SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2000
Commission File Number 1-14795
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
44 Church Street
P.O. Box HM2064
Hamilton HM HX, Bermuda
(Address, zip code of principal executive offices)
(441) 296-8560
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No___
The aggregate number of shares outstanding of Registrant's common stock, $.01
par value, on October 2, 2000 was 5,323,286.
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
FORM 10-Q
TABLE OF CONTENTS
-----------------
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...........................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risks...24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................25
Item 2. Changes in Securities and Use of Proceeds......................25
Item 3. Defaults Upon Senior Securities................................25
Item 4. Submission of Matters to a Vote of Security Holders............25
Item 5. Other Information..............................................25
Item 6. Exhibits and Reports on Form 8-K...............................26
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------ -----
(unaudited)
Assets
Investments:
Securities available for sale, at fair value:
<S> <C> <C>
Fixed maturities $ 40,694,556 $ 42,986,758
Common stock 163,968 704,493
Investment in real estate 12,039,842 19,267,265
Short-term investments 6,749,791 7,411,218
----------- -----------
Total investments 59,648,157 70,369,734
Cash 427,154 6,025,847
Restricted cash - 5,123,523
Accrued investment and interest income 2,783,663 3,782,115
Notes receivable:
Related parties 1,700,000 -
Other 11,255,264 9,955,088
Premiums receivable 12,239,544 25,386,776
Commissions receivable 5,948 36,100
Funds on deposit 353,407 408,951
Ceded unearned premium 4,591,075 18,805,126
Reinsurance recoverable 6,065,502 13,562,394
Due from affiliate 2,088,748 1,339,149
Income tax recoverable - 154,872
Deferred income taxes 733,227 2,116,012
Deferred acquisition costs 274,701 1,651,805
Property, plant and equipment 1,234,294 1,595,922
Prepaid Items 604,537 2,093,498
Goodwill 234,467 1,575,672
Other assets 113,846 1,648,831
------------- -------------
Total assets $ 104,353,534 $165,631,415
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Unpaid loss and loss adjustment expenses $ 20,413,236 $ 33,664,871
Unearned premiums 9,496,342 34,058,289
Reinsurance on paid loss and loss adjustment expenses 1,419,536 -
Reinsurance deposits on retroactive contract 48,375 -
Ceded premiums payable 6,739,068 19,647,751
Due to affiliate:
Ceded premiums payable 1,636,207 187,402
Reinsurance on paid loss and loss adjustment expenses 79,198 241,608
Escrow deposits - 5,211,023
Accounts payable and accrued expenses 1,893,470 8,661,978
Funds held 357,509 1,153,997
Loan payable - 4,020,535
Collateral held 1,208,976 777,083
Income tax payable 22,857 -
----------- -----------
Total liabilities 43,314,774 107,624,537
----------- -----------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 5,000,000 shares; no
<S> <C> <C>
shares issued and outstanding - -
Common stock, $0.01 par value; authorized 15,000,000 shares;
issued and outstanding at December 31, 1999, 6,077,750
shares, and at September 30, 2000, 6,281,386 shares 60,777 62,814
Additional paid-in capital 33,810,387 35,148,577
Retained earnings 30,625,739 28,838,715
Accumulated other comprehensive loss, net (1,288,804) (461,914)
Treasury Stock, 300,000 shares at December 31, 1999 and 958,100
shares at September 30, 2000 (2,169,339) (5,581,314)
----------- ------------
Total shareholders' equity 61,038,760 58,006,878
----------- ------------
Total liabilities and
shareholders' equity $104,353,534 $165,631,415
============= =============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Direct premiums earned $ 2,212,188 $ 11,636,314 $ 5,325,894 $ 21,009,226
Assumed premiums earned:
Affiliate 799,131 1,769,646 2,383,284 3,998,187
Nonaffiliates 2,279,402 4,113,826 6,066,682 9,785,408
----------- ----------- ----------- -----------
Total assumed premiums earned 3,078,533 5,883,472 8,449,966 13,783,595
----------- ----------- ----------- ----------
Ceded premiums earned:
Affiliate 1,082,486 1,170,306 3,085,890 3,219,951
Nonaffiliates 682,013 6,769,616 1,108,583 10,633,895
------------ ----------- ----------- ----------
Total ceded premiums earned 1,764,499 7,939,922 4,194,473 13,853,846
----------- ----------- ----------- ----------
Net premiums earned 3,526,222 9,579,864 9,581,387 20,938,975
----------- ----------- ----------- ----------
Net investment income 746,194 667,623 2,159,959 2,001,630
Interest on notes receivable 512,289 377,679 2,019,851 1,252,648
Brokerage commission income 276,800 859,449 771,034 1,812,087
Management fees from affiliate 339,320 350,392 1,064,908 1,068,738
Net realized gains (losses) 120,207 ( 9,352) 218,064 (215,063)
Other income 245,007 69,543 706,056 767,949
----------- ------------- ---------- ------------
Total revenues 5,766,039 11,895,198 16,521,259 27,626,964
----------- ------------ ---------- ------------
Expenses:
Loss and loss adjustment expenses
incurred 2,147,664 4,980,766 5,567,194 11,801,592
Acquisition expenses 193,644 1,961,952 865,060 4,744,783
Payroll and related expenses 1,153,340 1,921,571 3,496,027 5,503,629
Other expenses 724,355 2,253,160 2,039,358 5,059,535
Expense due to rescission - - - 3,541,848
------------ ---------- ---------- -----------
Total expenses 4,219,003 11,117,449 11,967,639 30,651,387
------------ ---------- ---------- ----------
Earnings (loss) before income taxes 1,547,036 777,749 4,553,620 (3,024,423)
Income taxes 187,773 123,923 33,782 (1,237,399)
------------ ------------ ---------- -----------
Net earnings (loss) $1,359,263 $653,826 $4,519,838 $(1,787,024)
------------ ------------ ---------- ------------
Net earnings (loss) per share:
Basic $ 0.23 $ 0.12 $ 0.75 $ (0.32)
========= ========== ========== ===========
Diluted $ 0.23 $ 0.12 $ 0.74 $ (0.32)
========= ========== ========== ===========
Common shares used in computing earnings
per share:
Basic 6,009,208 5,377,597 6,050,059 5,609,170
========= ========= ========= ===========
Diluted 6,027,667 5,377,597 6,077,700 5,610,944
========= ========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
-3-
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 2000
---- ----
Cash flow from operating activities:
<S> <C> <C>
Net earnings (loss) $ 4,519,838 $(1,787,024)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Realized (gains) losses on sale of investments (218,064) 215,063
Amortization (deferral) of acquisition costs 1,195,038 (1,377,104)
Change in:
Accrued investment and interest income (917,477) (998,452)
Premiums receivable (4,765,230) (13,147,232)
Commissions receivable (236,444) (30,152)
Reinsurance recoverable and ceded unearned premiums (2,487,200) (23,130,479)
Funds held by reinsured (318,401) 740,944
Due from affiliate 366,471 749,599
Income taxes 116,346 (177,729)
Deferred income taxes (224,320) (1,382,785)
Unpaid losses and loss adjustment expenses 3,610,764 13,251,635
Unearned premiums 2,674,281 24,561,947
Liability for deductible fees held (488,039) (48,375)
Ceded premiums payable 2,590,235 12,908,683
Due to affiliate 103,948 (1,286,395)
Accounts payable and accrued expenses (1,343,746) 6,768,508
Collateral held 949,068 (431,893)
Prepaid items - (1,331,461)
Other, net (526,928) 223,593
------------- -----------
Net cash provided by operating activities 4,600,140 14,290,891
------------ -----------
Cash flow from investing activities:
Purchases of fixed maturities (5,765,209) (7,762,871)
Purchases of equity investments (1,321,179) (5,766,571)
Proceeds from maturity and redemption of fixed
maturities 8,083,197 650,024
Proceeds from sale of fixed maturities 2,103,289 10,897,958
Proceeds of sale of equity investments 3,065,525 5,134,381
Purchase of Trafalgar Insurance Company - (7,050,877)
Increase in short-term investments (6,301,212) (731,427)
Proceeds from notes receivable - related parties 280,000 1,530,000
Advances in notes receivable - other (4,287,138) 1,300,176
Increase in investment in real estate (887,328) (7,227,423)
Purchase of fixed assets, net (891,649) (361,628)
------------ -------------
Net cash used in investing activities (5,921,704) (9,388,258)
----------- -------------
Cash flow from financing activities:
Proceeds from sale of common stock 1,276 -
Purchase of treasury stock (1,101,144) (3,411,975)
Proceeds from escrow deposits - 5,211,023
Proceeds from loan payable - 4,020,535
------------ ------------
Net cash used in financing activities (1,099,868) 5,819,583
----------- ------------
Net increase (decrease) in cash (2,421,432) 10,722,216
Net cash and restricted cash at beginning of period 4,737,132 427,154
----------- -------------
Net cash and restricted cash at end of period $2,315,700 $11,149,370
=========== =============
Noncash items operating activities:
Change in accrued interest income 980,120 -
Recoverable due to rescission in other assets - (1,323,000)
Change in prepaid items - (170,000)
Investing activities:
Decrease in notes receivable-other 9,162,777 -
Purchase of real estate (10,142,897) -
Financing activities:
Issuance of common stock - 1,323,000
Notes receivable related parties - 170,000
----------------- -----------
Net noncash adjustments - -
================= ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
-4-
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------- --------------------------------
1999 2000 1999 2000
----------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Net earnings (loss) $1,359,263 $ 653,826 $4,519,838 $(1,787,024)
Other comprehensive earnings before income taxes:
Unrealized gains (losses) on securities
available for sale (564,704) 529,033 (1,687,589) 970,752
Reclassification adjustment for
realized gains (loss) included in net
earnings 120,207 (9,352) 126,018 (215,063)
----------- ----------- ------------- --------------
Total other comprehensive earnings (loss)
before taxes (444,497) 519,681 (1,561,571) 755,689
Income tax (benefit) expense related to
items of comprehensive income (22,649) 104,245 (134,325) (71,201)
------------ ------------ -------------- --------------
Other comprehensive earnings (loss) net of
income taxes (421,848) 415,436 (1,427,246) 826,890
------------- ---------- -------------- -------------
Total comprehensive earnings (loss) $ 937,415 $1,069,262 $3,092,592 $(960,134)
============= ========== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
-5-
<PAGE>
American Safety Insurance Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim consolidated financial statements of
American Safety Insurance Group, Ltd. ("American Safety") and its subsidiaries
(collectively, the "Company") are prepared in accordance with generally accepted
accounting principles of the United States and, in the opinion of management,
reflect all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation of the interim periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, based on the best
information available, in recording transactions resulting from business
operations. The balance sheet amounts that involve a greater extent of
accounting estimates and actuarial determinations subject to future changes are
the Company's liabilities for unpaid losses and loss adjustment expenses. As
additional information becomes available (or actual amounts are determinable),
the recorded estimates may be revised and reflected in operating results. While
management believes that the liability for unpaid losses and loss adjustment
expenses is adequate to cover the ultimate liability, such estimates may be more
or less than the amounts actually paid when claims are settled.
The results of operations for the nine months ended September 30, 2000 may
not be indicative of the results that may be expected for the full year ending
December 31, 2000. These unaudited interim consolidated financial statements and
notes should be read in conjunction with the financial statements and notes
included in the audited consolidated financial statements of the Company for the
year ended December 31, 1999.
The unaudited interim consolidated financial statements include the
accounts of American Safety and each of its subsidiaries. All significant
intercompany balances have been eliminated.
Note 2 - Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, is
effective for years beginning after June 15, 2000. The standard requires that
all derivatives be recorded as an asset or liability, at estimated fair value,
regardless of the purpose or intent for holding the derivative. If a derivative
is not utilized as a hedge, all gains or losses from the change in the
derivative's estimated fair value are recognized in earnings. The gains or
losses from the change in estimated fair value of certain derivatives utilized
as hedges are recognized in earnings or other comprehensive income depending on
the type of hedge relationship. The Company expects that adoption of SFAS No.
133, as amended by statement 138, will have an immaterial impact on the
Company's consolidated financial position and results of operations.
-6-
<PAGE>
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities-a
replacement of FASB Statement No. 125. SFAS No. 140 revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures not previously required under SFAS
No. 125. This statement is effective for all transfers and servicing of
financial assets and liabilities occurring after March 31, 2001. For recognition
and reclassification of collateral and for disclosures relating to
securitization transactions and collateral, it is effective for fiscal years
ended after December 15, 2000. The Company is currently assessing the impact of
SFAS No. 140, but does not believe that the statement will have a material
impact on the Company's consolidated financial position and results of
operation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 -- Revenue Recognition in Financial
Statements. SAB 101, as amended, is effective for fiscal years ended after
December 15, 2000. The bulletin further defines when revenues are recognizable
and provides a series of questions and answers related to specific revenue
recognition topics. The Company does not expect the adoption of SAB 101 to have
a material impact on the Company's consolidated financial position and results
of operation.
Note 3 - Nature of Operations
The following is a description of certain risks facing the Company:
(a) Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates which will create additional
expenses not anticipated by the insurer in pricing its products and beyond those
recorded in the financial statements. Regulatory initiatives designed to reduce
insurer profits or otherwise affecting the industry in which the Company
operates, new legal theories or insurance company insolvencies through guaranty
fund assessments, may create costs for the Company beyond those recorded in the
financial statements. The Company attempts to mitigate this risk by writing
insurance business in several states, thereby spreading this risk over a large
geographic area.
(b) Potential Risk of United States Taxation of Bermuda Operations. Under
current Bermuda law, American Safety is not required to pay any taxes in Bermuda
on either income or capital gains. American Safety has received an undertaking
from the Minister of Finance in Bermuda that will exempt American Safety from
taxation until the year 2016 in the event of any such taxes being imposed. The
Company, exclusive of its United States subsidiaries, does not consider itself
to be engaged in a trade or business in the United States and accordingly does
not expect to be subject to direct United States income taxation. The Company's
U.S. subsidiaries are subject to taxation in the United States.
Whether a foreign corporation is engaged in a United States trade or
business or is carrying on an insurance business in the United States depends
upon the level of activities conducted in the
-7-
<PAGE>
United States. If the activities of a foreign company are "continuous, regular,
and considerable,"; the foreign company will be deemed to be engaged in a United
States trade or business. Due to the fact that American Safety will continue to
maintain an office in Bermuda and American Safety and its Bermuda subsidiary's
business is reinsuring contracts via treaty reinsurance agreements, which are
all signed outside of the United States, American Safety does not consider
itself to be engaged in a trade or business in the United States and,
accordingly, does not expect to be subject to United States income taxes. This
position is consistent with the position taken by various other entities that
have a similar operational structure as American Safety.
However, because the Internal Revenue Code of 1986, as amended, the
Treasury Regulations and court decisions do not definitively identify activities
that constitute being engaged in a United States trade or business, and because
of the factual nature of the determination, there can be no assurance that the
Internal Revenue Service will not contend that American Safety or its Bermuda
subsidiary are engaged in a United States trade or business. In general, if
American Safety or its Bermuda subsidiary are considered to be engaged in a
United States trade or business, it would be subject to (i) United States
Federal income tax on its taxable income that is effectively connected with a
United States trade or business at graduated rates and (ii) the 30 percent
branch profits tax on its effectively connected earnings and profits deemed
repatriated from the United States. (c) Credit Risk is the risk that issuers of
securities owned by the Company or secured notes receivable will default or that
other parties, including reinsurers that have obligations to the insurer, will
not pay or perform. The Company attempts to mitigate this risk by adhering to a
conservative investment strategy, by obtaining sufficient collateral for secured
note obligations and by maintaining sound reinsurance, credit and collection
policies.
(d) Interest Rate Risk is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. The Company attempts
to mitigate this risk by attempting to match the maturities of its assets with
the expected payouts of its liabilities.
Note 4 - Investments
The amortized cost and estimated fair values of investments at December 31,
1999 and September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Gross Gross Amount at
Amortized unrealized unrealized Estimated which shown in
Cost gains losses fair value the balance sheet
-------------- ------------ ----------- ---------- ------------------
December 31, 1999:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations
<S> <C> <C> <C> <C> <C>
and agencies $17,475,473 $ - $624,997 $16,850,476 $16,850,476
Obligations of states and political
subdivision 6,526,137 38,835 104,972 6,460,000 6,460,000
Corporate securities 14,623,165 2,427 519,015 14,106,577 14,106,577
Mortgage-backed securities 3,433,949 209 156,655 3,277,503 3,277,503
------------ --------- ---------- ----------- -----------
</TABLE>
-8-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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
=========== ========= ========== =========== ===========
September 30, 2000:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $24,677,991 $ 94,727 $ 347,026 $24,425,692 $24,425,692
Obligations of states and political
subdivisions 9,618,550 65,489 57,628 9,626,411 9,626,411
Corporate securities 8,817,218 4,239 366,573 8,454,884 8,454,884
Mortgage-backed securities 486,958 588 7,775 479,771 479,771
----------- --------- ----------- ----------- ----------
Total fixed maturities 43,600,717 165,043 779,002 42,986,758 42,986,758
Equity investments - common stocks 707,493 - - 707,493 707,493
----------- --------- ---------- ----------- -----------
Total $44,308,210 $ 165,043 $779,002 $43,694,251 $43,694,251
=========== ========= ========== =========== ===========
</TABLE>
Note 5 - Segment Information
(a) Factors used to identify the Company's reportable segments:
The Company's United States and Bermuda operating segments were identified
by management as separate operating segments based upon the regulatory
environments of each of these countries. Significant differences exist
under United States and Bermuda law concerning the regulation of insurance
entities including differences in: types of permissible investments,
minimum capital requirements, solvency monitoring, pricing, corporate
taxation, etc.
(b) Products and services from each reportable segment:
The Company's United States and Bermuda operating segments, develop,
underwrite, manage and market primary casualty insurance and reinsurance
programs in the alternative insurance market for environmental remediation
risks, employee leasing and staffing industry risks, and other specialty
risks. The Company has expertise in developing specialty insurance
coverages and custom designed risk management programs not generally
available in the standard insurance market.
The Company is also involved in the development of the Harbour Village Golf
and Yacht Club in Ponce Inlet, Florida, as discussed in Note 7, and this
item is reflected in the segment United States-Real Estate.
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<PAGE>
The United States operating segment's specialty insurance programs provide
insurance and reinsurance for general, pollution and professional liability
exposures, for workers' compensation and surety, as well as custom designed
risk management programs for contractors, consultants and other business
and property owners who are involved with environmental remediation,
employee leasing and staffing, and other specialty risks.
Through its United States brokerage and management services subsidiaries,
the Company provides specialized insurance program development,
underwriting, risk and reinsurance placement, program management,
brokerage, loss control, claims administration and marketing services. The
Company also insures and places risks through its United States insurance
subsidiary, as well as its non-subsidiary risk retention group affiliate
and other unaffiliated insurance and reinsurance companies.
Through its Bermuda operating segment, the Company places and reinsures a
portion of the risks underwritten directly by its United States segment,
its risk retention group affiliate and other insurers.
(c) Information about segment profit or loss and assets:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
---- ----
United States - Insurance
<S> <C> <C>
Net Premiums Earned - All Other 7,663,886 19,080,500
Net Premiums Earned - Intersegment (2,870,232) (5,935,873)
Net investment income and interest on notes
receivable 558,043 1,339,556
Other revenues 2,895,906 3,469,266
--------- -----------
Total Revenues 8,247,603 17,953,449
Depreciation and amortization expense 71,097 132,283
Equity in net earnings of subsidiaries 436,628 -
Income taxes 33,782 (1,108,947)
Segment loss 146,094 (2,089,586)
Significant noncash items other than
depreciation and amortization - -
Property, plant and equipment 228,762 547,964
Total investments 19,231,658 41,001,732
Total assets 42,690,975 119,650,975
Total policy and contract liabilities 18,797,327 60,037,244
Total liabilities 33,292,874 92,490,080
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
---- ----
United States - Real Estate
<S> <C> <C>
Net Premiums Earned - All Other - -
Net Premiums Earned - Intersegment - -
Net investment income and interest on Notes - -
Other revenues - 150
--------- --------
Total revenues - 150
Depreciation and amortization - 31,109
Equity in net earnings of subsidiaries - -
Income taxes - (128,452)
Segment loss - (238,555)
Significant noncash items - -
Property, plant and equipment - 222,189
Total investments - -
Total assets - 21,034,807
Total policy and contract liabilities - -
Total liabilities - 11,608,676
Bermuda
Net Premiums Earned - All Other 1,917,501 1,858,475
Net Premiums Earned - Intersegment 2,870,232 5,935,873
Net investment income and interest on notes
receivable 3,621,767 1,914,722
Other revenues 249,941 632,955
---------- -----------
Total revenues 8,659,441 10,342,025
Depreciation and amortization expense - 15,094
Equity in net earnings (loss) of subsidiaries 1,718,391 (1,193,346)
Income Taxes - -
Segment profit 4,373,744 541,117
Significant noncash items other than
depreciation and amortization - -
Property, plant and equipment 865,587 825,769
Total investments 39,667,590 56,694,084
Total assets 92,384,858 86,960,497
Total policy and contract liabilities 12,283,120 16,615,861
Total liabilities 14,510,049 18,947,298
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
---- ----
Intersegment Eliminations
Net Premiums Earned - All Other - -
Net Premiums Earned - Intersegment - -
Net investment income and interest on notes - -
receivable
<S> <C> <C>
Other revenues (385,785) (668,660)
--------- ---------
Total revenues (385,785) (668,660)
Depreciation and amortization expense - -
Equity in net earnings of subsidiaries (2,155,019) 1,193,346
Income taxes - -
Segment profit (loss) - -
Significant noncash items other than
depreciation and amortization - -
Property, plant and equipment - -
Total investments (9,397,445) (46,593,347)
Total assets (38,122,652) (62,014,864)
Total policy and contract liabilities (6,200,361) (8,929,945)
Total liabilities (12,111,759) (15,421,517)
Total
Net Premiums Earned - All Other 9,581,387 20,938,975
Net Premiums Earned - Intersegment - -
Net investment income and interest on notes
receivable 4,179,810 3,254,278
Other revenues 2,257,958 3,433,711
----------- -----------
Total revenues 16,521,259 27,626,964
Depreciation and amortization expense 71,097 178,486
Equity in net earnings of subsidiaries - -
Income taxes 33,782 (1,237,399)
Segment profit (loss) 4,519,838 (1,787,024)
Significant noncash items other than
depreciation and amortization - -
Property, plant and equipment 1,094,349 1,595,922
Total investments 49,501,803 51,102,469
Total assets 96,953,181 165,631,415
Total policy and contract liabilities 24,880,086 67,723,160
Total liabilities 35,691,164 107,624,537
</TABLE>
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<PAGE>
Note 6 - Shareholder Matters
During the quarter ended September 30, 2000, the Company repurchased 58,100
common shares at a total price of $228,050 in open market transactions pursuant
to its share repurchase program.
Note 7 - Investment in Real Estate
The Company's investment in the development of the Harbour Village Golf and
Yacht Club ("Harbour Village") project is comprised of 173 acres of property in
Ponce Inlet, Florida which was acquired through foreclosure on April 13, 1999.
At the date of foreclosure, the Company evaluated the carrying value of its
investment in real estate by comparing the fair value of the foreclosed
collateral to the book value of the underlying loan and accrued interest. As the
book value of the loan and accrued interest was less than the fair value of the
collateral, no loss was recognized on foreclosure and the book balance of the
loan and accrued interest became the basis of the real estate.
The Company announced on March 10, 2000, its plans to complete development
of the Harbour Village project through its subsidiary, Ponce Lighthouse
Properties, Inc.
Note 8 - Acquisitions
On March 24, 2000, the Company purchased Trafalgar Insurance Company, an
Oklahoma licensed insurance company, which has authority to operate as an excess
and surplus lines insurance company in 34 states and the District of Columbia.
Trafalgar Insurance Company's stock was acquired from Houston Casualty Company
for a purchase price of $16.3 million cash, and Trafalgar had, at closing, cash
of $9.3 million and investments of $5.7 million creating $1.3 million of
goodwill. The net cash outlay for this acquisition was $7.0 million. Prior to
closing, Trafalgar entered into a bulk assumption reinsurance agreement with
Houston Casualty, under which Houston Casualty assumed all of Trafalgar's prior
and existing insurance business. Trafalgar has been renamed American Safety
Indemnity Company.
On January 6, 2000, the Company acquired (i) the stock of L&W Holdings,
Inc. and its wholly-owned subsidiary, RCA Syndicate #1, Ltd., an Illinois
licensed insurance carrier operating on the INEX (formerly the Illinois
Insurance Exchange), (ii) the stock of Principal Management, Inc., an insurance
program development and management company headquartered in Okemos, Michigan,
and in a related transaction, the Company also acquired (iii) the stock of
Pegasus Insurance, a Cayman Islands licensed insurance carrier. The transactions
were structured as stock acquisitions, with the purchase price paid by the
Company consisting of $3,500,000 plus 200,000 American Safety common shares and
earnout provisions for up to an additional 254,000 American Safety common shares
over a five-year period. Of the purchase price, $1,000,000 of cash and 109,086
shares of stock are held in escrow to secure the obligations of the sellers. The
Company also obtained a security interest in a real estate condominium in the
Cayman Islands with an estimated
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<PAGE>
value of $600,000 to secure the obligations of the sellers. On April 21, 2000,
the Company filed a lawsuit to rescind these acquisitions based upon the
sellers' misrepresentations as to the business affairs and financial condition
of the acquired companies, and recognized an expense, net of recoverables, of
$3.5 million for such rescission.
Note 9 - Income Taxes
Total income tax (benefit) for the nine months ended September 30, 1999 and
2000 were allocated as follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1999 2000
---- ----
Tax benefit attributable to:
<S> <C> <C>
Income (loss) from continuing operations $33,782 $(1,237,399)
Unrealized losses on
securities available for sale (62,241) (71,266)
-------- ------------
Total $(28,459) $ (1,308,665)
======== ============
</TABLE>
U.S. Federal and state income tax expense (benefit) from continuing
operations consists of the following components:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
September 30, 1999 (128,297) 162,079 33,782
September 30, 2000 74,120 (1,311,519) (1,237,399)
</TABLE>
The state income tax components aggregated $134,017 and $(34,314) for the
nine months ended September 30, 1999 and 2000, respectively.
Income tax expense (benefit) for the period ended September 30, 1999 and
2000 differed from the amount computed by applying the U.S. Federal income tax
rate of 34% to earnings (loss) before Federal income taxes as a result of the
following:
-14-
<PAGE>
<TABLE>
<CAPTION>
September 30,
1999 2000
---- ----
<S> <C> <C>
Expected income tax expense (benefit) $1,548,231 $(1,028,304)
Foreign earned income not subject to U.S.
taxation (1,487,073) (183,980)
Tax-exempt interest (73,039) (97,996)
State taxes and other 45,663 72,881
------------ -------------
$ 33,782 $(1,237,399)
============ =============
</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, September 30,
1999 2000
---- ----
Deferred tax assets:
<S> <C> <C>
Loss reserve discounting $ 509,011 $ 832,855
Unearned premium reserves 185,459 765,036
Unrealized loss on securities 80,844 152,110
Net operating loss carry forward - 879,425
---------- ----------
Gross deferred tax assets 775,314 2,629,426
---------- ----------
Deferred tax liabilities:
Deferred acquisition costs 42,087 513,414
---------- -----------
Gross deferred tax liabilities 42,087 513,414
---------- -----------
Net deferred tax asset $ 733,227 $2,116,012
========== ===========
</TABLE>
A valuation allowance has not been established as the Company believes it
is more likely than not that the deferred tax asset will be realized. The
Company believes it will have sufficient future income to offset the net
operating loss carry forward.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
American Safety is a specialty insurance and financial services holding
company which, through its subsidiaries, develops, underwrites, manages and
markets primary casualty insurance and reinsurance programs in the alternative
insurance market for environmental remediation risks,
-15-
<PAGE>
employee leasing and staffing industry risks, and other specialty risks, as well
as provides a broad range of financial services and products to middle market
businesses.
During the past ten years, the Company operated in a generally soft market
cycle which is characterized by excess insurance capacity and declining
insurance premium rates. The Company's reported combined ratio for its
insurance operations may not provide an indication of the Company's overall
profitability from insurance and reinsurance programs due to the exclusion of
fee and commission income and expenses generated in related management and
agency subsidiaries.
Forward Looking Statements
This Report contains certain forward-looking statements within the meaning
of United States' securities laws which are intended to be covered by the
safe harbors created thereby. Forward-looking statements involve risks and
uncertainties which may cause actual results to differ, and are subject to
change based on various factors, including the outcome of the Company's lawsuit
for rescission of the acquisition of an insurance agency and two related
insurance companies, competitive conditions in the insurance industry,
unpredictable developments in loss trends, adequacy and changes in loss
reserves, market acceptance of new coverages and enhancements, changes in
insurance regulatory requirements and tax statutes, changes in levels of general
business activity and economic conditions, and the Company's ability to
integrate and operate acquired businesses and the risks associated with such
businesses. With respect to the development of the Harbour Village Golf and
Yacht Club project, such forward-looking statements involve risks and
uncertainties which may cause actual results to differ, and are subject to
change based on various real estate development industry factors, including
competitive housing conditions in the local market area, risks inherent in new
construction, changes in interest rates and the availability of mortgage
financing for prospective purchasers of condominium units and boat slips, and
changes in local and national levels of general business activity and economic
conditions. For additional factors which could influence the results of the
Company's operating and financial performance, see the Company's filings with
the Securities and Exchange Commission. All statements, other than statements of
historical facts, included or incorporated by reference in this Report that
address activities, events or developments that the Company expects or
anticipates will or may occur in the future constitute forward-looking
statements. Although the Company believes that the assumptions underlying the
forward-looking statements contained in this Report are reasonable, any of the
assumptions could over time prove to be inaccurate and therefore, there can be
no assurance that the forward-looking statements included in this Report will
themselves prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included in this Report, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
[The remainder of this page is intentionally left blank]
-16-
<PAGE>
Results of Operations
The following table sets forth the Company's consolidated revenues:
<TABLE>
<CAPTION>
Three Nine
Months Months
Three Months Nine Months Ended Ended
Ended September 30, Ended September 30, September September
30, 30,
---------------------------- --------------------------- ------------- --------------
1999 to 1999 to
1999 2000 1999 2000 2000 2000
------------- ------------- ------------- ------------- ------------- --------------
(Dollars in thousands)
--------------------------------------------------------------------------------------
Net Premiums earned:
Reinsurance:
<S> <C> <C> <C> <C> <C> <C>
Workers' compensation $2,339 $3,598 $5,541 $9,229 53.8% 66.6%
General liability and excess and
surplus from affiliate 487 1,462 2,301 3,249 200.2 41.2
Auto Liability 6 - 28 - (100.0) (100.0)
------- --------- ------- ------ ----- -----
Total reinsurance 2,832 5,060 7,870 12,478 78.7 58.6
Primary insurance:
Private Passenger Auto - 122 - 122 - -
Prepaid Legal - - - 8 - -
Excess and Surplus - 244 - 272 - -
Commercial Line - 1,197 - 2,022 - -
Workers' compensation - 91 - 253 - -
Surety 694 2,866 1,711 5,784 313.0 238.0
------- ----- ----- ------ ----- -----
Total primary insurance 694 4,520 1,711 8,461 551.3 394.5
------ ----- ----- ------- ------ -----
Total net premiums earned 3,526 9,580 9,581 20,939 171.7 118.5
------ ----- ----- ------ ------ -----
Net investment income 746 668 2,160 2,002 (10.5) (7.3)
Interest on notes receivable 512 377 2,020 1,252 (26.3) (38.0)
Commission and fee income:
Brokerage commission income 277 859 771 1,812 210.1 135.0
Management fees from affiliate 339 350 1,065 1,069 3.2 0.4
------ ------- ------- ------- ------ ------
Total commission and fee income 616 1,209 1,836 2,881 96.3 56.9
------ ------- ------- ------ ------ ------
Net realized gains (losses) 120 (9) 218 (215) (107.5) (198.6)
Other income 245 70 706 768 (71.4) 8.8
------ ------- ------- ------- ------- -------
Total Revenues $5,765 $11,895 $16,521 $27,627 106.3% 67.2%
------ ------- ------ ------- ------ ------
</TABLE>
The following table sets forth the components of the Company's GAAP
combined ratio for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1999 2000 1998 1999 2000
---- ---- ---- ---- ---- ----
Insurance operations:
<S> <C> <C> <C> <C> <C> <C>
Loss and loss adjustment expense ratio 63.9% 60.9% 52.0% 54.3% 59.6% 56.4%
Expense ratio 4.1 15.0 32.1 33.7 9.2 32.7
---- ---- ---- ---- ----- ----
Combined ratio 68.0 75.9% 84.1% 88.0% 68.8% 89.1%
---- ---- ---- ---- ---- ----
</TABLE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Net Premiums Earned. Net premiums earned increased 171% from $3.5 million
in the quarter ended September 30, 1999 to $9.6 million in the quarter ended
September 30, 2000. The principal factors contributing to the increase for the
quarter ended September 30, 2000 as compared to the prior period were the
Company's assumption of workers' compensation reinsurance business, which
increased by 54% from $2.3 million to $3.6 million, the Company's surety
business, which increased by 313% from $694,000 to $2.9 million, the Company's
assumption of general liability and excess and surplus reinsurance business,
which increased by 200% from $487,000 to $1.5 million, and the Company's new
commercial lines and primary excess and surplus lines of business, which
generated net earned premiums of $1.2 million and $244,000, respectively, in the
quarter ending September 30, 2000.
Net Investment Income. Net investment income decreased 10.5% from $746,000
in the quarter ended September 30, 1999 to $668,000 in the quarter ended
September 30, 2000 due to lower levels of invested assets. Average invested
assets decreased to $48.2 million from $50.5 million when comparing third
quarter 2000 with third quarter 1999. The main reason for this decrease relates
to Treasury stock purchases made since September 30, 1999. The average pre-tax
yield on investments was 5.9% in the quarter ended September 30, 1999 and 5.5%
in the quarter ended September 30, 2000. The average after-tax yield on
investments was 5.6% in the quarter ended September 30, 1999 and 4.4% in the
quarter ended September 30, 2000. The reduction in the after tax yield is
primarily due to the acquisition of American Safety Indemnity Company (formerly
known as Trafalgar Insurance Company), which resulted in a substantial portion
of the Company's bond portfolio being held by a United States subsidiary.
Interest from Notes Receivable. Interest from notes receivable decreased
26% from $512,000 in the quarter ended September 30, 1999 to $378,000 in the
quarter ended September 30, 2000, which primarily relates to the repayment of
various loans, including the previously defaulted American Darico loan. The
Company was successful in recovering all amounts that were due from the
collateral securing repayment of the American Darico loan. As a result of the
Company's refinancing of certain secured notes receivable from a borrower in the
fourth quarter of fiscal year 2000, including the transfer of real estate to the
Company as partial repayment of these notes receivable, there will be a
reduction in interest on notes receivable on a going-forward basis.
Brokerage Commission Income. Brokerage commission income increased 210%
from $277,000 in the quarter ended September 30, 1999 to $859,000 in the quarter
ended September 30, 2000 as a result of increased excess and surplus lines
premium, with commissions recognized as revenue upon the inception of such
policies written by the Company's non-subsidiary affiliate, American Safety Risk
Retention Group, Inc. However, beginning in the third quarter of fiscal year
2000, policies are being written by the American Safety Indemnity Company, and
such revenue will be recognized as premiums are earned over the life of the
underlying policies.
Management Fees. Management fees increased 3% from $339,000 in the quarter
ended September 30, 1999 to $350,000 in the quarter ended September 30, 2000.
These fees are derived
-17-
<PAGE>
from services provided by the Company to its risk retention group affiliate,
which services remained consistent as compared to the prior period.
Net Realized Gains. Net realized gains decreased from $120,000 in the
quarter ended September 30, 1999 to a loss of $9,000 for the quarter ended
September 30, 2000 due to the sale of municipal bonds which were replaced with
higher yield bonds.
Other Income. Other income decreased from $245,000 in the quarter ended
September 30, 1999 to $70,000 for the quarter ended September 30, 2000 as a
result of lower fees generated by the Company's financial service subsidiary.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 131% from $2.1 million in the quarter ended September 30, 1999 to $5.0
million in the quarter ended September 30, 2000. The increase in loss and loss
adjustment expense was primarily due to increased premium volume over the prior
period.
Acquisition Expenses. Policy acquisition expenses increased from $194,000
in the quarter ended September 30, 1999 to $1.9 million in the quarter ended
September 30, 2000 primarily as a result of increased premium production in all
lines of business.
Payroll and Other Expenses. Payroll and other expenses increased 122% from
$1.9 million in the quarter ended September 30, 1999 to $4.2 million in the
quarter ended September 30, 2000 as a result of increases in salary, benefits
and operating expense primarily due to our newer underwriting units and license
fees for expanding our capability to direct write additional lines of business,
increased premium tax expense on new direct insurance business,
non-capitalizable expenses related to the development of the Harbour Village
project, and expenses associated with the Company's financial service
subsidiary.
Income Taxes. Federal and state income taxes decreased from $188,000 in the
quarter ended September 30, 1999 to $124,000 in the quarter ended September 30,
2000 due to decreased taxable income in the Company's U.S. subsidiaries. The
decrease in taxable income was primarily due to increased underwriting expenses.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Net Premiums Earned. Net premiums earned increased 118% from $9.6 million
in the nine months ended September 30, 1999 to $20.9 million in the nine months
ended September 30, 2000. The principal factors contributing to the increase for
the nine months ended September 30, 2000 as compared to the prior period were
the Company's assumption of workers' compensation reinsurance business, which
increased net premiums by 67% from $5.5 million to $9.2 million, the Company's
surety business, which increased by 238% from $1.7 million to $5.8 million, the
Company's assumption of general liability and excess and surplus reinsurance
business, which increased by 41%
-18-
<PAGE>
from $2.3 million to $3.2 million, and the Company's new commercial lines
and primary excess and surplus lines business, which generated net earned
premiums of $2.0 million and $272,000, respectively, in the nine months ended
September 30, 2000.
Net Investment Income. Net investment income decreased 7% from $2.16
million in the nine months ended September 30, 1999 to $2.0 million in the nine
months ended September 30, 2000 due to a reduction in the investment portfolio,
as a result of expenditures on acquisitions, real estate and treasury stock. The
average annual pre-tax yield on investments was 5.7% in the nine months ended
September 30, 1999 and 5.4% in the nine months ended September 30, 2000. The
average annual after-tax yield on investments was 5.5% in the nine months ended
September 30, 1999 and 4.4% in the nine months ended September 30, 2000. The
reduction in the after tax yield is primarily due to the acquisition of American
Safety Indemnity Company (formerly known as Trafalgar Insurance Company), which
resulted in a substantial portion of the Company's bond portfolio being held by
a United States subsidiary.
Interest from Notes Receivable. Interest from notes receivable decreased
38% from $2.0 million in the nine months ended September 30, 1999 to $1.3
million in the nine months ended September 30, 2000, which primarily relates to
the repayment of various loans, including the previously defaulted American
Darico loan. The Company was successful in recovering all amounts that were due
from the collateral securing repayment of the American Darico loan. As a result
of the Company's refinancing of certain secured notes receivable from a borrower
in the fourth quarter of fiscal year 2000, including the transfer of real estate
to the Company as partial repayment of these notes receivable, there will be a
reduction in interest on notes receivable on a going-forward basis.
Brokerage Commission Income. Income from insurance brokerage operations
increased 135% from $771,000 in the nine months ended September 30, 1999 to $1.8
million in the nine months ended September 30, 2000 as a result of increased
excess and surplus lines premium, with commissions recognized as revenue upon
the inception of such policies written by the Company's non-subsidiary
affiliate, American Safety Risk Retention Group, Inc. However, beginning in the
third quarter of fiscal year 2000, policies are being written by the American
Safety Indemnity Company, and such revenue will be recognized as premium earned
over the life of the underlying policies.
Management Fees. Management fees increased from $1.06 million in the nine
months ended September 30, 1999 to $1.07 million in the nine months ended
September 30, 2000. These fees are derived from services provided by the Company
to its risk retention group affiliate, which services remained consistent as
compared to the prior period.
Net Realized Gains. Net realized gains decreased 198% from a gain of
$218,000 in the nine months ended September 30, 1999 to a loss of $215,000 in
the nine months ended September 30, 2000. The decrease is related to bond
portfolio sales for the purchase of American Safety Indemnity Company.
-19-
<PAGE>
Other Income. Other income increased from $706,000 in the nine months ended
September 30, 1999 to $768,000 for the nine months ended September 30, 2000. The
increase principally relates to a commitment fee from the proposed sale of the
Harbour Village project.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 112% from $5.6 million in the nine months ended September 30, 1999 to
$11.8 million in the nine months ended September 30, 2000. This increase in loss
and loss adjustment expense was primarily due to increased premium volume over
the prior period.
Acquisition Expenses. Policy acquisition expenses increased 448% from
$865,000 in the nine months ended September 30, 1999 to $4.7 million in the nine
months ended September 30, 2000 as a result of increased premium production in
all lines of business.
Expense Due to Rescission. Expense due to rescission was $3.5 million and
relates to the rescission of the acquisition of a group of companies. See Note 8
to the Financial Statements.
Payroll and Other Expenses. Payroll and other expenses increased 90% from
$5.5 million in the nine months ended September 30, 1999 to $10.6 million in the
nine months ended September 30, 2000 as a result of increases in salary,
benefits and operating expense primarily due to increased staffing for new and
existing programs, increased premium tax expense on new direct insurance
business, non-capitalizable expenses related to the development of the Harbour
Village project, and expenses associated with the Company's financial service
subsidiary.
Income Taxes. Federal and state income taxes decreased from $34,000 in the
nine months ended September 30, 1999 to a benefit of $1.2 million in the nine
months ended September 30, 2000 due to decreased taxable income in the Company's
U.S. subsidiaries. The decrease in taxable income was primarily due to expenses
relating to rescission of the acquisition of a group of companies and increases
in underwriting expenses. The Company has not set up a valuation allowance as it
believes it will generate sufficient future taxable income to recover the net
operating loss carryforward.
Liquidity and Capital Resources
The Company historically has met its insurance-related cash requirements
and financed its insurance-related growth principally through cash flows
generated from operations. The Company's primary sources of cash flow for its
insurance operations are proceeds from the sale or maturity of invested assets,
premiums earned, investment income, commission income and management fees. The
Company's short-term cash requirements are primarily for claims payments,
reinsurance premiums, commissions, salaries, employee benefits and other
operating expenses, and the purchase of investment securities, which have
historically been satisfied from operating cash flows. Due to the uncertainty
regarding settlement of unpaid claims, the long-term liquidity requirements of
the Company may vary, and the Company has attempted to structure its investment
portfolio to take into account the historical payout patterns. Management
believes that the Company's current cash flows are sufficient for its short-term
needs and the Company's invested assets are sufficient for its
-20-
<PAGE>
long-term needs. The Company also purchases reinsurance to mitigate the effect
of large claims and to stabilize demands on its liquidity.
The Company's primary source of cash flow for its Florida real estate
development is an acquisition, development, and construction loan from a bank.
Proceeds from this loan are used for development and construction of the Harbour
Village project.
The Company expects that net operating losses will occur in the fourth
quarter of fiscal year 2000 as a result of general administrative expenses
relating to the Company's investment in new operating units exceeding revenue
production, non-capitalizable expenses incurred in the development and
construction of the Harbour Village project, and lower brokerage income as a
result of excess and surplus lines premium written by the Company as opposed to
being written by the Company's non-subsidiary affiliate.
During the quarter ended September 30, 2000, the Company repurchased 58,100
common shares in open market transactions pursuant to its share repurchase
program.
On a consolidated basis, net cash provided from operations was $4.6 million
for the nine months ended September 30, 1999 and $14.3 million for the nine
months ended September 30, 2000. The positive cash flows for both periods were
primarily attributable to net premiums written, and increases in reserves for
unpaid losses. Since workers' compensation and general liability claims may be
paid over an extended period of time, the Company has established loss reserves
for such lines of business. The assets supporting the Company's loss reserves
continue to earn investment income until claims payments are made.
Total assets increased from $104.4 million at December 31, 1999 to $165.6
million at September 30, 2000, primarily due to increases in premiums
receivable, reinsurance recoverables, deferred income tax, real estate
investments and goodwill from the purchase of Trafalgar Insurance Company. Cash,
invested assets and notes receivable were $73.0 million at December 31, 1999 and
$91.5 million at September 30, 2000. The increase in cash, invested assets and
notes receivable was primarily due to receipt of escrow deposits, increases in
investment in real estate and cash flow from insurance operations. Other assets
increased from $114,000 at December 31, 1999 to $1.6 million at September 30,
2000 as a result of $1.3 million collateral held which lowered the expense due
to the Company's rescission of the acquisition of a group of companies.
American Safety is an insurance and financial services holding company
whose principal assets are its investment portfolio and its investment in the
capital stock of its subsidiaries. As an insurance holding company, American
Safety's ability to pay dividends to its shareholders will depend, to a
significant degree, on the ability of the Company's subsidiaries to pay
dividends to American Safety. The jurisdictions in which American Safety and its
insurance and reinsurance subsidiaries are domiciled place limitations on the
amount of dividends or other distributions payable by insurance companies in
order to protect the solvency of insurers.
-21-
<PAGE>
In January 1997, the Securities and Exchange Commission approved rule
amendments regarding disclosures concerning derivative financial instruments,
other financial instruments and derivative commodity instruments (the
"Release"). The Release requires inclusion in the footnotes to the financial
statements of extensive detail about the accounting policies followed by a
company in connection with its accounting for derivative financial instruments
and derivative commodity instruments. As of September 30, 2000, the Company had
no investments in derivative instruments.
Harbour Village Development. The Company announced in March 2000 its plans
to complete development of the Harbour Village Golf and Yacht Club ("Harbour
Village"), located in Ponce Inlet, Florida, consisting of 786 residential
condominium units, a marina containing 142 boat slips, a par 3 golf course and
beach club. The project acquired by the Company through foreclosure in April
1999, has been under development by its subsidiary, Ponce Lighthouse Properties,
Inc. The number of residential condominium units planned for the project has
been increased from 786 to 811. As of September 30, 2000, the Company's
marketing efforts had generated nearly $60 million of pre-construction sales.
It is anticipated that Harbour Village will be developed in three phases
over the next three to five years, depending on future sales activities and
economic conditions that may impact the marketing of the condominium units. In
July 2000, the Company closed a $37 million acquisition, development and
construction loan facility in order to commence construction of Phase I. During
the third quarter of fiscal year 2000, the Company drew down approximately $4
million from this loan facility. The anticipated construction cost for the
entire Harbour Village project is in excess of $160 million over a three to five
year period. Phase I of the development consists of construction of all site
work including a 142-boat slip marina, 372 residential units, and amenities. No
assurance can be given, however, as to either future sales activities of the
condominium units or the impact of local and national economic conditions on the
Company's marketing efforts for the development of the Harbour Village project.
Management believes that the bank credit facility, together with
anticipated cash flows from marketing and sales operations, will meet the
liquidity needs for the construction and development of Phase I of the Harbour
Village project during the first 24 months of development. There can be no
assurance, however, that the amounts available from the Company's sources of
liquidity, exclusive of the bank credit facility for the project, will be
sufficient or available to meet the Company's future capital needs for the
project.
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
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<PAGE>
and accordingly does not expect to be subject to direct United States income
taxation. The Company's U.S. subsidiaries are subject to taxation in the United
States.
Inflation
Property and casualty insurance premiums are established before the amounts
of losses and loss adjustment expenses are known and therefore before the extent
by which inflation may affect such expenses is known. Consequently, the Company
attempts, in establishing its premiums, to anticipate the potential impact of
inflation. However, for competitive and regulatory reasons, the Company may be
limited in raising its premiums consistent with anticipated inflation, in which
event the Company, rather than its insureds, would absorb inflation costs.
Inflation also affects the rate of investment return on the Company's investment
portfolio with a corresponding effect on the Company's investment income.
Combined Ratio
The combined ratio of an insurance company measures only the underwriting
results of insurance operations and not the profitability of the overall
company. The Company's reported combined ratio for its insurance operations may
not provide an accurate indication of the Company's overall profitability from
insurance and reinsurance programs due to the exclusion of fee and commission
income and expenses generated in related management and agency subsidiaries.
Depending on the Company's mix of business going-forward, the combined ratio may
fluctuate from time to time and may not reflect the overall profitability of
insurance programs to the Company.
Reserves
Certain of the Company's insurance policies and reinsurance assumed,
including general and pollution liability policies covering environmental
remediation risks, as well as workers' compensation policies, may be subject to
claims brought years after an incident has occurred or the policy period has
ended. The Company is required to maintain reserves to cover its estimated
liability for losses and loss adjustment expenses with respect to reported and
unreported claims incurred. The Company engages an independent internationally
recognized actuarial consulting firm to provide reserve studies, opinions and
rate studies. Reserves are estimates at a given time, which are established from
actuarial and statistical projections by the Company of the ultimate settlement
and administration costs of claims occurring on or prior to such time, including
claims that have not yet been reported to the insurer. The establishment of
appropriate loss reserves is an inherently uncertain process, and there can be
no assurance that the ultimate payments will not materially exceed the Company's
reserves.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
The Company's market risk has not changed materially since December 31,
1999.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Item 6(b) of this Part II.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Report:
Exhibit No. Description
----------- -----------
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of November 2000.
American Safety Insurance Group, Ltd.
By: /s/ Lloyd A. Fox
----------------------------------------
Lloyd A. Fox
President and Chief Executive Officer
By: /s/ Steven B. Mathis
---------------------------------------
Steven B. Mathis
Chief Financial Officer
(Principal Financial Officer)
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<PAGE>
Exhibit 11
American Safety Insurance Group, Ltd. and subsidiaries
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- ------------------
September 30 September 30 September 30 September 30
1999 2000 1999 2000
---- ---- ---- ----
Basic:
Earnings Available to Common
<S> <C> <C> <C> <C>
Shareholders.................... $1,359,263 $653,826 $4,519,838 $(1,787,024)
========== ======== ========== ============
Weighted Average Common Shares
Outstanding..................... 6,009,208 5,377,597 6,050,059 5,609,170
Basic Earnings (Loss) Per Common
Shares ......................... $ .23 $ .12 $ .75 $ (.32)
========== ========= ========= ============
Diluted:
Earnings Available to Common
Shareholders.................... $1,359,263 $653,826 $4,519,838 $(1,787,024)
========== ======== ========== ===========
Weighted Average Common Shares
Outstanding..................... 6,009,208 5,377,597 6,050,059 5,609,170
Weighted Average Common Shares
Equivalents Associated with
Options......................... 18,459 - 27,641 1,774
Total Weighted Average Common
Shares.......................... 6,027,667 5,377,597 6,077,700 5,610,944
========= ========= ========= =========
Diluted Earnings per Common
Shares.......................... $ .23 $ .12 $ .74 $ ( .32)
========= ========= ========= ==========
</TABLE>
