, as well as its
U.S. insurance subsidiary, American Safety Casualty Insurance Company ("American
Safety Casualty"), its Bermuda reinsurance subsidiary, American Safety
Reinsurance, Ltd. ("American Safety Re") and its non-subsidiary risk retention
group affiliate, American Safety Risk Retention Group, Inc. ("American Safety
RRG"). The rating of "A (Excellent)" is the third highest of A.M. Best's 16
letter ratings. A.M. Best's ratings are an independent opinion of an insurer's
ability to meet its obligations to policyholders, which opinion is of concern
primarily to policyholders, insurance agents and brokers and should not be
considered an investment recommendation. In June 1998, A.M. Best assigned a
higher financial size rating (VII) on a group basis to American Safety
representing capital and surplus in excess of $50 million as a result of the
Company's completion of its initial public offering in February 1998.
Alternative Insurance Market
The alternative insurance market has developed over the past 15 years to
serve insureds whose insurance needs have not been adequately met by the
standard insurance market. According to A.M. Best, from 1990 to 1995, a period
characterized by excess insurance capacity and declining premium rates, the
alternative insurance market grew from approximately 35% to 44% of the total
U.S. commercial property and casualty insurance market, and the total annual
premium volume of the alternative insurance market grew from approximately $66
billion to $104 billion.
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Alternative insurance programs generally involve (i) the underwriting of
risks which are characterized by the standard insurance market as difficult or
which generate too little premium for standard insurance companies; and/or (ii)
the design of specialized insurance programs, such as deductible or risk
retention programs, and captive or rent-a-captive programs, which enable
insureds to assume a portion of their own risks and share in the underwriting
profitability or losses of the program. Originally developed to respond to the
needs of insureds for adequate insurance coverage and affordable premium rates,
the alternative insurance market also responds to strategic needs of insureds
for better financial management, improved claims handling, more effective risk
management, customized insurance programs, direct access to the worldwide
reinsurance market and greater control over loss prevention. The benefits of
such alternative insurance market techniques typically include lower and more
stable costs, greater control by the client of its risk management program and
an increased emphasis within the client's organization on loss prevention and
loss control.
Business Strategy
The Company's business strategy is to develop insurance programs for the
environmental remediation industry and the employee leasing and staffing
industry, as well as other specialty industries and risks. The Company targets
niche insurance markets and opportunities where its expertise is required and
where competition is limited. The Company seeks to generate underwriting
profits, program management fees and brokerage commissions through such
insurance programs. The Company utilizes a flexible approach to accomplish its
strategy by combining (i) intensive underwriting, (ii) value-added services,
including quality coverage enhancements, professional risk management, dedicated
loss control and claims management, and (iii) superior service to insurance
agents, brokers and insureds. Further, the Company differentiates itself by its
ability to select its roles as program developer, primary underwriter,
reinsurer, program manager and broker based on its assessment of each specialty
risk profile. The Company's financial services subsidiary seeks to provide
integrated insurance and financial programs for middle market businesses.
Program Development, Management and Administrative Operations
The Company's U.S. brokerage and management subsidiaries, in combination
with the Company's primary insurance and reinsurance companies, provide a broad
range of dedicated services in connection with the development and
implementation of specialty risk insurance programs.
Insurance Services. American Safety Insurance Services, Inc. ("ASI
Services") provides insurance program development, underwriting, risk placement,
reinsurance placement, program management, brokerage, loss control, claims
administration,
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marketing and administrative services to the Company's U.S. insurance
operations, its risk retention group affiliate, and unaffiliated insurers and
reinsurers.
ASI Services identifies and evaluates potential new program business and
also receives submissions for new programs from insurance brokers and other
intermediaries throughout the United States. When a submission for a new program
is received, ASI Services identifies the resources needed to evaluate and
develop the program. In evaluating and developing a new program, ASI Services
considers the following factors: whether the submitting party will bear risk and
the collateral security required therefor; the analysis of historic loss data;
the integrity and experience of the submitting party; the availability of
reinsurance; and the potential profitability of the program to the Company. If
the prospects for a new program appear favorable, ASI Services designs the
structure for the new program and determines what additional services, such as
program management, brokerage, reinsurance, loss control, claims administration,
marketing, or other services will be required. ASI Services determines which
entities, both affiliated and unaffiliated, are best able to provide such
services in a cost-effective manner and implements the program.
ASI Services has developed many of the Company's primary insurance and
reinsurance programs. ASI Services has also served since 1990 as the program
manager for the Company's risk retention group affiliate, providing it, within
administrative guidelines, with program management, underwriting, loss control,
brokerage, marketing and financial services.
Management and Administrative Services. In the development and
implementation of programs, ASI Services provides a number of fee and
commission-based services. ASI Services provides (i) program management services
for the overall management and administration of a program; (ii) underwriting
services for evaluating individual risks or classes of risk; (iii) risk
placement services for determining the most effective means of providing
particular coverages; (iv) brokerage services for placing risks with affiliated
or unaffiliated insurers; (v) reinsurance intermediary services for placing
ceded reinsurance for a program; (vi) loss control services for evaluating the
risks posed by a particular class of risk, as well as the ability of insureds to
control their losses; (vii) claims administration services for the prompt
reporting and handling of claims, and the supervision of claims adjusters and
third party administrators; (viii) marketing services for designing and placing
advertisements and other marketing materials, as well as marketing insurance
programs to independent agents and brokers; and (ix) administrative services,
including for billing, collecting and reporting primary and reinsurance
premiums, producing financial reports on programs and paying claims.
Other Insurance Service Subsidiaries. The Company has three other U.S.
subsidiaries engaged, under the direction of ASI Services, in various
administrative and insurance agency services. Environmental Claims Services,
Inc. operates as a specialized
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claims administration facility engaged in the administration and analysis of
environmental and other specialty program claims. Sureco Bond Services, Inc. is
a surety bond agency authorized to write contract performance and payment bonds
for unaffiliated insurers. American Safety Purchasing Group, Inc. was formed to
facilitate the provision of certain insurance coverages through a purchasing
group (as defined by the Risk Retention Act) by licensed insurance companies,
including the Company's U.S. insurance subsidiary, American Safety Casualty.
Primary Insurance Operations
The Company, through its U.S. insurance subsidiary and its risk retention
group affiliate, provides primary casualty insurance in the alternative
insurance market in all 50 states for environmental remediation risks, employee
leasing and staffing industry risks, and other specialty risks. The Company's
specialty insurance programs include coverages for general liability, pollution
liability, professional liability, workers' compensation, commercial auto and
surety, as well as custom designed risk management programs (including captive
and rent-a-captive programs), for contractors, consultants and other businesses
and property owners who are involved with environmental remediation, employee
leasing and staffing, and other specialty risks.
Environmental Insurance Programs. The Company has developed specialty
insurance programs for a broad range of environmental concerns and believes that
its intensive underwriting, dedicated loss control and claims management, and
superior service orientation will enable it to expand its insurance program base
to other environmental coverages not currently being provided. Since 1986, the
Company's insurance programs have helped asbestos abatement and other
environmental remediation contractors and consultants, as well as property
owners, perform remediation work in schools, hospitals, commercial, industrial
and other facilities, thereby protecting school children, factory workers, and
numerous public and private employees from the potential threat of environmental
health hazards.
The Company's in-house underwriting department consists of trained
environmental and other specialty risk underwriters. The underwriting staff
analyzes loss histories of prospective insureds, as well as the insureds'
technical capabilities and experience with similar projects to those for which
insurance is being requested. The underwriting staff may also request references
and financial information. Some of the underwriters have technical backgrounds
and experience in various environmental fields. The Company's in-house loss
control department is also involved in the underwriting process, in reviewing
technical work guidelines provided by insureds, such as safety and health
practices and procedures, as well as inspecting contractor insureds'
environmental remediation project sites and recordkeeping throughout the United
States.
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<PAGE>
The Environmental Business Journal's Annual Industry Overview 1997
estimated that the United States environmental industry, which includes
contractors, consultants, equipment manufacturers and other service firms served
by the Company, generated approximately $181 billion of revenue in 1996.
The Company's general and pollution liability policies for environmental
risks cover bodily injury and property damage to third parties arising out of
the operations of insureds, which may include losses arising from exposure to
specific hazardous substances that are released during a remediation project.
Coverages provided for professional liability protect insureds against claims
arising out of errors and omissions committed in the performance of professional
consulting, testing, laboratory and similar services, such as the failure to
detect hazardous materials in connection with assessments for same, or the
failure to properly design or monitor performance on remediation projects in
accordance with contracts entered into by such insureds. The Company also
provides workers' compensation coverage for contractors involved in
environmental remediation, which may include risks such as occupational diseases
from exposure to hazardous substances.
The Company provides coverage for a broad range of environmental risks,
including:
Asbestos Abatement. Asbestos is a fibrous mineral which has been
commercially produced for, among other things, insulation and reduction of fire
and heat in buildings and products. In spite of the usefulness of asbestos,
health problems have arisen with its use. In response to the need for detection,
abatement and removal of asbestos, the asbestos abatement industry developed in
the mid-1980's and sought insurance for risks involved with its business. For
the past 14 years, the Company has provided general, pollution and professional
liability coverages as well as workers' compensation coverage for contractors,
consultants, other businesses and property owners involved with asbestos
abatement.
Lead Abatement. The Company provides general, pollution and professional
liability coverages and workers' compensation coverage for lead paint abatement
contractors, consultants and property owners in connection with the abatement of
lead paint from both public and private facilities, including housing authority
complexes.
Underground Storage Tank Removal. The Company provides general, pollution
and professional liability coverages as well as workers' compensation coverage
to contractors and consultants for the removal and replacement of underground
storage tanks, including associated soil remediation activities attributed to
leaking underground storage tanks.
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Other Hazardous Substances. The Company provides general, pollution and
professional liability coverages, and workers' compensation coverage in
connection with the removal and remediation of other hazardous substances,
including hazardous waste, polychlorinated biphenyls (PCBs) and various
petroleum products.
Other Environmental Risks. The Company provides environmental insurance
coverages that offer protection against environmental exposures arising from
general business operations. Environmental insurance coverage is offered for
varied purposes such as facilitating the financing of real estate transactions,
transferring real estate and protecting against the release of hazardous
substances from disposal sites.
Surety. The Company's U.S. insurance subsidiary, American Safety Casualty,
is licensed to write surety bonds in 46 states and the District of Columbia
primarily providing contract performance and payment bonds to environmental and
construction contractors. American Safety Casualty is listed as an acceptable
surety on federal bonds, commonly known as a "Treasury Listed" or "T-listed"
surety, enabling it to issue surety bonds for federal projects, as well as state
and private projects that utilize such designation as a reference in determining
the acceptability of surety companies. American Safety Casualty's underwriting
limitation, as determined by the Department of the Treasury as of July 1, 1999,
was $805,000 on a per-bond basis; however, this limitation does not constrain
the amount of a bond that can be written, provided that the excess exposure is
protected with approved reinsurance or other methods prescribed by the
Department of the Treasury. American Safety Casualty maintains reinsurance with
approved reinsurers for the purpose of issuing bonds in excess of its
underwriting limitation.
Employee Leasing and Staffing Industry. The Company, through its U.S.
brokerage and management services subsidiaries, places and writes workers'
compensation and general liability insurance for employee leasing companies
(also known as professional employer organizations) and staffing industry
companies through custom designed captive and rent-a-captive programs. These
insurance programs were originally developed to enable employee leasing and
staffing industry companies to obtain environmental services industry clients;
subsequently, these programs have been expanded to cover non-environmental
clients as well.
Employee leasing companies generally focus on small to medium size
businesses and provide their clients with integrated human resource
administration and risk management services. Although the client maintains
control of the activities of the worksite employees, the employee leasing
company legally becomes the employer of record for its client's employees. The
employee leasing company assumes substantial employer responsibilities and
risks, including payment of payroll, filing and remitting of related taxes,
provision for workers' compensation insurance coverage, management of workers'
compensation claims, provision and administration of health and other employee
benefits
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and offering of various risk management services in compliance with state and
federal guidelines.
Staffing industry companies provide temporary employees to a broad range of
industries and businesses, with the staffing companies directly employing the
workers and remaining responsible for payroll, workers' compensation insurance
coverage and human resource functions.
General liability policies written for employee leasing and staffing
companies protect such companies from claims arising out of bodily injury or
property damage arising from their operations, which may include claims brought
against an employee leasing and staffing company as a result of performance of
activities by their employees, although such employees are under the direction
and control of such employee leasing and staffing company's clients. Employee
leasing and staffing companies generally require their clients to independently
maintain general liability coverage to protect the client against such claims.
Substantially all of the premiums assumed by the Company from this line of
business are attributable to workers' compensation coverage provided.
Underwriting. ASI Services's underwriting staff handles all insurance
underwriting functions, with specific underwriting authority related to the
experience and knowledge level of each underwriter. Risks that are perceived to
be more difficult and complex are underwritten by experienced staff and reviewed
by management. ASI Services uses management information reports to measure risk
selection and pricing in order to control underwriting performance. The
principal underwriting factors used by ASI Services for underwriting liability,
workers' compensation and surety coverages, are a financially stable business,
an established operating history, favorable loss histories and a demonstrated
commitment to loss control practices.
Claims. Claims arising under the policies and treaties issued or reinsured
by the Company are reviewed and managed by ASI Services's internal claims
department. When ASI Services receives notice of a loss, its claims personnel
open a claim file and establish a reserve with respect to the loss. ASI Services
retains claims settlement authority, delegating only limited settlement
authority to certain third party administrators. ASI Services emphasizes prompt
and fair settlement of meritorious claims, maintenance of adequate loss reserves
and careful control of claims adjustment and legal expenses.
Reinsurance Assumed
Reinsurance is a contractual arrangement under which one insurer (the
ceding company) transfers to another insurer (the reinsurer) all or a portion of
the risk(s) that the ceding company has assumed under the insurance policy or
policies it has issued. A ceding company may purchase reinsurance for any number
of reasons including to obtain, through
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the transfer of a portion of its liabilities, greater underwriting capacity than
its own capital resources would support, to stabilize its underwriting results,
to protect against catastrophic loss, and to enter into or withdraw from a line
of business. Reinsurance can be written on either a quota share or excess of
loss basis, under either a treaty or facultative reinsurance agreement.
Substantially all of the reinsurance business that the Company currently
assumes is for primary insurance coverages that the Company has developed and
underwritten. The Company, through its reinsurance subsidiary, enters into
treaties with its U.S. insurance subsidiary, its risk retention group affiliate
and unaffiliated insurers with whom the Company has developed insurance
programs. The Company reinsures, generally on an excess of loss basis, the
general liability, pollution liability, professional liability, workers'
compensation and surety risks for contractors, consultants and other businesses
and property owners who are involved with environmental remediation, as well as
programs for the employee leasing and staffing industry and other specialty
risks.
For the year ended December 31, 1998, of the $10.1 million of gross
reinsurance premiums written by the Company, approximately $3.4 million was
assumed from its risk retention group affiliate, with the balance of
approximately $6.7 million assumed from unaffiliated insurers. For the year
ended December 31, 1999, of the $13.2 million of gross reinsurance premiums
written by the Company, approximately $4.1 million was assumed from its risk
retention group affiliate, with the balance of approximately $9.1 million
assumed from unaffiliated reinsurers.
The Company's assumed reinsurance business for general liability,
pollution, and professional liability is written under excess of loss treaties
primarily with its risk retention group affiliate. In the layer of the first
$250,000 of loss per occurrence, the Company assumes 70% of the losses arising
from claims covered under the policies written after the reinsured pays the
first $100,000 of claims in the aggregate on an annual basis; and the reinsured
retains 30% of the risk after payment of the aggregate amount. The Company also
assumes workers' compensation reinsurance from Legion Insurance Company
("Legion"). After a retention of the first 10% of premium by Legion for payment
of claims, the Company reinsures Legion for the next $250,000 per occurrence,
subject to aggregate stop-loss reinsurance for losses above a 70% loss ratio.
The Company's U.S. insurance subsidiary cedes certain risks on a quota
share basis to the Company's Bermuda reinsurance subsidiary in order to provide
for a spread of risk among the respective companies as well as to increase the
capacity of the Company's U.S. insurance subsidiary to write insurance and
reinsurance business.
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Management's reinsurance underwriting strategy is to utilize the
underwriting expertise of ASI Services, the Company's principal U.S. program
development, underwriting and administrative services subsidiary, to practice
discipline in selecting and retaining risks and structuring insurance programs
which the Company reinsures. The Company's reinsurance treaties with its U.S.
insurance subsidiary and its risk retention group affiliate automatically cover
primary insurance programs written by such insurers. The Company utilizes ASI
Services to provide direct contact with reinsureds, either by underwriting or
claim audits or periodic loss control visits to the insureds and the producing
brokers, both to enhance the quality of the underwriting process and to develop
and retain business relationships.
Selected Operating Information
Gross Premiums Written and Produced. As a result of the Company's roles in
connection with insurance program development, risk bearing on a primary and
reinsurance basis, insurance and reinsurance brokerage, and production and
administration, the Company is involved in a number of insurance and reinsurance
premium and fee-generating activities. The Company places insurance and
reinsurance with its subsidiaries and its risk retention group affiliate, and
also acts as an agency and broker for its risk retention group affiliate,
unaffiliated insurers and reinsurers for which the Company receives brokerage
commissions of 10-15% of gross premiums written and produced. For the year ended
December 31, 1999, the Company was involved with the placement of approximately
$32.2 million of gross premiums through its various programs and subsidiaries.
The following table sets forth the Company's premiums written and produced
for the years ended December 31, 1998 and December 31, 1999:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1999
Gross Ceded Net Gross Ceded Net
----- ----- --- ----- ----- ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
The Company $ 14,739 $ 5,087 $ 9,652 $ 25,290 $ 8,864 $ 16,426
American Safety RRG (1) 4,648 7,469
Other Insurers and Reinsurers (2) 10,532 4,041
Less: Ceded from American Safety RRG to
the Company (3) (3,372) (4,560)
$ 26,547 $ 32,240
(1) Represents premiums written by American Safety RRG, the Company's non-subsidiary affiliate.
(2) Represents premiums produced by the Company, as an agency and broker, for unaffiliated insurers and
reinsurers.
(3) Represents premiums ceded to the Company from American Safety RRG.
</TABLE>
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Net Premiums Written. The following table sets forth the Company's net
premiums written by principal lines of insurance and reinsurance for the years
ended December 31, 1998 and December 31, 1999:
<TABLE>
<CAPTION>
Year Ended Year Ended
Net Premiums Written December 31, 1998 December 31, 1999
(Dollars in thousands)
<S> <C> <C> <C> <C>
General Liability $ 3,065 31.8% $ 4,245 25.8%
Workers' Compensation 5,819 60.3 8,289 50.5
Surety 642 6.6 3,330 20.2
Auto 126 1.3 - -
Prepaid Legal - - 42 .3
Commercial Lines - - 520 3.2
Total $ 9,652 100.0% $16,426 100.0%
</TABLE>
The following table sets forth the Company's net premiums
written by specialty industry for the years ended December 31, 1998 and December
31, 1999:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1999
----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Environmental $ 7,622 79.0% $ 9,424 57.4%
Employee Leasing 1,788 18.5 4,517 27.4
Bail Bonds and Other 242 2.5 1,643 10.0
Commercial Lines - - 520 3.2
Excess & Surplus Lines - - 322 2.0
Total $ 9,652 100.0% $16,426 100.0%
</TABLE>
Commissions and Fees. The Company generates fee and commission income in
connection with the Company's program development and management, insurance and
reinsurance brokerage services, and production and other insurance related
services. Fee and commission income was $1.8 million for the year ended December
31, 1998, and $1.8 million for the year ended December 31, 1999.
Combined Ratio. The combined ratio is a standard measure of a property and
casualty insurer's performance in managing its losses and expenses. Underwriting
results are generally considered profitable when the combined ratio is less than
100%. The following comparison of statutory combined ratios suggests that the
Company has experienced more favorable results than the property and casualty
insurance industry over the past three years.
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Combined Ratio (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
The Company(1)(2).................................................. 79.5% 72.5% 66.5%
Property and casualty industry(3).................................. 101.6 105.6 107.5
</TABLE>
(1) Data have been derived from the consolidated financial statements of the
Company.
(2) Payments by American Safety Casualty to ASI Services for management
services are included in the combined ratio.
(3) The statutory industry data was obtained from A.M. Best.
Although the combined ratio is the generally accepted measure for comparing
results within the property and casualty insurance industry, the combined ratio
does not distinguish between property and casualty companies based upon their
mix of business. The Company focuses primarily on long-tail liability coverages
and writes a very limited amount of short-tail liability coverages. Long-tail
liability insurance coverages often produce greater underwriting losses than
short-tail liability insurance. Long-tail liability coverages also produce more
investable cash flow for an insurance company because the losses may not be paid
out for many years. Therefore, the companies writing long-tail insurance
coverages may be able to mitigate their higher underwriting losses by deriving
investment income. Accordingly, a higher combined ratio (on a statutory basis)
for a company writing long-tail liability insurance does not necessarily mean
lower profitability.
The Company at times writes insurance program business with a higher
expense ratio resulting from significant commission expense (e.g. bail bond
program) and a higher loss ratio resulting from minimum reserves that are
established on other programs (e.g. workers' compensation). As a result, the
Company's combined ratio may fluctuate over time due to the presence or absence
of such program business in any year and the initiation of new programs.
Premium and Loss Summary. The Company is engaged in the development of
programs and underwriting of coverages as both a primary casualty insurer and a
reinsurer. The following table provides selected historical information on
generally accepted accounting principles ("GAAP") basis concerning the business
written by the Company and the associated underwriting risks. This data should
be read in conjunction with the consolidated financial statements and notes
thereto and the Selected Financial Data included elsewhere in this Report.
-12-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
(In thousands, except ratio data)
Reinsurance:
<S> <C> <C> <C>
Gross Premiums Written $ 7,501 $ 10,136 $ 13,204
Net Premiums Written 7,072 8,996 12,266
Net Premiums Earned 6,645 8,608 10,891
Loss & Loss Adjustment Expense Ratio 61.2% 57.3% 54.3%
Primary:
Gross Premiums Written $ 4,060 $4,603 $ 12,086
Net Premiums Written 1,899 656 4,160
Net Premiums Earned 1,702 581 2,782
Loss & Loss Adjustment Expense Ratio 1.5% 41.5% 35.2%
Combined:
Gross Premiums Written $ 11,561 $ 14,739 $ 25,290
Net Premiums Written 8,971 9,652 16,426
Net Premiums Earned 8,347 9,189 13,673
Loss & Loss Adjustment Expense Ratio 49.0% 56.3% 50.4%
Expense Ratio 32.8% 16.9% 19.3%
------- ------- -------
Combined 81.8% 73.2% 69.7%
======= ======= =======
</TABLE>
Significant fluctuations in demand for and supply of various casualty
insurance and reinsurance lines of business have led to substantial price
fluctuations over time. The Company's management seeks to expand and contract
various lines of business based on the relative favorability of the pricing
environment for its products. As a writer of both primary insurance and
reinsurance, the Company has additional flexibility to adjust its business mix
in response to price differences in these markets and to utilize its knowledge
of primary insurance markets to guide its assumption of insurance and
reinsurance risks. During the past decade, the Company has operated in a soft
market cycle which is characterized by excess insurance capacity and declining
insurance premium rates.
Reinsurance Ceded
The Company obtains reinsurance for its primary insurance and reinsurance
operations from unaffiliated reinsurers to protect and mitigate the exposures of
the Company. The Company's reinsurance program for general and pollution
liability risks operates on an excess of loss basis, with the Company's maximum
exposure, on a per occurrence basis, limited to $175,000. For surety business
written by American Safety Casualty, the Company maintains an excess of loss
treaty on a per bond and a per principal basis, thereby limiting the Company's
maximum exposure on a per principal basis to $250,000. For workers' compensation
reinsurance business assumed by the Company, the Company's maximum exposure is
$250,000 per occurrence, and aggregate stop loss reinsurance is maintained for
losses above a 70% loss ratio. Reinsurance treaties maintained by the Company
for its protection have no loss ratio restrictions or aggregate limits of
liability.
-13-
<PAGE>
The Company purchases reinsurance for its primary insurance business lines
and its reinsurance business. Gross reinsurance premiums ceded in 1998 were $5.1
million, which constitutes 34.5% of the gross premiums written, and in 1999 were
$8.9 million, which constitutes 35.1% of the gross premiums written. The amount
of reinsurance obtained by the Company varies with the line of business insured
or reinsured.
The Company evaluates the credit quality of the U.S. reinsurers and
retrocessionaires to which it cedes business. The following table sets forth
certain information relating to the Company's unaffiliated reinsurers and
retrocessionaires as of December 31, 1999.
<TABLE>
<CAPTION>
Premiums Ceded
for Year Ended A.M. Best
Reinsurers December 31, 1999 Rating(1)
(In thousands)
<S> <C> <C>
Houston Casualty Company............................................ $1,465 A+
Louisiana Pest Control Insurance Company............................ 622 B+
Reliance Reinsurance Corporation.................................... 540 A-
Signet Star Reinsurance Company..................................... 501 A
Odyssey Reinsurance Corporation..................................... 181 A-
Midwest Employers Casualty Company.................................. 49 A-
Zurich American Insurance Group..................................... 44 A+
American Reinsurance Company........................................ 7 A++
-----------------
(1) A.M. Best rating currently assigned.
</TABLE>
Reserves
The Company is required to maintain reserves to cover its estimated
ultimate liability for losses and loss adjustment expenses with respect to
reported and unreported claims incurred. The Company engages an independent
internationally recognized actuarial consulting firm to provide reserve studies,
opinions and rate studies. Reserves are estimates at a given time, which are
established from actuarial and statistical projections by the Company of the
ultimate settlement and administration costs of claims occurring on or prior to
such time, including claims that have not yet been reported to the insurer. The
establishment of appropriate loss reserves is an inherently uncertain process,
and there can be no assurance that ultimate payments will not materially exceed
the Company's reserves.
With respect to reported claims, reserves are established on a case-by-case
basis. The reserve amounts on each reported claim are determined by taking into
account the circumstances surrounding each claim and policy provisions relating
to the type of loss. Loss
-14-
<PAGE>
reserves are reviewed on a regular basis, and as new data becomes available,
appropriate adjustments are made to reserves.
Approximately 46% of the Company's net reserves relate to liability
associated with its asbestos abatement and other environmental general liability
insurance programs. Another 49% of net reserves are attributable to the workers'
compensation insurance program. The 5% balance of reserves is spread among
surety and other coverages.
In establishing reserves for its general liability insurance program, the
Company uses paid and reported Bornhuetter-Ferguson methods which are based in
part on developing paid and reported losses and an initial expected loss level.
Initial expected losses reflect an expected loss ratio estimated from the ten
year experience of the Company and a loss cost model applied to premium by
coverage year. This loss indication and paid/reported losses are assigned
respective weights to obtain estimates of ultimate losses which are considered
in establishing ultimate loss levels.
In establishing reserves for its workers' compensation insurance program,
several methods are employed in determining ultimate losses: a pure premium
method; two Bornhuetter-Ferguson methods - paid and reported; and two loss
development methods - paid and incurred. The first three methods use industry
expected losses adjusted for the Company's experience while the last two methods
rely on industry payment and reporting patterns to develop the Company's actual
losses. The Company reviews all methods each coverage year in determining
ultimate losses.
In establishing reserves for its surety and other coverages, the Company
uses an expected loss ratio method due to the limited amount of exposure assumed
and the lack of historical Company specific information available.
All the methods used are generally accepted actuarial methods and, with the
exception of the pure premium method, rely in part on loss reporting and payment
patterns while considering the long tail nature of the coverages and inherent
variability in projection results from year-to-year. The patterns used are
generally based on industry data with supplemental consideration given to
Company experience as deemed warranted.
The Company's independent actuarial consulting firm also relies on industry
data to provide the basis for reserve analysis on newer lines of business.
Provisions for inflation are implicitly considered in the reserving process. For
GAAP purposes, the Company's reserves are carried at the total estimate for
ultimate expected loss, without any discount to reflect the time value of money.
Reserve calculations are reviewed regularly by management and periodically by
regulators. The Company's independent actuarial consulting firm annually
expresses an opinion on the adequacy of statutory reserves established by
management, which opinion is filed with the various jurisdictions in which
-15-
<PAGE>
the Company's insurance and reinsurance subsidiaries and its risk retention
group affiliate are licensed. Based upon practices and procedures employed by
the Company, without regard to independent actuarial opinions, management
believes that the Company's reserves are adequate.
The following table provides a reconciliation of beginning and ending
liability balances on a GAAP basis for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C>
Gross losses and loss adjustment expense reserves at
beginning of year $ 8,914 $ 11,572 $14,701
Reinsurance recoverable at beginning of year 45 779 1,841
----- ------- ------
Net losses and loss adjustment expense reserves at
beginning of year............................................. 8,869 10,793 12,860
----- ------- ------
Add:
Incurred losses related to:
Current accident years........................................ 3,112 4,383 7,449
Prior accident years.......................................... 981 794 (553)
------ -------- -----
Total incurred losses.................................... 4,093 5,177 6,896
------ -------- -----
Less:
Claims payments related to:
Current accident years........................................ 342 103 1,707
Prior accident years.......................................... 1,827 3,007 3,701
------- -------- ------
Total claims paid........................................ 2,169 3,110 5,408
------- -------- ------
Net losses and loss adjustment expense reserves at end
of year...................................................... 10,793 12,860 14,348
Reinsurance recoverable at end of year........................... 779 1,841 6,065
-------- -------- -------
Gross losses and loss adjustment expense reserves at end of year $ 11,572 $ 14,701 $20,413
======== ======== =======
</TABLE>
The following table shows the development of the reserves for unpaid losses
and loss adjustment expenses from 1989 through 1999 for the Company's primary
insurance and reinsurance subsidiaries on a GAAP basis. The 1989 year includes
information for all years prior (1986, 1987 and 1988 only). The top line of the
table shows the liabilities at the balance sheet date for each of the indicated
years. This reflects the estimated amounts for losses and loss adjustment
expenses for claims arising in that year and all prior years that are unpaid at
the balance sheet date, including losses incurred but not yet reported to the
Company. The upper portion of the table shows the re-estimated amount of
previously recorded liability based on experience as of the end of each
succeeding year. The lower portion of the table shows the cumulative amounts
subsequently paid as of successive years with respect to the liability. The
estimates change as more information becomes known about the frequency and
severity of claims for individual years. A redundancy (deficiency) exists when
the re-estimated liability at each December 31 is less (greater) than the prior
-16-
<PAGE>
liability estimate. The "cumulative redundancy" depicted in the table, for any
particular calendar year, represents the aggregate change in the initial
estimates over all subsequent calendar years.
<TABLE>
<CAPTION>
Year Ended December 31,
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid
losses and loss
adjustment expense 2,397 $4,359 $4,552 $4,135 $4,798 $6,048 $8,288 $8,869 $10,793 $12,860 $14,348
Reserves re-estimated
at December 31:
1 year later. 2,910 2,786 3,264 4,266 4,653 5,854 7,482 9,850 11.587 12,307
2 years later 1,968 2,327 3,057 4,100 4,584 5,381 7,518 9,926 12,253 --
3 years later 1,533 2,169 2,956 4,148 3,920 4,823 7,398 9,606 -- --
4 years later 1,391 2,119 2,933 3,644 3,063 4,373 7,027 -- -- --
5 years later 1,329 1,967 2,607 2,987 2,740 3,941 -- -- -- --
6 years later 1,130 1,948 1,953 2,765 2,535 -- -- -- -- --
7 years later 1,187 1,438 1,693 2,504 -- -- -- -- -- --
8 years later 806 1,310 1,422 -- -- -- -- -- -- --
9 years later 715 1,253 -- -- -- -- -- -- -- --
10 years later 670 -- -- -- -- -- -- -- -- --
Cumulative -
redundancy
(deficiency)........ 1,727 3,106 3,130 1,631 2,263 2,107 1,261 (737) (1,460) 553
Cumulative amount of
liability paid through
December 31:
1 year later 54 319 99 524 152 501 931 1,827 3,007 3,701
2 years later 88 378 308 651 382 997 2,056 3,506 5,707 --
3 years later 175 554 380 872 621 1,552 2,906 4,918 -- --
4 years later 203 611 531 1,095 776 1,899 3,656 -- -- --
5 years later 244 693 697 1,235 1,064 2,162 -- -- -- --
6 years later 299 757 701 1,511 1,252 -- -- -- -- --
7 years later 325 757 699 1,516 -- -- -- -- -- --
8 years later 324 755 700 -- -- -- -- -- -- --
9 years later 321 755 -- -- -- -- -- -- -- --
10 years later 321 -- -- -- -- -- -- -- -- --
Net reserve December
31 10,793 12,860 14,348
Reinsurance Recoverable 779 1,841 6,065
------- ------ ------
Gross Reserve 11,572 14,701 20,413
====== ====== ======
</TABLE>
Investments
The Company entered into an Investment Services Agreement with Invesco
Capital Management, Inc. ("Invesco") in September 1999 whereby Invesco provides
investment advisory services to the Company, subject to the investment policies
and guidelines established by the Company's Board of Directors. The Company has
consistently invested primarily in investment grade fixed income securities,
with the objective of providing reasonable returns while limiting liquidity risk
and credit risk. The Company's investment strategy has been to increase its
investments in high quality bonds, as opposed to equity securities, in order to
avoid market fluctuations. The investment portfolio consists primarily of
government and governmental agency securities and high quality marketable
corporate securities which are rated at investment grade level.
-17-
<PAGE>
At December 31, 1999, the Company's total assets of $104.4 million
consisted of the following: cash, investments and notes receivable 69.9%;
premiums receivable and agent's balances 11.7%; and other assets 18.4%. At
December 31, 1999, the Company held investment grade fixed income debt
securities valued at $40.7 million and secured notes receivable valued at $13.0
million. Secured notes receivable of $11.3 million represented secured loans to
unaffiliated parties, at or above market rates, secured by corporate and
personal guarantees, real estate and other collateral.
The Company's cash and investments at December 31, 1999 totaled
approximately $61 million, and were classified as follows:
<TABLE>
<CAPTION>
Book Value Percent of
Type of Investment (In thousands) Portfolio
<S> <C> <C>
Cash and short-term investments $ 7,177 11.6%
United States government securities 17,476 28.4
Mortgage-backed securities 3,434 5.6
Corporate bonds 8,706 14.2
Foreign investments 5,917 9.6
Municipal bonds 6,526 10.6
Equity securities 166 .4
Real Estate 12,040 19.6
------ ----
Total $ 61,442 100.0%
====== =====
</TABLE>
The statement and fair values of the bond portfolio, classified by
rating, as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Fair Amount Reflected Percent of
S&P's/Moody's Rating(1) Value on Balance Sheet Total
(In thousands)
<S> <C> <C> <C>
AAA/Aaa (including United States Treasuries of
$16,682) .................................... $ 28,588 $ 28,588 70.3%
AA/Aa ....................................... 7,875 7,875 19.4
A/A ......................................... 2,705 2,705 6.6
BBB/Baa ..................................... 1,526 1,526 3.7
----- ------ ------
Total................................ $ 40,694 $ 40,694 100.0%
====== ====== ======
</TABLE>
(1) Ratings are assigned by Standard & Poor's ("S&P") or, if no S&P rating is
available, by Moody's Investors Service Inc. ("Moody's").
The National Association of Insurance Commissions ("NAIC") has a bond
rating system by which it assigns securities to classes called "NAIC
designations" that are used by insurers when preparing their annual financial
statements. The NAIC assigns designations to publicly traded as well as
privately placed securities. The designations assigned by the NAIC range from
class 1 to class 6, with a rating in class 1 being the highest quality. As of
December 31, 1999, all of the Company's bond portfolio, measured on a
-18-
<PAGE>
statutory carrying value basis, was invested in securities rated in class 1 or
class 2 by the NAIC, which are considered investment grade.
The weighted average maturity of the Company's bond portfolio at December
31, 1999 was 6.1 years. The composition of the Company's bond portfolio,
classified by maturity, as of December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
Maturity Cost Value
(In thousands)
<S> <C> <C>
Due in one year or less....................................... $ 350 $ 350
Due from one to five years.................................... 22,080 21,512
Due from five to ten years.................................... 13,145 12,774
Due after ten years........................................... 3,050 2,781
Mortgage-backed securities.................................... 3,434 3,277
------ ------
Total ............................................. $ 42,059 $ 40,694
====== ======
</TABLE>
- ----------
(1) Based on stated maturity dates with no prepayment assumptions.
The Company's investment grade fixed maturity securities included mortgage
backed bonds of $3.3 million, which are subject to risks associated with the
variable prepayments of the underlying mortgage loans.
At December 31, 1999, the Company had secured notes receivable from related
and unrelated parties in the amounts of $1.7 million and $11.3 million,
respectively. These notes mature over the next two years and carry interest
rates between 8% to 25%. All of these loans are collateralized with various
forms of real estate, personal and corporate guarantees, and financial guaranty
bonds. At December 31, 1999, all payments on such notes were current and as of
March 4, 2000, the related party note balance was $170,000.
Of the nine notes receivable from unrelated parties, four of the notes required
monthly interest payments at December 31, 1999. Accrued interest on these
interest paying notes was $35,000 at December 31, 1999, which represents current
amounts due. Accrued interest on the interest accruing notes was $1.9 million at
December 31, 1999.
During 1999, the Company foreclosed on the Harbour Village note receivable.
Subsequent to the foreclosure, the Company took possession of the collateral
property, which had a fair value in excess of the carrying value of the note.
During 1999 the Company negotiated with a potential purchaser and recorded
$360,000 of management fees to manage the property prior to the anticipated
sale, which did not close in February 2000. Additionally, the Company incurred
development costs related to the property in the amount of $2.5 million, which
were capitalized as investments in real estate.
American Safety Risk Retention Group, Inc.
Organization History. Following the enactment of the Risk Retention Act,
American Safety, in order to establish a U.S. insurance company to market and
underwrite specialty environmental coverages, provided financial and technical
assistance in connection with the organization of American Safety RRG in 1988.
American Safety RRG is not owned by the Company but is managed by ASI Services,
the Company's principal U.S. program development, underwriting and
administrative services subsidiary, on a fee-for-service basis. American Safety
RRG is authorized to write liability insurance in all 50 states as a result of
the Risk Retention Act, its license from the Vermont Department of Banking,
Insurance, Securities and Health Care Administration (the "Vermont Department")
under the Vermont Captive Act as a stock captive insurance company, and other
state insurance filings. Presently, five of the directors of American Safety RRG
are also directors of the Company.
-19-
<PAGE>
The directors of American Safety RRG are elected annually by the
insureds/shareholders of American Safety RRG.
American Safety transferred its book of primary insurance business to
American Safety RRG in 1988 and American Safety RRG replaced American Safety as
the policy issuing carrier insuring general, pollution and professional
liability risks for contractors, consultants and other businesses and property
owners who are involved with environmental remediation. American Safety then
became the quota share reinsurer of the risks transferred and subsequently
underwritten by American Safety RRG. All reinsurers of American Safety RRG are
required to be approved as reinsurers by the Vermont Department, and American
Safety has been an authorized reinsurer of American Safety RRG since 1988. The
Company, through its insurance subsidiaries, participates in the business of
American Safety RRG as its primary reinsurer under an excess of loss/quota share
reinsurance arrangement. For policies written by American Safety RRG, the
Company receives 44.1% of the premium and assumes 70% of the risk in the layer
of the first $250,000 of loss per occurrence, subject to American Safety RRG's
retention of the first $100,000 of loss in the aggregate each year. American
Safety RRG also cedes 100% of the risk in the layer of $750,000 in excess of
$250,000 per occurrence, 100% of the risk in the layer of $4 million in excess
of $1 million, to unaffiliated reinsurers, and 100% of the risk in the layer of
$10 million in excess of $5 million, to unaffiliated reinsurers.
Regulation. The Risk Retention Act facilitates the establishment of risk
retention groups to insure certain liability risks of its members. The statute
applies only to "liability" insurance and does not permit coverage of personal
risk liability or workers' compensation. Membership in a risk retention group is
limited to persons engaged in businesses or activities that are similar or
related with respect to the liability to which the members are exposed by virtue
of any related, similar, or common business, trade, products, services
(including professional services), premises or operations. Ownership in a risk
retention group is limited to persons who are members of the group and who are
provided insurance by the group.
The Risk Retention Act and the Vermont Captive Act require that each
insured of American Safety RRG be a shareholder. Each insured is required to
purchase one share of the American Safety RRG's common stock upon the acceptance
of the applicant as an insured. There is no trading market for the shares of
common stock of American Safety RRG and each share is restricted as to transfer.
If and when a holder of American Safety RRG common stock ceases to be an
insured, whether voluntarily or involuntarily, such person's share of common
stock is automatically canceled and such person is no longer a shareholder of
American Safety RRG. The ownership interests of members in a risk retention
group are
-20-
<PAGE>
considered to be exempt securities for purposes of the registration provisions
of the Securities Act and the Securities and Exchange Act and are likewise not
considered securities for purposes of any state securities law.
Congress intended under the Risk Retention Act that the primary
responsibility for regulating the financial condition of a risk retention group
would rest on the state in which the group is licensed or chartered. American
Safety RRG is subject to regulation as a captive insurer under the insurance
laws of Vermont and, to a lesser extent, under the laws of each state in which
it is doing business. The Risk Retention Act requires a risk retention group to
provide a notice on each insurance policy which it issues to the effect that (i)
the policy is issued by a risk retention group; (ii) the risk retention group
may not be subject to all of the insurance laws and regulations of the state in
which the policy is being issued; and (iii) no state insurance insolvency
guaranty fund is available to the policies issued by the risk retention group.
Management. Since 1990, ASI Services has managed the nationwide operations
of American Safety RRG from its offices in Atlanta, Georgia pursuant to a
program management agreement with a three year term. American Safety RRG has
also entered into local management services agreements since 1988 with captive
management companies of national insurance brokerage or insurance companies with
offices located in Burlington, Vermont to provide local administrative services.
ASI Services acts as the program manager for American Safety RRG pursuant
to the program management agreement and is authorized to solicit and accept
applications for insurance and to issue insurance policies on behalf of American
Safety RRG subject to program administration rules and procedures of American
Safety RRG. For 1999, the program management agreement between American Safety
RRG and ASI Services provided for payment of a monthly program management fee of
$45,000 and a managing general agency commission of 10-15% of premium, depending
on the amount of premium paid by the insured. ASI Services was also compensated
for direct production of business, and was reimbursed for marketing expenses
actually incurred, and for loss control expenses actually incurred plus a 20%
fee. The Company's recognized revenues from American Safety RRG for the years
ended December 31, 1998 and December 31, 1999 are as follows:
-21-
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1999
(In thousands)
<S> <C> <C>
Assumed earned premiums from
American Safety RRG........................ $ 2,835 $ 3,449
Ceded earned premiums to American
Safety RRG ............................ 2,317 3,973
----- -----
Net premiums earned.......................... 518 (524)
Management fees.............................. 714 722
Brokerage commission income.................. 634 1,080
Loss control fees............................ 73 75
</TABLE>
In the table above assumed premiums earned represent the assumption of a
portion of liability risks by the Company from American Safety RRG, and ceded
premiums represent the transfer of a portion of liability risks from the Company
to American Safety RRG. Management fees include administrative services,
underwriting services, claims administration services, financial, accounting,
billing and collection services and consulting services.
The Company derived approximately 11.6% ($1.9 million) of its revenues in
1998 and 6.1% ($1.4 million) of its revenues in 1999 from American Safety RRG
for administrative and management fees, producing agent commissions, loss
control fees, reinsurance intermediary fees and reinsurance premiums.
Insurance Regulation
The Company's primary insurance and reinsurance operations are subject to
regulation under applicable insurance statutes of the jurisdictions or states in
which each subsidiary is domiciled and writes insurance. Insurance regulations
are intended to provide safeguards for the policyholders rather than to protect
shareholders of insurance companies or their holding companies.
The nature and extent of state regulation varies from jurisdiction to
jurisdiction, but typically involves prior approval of the acquisition of
control of an insurance company or of any company controlling an insurance
company, regulation of certain transactions entered into by an insurance company
with an affiliate, approval of premium rates for lines of insurance, standards
of solvency and minimum amounts of capital and surplus which must be maintained,
limitations on types and amounts of investments, restrictions on the size of
risks which may be insured by a single company, deposits of securities for the
benefit of policyholders, and reports with respect to financial condition and
-22-
<PAGE>
other matters. In addition, state regulatory examiners perform periodic
examinations of insurance companies.
Although the federal government does not directly regulate the business of
insurance in the United States, federal initiatives often affect the insurance
business in a variety of ways. The insurance regulatory structure has also been
subject to scrutiny in recent years by the National Association of Insurance
Commissioners ("NAIC"), federal and state legislative bodies and state
regulatory authorities. Various new regulatory standards have been adopted and
proposed in recent years. The development of standards to ensure the maintenance
of appropriate levels of statutory surplus by insurers has been a matter of
particular concern to insurance regulatory authorities.
Bermuda Regulation
American Safety, as a licensed Bermuda insurance company, and its Bermuda
reinsurance subsidiary, American Safety Re, are subject to regulation under The
Insurance Act 1978, as amended, and related regulations (the "Bermuda Act"),
which provides that no person shall conduct insurance business (including
reinsurance) in or from Bermuda unless registered as an insurer under the
Bermuda Act by the Minister of Finance (the "Minister").
The Bermuda Act requires, among other things, Bermuda insurance companies
to meet and maintain certain standards of solvency, to file periodic reports in
accordance with the Bermuda Statutory Accounting Rules, to produce annual
audited financial statements and to maintain a minimum level of statutory
capital and surplus. In general, the regulation of insurers in Bermuda relies
heavily upon the auditors, directors and managers of the Bermuda insurer, each
of which must certify that the insurer meets the solvency capital requirements
of the Bermuda Act. Furthermore, the Minister is granted powers to supervise,
investigate and intervene in the affairs of insurance companies.
Neither American Safety nor American Safety Re is registered or licensed as
an insurance company in any state or jurisdiction in the United States.
U.S. Regulation
American Safety, as a specialty insurance and financial services holding
company, does not itself do business in the United States. The Company, through
its U.S. subsidiaries, does business in the United States. The Company's U.S.
insurance subsidiary's operations are subject to state regulation where it is
domiciled and where it writes insurance.
-23-
<PAGE>
American Safety Casualty, the Company's U.S. insurance subsidiary domiciled
in Delaware, was acquired by the Company in 1993. American Safety Casualty is
currently licensed as a property and casualty insurer in 47 states and the
District of Columbia. The insurer is subject to regulation and examination by
the Delaware Insurance Department and the other states in which it is an
admitted insurer. The Delaware Insurance Department examines American Safety
Casualty on a triennial basis. No other state has examined American Safety
Casualty since it was acquired by the Company. The insurance laws of Delaware
place restrictions on a change of control of American Safety as result of its
ownership of American Safety Casualty. Under Delaware law no person may obtain
10% or more of the voting securities of American Safety without the prior
approval of the Delaware Insurance Department.
American Safety Casualty, as a licensed insurer, is subject to state
regulation of rates and policy forms in the various states in which direct
premiums are written for its general liability and workers' compensation lines
of business. Under such regulations, a licensed carrier may be required to file
and obtain prior approval of its policy form and the rates that are charged to
insureds. While American Safety Casualty is licensed to write workers'
compensation insurance in a number of states, it presently does not produce
direct premiums from such line of business, and is therefore not subject to such
regulations with respect to this line of business. If American Safety Casualty,
in the future, directly writes workers' compensation insurance, it would become
subject to such regulations. American Safety Casualty, as a licensed insurer, is
also required to participate in state insolvency funds, or shared markets, which
are designed to protect insureds of insurance carriers which become unable to
pay claims due to an insurer's insolvency. Assessments made against insurers
participating in such funds are based on direct premiums written by
participating insurers, as a percentage of total direct written premiums of all
participating insurers.
Competition
The casualty insurance and reinsurance business is highly competitive with
respect to a number of factors, including overall financial strength of the
insurer or reinsurer, ratings by rating agencies, premium rates, policy terms
and conditions, services offered, reputation and commission rates. The Company
faces competition from a number of insurers who have greater financial and
marketing resources and greater name recognition than the Company. Although the
Company's business strategy is to develop insurance programs for the
environmental remediation industry, the employee leasing and staffing industry,
as well as other specialty industries and risks by targeting niche markets where
its expertise is required and where competition is limited, the Company
nevertheless encounters competition from other insurance companies engaged in
insuring risks in broader lines of business which encompass the Company's niche
markets and specialty programs, and such competition is expected to increase as
the Company expands its operations.
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<PAGE>
Employees
At December 31, 1999, the Company employed 77 persons, none of whom was
represented by a labor union. ASI Services employs all of the Company's
employees and manages the Company's U.S. business operations, while the
Company's Bermuda operations are managed under contract by Mutual Risk
Management (Bermuda), Ltd., an unaffiliated party.
Item 2. Properties
The Company's Bermuda offices are located at 44 Church Street, Hamilton,
Bermuda, and the telephone number is (441) 296-8560. The offices of the
Company's U.S. subsidiaries are located at 1845 The Exchange, Suite 200,
Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.
Item 3. Legal Proceedings
The Company, through its subsidiaries, is routinely a party to pending or
threatened litigation in the normal course of its business. Based upon
information presently available, in view of legal and other defenses available
to the Company's subsidiaries, management does not believe that any pending or
threatened litigation or disputes will have any material adverse effect on the
Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders during
fourth quarter of the fiscal year ended December 31, 1999.
Management of the Company
The following table provides information regarding the management of the
Company. Biographical information for each of such persons is set forth
immediately following the table.
<TABLE>
<CAPTION>
Name Age Position
<S> <C>
Lloyd A. Fox.................... 54 President and Director
Stephen R. Crim................. 36 Executive Vice President
Joseph D. Scollo, Jr............ 36 Senior Vice President - Operations
Fred J. Pinckney................ 52 General Counsel and Secretary
Steven B. Mathis................ 32 Chief Financial Officer
J. Jeffrey Hood................. 36 Vice President-Claims and Loss Control
Kenneth A. Schneider............ 39 Senior Vice President-Underwriting
</TABLE>
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<PAGE>
Lloyd A. Fox has been a director of the Company since 1996 and is President
of the Company. Since 1990, Mr. Fox has headed the management of the Company's
U.S. subsidiaries. He assisted as general legal counsel in the formation of
American Safety in 1986. Previously, Mr. Fox was an attorney for 16 years in
Atlanta, Georgia, where his practice centered on insurance, the environmental
and construction industries, as well as corporate and taxation matters. He
received a juris doctor degree from the University of Michigan Law School in
1974 and a bachelor of science degree in pharmacy from Brooklyn College of
Pharmacy in 1968. Mr. Fox is a frequent speaker at insurance seminars and
environmental training courses throughout the United States.
Stephen R. Crim is Executive Vice President of the Company and has been
responsible for all underwriting functions since joining the Company in 1990.
Previously, Mr. Crim was employed in the underwriting department of Aetna
Casualty and Surety and The Hartford Insurance Co. between 1986 and 1990. Mr.
Crim has 13 years experience in the insurance industry. Mr. Crim received a
bachelors degree in mathematics from the Indiana University in 1986.
Joseph D. Scollo, Jr. is Senior Vice President - Operations of the Company
since November 1998. Previously, Mr. Scollo served as senior vice president -
operations of United Coastal Insurance Company, New Britain, Connecticut since
1989. Mr. Scollo has eight years experience in the insurance industry. Mr.
Scollo received a bachelor of science degree in economics from Western New
England College in 1985 and is a certified public accountant.
Fred J. Pinckney became General Counsel and Secretary of the Company in
October 1997. Previously, Mr. Pinckney was an attorney for 25 years in Atlanta,
Georgia, where his practice centered on securities and corporate matters. Since
1988, Mr. Pinckney was a partner in the law firm of Parker, Johnson, Cook &
Dunlevie, which merged in 1996 with Womble Carlyle Sandridge & Rice, PLLC, where
he was a member until he joined the Company. He was involved as special legal
counsel in the formation of American Safety in 1986 and acted as outside legal
counsel to the Company prior to joining the Company. Mr. Pinckney received a
juris doctor degree from the University of Michigan Law School in 1973 and a
bachelor of arts degree in political science from the University of Pittsburgh
in 1969.
Steven B. Mathis became Chief Financial Officer of the Company in August
1998. Previously he was the Company's controller since 1992 and he is currently
responsible for all accounting and treasury functions of the Company. Mr. Mathis
has ten years accounting experience in the insurance industry having held
accounting positions with American Insurance Managers, Inc. and American
Security Group. Mr. Mathis received
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<PAGE>
a bachelor of business administration degree in accounting from the University
of Georgia in 1989.
J. Jeffrey Hood is Vice President-Claims and Loss Control of ASI Services
and of American Safety Casualty and has been responsible for loss control and
safety matters since joining the Company in 1990. Previously, Mr. Hood had
served as a loss control and safety coordinator and claims administrator for
national technical and insurance organizations for four years. Mr. Hood received
a bachelor of science degree in petroleum engineering from Mississippi State
University in 1985.
Kenneth A. Schneider is Senior Vice President-Underwriting of ASI Services.
Prior to joining the Company in 1997, Mr. Schneider was a senior vice
president/managing director of Alexander & Alexander's environmental
underwriting, risk management and consulting division from 1993 to 1997, a
regional manager for marketing and underwriting for The ERIC Group from 1990 to
1993, and an environmental business manager for AIG Consultants from 1989 to
1990. Mr. Schneider has 17 years experience in the insurance and environmental
industry. Mr. Schneider received a masters of business administration degree
from the George Washington University in 1988 and a bachelor of science degree
in geology from Beloit College in 1983.
[The Remainder of this Page Intentionally Left Blank]
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<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common shares commenced trading on the National Association
of Security Dealers, Inc.'s National Market under the symbol "AMSFF" on February
13, 1998 as a result of the Company's completion of its initial public offering.
On February 5, 1999, the Company's common shares were listed and traded on the
New York Stock Exchange, Inc. under the symbol "ASI" and the Company's prior
listing on the National Association of Security Dealers, Inc.'s National Market
ceased. As of February 2, 2000, there were approximately 2,200 holders of the
Company's common shares.
The following table sets forth the high and low prices per share of the
Company's common shares for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1999 High Low
----------------------------------- ---- ---
<S> <C> <C>
First Quarter $ 10.38 $ 7.81
Second Quarter 10.00 6.63
Third Quarter 8.56 7.13
Fourth Quarter 7.94 6.00
</TABLE>
The Company does not anticipate paying cash dividends on its common shares
in the foreseeable future. As an insurance holding company, the Company's
ability to pay cash dividends to its shareholders will depend, to a significant
degree, on the ability of the Company's subsidiaries to pay cash dividends to
American Safety. The jurisdictions in which American Safety and its insurance
and reinsurance subsidiaries are domiciled place limitations on the amount of
dividends or other distributions payable by insurance companies in order to
protect the solvency of insurers. The Company's current plans are for its
insurance and reinsurance subsidiaries to retain their capital for growth.
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<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data with
respect to the Company for the periods indicated. The balance sheet data have
been derived from the audited financial statements of the Company. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto included elsewhere in this
Report.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In thousands, except per share and ratio data)
Income Statement Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Direct and assumed premiums
earned.................... $ 6,109 $ 5,316 $ 10,590 $ 13,183 $ 19,688
Ceded premiums earned......... (362) (1,044) (2,243) (3,994) (6,015)
----- ------- ------- ------- ------
Net premiums earned...... 5,747 4,272 8,347 9,189 13,673
Net investment income......... 1,346 1,207 1,647 2,847 2,878
Interest on notes receivable.. 7 885 798 2,409 2,614
Brokerage commission
income.................... 2,145 1,881 1,999 1,114 1,107
Management fees from
affiliate.................. 475 479 601 714 722
Net realized gains (losses)... 200 177 84 443 174
Other income.................. - 5 14 24 921
------- ------- ------- ------- ------
Total revenues........... 9,920 8,906 13,490 16,740 22,089
------- ------- ------- ------- ------
Expenses:
Losses and loss adjustment
expenses incurred.......... 2,905 2,056 4,093 5,177 6,896
Acquisition expenses.......... 1,086 646 2,336 1,010 1,819
Other expenses................ 2,029 3,110 3,494 4,798 7,371
----- ----- ----- ------ ------
Total expenses........... 6,020 5,812 9,923 10,985 16,086
----- ----- ----- ------ ------
Earnings before
income taxes.......... 3,900 3,094 3,567 5,755 6,003
Income Taxes.................... 720 177 356 (199) 83
------- ------- ------- -------- -------
Net earnings.................... $ 3,180 $ 2,917 $ 3,211 $ 5,954 $ 5,920
======= ======= ======= ======= =======
Net diluted earnings
per share.................... $ 1.07 $ 0.98 $ 1.08 $ 1.04 $ 0.98
Common shares and common
share equivalents used in
computing net diluted earnings
per share.................... 2,964 2,964 2,964 5,738 6,032
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
GAAP Ratios:
Loss and loss adjustment expense
ratio 50.5% 48.1% 49.0% 56.3% 50.4%
Expense Ratio 23.4 29.3 32.8 16.9 19.3
Combined ratio 73.9% 77.4% 81.8% 73.2% 69.7%
Net premiums written to
Equity 0.4x 0.3x 0.4x 0.2x 0.3x
Statutory Ratios:
Loss and loss adjustment
expense ratio 50.5% 48.1% 49.0% 56.3% 50.4%
Expense ratio 21.9 27.1 30.5 16.2 16.1
Combined ratio 72.4% 75.2% 79.5% 72.5% 66.5%
Balance Sheet Data (at end of
period)
Total investments $ 20,648 $ 17,964 $ 29,341 $ 51,048 $59,648
Total assets 27,143 31,299 47,668 86,147 104,354
Unpaid losses and loss
adjustment expenses 8,294 8,914 11,572 14,700 20,413
Total liabilities 10,529 13,267 25,827 26,878 43,315
Total shareholders' equity 16,614 18,032 21,841 59,269 61,039
</TABLE>
[The Remainder of this Page Intentionally Left Blank]
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<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information in the following discussion is presented on the basis of
generally accepted accounting principles ("GAAP") and should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Report. All amounts and percentages are
approximations.
-31-
<PAGE>
Results of Operations
The following table sets forth the Company's consolidated revenues:
<TABLE>
<CAPTION>
Percent Increase
Year Ended December 31, Decrease
----------------------- --------
1997 to 1998 to
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Premiums earned:
Reinsurance:
Workers' Compensation $ 5,144 $ 6,135 $ 7,712 19.3% 25.7%
General Liability from affiliate 1,463 2,381 3,149 62.7 32.3
Auto Liability - 96 30 100.0 (68.8)
------ ------ ------
Total reinsurance 6,607 8,612 10,891 30.3 26.5
------ ------ ------
Primary Insurance:
Prepaid Legal - - 42 - -
Commercial Lines - - 39 - -
Workers' Compensation - - 66 - -
Surety 1,740 577 2,635 (66.8) 356.6
------ ------ ------
Total primary insurance 1,740 577 2,782 (66.8) 382.1
------ ------ ------
Total net premiums earned 8,347 9,189 13,673 10.1 48.8
------ ------ ------
Net Investment Income 1,647 2,847 2,878 72.9 1.1
Interest on notes receivable 798 2,409 2,615 201.9 8.6
Commission and fee income:
Brokerage commission income 1,999 1,114 1,107 (44.3) (0.6)
Management fees from affiliates 601 714 722 18.8 1.1
------ ------ ------
Total commission and fee income 2,600 1,828 1,829 (29.7) .1
------ ------ ------
Net realized gains (losses) 84 443 174 427.4 (60.7)
Other income 14 24 921 71.4 3,737.5
------ ------ ------
Total Revenues $ 13,490 $ 16,740 $ 22,089 24.1% 32.0%
====== ====== ======
</TABLE>
The following table sets forth the components of the Company's statutory
combined ratio for the period indicated:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
Insurance Operations
<S> <C> <C> <C>
Loss & Loss Adjustment Expense Ratio 49.0% 56.3% 50.4%
Expense Ratio 32.8 16.9 19.3%
----- ----- -----
Combined Ratio 81.8% 73.2% 69.7%
===== ===== =====
</TABLE>
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<PAGE>
Year Ended December 31, 1999 to Year ended December 31, 1998
Net Premiums Earned. Net premiums earned increased 48.8% from $9.2 million
in 1998 to $13.7 million in 1999. The principal factors accounting for the
result were an increase of workers' compensation reinsurance premiums by 26.8%
or $1,644,000, and an increase of general liability reinsurance premiums by
32.2% or $768,000 and an increase of surety premiums by 356.6% or $2,057,000
which can be attributed to increased bail bond premium production which produced
$1.3 million in net earned premium in such year.
Net Investment Income. Net investment income increased 1.1% from $2.8
million in 1998 to $2.9 million in 1999 as a result of the investment of
additional cash flows from insurance operations offset by additional investments
in notes receivable and real estate. The average annual pre-tax yield on
investments was 7.1% in 1998 and 5.8% in 1999. The average annual after-tax
yield on investments was 6.7% in 1998 and 5.4% in 1999.
Interest from Notes Receivable. Interest from notes receivable increased
8.5% from $2,409,000 in 1998 to $2,615,000 in 1999 as a result of an increase of
the average outstanding secured notes receivable. The average annual pretax
yield on notes receivable was 22.4% and 18.0% in 1998 and 1999, respectively.
Brokerage Commission Income. Income from insurance brokerage operations
decreased 1% from $1.1 million in 1998 to $1.1 million in 1999 as a result of
increased commissions derived from insurance business produced through the
Company's risk retention group affiliate which was offset by lower commissions
from the Company's brokerage operations.
Management Fees. Management fees increased 1.2% from $714,000 in 1998 to
$722,000 in 1999 as a result of increased service levels provided by the Company
to its risk retention group affiliate.
Net Realized Gains. Net realized gains from the sale of investments
decreased from $443,000 in 1998 to $174,000 in 1999.
Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses
increased 33.2% from $5.2 million in 1998 to $6.9 million in 1999 primarily due
to an increase in net earned premiums. Increases in general liability and surety
business accounted for the largest portion of the increase in loss and loss
adjustment expenses. During 1999, the Company experienced favorable development
on prior accident years and released approximately $553,000 of reserves.
Acquisition Expenses. Policy acquisition expenses increased 80.1% from $1
million in 1998 to $1.8 million in 1999 as a result of increased premium
production and the Company's new reinsurance program for surety business.
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<PAGE>
Payroll and Other Expenses. Payroll and other expenses increased 53.6% from
$4.8 million in 1998 to $7.4 million in 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 increased from a benefit of
$199,244 in 1998 to an expense of $82,722 in 1999 due to increased taxable
income in the Company's U.S. subsidiaries.
Year Ended December 31, 1998 to Year ended December 31, 1997
Net Premiums Earned. Net premiums earned increased 10.1% from $8.3 million
in 1997 to $9.2 million in 1998. The principal factors accounting for the result
were an increase of workers' compensation reinsurance premiums by 19.3% or
$991,000 and an increase of general liability reinsurance premiums by 62.7% or
$918,000. Those increases were partially offset due to a decrease of surety
premiums by 66.8% or $1,163,000, which can be attributed to reduced bail bond
premium production from a discontinued program during 1997 which produced $1.4
million in net earned premium in such year.
Net Investment Income. Net investment income increased 72.9% from $1.6
million in 1997 to $2.8 million in 1998 as a result of the investment of
additional cash flows from insurance operations and from investment of the
Company's initial public offering proceeds during 1998. The average annual
pre-tax yield on investments was 7.0% in 1997 and 7.1% in 1998. The average
annual after-tax yield on investments was 6.3% in 1997 and 6.7% in 1998.
Interest from Notes Receivable. Interest from notes receivable increased
201.9% from $798,000 in 1997 to $2,409,000 in 1998 as a result of an increase of
$10.9 million in outstanding secured notes receivable.
Brokerage Commission Income. Income from insurance brokerage operations
decreased 44.3% from $2 million in 1997 to $1.1 million in 1998 as a result of
additional premiums being written by the Company's U.S. insurance subsidiary in
which acquisition expenses and brokerage income are eliminated due to
consolidation.
Management Fees. Management fees increased 18.8% from $601,000 in 1997 to
$714,000 in 1998 as a result of increased service levels provided by the Company
to its risk retention group affiliate.
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<PAGE>
Net Realized Gains. Net realized gains from the sale of investments
increased from $84,000 in 1997 to $443,000 in 1998, primarily from the sale of
fixed maturities due to favorable market conditions.
Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses
increased 26.5% from $4.1 million in 1997 to $5.2 million in 1998 primarily due
to a 10.1% increase in net earned premiums combined with an increase in the
projected losses for workers' compensation and a decrease in the projected
losses for general liability. The Company recorded loss and loss adjustment
expenses for workers' compensation to the aggregate stop-loss attachment point
of its reinsurance.
Acquisition Expenses. Policy acquisition expenses decreased 56.8% from $2.3
million in 1997 to $1 million in 1998 as a result of increased premiums written
by the Company's U.S. insurance subsidiary and produced by the Company's U.S.
brokerage subsidiary where acquisition expenses and brokerage income are
eliminated due to consolidation.
Other Expenses. Other expenses increased 37.3% from $3.5 million in 1997 to
$4.8 million in 1998 which is primarily due to salary and employee benefit
increases resulting from additional staffing for new and existing programs.
Income Taxes. Federal and state income taxes decreased from $355,531 in
1997 to a benefit of $199,244 in 1998 due to additional premiums being ceded to
the Company's Bermuda reinsurance subsidiary and investment income earned in
Bermuda.
Liquidity and Capital Resources
The Company historically has met its cash requirements and financed its
growth principally through cash flows generated from operations. During the past
decade, the Company has operated in a soft market cycle which is characterized
by excess insurance capacity and declining insurance premium rates. The
Company's 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 the
short-term needs of its insurance business and the Company's invested assets are
sufficient for the long-term needs of its insurance business. The Company also
purchases reinsurance to mitigate the effect of large claims and to help
stabilize demands on its liquidity.
-35-
<PAGE>
On a consolidated basis, net cash provided from operations was $9.4 million
for 1997, $2.4 million for 1998 and $5.5 million for 1999. The positive cash
flows for said 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 loss reserves for such lines of business. The
assets supporting the Company's reserves continue to earn investment income
until claim payments are made.
Total assets increased from $47.7 million at December 31, 1997 to $86.1
million at December 31, 1998 and to $104.4 million at December 31, 1999,
primarily due to increases in premiums receivable, reinsurance recoverables and
real estate investments. Cash, invested assets and notes receivable increased
from $37.4 million at December 31, 1997 to $72 million at December 31, 1998 and
to $73 million at December 31, 1999 as a result of increases in net premiums
written and investment income. The Company completed its 1999 stock repurchase
program of 300,000 common shares of the Company on December 31, 1999 at a total
cost of $2,169,339.
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. 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.
Harbour Village Development. American Safety announced in March 2000 its
plans to complete development of the Harbour Village Golf and Yacht Club,
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 property, acquired by American Safety through foreclosure in April 1999, has
been under development through its Ponce Lighthouse Properties, Inc. subsidiary.
While the property was being marketed for sale, deposits have been received
for in excess of $40 million of pre-construction sales that have been generated
under American Safety's development effort.
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<PAGE>
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 marketing of the condominium units. The
Company intends to obtain an acquisition and development loan and a revolving
bank credit facility in order to construct in sequence the three phases of
Harbour Village. The anticipated construction cost for the entire project is in
excess of $160 million. Financing in the approximate amount of $34 million will
be required for construction of Phase I. The Company has received a proposal for
the bank credit facility, and is in the process of obtaining a commitment for
such credit facility. 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 Harbour Village.
Management believes that the Company will be able to obtain a bank credit
facility which, together with anticipated cash flows from marketing and sales
operations, will meet the liquidity needs for the construction and development
of Phase I of Harbour Village 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.
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<PAGE>
Impact of Inflation
Property and casualty insurance premiums are established before the amounts
of losses and loss adjustment expenses are known and therefore before the extent
by which inflation may affect such expenses is known. Consequently, the Company
attempts, in establishing its premiums, to anticipate the potential impact of
inflation. However, for competitive and regulatory reasons, the Company may be
limited in raising its premiums consistent with anticipated inflation, in which
event the Company, rather than its insureds, would absorb inflation costs.
Inflation also affects the rate of investment return on the Company's investment
portfolio with a corresponding effect on the Company's investment income.
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.
Year 2000
The Year 2000 issue was 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. During 1999, the Company, together with consulting outside
vendors, reviewed its information technology systems (i.e., underwriting,
insureds, claims and accounting) and the systems have proved to be Year 2000
compliant by processing date information accurately and without interruption
when required to process dates in the year 1999 and beyond.
In the context of the Year 2000 issue, the Company 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 contacted
with its material business partners to determine their
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<PAGE>
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
could not identify a material business partner that was not compliant with
respect to the Year 2000 issue.
The Company has conducted a review of its underwriting guidelines and
policies, and has determined that the insurance policies issued by the Company
did not insure Year 2000 claims. However, changing social and legal trends may
create unintended coverage for claims by reinterpreting insurance contracts and
exclusions. It is impossible to predict what, if any, exposure insurance
companies may ultimately have for Year 2000 claims whether coverage for the
issue was specifically excluded or included.
The Company 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.
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 insurance industry factors, including, without
limitation, competitive conditions in the insurance industry, unpredictable
developments in loss trends, adequacy and changes in loss reserves, market
acceptance of new coverages and enhancements, and changes in levels of general
business activity and economic conditions. With respect to the development of
the Harbour Village property, 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 herein 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
herein, 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's Consolidated Balance Sheets includes assets whose estimated fair
values are subject to market risk. The primary market risks to the Company are
equity price risk associated with investments in equity securities and interest
rate risk associated with investments in fixed maturities. The Company has no
direct commodity or foreign exchange risk as of December 31, 1999. The estimated
fair value of the Company's investment portfolio at December 31, 1999 was $60
million, 79% of which was invested in fixed maturities and short-term
investments, 1% of which was invested in equity securities and 20% of which was
invested in real estate.
Equity Price Risk
The Company invests funds in equity securities which have historically,
over long periods of time, produced higher returns relative to fixed income
investments. The Company intends to hold these investments over the long term.
This focus on long-term total investment returns may result in variability in
the level of unrealized investment gains and losses from one period to the next.
The changes in the estimated fair value of the equity portfolio are presented as
a component of shareholders' equity in accumulated other comprehensive income,
net of taxes.
The table below summarizes the Company's equity price risk and shows the
effect of a hypothetical 20% increase and a 20% decrease in market prices as of
December 31, 1999. The selected hypothetical changes do not indicate what could
be the potential best or worst case scenarios (dollars in thousands):
-39-
<PAGE>
<TABLE>
<CAPTION>
Estimated Fair Hypothetical
Estimated Value after Percentage Increase
Fair Value at Hypothetical Hypothetical (Decrease) in
December 31, 1999 Price Change Change in Prices Shareholders' Equity
- ------------------------ ----------------------- ----------------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
Equity Securities $ 164 20% increase $ 197 0.1%
20% decrease 131 -0.1
</TABLE>
Interest Rate Risk
The Company's fixed maturity investments and borrowings are subject to
interest rate risk. Increases and decreases in interest rates typically result
in decreases and increases in the fair value of these financial instruments.
Approximately three quarters of the Company's investable assets come from
premiums paid by policyholders. These funds are invested predominantly in high
quality corporate, government and municipal bonds with relatively short
durations. The fixed maturity portfolio is exposed to interest rate
fluctuations; as interest rates rise, their fair values decline and as interest
rates fall, the fair value of the fixed maturity portfolio rises. The changes in
the fair market value of the fixed maturity portfolio are presented as a
component shareholders' equity in accumulated other comprehensive income, net of
taxes.
The Company works to manage the impact of interest rate fluctuations on its
fixed maturity portfolio. The effective duration of the fixed maturity portfolio
is managed with consideration given to the estimated duration of the Company's
liabilities. The Company has investment policies which limit the maximum
duration and maturity of the fixed maturity portfolio.
The table below summarizes the Company's interest rate risk and shows the
effect of a hypothetical change in interest rates as of December 31, 1999. The
selected hypothetical changes do not indicate what would be the potential best
or worst case scenarios (dollars in thousands):
<TABLE>
<CAPTION>
Hypothetical
Estimated Fair Percentage
Fixed Maturity Estimated Fair Estimated Change Value after Increase (Decrease)
Investments Value at in Interest Rate Hypothetical in Shareholders's
December 31, (bp=basis points) Change in Interest Equity
1999 Rate
- -------------------------------- ----------------- --------------------- --------------------- ------------------------
<S> <C> <C> <C> <C>
Total Fixed Maturity $47,444 200bp decrease $ 50,671 5.3%
Investments (including 100bp decrease 48,987 2.5
short-term investments) 100bp increase 45,842 -2.6
200bp increase 44,365 -5.0
- -------------------------------- ----------------- --------------------- --------------------- ------------------------
</TABLE>
-40-
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements required under this Item 8
are included as part of Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-41-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 regarding directors and executive
officers of the Company will be set forth in the Company's 2000 Proxy Statement
which will be filed with the Securities and Exchange Commission pursuant to
applicable regulations, and is hereby incorporated by this reference. Additional
information required by this Item 10 with respect to executive officers is set
forth in Part I, Item 4 of this Report.
Item 11. Executive Compensation
The information required by this Item 11 regarding executive compensation
will be set forth in the Company's 2000 Proxy Statement which will be filed with
the Securities and Exchange Commission pursuant to applicable regulations, and
is hereby incorporated by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 regarding security ownership of
certain beneficial owners and management of the Company will be set forth in the
Company's 2000 Proxy Statement which will be filed with the Securities and
Exchange Commission pursuant to applicable regulations, and is hereby
incorporated by this reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 regarding certain relationships
and related transactions of the Company will be set forth in the Company's 2000
Proxy Statement which will be filed with the Securities and Exchange Commission
pursuant to applicable regulations, and is hereby incorporated by this
reference.
-42-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) Financial Statements Schedules, and Exhibits
1. Financial Statements
The following is a list of financial statements, together with
reports thereon, filed as part of this Report:
- Independent Auditors' Report
- Consolidated Balance Sheets at December 31, 1998 and 1999
- Consolidated Statements of Earnings for the Years Ended December
31, 1997, 1998 and 1999
- Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997, 1998 and 1999
- Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999
- Consolidated Statements of Comprehensive Earnings for the Years
Ended December 31, 1997, 1998 and 1999
- Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following is a list of financial statement schedules filed as
part of this Report:
<TABLE>
Schedule Number Page
--------------- ----
<S> <C>
- Schedule II - Condensed Financial Statements 47
(Parent only)
- Schedule III - Supplemental Information 51
- Schedule IV - Reinsurance 52
</TABLE>
Other schedules have been omitted as they are not applicable to the
Company, or the required information has been included in the financial
statements and related notes.
-43-
<PAGE>
3. Exhibits
The following is a list of exhibits required to be filed as
part of this Report:
Exhibit
Number Title
3.1* Memorandum of Association of the Company
3.2* Form of Bye-Laws of the Company
4.1* Common Share Certificate
10.1* Employment Contract between the Company and Lloyd A. Fox
10.2* Incentive Stock Option Plan
10.3* Directors Stock Award Plan
10.4** Lease Agreement between 1845 Tenants-In-Common (formerly known as
Windy Hill Exchange, L.L.C.) and American Safety Insurance Services,
Inc. (formerly known as Environmental Management Services, Inc.) for
office space in Atlanta, Georgia.
10.5* Program Management Agreement between Synergy Insurance Services, Inc.
(now known as American Safety Insurance Services, Inc.) and American
Safety Risk Retention Group, Inc.
21.1* Subsidiaries of the Company
27 Financial Data Schedule
*Incorporated by reference to the Exhibits to Registrant's Amendment No. 1 to
Registration Statement filed January 27, 1998 on Form S-1 (Registration No.
333-42749)
**Incorporated by reference to the Exhibits to Registrant's Registration
Statement filed December 19, 1997 on Form S-1 (Registration No. 333-42749)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
the year ended December 31, 1999.
-44-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 30, 2000.
AMERICAN SAFETY INSURANCE GROUP, LTD.
------------------------------------
By:
-------------------------------
Lloyd A. Fox
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities indicated on
March 30, 2000.
Signature Title
- ------------------------------------------------ President and Director
Lloyd A. Fox (Principal Executive Officer)
- ------------------------------------------------ Chief Financial Officer
Steven B. Mathis (Principal Financial Officer
and Principal Accounting
Officer)
- ------------------------------------------------ Chairman of the Board
Frederick C. Treadway of Directors
- ------------------------------------------------ Director
David V. Brueggan
- ------------------------------------------------ Director
Cody W. Birdwell
- ------------------------------------------------ Director
William O. Mauldin, Jr.
- ------------------------------------------------ Director
Thomas W. Mueller
- ------------------------------------------------ Director
Timothy E. Walsh
-45-
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
QUARTERLY INFORMATION
(UNAUDITED)
The following table presents the quarterly results of consolidated
operations for 1999 and 1998 (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $ 4,769 $ 5,519 $ 5,513 $ 6,114
Income before taxes 1,673 1,333 1,547 1,449
Net income 1,719 1,441 1,359 1,401
Comprehensive income 1,158 997 937 845
Net income per share
Basic $ 0.28 $ 0.24 $ 0.23 $ 0.24
Diluted 0.28 0.24 0.23 0.24
Common stock price ranges
High $ 10.38 $ 10.00 $ 8.56 $ 7.94
Low 7.81 6.63 7.13 6.00
1998 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
Operating revenues $ 3,549 $ 3,945 $ 3,832 $ 4,970
Income before taxes 1,078 1,567 1,529 1,581
Net income 1,024 1,581 1,598 1,751
Comprehensive income 962 1,654 2,446 1,248
Net income per share
Basic $ 0.23 $ 0.26 $ 0.26 $ 0.29
Diluted 0.23 0.26 0.26 0.29
Common stock price ranges
High $ 13.50 $ 14.75 $ 12.38 $10.00
Low 11.00 11.12 8.75 6.75
</TABLE>
-46-
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
---- ----
Assets
<S> <C> <C>
Investment in Subsidiary $ 23,174,367 $25,535,858
Other Investments:
Fixed Maturities 32,395,918 26,631,892
Common Stock 2,973,374 -
Cash 1,820,578 510,419
Shareholder Loan 280,000 -
Secured Note Receivable 5,335,125 9,543,377
Investment Income Due and Accrued 1,431,281 2,285,599
Total Investments & Cash 67,410,643 64,507,145
Premiums Receivable 844,956 1,174,686
Due from Affiliate - 220,247
Ceded Loss Reserves 2,043,988 1,477,114
Property Plant and Equipment - 841,701
Other Assets 330,312 503,799
------------ -----------
Total Assets $ 70,629,899 $68,724,692
============ ===========
Liability and Shareholders' Equity
Unpaid Losses and Loss Adjustments Expenses $ 7,437,036 $ 5,463,793
Ceded Premium Payable 1,140,399 178,638
Assumed Loss and LAE Payable - 793,296
Liability for Deductible Fees Held 577,428 48,375
Due to Related Party 2,095,113 1,170,000
Accounts Payable and
Accrued Expenses 110,630 31,830
---------- ---------
Total Liabilities 11,360,606 7,685,932
---------- ---------
Common Stock 60,747 60,777
Additional Paid in Capital 33,809,141 33,810,387
Unrealized Gain-Investments (1,288,804) 693,934
Retained Earnings 24,705,471 30,625,739
Treasury Stock - (2,169,339)
---------- ----------
Total shareholders' equity 59,269,293 61,038,760
---------- ----------
Total liabilities & shareholders' equity $ 70,629,899 $ 68,724,692
========== ==========
See accompanying auditors' report
</TABLE>
-47-
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED INCOME STATEMENT
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Direct and Assumed Premiums Earned $ 6,494,394 $ 2,884,327 $563,543
Ceded Premiums Earned (3,016,373) (1,325,351) (23,487)
Net Premiums Earned 3,478,021 1,558,976 540,056
Investment Income 909,614 1,869,231 1,989,252
Interest on Notes Receivable 798,139 1,001,773 1,170,484
Realized Gains on Sale of Investments 84,283 436,871 134,316
Other Income - - 142,495
--------- --------- ---------
Total Revenues 5,270,057 4,866,851 3,976,603
--------- --------- ---------
Expenses:
Losses and LAE Incurred 1,832,184 396,305 141,869
Acquisition Expenses 626,745 288,903 37,959
Other Underwriting Expenses 358,995 343,466 589,888
--------- --------- ---------
Total Expenses 2,817,924 1,028,674 769,716
--------- --------- ---------
Earnings Before Equity In
Earnings of Subsidiary 2,452,133 3,838,177 3,206,887
Equity in Net Earnings of Subsidiary 758,881 2,116,072 2,713,381
--------- --------- ---------
Net Earnings $ 3,211,014 $ 5,954,249 $ 5,920,268
========= ========= =========
See accompanying auditors' report
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED STATEMENT OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
Cash flow from operating activities:
<S> <C> <C> <C>
Net earnings before equity in earnings of subsidiary $ 2,452,13 $ 3,838,177 $ 3,206,887
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Change in:
Accrued investment income 301,154 (836,983) (854,318)
Premiums receivable/Payable (990,984) 1,500,040 (1,291,491)
Due from/to affiliate (107,049) 2,202,162 (1,145,360)
Unpaid losses and loss adjustment expenses 638,819 (1,331,079) (1,406,369)
Unearned premiums 359,094 (895,851) -
Liability for deductible fees held 4,076,532 (3,499,104) (529,053)
Accounts payable and accrued expenses 5,061 65,385 (78,800)
Loss and LAE payable 243,906 (243,906) 793,296
Other, net 57,419 (279,238) (174,430)
-------- ---------- ----------
Net cash provided by operating activities 7,036,08 519,603 (1,479,638)
-------- ---------- ----------
Cash flow from investing activities:
Decrease (increase) in investments (6,392,515) (20,987,278) 3,179,743
Investment in subsidiary - (11,100,000) (500)
Purchases of fixed assets, net - - (841,701)
----------- ----------- ----------
Net cash provided by investing activities (6,392,515) (32,087,278) 2,337,542
----------- ------------ ----------
Cash flow from financing activities:
Proceeds from sale of common stock 297,279 31,088,847 1,276
Purchase of Treasury Stock - - (2,169,339)
Dividends paid - - -
------- ---------- -----------
Net cash used by financing activities 297,279 31,088,847 (2,168,063)
------- ---------- -----------
Net increase (decrease) in cash 940,849 (478,828) (1,310,159)
Cash at beginning of year 1,358,557 2,299,406 1,810,578
--------- --------- ---------
Cash at end of year $ 2,299,406 $ 1,820,578 $ 510,419
========= ========= =========
See accompanying auditors' report
</TABLE>
-49-
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1998
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net earnings $ 3,211,014 $ 5,954,249 $ 5,920,268
Other comprehensive earnings (loss) before income taxes:
Unrealized gains (losses) on securities available for sale 470,427 31,854 (2,282,895)
Reclassification adjustment for realized gains included in
net earnings (93,773) 359,682 119,643
--------- --------- ---------
Total other comprehensive earnings (loss) before taxes 376,654 391,536 (2,163,252)
Income tax expense (benefit) related to items of
comprehensive income 76,157 6,236 (180,514)
--------- --------- ---------
Other comprehensive earnings (loss) net of income taxes 300,497 385,300 (1,982,738)
--------- --------- ---------
Total comprehensive earnings $ 3,511,511 $ 6,339,549 $ 3,937,530
========= ========= =========
See accompanying auditors' report
</TABLE>
-50-
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Reserves
for Claims and Amorti- Paid
Unpaid Claim Adjust- zation Claims
Claims Discount, ment Expenses of and
Deferred and Claim if any, Net Incurred Deferred Claim
Policy Ac- Adjust- Deducted Invest- Related to Policy Adjust-
quisition ment in Unearned Earned ment Current Prior Acquisi- ment Premiums
Costs Expenses Column C Premiums Premiums Income Year Years tion Costs Expenses Written
- ------------------ ---------- ---------- --------- -------- -------- -------- ------- ------- ---------- -------- -------
United States
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 46 4,847 - 1,436 2,456 737 1,686 642 325 976 5,134
December 31, 1998 (106) 7,311 - 2,712 4,852 817 1,844 828 24 1,336 4,624
December 31, 1999 212 11,855 - 7,318 11,174 807 3,166 (511) 640 2,313 8,848
- ------------------ ---------- ---------- --------- ----- ------- -------- ------- ------- -------- -------- ------
Bermuda
December 31, 1997 46 6,725 - 896 5,891 910 1,426 339 326 1,193 3,837
December 31, 1998 46 7,389 - 1,183 4,337 2,030 2,539 (34) 242 1,774 5,028
December 31, 1999 62 8,558 - 2,178 2,499 2,071 4,283 (42) 525 3,095 7,578
- ------------------ ----------- ---------- --------- ----- ------- -------- ------- ------- -------- -------- -------
Combined Total
December 31, 1997 92 11,572 - 2,332 8,347 1,647 3,112 981 651 2,169 8,971
December 31, 1998 (60) 14,700 - 3,895 9,189 2,847 4,383 794 266 3,110 9,652
December 31, 1999 274 20,413 - 9,496 13,673 2,878 7,449 (553) 1,165 5,408 16,426
- ------------------ ---------- ----------- ---------- ----- -------- ------- ------- ------- -------- ---------- --------
See accompanying auditors' report
</TABLE>
-51-
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Year Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Property-Liability Ceded to Percentage of
Insurance Premiums Gross Other Assumed from Net Amount
Earned Amount Companies Other Companies Amount Assumed to Net
- -------------------------- -------------- ----------------- ------------------- ----------------- -----------------
United States
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 3,515 1,813 754 2,456 30.7%
December 31, 1998 3,532 3,626 4,982 4,888 101.9%
December 31, 1999 7,891 5,934 9,217 11,174 82.5%
- -------------------------- -------------- ----------------- ------------------- ----------------- -----------------
Bermuda
December 31, 1997 - 430 6,321 5,891 107.3%
December 31, 1998 - 368 4,669 4,301 108.6%
December 31, 1999 - 81 2,580 2,499 103.2%
- -------------------------- -------------- ----------------- ------------------- ----------------- -----------------
Combined Total
December 31, 1997 3,515 2,243 7,075 8,347 84.8%
December 31, 1998 3,532 3,994 9,651 9,189 105.0%
December 31, 1999 7,891 6,015 11,797 13,673 86.3%
- -------------------------- ------------- ---------------- ------------------- ----------------- ----------------
See accompanying auditors' report
</TABLE>
-52-
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1999
With Independent Auditors' Report Thereon
<PAGE>
Independent Auditors' Report
The Board of Directors
American Safety Insurance Group, Ltd.:
We have audited the consolidated financial statements of American Safety
Insurance Group, Ltd. and subsidiaries as listing in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Safety Insurance Group, Ltd. and subsidiaries as of December 31, 1998 and 1999,
and the results of their operations and their cash flow for each of the years in
the three-year period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Atlanta, Georgia
March 24, 2000
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Assets 1998 1999
------ ---- ----
Investments:
Securities available for sale, at fair value:
<S> <C> <C>
Fixed maturities $ 45,308,326 $ 40,694,556
Common stock 3,453,123 163,968
Investment in real estate - 12,039,842
Short-term investments 2,286,320 6,749,791
---------- ----------
Total investments 51,047,769 59,648,157
Cash 4,737,132 427,154
Accrued investment income 2,441,857 2,783,663
Notes receivable:
Related parties 280,000 1,700,000
Other 15,939,894 11,255,264
Premiums receivable 5,838,567 12,239,544
Commissions receivable 22,569 5,948
Ceded unearned premium 1,742,021 4,591,075
Reinsurance recoverable 1,840,884 6,065,502
Funds on deposit - 353,407
Due from affiliate 668,074 2,088,748
Income tax recoverable 277,292 -
Deferred income taxes 362,951 733,227
Deferred acquisition costs - 274,701
Property, plant and equipment 185,807 1,234,294
Prepaid items 5,644 604,537
Goodwill 252,239 234,467
Other assets 504,772 113,846
---------- ------------
Total assets $ 86,147,472 $104,353,534
========== ============
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses 14,700,473 20,413,236
Unearned premiums 3,894,568 9,496,342
Liability for deductible fees held 244,998 -
Reinsurance on paid losses and loss adjustment expenses 380,858 1,419,536
Reinsurance deposits on retroactive contract 332,430 48,375
Ceded premiums payable 4,382,922 6,739,068
Due to affiliate:
Ceded premiums payable 201,778 1,636,207
Reinsurance on paid losses and loss adjustment expenses 52,151 79,198
Accounts payable and accrued expenses 2,688,001 1,893,470
Funds held - 357,509
Collateral held - 1,208,976
Income tax payable - 22,857
---------- ----------
Total liabilities 26,878,179 43,314,774
---------- ----------
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 5,000,000 shares;
no shares issued and outstanding - -
Common stock, $0.01 par value; authorized 15,000,000 shares; issued and
outstanding at December 31, 1998, 6,074,770 shares, and at
December 31, 1999, 6,077,750 shares 60,747 60,777
Additional paid-in capital 33,809,141 33,810,387
Retained earnings 24,705,471 30,625,739
Accumulated other comprehensive income, net 693,934 (1,288,804)
Treasury stock, 0 shares in 1998, and 300,000 shares in 1999 - (2,169,339)
---------- ----------
Total shareholders' equity 59,269,293 61,038,760
---------- ----------
Total liabilities and shareholders' equity $ 86,147,472 $ 104,353,534
========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1997, 1998, and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Direct premiums earned $ 3,514,559 $ 3,532,154 $ 7,891,093
Assumed premiums earned:
Affiliate 1,855,739 2,834,855 3,449,178
Nonaffiliates 5,219,394 6,815,696 8,347,482
--------- --------- -----------
Total assumed premiums earned 7,075,133 9,650,551 11,796,660
--------- --------- ----------
Ceded premiums earned:
Affiliate 1,250,974 2,317,414 3,972,686
Nonaffiliates 991,611 1,676,677 2,042,216
---------- ---------- ---------
Total ceded premiums earned 2,242,585 3,994,091 6,014,902
--------- ---------- ---------
Net premiums earned 8,347,107 9,188,614 13,672,851
--------- --------- ----------
Net investment income 1,646,926 2,847,359 2,877,771
Interest on notes receivable 798,139 2,408,908 2,614,572
Brokerage commission income 1,998,923 1,113,843 1,107,497
Management fees from affiliate 601,319 713,528 721,845
Net realized gains 83,548 443,230 173,605
Other income 13,874 24,367 920,926
------------ ---------- ----------
Total revenues 13,489,836 16,739,849 22,089,067
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses incurred 4,092,728 5,177,033 6,896,423
Acquisition expenses 2,335,883 1,009,906 1,819,041
Payroll and related expenses 2,371,051 3,500,676 5,032,382
Other expenses 1,123,629 1,297,229 2,338,231
--------- ---------- ----------
Total expenses 9,923,291 10,984,844 16,086,077
--------- ---------- ----------
Earnings before income taxes 3,566,545 5,755,005 6,002,990
Income taxes 355,531 (199,244) 82,722
---------- --------- ---------
Net earnings $ 3,211,014 $ 5,954,249 $ 5,920,268
========= ========= =========
Net earnings per share:
Basic $1.08 $1.05 $0.99
----- ----- -----
Diluted $1.08 $1.04 $0.98
----- ----- -----
Average number of shares outstanding:
Basic 2,963,931 5,661,700 6,006,005
Diluted 2,963,931 5,738,039 6,032,364
----------- --------- ---------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1998, and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
Common stock - number of shares:
<S> <C> <C> <C>
Balance at beginning of period 2,872,830 2,925,230 6,074,770
Issuance of common shares 52,400 3,149,540 2,980
----------- --------- ---------
Balance at end of period 2,925,230 6,074,770 6,077,750
=========== ========= =========
Common stock:
Balance at beginning of period $ 28,728 $ 29,252 $ 60,747
Issuance of common shares 524 31,495 30
----------- ----------- ---------
Balance at end of period 29,252 60,747 60,777
----------- ----------- ---------
Additional paid-in capital:
Balance at beginning of period 2,455,034 2,751,789 33,809,141
Issuance of common shares 296,755 31,057,352 1,246
----------- ----------- ----------
Balance at end of period 2,751,789 33,809,141 33,810,387
----------- ----------- ----------
Retained earnings:
Balance at beginning of period 15,540,208 18,751,222 24,705,471
Net earnings 3,211,014 5,954,249 5,920,268
----------- ---------- ----------
Balance at end of period 18,751,222 24,705,471 30,625,739
---------- ---------- ----------
Accumulated other comprehensive income:
Balance at beginning of period 8,137 308,633 693,934
Unrealized gain (loss) during the period (net of deferred
tax benefit (expense) of $(76,157), $(6,236), and
$180,514, respectively 300,496 385,301 (1,982,738)
----------- ----------- -----------
Balance at end of period 308,633 693,934 (1,288,804)
----------- ----------- -----------
Treasury Stock:
Balance at beginning of period - - -
Shares purchased - - (2,169,339)
------------ ----------- -----------
Balance at end of period - - (2,169,339)
------------ ----------- -----------
Total shareholders' equity $ 21,840,896 $ 59,269,293 $ 61,038,760
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Years ended December 31, 1997, 1998, and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities:
Net earnings $ 3,211,014 $ 5,954,249 $ 5,920,268
Adjustments to reconcile net earnings to net cash provided by
Realized losses (gains) on sale of investments (83,548) (443,230) (173,605)
Amortization of deferred acquisition costs 650,698 265,586 1,164,590
Accretion of loan discount - (297,871) (510,636)
Change in:
Accrued investment income 248,239 (1,660,059) (1,321,926)
Premiums receivable (5,567,376) 612,725 (6,400,977)
Commissions receivable 45,586 (3,939) 16,621
Reinsurance recoverable and ceded unearned premiums (1,077,334) (2,154,755) (6,034,994)
Due from affiliate 67,893 (20,979) (1,420,674)
Prepaid items - (5,644) (598,893)
Funds held - - (357,509)
Funds deposited - - 353,407
Collateral held - - 1,208,976
Income taxes (44,529) (277,646) (70,127)
Unpaid losses and loss adjustment expenses 2,657,079 3,128,934 5,712,763
Unearned premiums 967,120 1,562,989 5,601,774
Liability for deductible fees held 4,076,532 (3,499,104) (529,053)
Ceded premiums payable 4,811,440 (1,535,283) 2,356,146
Due to affiliate 259,192 (76,920) 1,461,476
Accounts payable and accrued expenses (369,528) 1,285,281 (794,531)
Other, net (450,496) (398,567) (71,865)
---------- --------- ---------
Net cash provided by operating activities 9,401,982 2,435,767 5,511,231
---------- --------- ---------
Cash flow from investing activities:
Purchase of fixed maturities (19,577,784) (82,199,114) (9,775,786)
Purchase of common stocks (2,078,706) (3,526,905) (1,305,656)
Proceeds from maturity and redemption of fixed maturities 1,040,956 22,543,671 7,732,263
Proceeds from sales of fixed maturities 9,290,969 41,620,120 4,034,887
Proceeds from sales of common stock 1,749,354 1,129,500 4,467,664
Proceeds from notes receivable - other 215,061 - -
Proceeds from notes receivable - related parties 566,841 300,000 -
Decrease (increase) in short-term investments (1,351,413) (462,490) (4,463,471)
Advances in notes receivable - other - (10,944,219) (3,967,511)
Advances in notes receivable - related parties - - (1,420,000)
Decrease (Increase) in investment in real estate - - (1,842,983)
Purchase of fixed assets, net (57,665) (16,876) (1,112,553)
----------- ------------ -----------
Net cash used in investing activities (10,202,387) (31,556,313) (7,653,146)
----------- ------------ -----------
Cash flow from financing activities:
Proceeds from sale of common stock 297,279 31,088,847 1,276
Purchase of treasury stock - - (2,169,339)
------------ ---------- -----------
Net cash provided by (used in) financing activities $ 297,279 $31,088,847 $(2,168,063)
------------ ---------- -----------
Net increase (decrease) in cash (503,126) 1,968,301 (4,309,978)
Cash at beginning of period 3,271,957 2,768,831 4,737,132
--------- --------- ---------
Cash at end of period $ 2,768,831 $ 4,737,132 $ 427,154
========= ========= ========
Non cash operating and investing activities:
Foreclosure on note receivable, including accrued
interest of $920,120 - - (10,142,897)
Supplemental disclosure of cash flow information:
Income taxes paid (recovered) $ 490,000 $ 80,000 $ (217,427)
=========== ============ ==========
Interest paid $ 54,010 $ - -
=========== ============ ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net Earnings $ 3,211,014 $ 5,954,249 $ 5,920,268
Other comprehensive earnings (loss) before income taxes:
Unrealized gains (losses) on securities available for sale 470,427 31,854 (2,282,895)
Reclassification adjustment for realized gains (losses)
included in net earnings (93,773) 359,682 119,643
---------- ---------- ----------
Total comprehensive earnings (loss) before taxes 376,654 391,536 (2,163,252)
Income tax expense (benefit) related to items of comprehensive income 76,157 6,236 (180,514)
---------- ---------- ----------
Other comprehensive earnings (loss) net of income taxes 300,497 385,300 (1,982,738)
---------- ---------- ----------
Total comprehensive earnings $ 3,511,511 $ 6,339,549 $ 3,937,530
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
AMERICAN SAFETY INSURANCE GROUP, LTD AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
December 31, 1997, 1998 and 1999
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements of American Safety
Insurance Group, Ltd. ("American Safety") and its subsidiaries
(collectively, the "Company") are prepared in accordance with
generally accepted accounting principles in the United States. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates,
based on the best information available, in recording transactions
resulting from business operations. The balance sheet amounts that
involve a greater extent of accounting estimates and actuarial
determinations subject to future changes are the Company's liabilities
for unpaid losses and loss adjustment expenses. As additional
information becomes available (or actual amounts are determinable),
the recorded estimates may be revised and reflected in operating
results. While management believes that the liability for unpaid
losses and loss adjustment expenses is adequate to cover the ultimate
liability, such estimates may be more or less than the amounts
actually paid when claims are settled.
(b) Description of Common Stock - Voting and Ownership Rights
The authorized share capital of the Company is 20 million shares,
consisting of 15 million common shares, par value $.01 per share
("Common Shares"), and 5 million preferred shares, par value $.01 per
share ("Preferred Shares"). The Common Shares are validly issued,
fully paid, and nonasssessable. There are no provisions of Bermuda law
or the Company's Bye-Laws which impose any limitations on the rights
of shareholders to hold or vote Common Shares by reason of such
shareholders not being residents of Bermuda. Holders of Common Shares
are entitled to receive dividends ratably when and as declared by the
Board of Directors out of funds legally available therefor.
Each holder of Common Shares is entitled to one vote per share on all
matters submitted to a vote of the Company's shareholders, subject to
the 9.5% voting limitation described below. All matters, including the
election of directors, voted upon at any duly held shareholders
meeting shall be authorized by a majority of the votes cast at the
meeting by shareholders represented in person or by proxy, except (i)
approval of a merger, consolidation or amalgamation; (ii) the sale,
lease, or exchange of all or substantially all of the assets of the
Company; and (iii) amendment of certain provisions of the Bye-Laws,
which each require the approval of at least 66-2/3% of the outstanding
voting shares (in addition to any regulatory or court approvals).
The Common Shares have noncumulative voting rights, which means that
the holders of a majority of the Common Shares may elect all of the
directors of the Company and, in such event, the holders of the
remaining shares will not be able to elect any directors.
The Bye-Laws contain certain provisions that limit the voting rights
that may be exercised by certain holders of Common Shares. The
Bye-Laws provide that each holder of Common Shares is entitled to one
vote per share on all matters submitted to a vote of the Company's
shareholders, except that if, and so long as, the Controlled Shares
(as defined below) of any person constitute 9.5% or more of the issued
and outstanding Common Shares, the voting rights with respect to the
Controlled Shares owned by such person shall be limited, in the
aggregate, to a voting power of 9.5%, other than the voting rights of
Frederick C. Treadway or Treadway Associates, L.P., affiliates of a
founding shareholder of the Company. "Controlled Shares" mean (i) all
shares of the Company directly, indirectly, or constructively owned by
any person and (ii) all shares of the Company directly, indirectly, or
beneficially owned by such person within the meaning of Section 13(d)
of the Exchange Act (including any shares owned by a group of persons,
as so defined and including any shares that would otherwise be
excluded by the provisions of Section 13(d)(6) of the Exchange Act).
Under these provisions, if, and so long as, any person directly,
indirectly, or constructively owns Controlled Shares having more than
9.5% of the total number of votes exercisable in respect of all shares
of voting stock of the Company, the voting rights attributable to such
shares will be limited, in the aggregate, to 9.5% of the total number
of votes.
No holder of Common Shares of the Company shall, by reason only of
such holder, have any preemptive right to subscribe to any additional
issue of shares of any class or series nor to any security convertible
into such shares.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of
American Safety Insurance Group, Ltd., a Bermuda company, American
Safety Reinsurance, Ltd.("American Safety Re") formed in January 1998
to serve as the successor for the reinsurance business of American
Safety, as a 100%-owned licensed Bermuda insurance company, and
American Safety Holdings Corp. ("American Safety Holdings"),
formed in July 1999 to serve as a 100%-owned insurance and financial
services holding company. American Safety Re in turn wholly owns
Ponce Lighthouse Properties, Inc. and Harbour Village Realty, Inc.
American Safety Holdings in turn wholly owns American Safety
Casualty Insurance Company ("American Safety Casualty"), a
property and casualty insurance company and American Safety
Insurance Services, Inc. ("ASI Services"), an insurance management
and brokerage company. ASI Services wholly owns the following
subsidiaries: Sureco Bond Services, Inc.("Sureco"), a bonding
agency; Environmental Claims Services, Inc. ("ECSI"),a claims
consulting firm; American Safety Financial Corp., a financial
services subsidiary; and American Safety Purchasing Group, Inc.,which
acts as a purchasing group for the placement of business with
American Safety Casualty.All significant intercompany balances
have been eliminated in consolidation.
(d) Business Environment
The following is a description of certain risks facing the Company
and its subsidiaries:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing its
products and beyond those recorded in the financial statements. That
is, regulatory initiatives designed to reduce insurer profits or
otherwise affecting the industry in which the insurer operates, new
legal theories or insurance company insolvencies through guaranty fund
assessments, may create costs for the insurer beyond those recorded in
the financial statements. The Company attempts to mitigate this risk
by actively writing insurance business in several states, thereby
spreading this risk over a large geographic area.
Potential Risk of United States Taxation of Bermuda Operations. Under
current Bermuda law, American Safety is not required to pay any taxes
in Bermuda on either income or capital gains. American Safety has
received an undertaking from the Minister of Finance in Bermuda that
will exempt American Safety from taxation until the year 2016 in the
event of any such taxes being imposed.
Whether a foreign corporation is engaged in a United States trade or
business or is carrying on an insurance business in the United States
depends upon the level of activities conducted in the United States.
If the activities of a foreign company are "continuous, regular, and
considerable," the foreign company will be deemed to be engaged in a
United States trade or business. Due to the fact that American Safety
will continue to maintain an office in Bermuda and American Safety and
American Safety Re's sole business is reinsuring contracts via treaty
reinsurance agreements, which are all signed outside of the United
States, American Safety does not consider itself to be engaged in a
trade or business in the United States and, accordingly, does not
expect to be subject to United States income taxes. This position is
consistent with the position taken by various other entities that have
similar operational structures 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 insurance subsidiary are
engaged in a United States trade or business. In general, if American
Safety or its Bermuda insurance 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
<PAGE>
profits deemed repatriated from the United States. Certain
subsidiaries of American Safety are, however subject to U.S. Federal
and state income tax, as they are domiciled and conduct business in
the United States.
Credit Risk is the risk that issuers of securities owned by the
insurer or secured notes receivable will default or that other
parties, including reinsurers that have obligations to the insurer,
will not pay or perform. The Company attempts to mitigate this risk by
adhering to a conservative investment strategy, by obtaining
sufficient collateral for secured note obligations and by maintaining
sound reinsurance, credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. The Company
attempts to mitigate this risk by attempting to match the maturities
of its assets with the expected payouts of its liabilities.
(e) Investments
Fixed maturity securities for which the Company has the positive
intent and ability to hold to maturity are classified as "held to
maturity" and are reported at amortized cost. Fixed maturity
and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as
"trading" and are reported at fair value, with unrealized gains and
losses included in earnings.Fixed maturity and equity securities not
classified as either held to maturity or trading are classified as
"available for sale" and are reported at fair value, with unrealized
gains and losses (net of deferred taxes) charged or credited
as a component of accumulated other comprehensive income.
While it is the Company's intent to hold fixed maturity securities
until the foreseeable future or until maturity, it may sell such
securities in response to, among other things, market conditions,
liquidity needs, or interest rate fluctuations. At December 31, 1998
and 1999, the Company considered all of its fixed maturity and equity
securities as available for sale.
Investment income is recorded as earned on the accrual basis and
includes amortization of premiums and accretion of discounts using
the interest method. Realized gains or losses on disposal of
investments are determined on a specific identification basis and
are included in revenues.
Investments in real estate are carried at the lower of cost or market
plus capitalized development costs.
The Company owns no on-balance sheet or off-balance sheet derivative
instruments.
(f) Notes Receivable
Notes receivable represent indebtedness under various secured lending
arrangements with related and unrelated parties. Interest income,
loan fees, and deferred loan costs are recognized on an effective
yield basis over the life of the loan. The allowance for
possible loan losses has been determined based on those losses
management considers probable at each reporting date. At December 31,
1997, 1998 and 1999, no allowance was deemed necessary by Company
management. Additionally, no loan losses were recognized for the
periods then ended.
The Company ceases the accural of interest on loans when any
payment is past 90 days or more. Additionally, the Company assesses
loan impairment by comparing the carrying value of such loan,
including accrued but unpaid interest at the valuation date to the
fair market vaule of collateral held with respect to such loan. Any
shortage of fair value over carrying value is first recognized by
reversing interest income recognized for the year of impairment and
then recognizing any further loss against the allowance for loan
losses. At December 31, 1998 and 1999, the Company did not maintain
an allowance for loan losses as it believes that the vaule of
collateral held is sufficient to preclude any losses. For the years
ended December 31, 1997, 1998, and 1999 the Company did not incur any
losses in its secured notes receivable portfolio.
(g) Recognition of Premium Income
General liability premiums are primarily assumed from American Safety
Risk Retention Group, Inc. ("American Safety RRG"), a nonsubsidiary
affiliate. General liability premiums are estimated based upon the
annual revenues of the underlying insureds. Additional or return
premiums are recognized for differences between provisional premiums
billed and estimated ultimate general liability premiums due. General
liability, surety, commercial auto, other commercial lines and
workers' compensation premiums are recorded ratably over the policy
period with unearned premium calculated on a pro rata basis over the
lives of the underlying coverages.
(h) Brokerage Commission Income
Brokerage commissions on business produced by Sureco are recognized as
income when the related insurance policies are underwritten.
Commissions on business produced by ASI Services are recognized as the
related insurance premiums are written. For ASI Services produced
business which remains in the consolidated group, any commissions
recognized are eliminated in consolidation or otherwise recognized in
revenue consistent with the recognition of premiums earned.
(i) Management Fees from Affiliate
The program management agreement between American Safety RRG and ASI
Services provided for payment of a monthly program management fee, a
managing general agency commission, producing agent commissions,
reimbursement for marketing expenses actually incurred, and
reimbursement for loss control expenses actually incurred plus a 20%
fee. The level of program management fees are designed to reimburse
the Company for the allocable share of expenses incurred in managing
the American Safety RRG program. The fees are earned as expenses are
incurred.
(j) Deferred Policy Acquisition Costs
The costs of acquiring business, primarily commissions and
underwriting expenses, are deferred (to the extent they are
recoverable from future premium income) and amortized to earnings in
relation to the amount of premiums earned. If necessary, investment
income is considered in the determination of the recoverability of
deferred policy acquisition costs. Deferred revenue results when
reinsurance ceding commissions received exceed the related deferred
acquisition costs for direct and assumed business. At December 31,
1998, the net deferred revenue balance was included in accounts
payable.
An analysis of deferred policy acquisition costs (deferred revenue)
follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $ 121,671 $ 92,870 (60,205)
Acquisition costs deferred 621,897 112,511 1,499,496
Amortized during the period (650,698) (265,586) (1,164,590)
-------- --------- ----------
Balance, end of period $ 92,870 $ (60,205) $ 274,701
======== ========= =========
</TABLE>
(k) Unpaid Losses and Loss Adjustment Expenses
The Company provides a liability for unpaid losses and loss adjustment
expenses based upon aggregate case estimates for reported claims and
estimates for incurred but not reported losses. Because of the length
of time required for the ultimate liability for losses and loss
adjustment expenses to be determined for certain lines of business
underwritten, the Company has limited experience upon which to base an
estimate of the ultimate liability. For this business, management has
established loss and loss adjustment expense reserves based on an
independent actuarial valuation that it believes is reasonable and
representative of anticipated ultimate experience. Beginning in 1996,
the Company's consultant refined the estimation process for the
determination of ultimate loss and loss adjustment expense to begin to
recognize differences between the Company's reporting and settlement
patterns and industry patterns as sufficient Company specific data (10
years of Company specific actuarial data) was then available. This
method (Bornhuetter-Ferguson) entails developing an initial expected
loss ratio based upon gross ultimate losses from prior accident years,
estimating the portion of ultimate losses expected to be reported and
unreported, and adding the actual reported losses to the expected
unreported losses to derive the indicated ultimate losses. However,
the net amounts that will ultimately be paid to settle the liability
may be more or less than the estimated amounts provided.
(l) Liability for Deductible Fees Held
Deductible fees held represent deposits held by the Company in its
capacity as administrator for self-insured programs. Such deposits
will be extinguished by the payment of claims on behalf of the
self-insured or by refund of excess deposits to the self-insured.
(m) Income Taxes
For subsidiaries subject to taxation, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
(n) Reinsurance
Reinsurance contracts do not relieve the Company from its obligation
to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company. The Company evaluates the
financial condition of its reinsurers and monitors concentration of
credit risk to minimize its exposure to significant losses from
reinsurer insolvencies. Reinsurance recoverables on unpaid losses and
prepaid reinsurance represent amounts recoverable from reinsurers for
unpaid losses and unearned ceded reinsurance premiums, respectively.
(o) Goodwill
On April 2, 1993, American Safety Casualty exchanged 8% of its common
shares for 100% of the common stock of ASI Services. The goodwill
created in this transaction is being amortized ratably over 20 years.
Accumulated amortization was $105,941 at December 31, 1998 and
$123,713 at December 31, 1999.
(p) Net Earnings Per Share
Basic EPS and diluted EPS are computed by dividing net earnings by the
weighted average number of shares outstanding for the period (basic
EPS) plus dilutive shares subject to stock options ( diluted EPS).
As shown on the accompanying consolidated statement of earnings, basic
EPS and diluted EPS for the year ended December 31, 1997 do not differ
from one another as all options were issued within a one-year period
of the initial public offering and, in accordance with guildlines
of the Securities and Exchange Commission, the options shares have
been treated as being outstanding for all reported periods using the
treasury stock method.
Earnings per share are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding 2,963,931 5,661,700 6,006,605
Shares attributable to stock options - 76,339 25,759
---------- --------- ---------
Weighted average common and common equivalents 2,963,931 5,738,039 6,032,364
========= ========= =========
Earnings per share:
Basic $1.08 $1.05 $0.99
Diluted $1.08 $1.04 $0.98
</TABLE>
(q) 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. 137
delayed the effective date for SFAS 133 to 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. Because the
Company has no derivative instruments, the Company expects that
adoption of SFAS No. 133 will have an immaterial impact on the
Company's consolidated financial position and results of operations.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." This SOP
suggests methods to determine when an entity should recognize a
liability for guaranty fund and other insurance-related assessments,
how to measure that liability, and when an asset may be recognized for
the recovery of such assessments through premium tax offsets or policy
surcharges. This SOP is effective for 1999, and the effect of initial
adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed.
Implementation of this statement is not expected to have a material
impact on the Company's financial position.
(r) Reclassifications
Certain items in the prior periods' financial statements have been
reclassified to conform with the 1999 presentation.
(2) Investments
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ 1,458,262 $ 2,571,518 $ 2,449,362
Equity securities 38,936 34,301 1,507
Short-term investments and cash 218,072 360,542 422,173
--------- ---------- -----------
1,715,270 2,966,361 2,873,042
Less investment expenses 68,344 119,002 (4,729)
--------- ---------- -----------
Net investment income $ 1,646,926 $ 2,847,359 $ 2,877,771
========= ========= ===========
</TABLE>
Realized and unrealized gains and losses were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Realized gains:
Fixed maturities $ 88,438 $ 457,066 $ 16,608
Equity securities - - 124,637
Real estate - - 53,962
------- --------- ---------
Total gains 88,438 457,066 195,207
------- --------- ---------
Realized losses:
Fixed maturities (4,890) (13,836) (17,171)
Equity securities - - (4,431)
-------- --------- ----------
Total losses (4,890) (13,836) (21,602)
--------- -------- ----------
Net realized gains (losses) $ 83,548 $443,230 $ 173,605
======== ======= =========
Changes in unrealized gains (losses):
Fixed maturities $367,598 $387,179 $(2,144,359)
Equity securities 9,056 4,357 (18,893)
-------- ------- ------------
Net unrealized gains (losses) $376,654 $391,536 $(2,163,252)
======= ======= ============
</TABLE>
At December 31, 1998 and 1999, the Company did not hold fixed-maturity
securities which individually exceeded 10% of shareholders' equity
except, U.S. government and government agency securities.
The amortized cost and estimated fair values of investments at
December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Amount
Gross Gross at which
Amortized unrealized unrealized Estimated shown in the
cost gains losses fair value balance sheet
---- ----- ------ ---------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 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
========== ========= ======== ========== ==========
December 31, 1999:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $17,475,473 $ - $ 624,997 $ 16,850,476 $ 16,850,476
Obligations of states and political
subdivisions 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
========== ========= ========= ========== ==========
</TABLE>
The amortized cost and estimated fair values of fixed maturities at
December 31, 1999, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities as certain borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalty.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
<S> <C> <C>
Due in one year or less $ 350,000 $ 350,000
Due after one year through five years 22,079,423 21,511,955
Due after five years through ten years 13,145,307 12,774,373
Due after ten years 3,050,045 2,780,726
Mortgage-backed securities 3,433,949 3,277,502
---------- ----------
Total $42,058,724 $40,694,556
========== ==========
</TABLE>
Bonds with an amortized cost of $4,272,797 and $6,232,836 were on deposit
with insurance regulatory authorities at December 31, 1998 and 1999 in
accordance with statutory requirements.
(3) Investment in Real Estate
The Company's investment in real estate is comprised of 173 acres of
property in the Ponce Inlet, Florida that was acquired in foreclosure
during April 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.
Throughout 1999 it was the Company's intent to sell the property and the
Company negotiated with a potential purchaser who was interested in
developing the property. During the negotiation period, the Company agreed
to manage the property development on the potential purchaser's behalf, as
it was in the Company's and the potential purchaser best interest to
continue the development of the property. Consequently, the Company
incurred additional capitalizable development costs of approxiametly $2.5
million during 1999.
On February 17, 2000 the Company was informed that the potential purchaser
was unable to secure acceptable construction financing terms and requested
an extension of time to seek other financing. The Company denied the
potential purchaser's request and has decided to develop the property for
its own account.
During 1999, the Company recognized $360,000 in property management fees
for the management of the property during the due diligence period on
behalf of the potential purchaser and applied $140,000 in nonrefundable
earnest monies against the carrying value of its investment in real estate.
See note 11 for contingencies relating to the financing requirements of
this development.
(4) Notes Receivable
As of December 31, 1999, other notes receivable consists of nine notes
which are secured by real and personal property and various
corporate and personal guarantees. These notes bear interest rates
ranging from 9.00% to 25.0% and are payable on various dates.
As of December 31, 1999, there are no delinquent note payments and no
losses have been incurred on the Company's notes receivable for any
period presented herein.
(5) Financial Instruments
The carrying amounts for short-term investments, cash, premiums
receivable, commissions receivable, accrued investment income, liability
for deductible fees held, ceded premiums payable, funds held, collateral
held and accounts payable and accrued expenses approximate their fair
values due to the short-term nature of these instruments.
Estimated fair values for fixed maturities were provided by outside
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics.
The estimated fair values for equity securities were determined by using
market quotations on the principal public exchange markets for which such
securities are traded.
During 1998, notes receivable are with affiliated individuals and
unaffiliated entities. Of the eight notes receivable at December 31,
1998, six have values which approximate fair values. These notes
have maturity dates in 1999 and 2000 or have minimal outstanding
principal balances at December 31, 1998. The carrying value and
approximate fair value of these remaining loans at December 31, 1998,
assuming a market interest rate of prime plus 1% (9-1/2%), are
$12,979,257 and $14,324,000, respectively.
During 1999, notes receivable are with affiliated individuals and
unaffiliated entities. Of the eleven notes receivable at December 31,
1999, all have fair values which approximate market values, and have
maturity dates in 2000 and 2001.
(6) Reinsurance
General Liability
Effective January 1, 1999, the Company entered into three Excess of Loss
Reinsurance treaties with Signet Star Reinsurance Company, Terra Nova
Insurance Company, Lloyds of London, and Zurich-American Insurance Group
(the "Reinsurers") for the Company's general liability lines of business.
The treaties provide $750,000 excess $250,000 and $4 million excess $1
million, and $10 million excess $5 million of coverage to the Company on
a 100% basis. The treaties also provide reinsurance coverage beginning at
$100,000 for occupational disease, cumulative trauma, employers'
liability and "action over" claims.
<TABLE>
<CAPTION>
COVERAGE LAYER--$10,000,000 X $5,000,000
<S> <C>
Lloyd's of London 77.5%
Terra Nova Insurance Company 12.5
Signet Star Reinsurance Company 10.0
------
100.0%
COVERAGE LAYER--$4,000,000 X $1,000,000
Lloyd's of London 50.0%
Signet Star Reinsurance Company 20.0
Zurich American Insurance Group 20.0
Terra Nova Insurance Company 10.0
------
100.0%
COVERAGE LAYER--$750,000 X $250,000
Signet Star Reinsurance Company 100.0%
COVERAGE LAYER--$0-$250,000(1)
American Safety Reinsurance, Ltd. 42.0%
American Safety RRG 30.0
American Safety Casualty 28.0
------
100.0%
</TABLE>
(1) The above percentages are after American Safety RRG retains the first
$100,000 in the aggregate.
Workers' Compensation
The Company assumes workers' compensation business from Legion Insurance
Company('Legion'). This business is produced by ASI Services, which
bills and collects the premiums on behalf of Legion and remits net of
its agent's commissions. Legion then deducts its expenses for the
program as well as 10% of the premium to deposit in its loss fund.
The balance of the premium is ceded to American Safety Casualty.
Legion uses the 10% loss fund to pay claims, and when this fund is
extinguished, Legion cedes to American Safety Casualty. American Safety
Casualty has a 50% quota share arrangement between itself and American
Reinsurance, Ltd. Pursuant to the arrangement with Legion Insurance
Company, the Company's exposure is limited to $250,000 per occurrence
and a 70% aggregate stop-loss ratio percentage. As discussed above
in "General Liability", the generalliability treaties also provide
occupational disease, cumulative trauma, and employers' liability
coverage up to $100,000 for this program as well.
Thefollowing table depicts the income statement effects to the Company from
its arrangement with Legion Insurance Company:
<TABLE>
<CAPTION>
Years
ended
December
31,
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Premiums assumed $ 5,171 $ 6,017 $ 7,391
Premiums ceded 27 124 -
Net premiums - earned 5,144 5,893 7,391
Loss and LAE incurred 3,582 4,552 5,845
Commissions 970 1,312 1,686
Loss control 3 - -
</TABLE>
The following table depicts the balance sheet effects to the Company from
its arrangement with Legion Insurance Company:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1998 1999
---- ---- ----
Assets (In thousands)
------
<S> <C> <C> <C>
Premium receivable $ 765 $ 1,485 $2,174
Liabilities
-----------
Unpaid loss and LAE 4,922 7,066 7,856
Unearned premiums 803 732 989
Reinsurance payable on paid loss and LAE 333 636 1,420
</TABLE>
Surety
Effective January 1, 1999, the Company entered into three excess of loss
reinsurance treaties with Signet Star Reinsurance Company, Terra Nova
Insurance Company, Lloyds of London, and Zurich-American Insurance Group
(the "Reinsurers") for the Company's surety line of business. The treaties
provide per bond and per principal reinsurance of $750,000 excess $250,000,
$4 million excess $1 million, and $10 million excess $5 million of coverage
to the Company on a 100% basis. American Safety Casualty also has a 50%
quota share arrangement between itself and American Safety Reinsurance,
Ltd.
<TABLE>
<CAPTION>
COVERAGE LAYER--$10,000,000 X $5,000,000
<S> <C>
Lloyd's of London 77.5%
Terra Nova Insurance Company 12.5
Signet Star Reinsurance Company 10.0
----
100.0%
COVERAGE LAYER--$4,000,000 X $1,000,000
Lloyd's of London 50.0%
Signet Star Reinsurance Company 20.0
Zurich American Insurance Group 20.0
Terra Nova Insurance Company 10.0
------
100.0%
COVERAGE LAYER--$750,000 X $250,000
Signet Star Reinsurance Company 100.0%
COVERAGE LAYER--$0-$250,000
American Safety Reinsurance, Ltd. 50.0%
American Safety Casualty 50.0
-----
100.0%
</TABLE>
The approximate effect of reinsurance on the financial statement accounts
listed below is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Written premiums:
Direct $ 4,060 $ 4,603 $12,086
Assumed 7,501 10,136 13,203
Ceded (2,590) (5,087) (8,864)
------- ------ -------
Net $ 8,971 $ 9,652 $16,425
===== ===== ======
Earned premiums:
Direct $ 3,515 $ 3,532 $ 7,891
Assumed 7,075 9,651 11,797
Ceded (2,243) (3,994) (6,015)
-------- ------- -------
Net $ 8,347 $ 9,189 $13,673
===== ===== ======
Losses and loss adjustment expenses incurred:
Direct $ 574 $ 928 $ 4,800
Assumed 4,125 5,095 6,045
Ceded (606) (846) (3,949)
------ ------ -------
Net $ 4,093 $ 5,177 $ 6,896
===== ===== =====
Unpaid loss and loss adjustment expenses:
Direct $ 872 $ 1,749 $ 5,638
Assumed 10,700 12,952 14,775
Ceded (779) (1,841) (6,065)
------- ------- -------
Net $10,793 $ 12,860 $14,348
====== ====== ======
</TABLE>
(7) Income Taxes
Total income tax (benefit) for the years ended December 31, 1997, 1998 and
1999 were allocated as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Tax expense (benefit) attributable to:
Income from continuing operations $ 355,531 $ (199,244) 82,722
Unrealized gains (losses) on
securities available for sale 76,157 6,236 (180,514)
-------- ---------- ---------
Total $ 431,688 $ (193,008) $ (97,792)
======== ========= =========
</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> <C> <C>
December 31, 1997 462,164 (106,633) 355,531
December 31, 1998 (39,850) (159,394) (199,244)
December 31, 1999 272,484 (l89,762) 82,722
</TABLE>
The state income tax components aggregated $6,884, $(74,698) and $93,627
for the years ended December 31, 1997, 1998 and 1999, respectively.
Income tax expense for the years ended December 31, 1997, 1998 and 1999
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>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense $ 1,212,625 $ 1,956,701 $2,041,017
Foreign earned income not subject to
Tax-exempt interest (57,945) (89,706) (77,895)
State taxes and other 34,576 (31,793) 147,952
---------- ----------- -------
$ 355,531 $ (199,244) $ 82,722
========== =========== =======
</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,
1998 1999
<S> <C> <C>
Deferred tax assets:
Loss reserve discounting $ 370,607 $ 509,011
Unearned premium reserves 65,989 185,459
Deferred revenue 36,129 -
Unrealized loss on securities - 80,844
------- -------
Gross deferred tax assets 472,725 775,314
------- -------
Deferred tax liabilities:
Deferred acquisition costs - 42,087
Unrealized gain on securities 99,670 -
Other 10,104 -
------- ---------
Gross deferred tax liabilities 109,774 42,087
------- ---------
Net deferred tax asset $ 362,951 $ 733,227
======= =========
</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.
(8) Insurance Accounting
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles which vary in certain respects,
for the Company and American Safety Casualty, from statutory accounting
practices prescribed or permitted by regulatory authorities. Statutory
accounting practices includes state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (the "NAIC"). In its March 1998
meeting, the NAIC membership adopted the Codification of Statutory
Accounting Principles Project (the "Codification") as the NAIC-supported
basis of accounting. The Codification was approved with a provision
allowing for commissioner discretion in determining appropriate statutory
accounting for insurers. Accordingly, such discretion will continue to
allow prescribed or permitted accounting practices that may differ from
state to state.
Although the NAIC has stated that the adoption date for the Codification is
January 1, 2001, the implementation date is dependent upon an insurer's
state of domicile.
The Company is in the process of determining the impact of Codification on
its financial statements.
The Bermuda Insurance Act of 1978 and related regulations (the "Act")
requires the Company to meet a minimum solvency margin. Statutory capital
and surplus as of December 31, 1997, 1998, and 1999 were $21,840,896,
$59,269,293 and $61,038,760, respectively, and the amounts required to be
maintained by the Company were $1,618,885, $1,928,938 and $2,350,928,
respectively. In addition, a minimum liquidity ratio must be maintained
whereby relevant assets, as defined by the Act, must exceed 75% of relevant
liabilities. Once these requirements have been met, there is no restriction
on the retained earnings available for distribution.
As reported in American Safety Casualty's 1999 annual statement, the
statutory capital and surplus of American Safety Casualty approximated
$10,636,000. The maximum amount of dividends which can be paid, without
prior written approval of the Commissioner of Insurance of the State of
Delaware, is limited to the greater of 10% of surplus as regards
policyholders or net income, excluding realized capital gains, of the
preceding year. Accordingly, American Safety Casualty can pay dividends in
2000 of approximately $1,063,600.
The National Association of Insurance Commissioners (the "NAIC") has
established risk-based capital ("RBC") requirements to help state
regulators monitor the financial strength and stability of property and
casualty insurers by identifying those companies that may be inadequately
capitalized. Under the NAIC's requirements, each insurer must maintain its
total capital above a calculated threshold or take corrective measures to
achieve the threshold. The threshold of adequate capital is based on a
formula that takes into account the amount of risk each company faces on
its products and investments. The RBC formula takes into consideration four
major areas of risk: (i) asset risk which primarily focuses on the quality
of investments; (ii) insurance risk which encompasses coverage-related
issues and anticipated frequency and severity of losses when pricing and
designing insurance coverages; (iii) interest rate risk which involves
asset/liability matching issues; and (iv) other business risks.
American Safety Casualty has calculated its RBC level and has determined
that its capital and surplus is significantly in excess of threshold
requirements.
(9) Related Party and Affiliate Transactions
The Company has entered into reinsurance agreements with two companies,
Intersure Reinsurance Company ("Intersure Re") and Omega Reinsurance
Company ("Omega Re"), both of which are owned and controlled by certain
officers of the Company, in order to provide limits of coverage not readily
available in the commercial marketplace. Reinsurance premiums ceded and
earned aggregated $430,000, $368,000 and $206,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. Additionally, Intersure was
granted an option to purchase common shares of American Safety at an option
price approximating fair value at the date of the grants. See note 12.
ASI Services, American Safety's underwriting and administrative services
subsidiary, leases office space from an entity which is owned by certain
directors and shareholders of the Company. The lease commenced on March 1,
1996 and expires on February 28, 2001. The Company pays base annual rent of
$282,401 plus an annual increase based on the consumer price index of at
least 4%.
The Company has two outstanding loans to employees totaling $1.7 million at
December 31, 1999. As of March 3, 2000, $1.53 million of these loans have
been paid. The interest rates on these loans approximates market rates.
<PAGE>
The following tables reconcile the income statement effects to the Company
from American Safety RRG:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Assumed premiums from American Safety RRG $ 1,856 $ 2,835 $ 3,449
Ceded premiums to American Safety RRG 1,251 2,318 3,973
----- ----- -----
Net premiums earned 605 517 (524)
Management fee 601 714 722
Loss control 58 73 75
Brokerage commission income 908 634 1,080
------- --- -----
Total revenues $ 2,172 $ 1,938 $ 1,353
====== ===== =====
Loss and LAE incurred $ 405 $ 346 $ 181
====== ===== =====
</TABLE>
For the years ended December 31, 1997, 1998, and 1999, ASI Services and
ECSI received fees from American Safety RRG for risk management, claims
administration and other management services. ASI Services also recognized
brokerage commission income from American Safety RRG.
The following table depicts the balance sheet effects to the Company from
American Safety RRG:
<TABLE>
<CAPTION>
December 31,
------------
Assets 1997 1998 1999
------ ---- ---- ----
<S> <C> <C>
Due from affiliate $ 288,951 $ 668,074 $ 2,088,748
Liabilities
Unpaid loss and LAE 5,886,030 5,491,731 6,541,918
Unearned premium 590,269 1,028,600 2,114,813
Ceded premiums payable 217,062 201,778 1,636,207
Reinsurance payable on paid loss
and LAE 41,085 82,853 79,198
</TABLE>
(10) Segment Information
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.
Products and services from each reportable segment
The Company is a specialty insurance holding company which, through
its United States and Bermuda operating segments, develops,
underwrites, manages and markets primary casualty insurance and
reinsurance programs in the alternative insurance market for
environmental remediation risks, employee leasing and staffing
industry risks, and other specialty risks. The Company has
demonstrated expertise in developing specialty insurance coverages and
custom designed risk management programs not generally available in
the standard insurance market.
The United States operating segment's specialty insurance programs
provide insurance and reinsurance for general, pollution and
professional liability exposures, for workers' compensation and
surety, as well as custom designed risk management programs for
contractors, consultants and other business and property owners who
are involved with environmental remediation, employee leasing and
staffing, and other specialty risks.
Through its United States brokerage and management services
subsidiaries, the Company also provides specialized insurance program
development, underwriting, risk and reinsurance placement, program
management, brokerage, loss control, claims administration and
marketing services. The Company also insures and places risks through
its United States insurance subsidiary, as well as its non-subsidiary
risk retention group affiliate and other unaffiliated insurance and
reinsurance companies.
Through its Bermuda operating segment, the Company places and
reinsures a portion of the risks underwritten directly by its United
States segment, its risk retention group affiliate and other insurers.
Information about segment profit or loss and assets
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998 1999
---- ---- ----
(In thousands)
United States
<S> <C> <C> <C>
Net premiums earned - All other $ 2,456 $ 4,857 11,174
Net premiums earned - Intersegment 2,413 (416) (4,082)
Net investment income and interest on notes receivable 737 817 807
Other revenues 2,720 2,079 3,115
Total revenues 8,326 7,337 11,014
Interest expense - - -
Depreciation and amortization expense 89 90 126
Equity in net earnings of subsidiaries - - 437 *
Income taxes 356 (199) 83
Segment profit (loss) 759 (30) (45)
Significant noncash items other than depreciation
Property, plant and equipment 169 186 393
Total investments 14,716 15,678 19,469
Total assets 25,621 29,304 48,653
Total policy and contract liabilities 7,577 12,541 23,428
Total liabilities 15,677 19,375 39,120
* Represents earnings during 1999 prior to transfer of American Safety Casualty from Bermuda segment to the U.S. segment
in August 1999
Bermuda
Net premiums earned - All other 5,891 4,332 2,499
Net premiums earned - Intersegment (2,413) 416 4,082
Net investment income and interest on notes receivable 1,708 4,439 4,686
Other revenues 84 437 327
Total revenues 5,270 9,624 11,594
Interest expense 44 - -
Depreciation and amortization expense - - 12
Equity in net earnings of subsidiaries 759 2,116 2,713
Income taxes - - -
Segment profit 2,452 5,984 5,965
Significant noncash items other than depreciation
Property, plant and equipment - - 841
Total investments 24,569 58,544 53,676
Total assets 36,313 87,309 93,022
Total policy and contract liabilities 13,729 11,193 12,262
Total liabilities 14,472 14,794 15,979
December 31,
------------
1997 1998 1999
---- ---- ----
(In thousands)
Intersegment Eliminations
Net premiums earned - All other $ - $ - $ -
Net premiums earned - Intersegment - - -
Net investment income and interest on notes receivable - - -
Other revenues (106) (221) (519)
Total revenues (106) (221) (519)
Interest expense - - -
Depreciation and amortization expense - - -
Equity in net earnings of subsidiaries (759) (2,116) (3,150)
Income taxes - - -
Segment profit (loss) - - -
Significant noncash items other than depreciation
Property, plant and equipment - - -
Total investments (9,944) (23,174) (25,536)
Total assets (14,266) (30,465) (37,321)
Total policy and contract liabilities (3,326) (4,561) (5,732)
Total liabilities (4,322) (7,291) (11,784)
Total
Net premiums earned - All other 8,347 9,189 13,673
Net premiums earned - Intersegment - - -
Net investment income and interest on notes receivable 2,445 5,256 5,493
Other revenues 2,698 2,295 2,923
Total revenues 13,490 16,740 22,089
Interest expense 44 - -
Depreciation and amortization expense 89 90 138
Equity in net earnings of subsidiaries - - -
Income taxes 356 (199) 83
Total profit (loss) 3,211 5,954 5,920
Significant noncash items other than depreciation
Property, plant and equipment 169 186 1,234
Total investments 29,341 51,048 47,609
Total assets 47,668 86,148 104,354
Total policy and contract liabilities 17,980 19,173 29,958
Total liabilities 25,827 26,878 43,315
</TABLE>
(11) Commitments and Contingencies
At December 31, 1998 and 1999, the Company had aggregate outstanding
irrevocable letters of credit which had not been drawn amounting to
$1,000,000 in favor of the Vermont Commissioner of Banking, Insurance, and
Securities. Investments in the amount of $1,000,000 have been pledged as
collateral to the issuing bank.
In March 2000, the Company announced plans to complete development of the
Harbour Village Golf and Yacht Club ("Harbour Village"). Harbour Village
was acquired by the Company through foreclosure in April 1999, has been
under management throughout 1999. It is anticipated that Harbour Village
will develop in three phases over a three to five year period. The Company
intends to borrow under a revolving bank credit facility in order to
construct in sequence the three phases of Harbour Village. The Company
anticipates construction costs for the entire project to be in excess of
$160 million. The Company anticipates that approximately $34 million we be
required for construction of Phase I. The company is in the process of
negotiating with a third party lender for a revolving line of credit in
order to begin Phase I construction. The Company believes that it will be
able to obtain a 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 Harbour Village during the first
24 months of development.
(12) Liability for Unpaid Loss and Loss
Adjustment Expenses
Activity in the liability for unpaid claims and claim adjustment expenses
is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------- ------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Unpaid loss and loss adjustment expenses, January 1 $ 8,914 $11,572 $14,701
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of period 45 779 1,841
------ ------ ------
Net unpaid loss and loss adjustment
expenses, January 1 8,869 10,793 12,860
------ ------ ------
Incurred related to:
Current year 3,112 4,383 7,449
Prior years 981 794 (553)
------ ------ ------
Total incurred 4,093 5,177 6,896
----- ----- -----
Paid related to:
Current year 342 103 1,707
Prior years 1,827 3,007 3,701
----- ----- -----
Total paid 2,169 3,110 5,408
----- ----- -----
Net unpaid losses and loss adjustment
expenses at end of period 10,793 12,860 14,348
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of period 779 1,841 6,065
----- ----- -----
Unpaid loss and loss adjustment end
expenses at of period $11,572 $14,701 $20,413
====== ====== ======
</TABLE>
The negative development in 1997 and 1998 is attributable to the Company's
workers' compensation line of business. Management continually attempts to
improve its loss estimation process by refining its ability to analyze loss
development patterns, claims payments and other information, but many
reasons remain for potential adverse development of estimated ultimate
liabilities. For example, the uncertainties inherent in the loss estimation
process have become increasingly subject to changes in legal trends. In
recent years, this trend has expanded the liability of insureds,
established new liabilities and reinterpreted contracts to provide
unanticipated coverage long after the related policies were written. Such
changes from past experience significantly affect the ability of insurers
to estimate liabilities for unpaid losses and related expenses. The
positive development in 1999 is attributable to improved experience on
workers compensation and general liability lines of business.
Management recognizes the higher variability associated with certain
exposures and books of business and considers this factor when establishing
liabilities for losses. Management currently believes the Company's gross
and net liabilities are adequate.
The net liabilities for losses and loss adjustment expenses maintained by
the Company's insurance subsidiaries are equal under both statutory and
generally accepted accounting principles.
(13) Stock Options
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted
Option average
shares exercise price
<S> <C> <C> <C>
1998 activity:
Granted 347,500 $ 11.00
Exercised (44,540) 5.96
Canceled (22,000) 11.00
-------- -----
Outstanding at December 31, 1998 451,181 9.86
1999 activity:
Granted 106,500 9.50
Canceled (15,250) -
-------- -----
Outstanding at December 31, 1999 542,431 $ 9.78
======= ====
</TABLE>
Of the 542,431 outstanding options at December 31, 1999, 232,348 were
exercisable. Of the 451,181 outstanding options at December 31, 1998,
125,681 were exercisable. The remainder vest evenly over a three year
period.
The following table summarizes information about stock options outstanding
at December 1, 1999
<TABLE>
<CAPTION>
Options outstanding Options exercisable
Weighted
average Weighted Weighted
Range of Number remaining average Number average
exercise prices outstanding contractual life exercise price Grant Year exercisable exercise price
---------------- ----------- ---------------- -------------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 5.96 51,090 2.18 $ 5.96 1997 51,090 $ 5.96
7.08 65,500 2.75 7.08 1997 65,500 7.08
11.00 9,091 .25 11.00 1997 9,091 11.00
11.00 320,000 8.13 11.00 1998 106,667 11.00
9.50 96,750 9.13 9.50 1999 - 9.50
------ ------
5.96-11.00 542,431 6.97 9.78 232,348 8.78
========== ======= ==== ==== ======= ====
</TABLE>
Had compensation cost for the Company's stock options granted in 1998 and
1999 been determined using the fair-value-based method as described in SFAS
No. 123, the Company's net earnings and earnings per share would
approximate the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(In thousands, except
per share amounts)
Net earnings:
<S> <C> <C>
As reported $ 3,211 $ 5,954 $ 5,920
Effect of stock options 217 418 736
----- ----- -----
Pro forma net earnings $ 2,994 $ 5,536 $ 5,184
===== ===== =====
Net earnings per share:
As reported $ 1.08 $ 1.04 $ .98
Effect of stock options 0.07 .07 .12
---- ----- -----
Pro forma net earnings per share $ 1.01 $ .97 $ .86
==== ==== ====
</TABLE>
The fair value of each option granted during 1998 and 1999 was estimated on
the date of grant using the Black-Scholes multiple option approach with the
following assumptions: dividend yield of 0.0%; expected volatility of 0.0%
and 37.87%,in 1998 and 1999 respectively; risk-free interest rate of 5.44%;
and expected life from the vesting dates ranging from 0.50 years to 10.00
years.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. The provisions of SFAS No. 123 are applicable
prospectively. The Company expects to grant additional awards in future
years. The Company granted options in 1998 and 1999 at an amount deemed to
be fair market value at the date of grant.
(14) Litigation
The Company is a defendant in various litigation matters considered to be
in the normal course of business. While the outcome of these matters cannot
be estimated with certainty, it is the opinion of management (after
consultation with legal counsel) that the resolution of such litigation
will not have a material adverse effect on the Company's financial
statements.
(15) Shareholder Matters
The Company filed a registration statement on Form S-1 with the Securities
and Exchange Commission for an initial public offering of 3,105,000 common
shares (including the underwriters' over-allotment option). Such
registration became effective February 12, 1998. Proceeds to the Company
pursuant to the initial public offering described above aggregated
approximately $31.8 million.
(16) Subsequent Events
During 1999, the Company negotiated a sales contract with a potential
purchaser of Harbour Village. During February 2000, the sale failed to
close, and the Company decided to proceed with development of the project.
During March 2000, the Company completed the acquisition of Trafalgar
Insurance Company, an excess and surplus lines carrier for $16.3 million
of which $1.2 million is attributable to goodwill.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 40,695
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 164
<MORTGAGE> 0
<REAL-ESTATE> 12,040
<TOTAL-INVEST> 59,648
<CASH> 427
<RECOVER-REINSURE> 10,657
<DEFERRED-ACQUISITION> 275
<TOTAL-ASSETS> 104,354
<POLICY-LOSSES> 20,413
<UNEARNED-PREMIUMS> 9,496
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 61
<OTHER-SE> 60,978
<TOTAL-LIABILITY-AND-EQUITY> 104,354
13,673
<INVESTMENT-INCOME> 2,878
<INVESTMENT-GAINS> 174
<OTHER-INCOME> 921
<BENEFITS> 6,896
<UNDERWRITING-AMORTIZATION> 1,819
<UNDERWRITING-OTHER> 7,370
<INCOME-PRETAX> 6,003
<INCOME-TAX> 83
<INCOME-CONTINUING> 5,920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,920
<EPS-BASIC> .99
<EPS-DILUTED> .98
<RESERVE-OPEN> 12,860
<PROVISION-CURRENT> 7,449
<PROVISION-PRIOR> (553)
<PAYMENTS-CURRENT> 1,707
<PAYMENTS-PRIOR> 3,701
<RESERVE-CLOSE> 14,348
<CUMULATIVE-DEFICIENCY> (553)
</TABLE>
