-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AsqCNFVBJkKI2WLZe504mwTgDxPFJNs+rVVdDIx7oKiixtyNiogjJFhqCEYNvn9E b94Y8ludDJkfPD2gJRHEZg== /in/edgar/work/20000815/0000783603-00-000009/0000783603-00-000009.txt : 20000922 0000783603-00-000009.hdr.sgml : 20000921 ACCESSION NUMBER: 0000783603-00-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SAFETY INSURANCE GROUP LTD CENTRAL INDEX KEY: 0000783603 STANDARD INDUSTRIAL CLASSIFICATION: [6411 ] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14795 FILM NUMBER: 701201 BUSINESS ADDRESS: STREET 1: 44 CHURCH STREET STREET 2: PO BOX HM 2064 CITY: HAMILTON HM HX BERMU STATE: D0 BUSINESS PHONE: 4412955688 MAIL ADDRESS: STREET 1: 44 CHRUCH STREET CITY: HAMILTON STATE: D0 10-Q 1 0001.txt AMERICAN SAFETY INSURANCE GROUP, LTD. SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 Commission File Number 1-14795 AMERICAN SAFETY INSURANCE GROUP, LTD. (Exact name of Registrant as specified in its charter) Bermuda Not Applicable (State or other (I.R.S. Employer jurisdiction Identification of incorporation) No.) 44 Church Street P.O. Box HM2064 Hamilton HM HX, Bermuda (Address, zip code of principal executive offices) (441) 296-8560 (Registrant's telephone number, including area code) -------------- Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No___ The aggregate number of shares outstanding of Registrant's common stock, $.01 par value, on August 11, 2000 was 5,381,386. AMERICAN SAFETY INSURANCE GROUP, LTD. FORM 10-Q TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements..........................................1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................15 Item 3. Quantitative and Qualitative Disclosures About Market Risks................................................24 PART II - OTHER INFORMATION Item 1. Legal Proceedings.............................................25 Item 2. Changes in Securities and Use of Proceeds.....................25 Item 3. Defaults Upon Senior Securities...............................25 Item 4. Submission of Matters to a Vote of Security Holders...........25 Item 5. Other Information.............................................25 Item 6. Exhibits and Reports on Form 8-K..............................26 -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Balance Sheets
December 31, June 30, 1999 2000 ------ ----- Assets (unaudited) Investments: Securities available for sale, at fair value: Fixed maturities $40,694,556 $39,664,373 Common stock 163,968 821,511 Investment in real estate 12,039,842 13,355,385 Short-term investments 6,679,791 4,769,232 ----------- ----------- Total investments 59,648,157 58,610,501 Cash 427,154 6,609,421 Accrued investment and interest income 2,783,663 3,371,782 Notes receivable: Related parties 1,700,000 - Other 11,255,264 12,264,630 Premiums receivable 12,239,544 19,119,757 Commissions receivable 5,948 22,792 Funds on deposit 353,407 352,663 Ceded unearned premium 4,591,075 8,315,405 Reinsurance recoverable 6,065,502 8,522,684 Due from affiliate 2,088,748 760,647 Income tax recoverable - 113,850 Deferred income taxes 733,227 2,383,766 Deferred acquisition costs 274,701 1,183,148 Property, plant and equipment 1,234,294 1,457,510 Prepaid Items 604,537 2,270,917 Goodwill 234,467 1,597,481 Other as 113,846 1,620,981 ---------- ----------- Total assets $104,353,534 $128,577,935 =========== =========== Liabilities and Shareholders' Equity Liabilities: Unpaid loss and loss adjustment expenses $ 20,413,236 $ 24,903,442 Unearned premiums 9,496,342 18,164,095 Reinsurance on paid loss and loss adjustment expenses 1,419,536 - Reinsurance deposits on retroactive contract 48,375 - Ceded premiums payable 6,739,068 15,238,897 Due to affiliate: Ceded premiums payable 1,636,207 42,000 Reinsurance on paid loss and loss adjustment expenses 79,198 135,235 Deposits - 4,294,839 Accounts payable and accrued expenses 1,893,470 4,905,968 Funds held 357,509 939,256 Loan payable - 1,375,584 Collateral held 1,208,976 1,412,961 Income tax payable 22,857 - ----------- ----------- Total liabilities 43,314,774 71,412,277 ---------- -----------
-1-
Assets December 31, June 30, 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, 1999, 6,077,750 shares, and at June 30, 2000, 6,281,386 shares 60,777 62,814 Additional paid-in capital 33,810,387 35,148,577 Retained earnings 30,625,739 28,184,889 Accumulated other comprehensive income, net (1,288,804) (877,350) Treasury Stock, 300,000 shares at December 31, 1999 and 900,000 shares at June 30, 2000 (2,169,339) (5,353,272) ----------- ----------- Total shareholders' equity 61,038,760 57,165,658 ----------- ----------- Total liabilities and shareholders' equity $104,353,534 $128,577,935 ============ ============
See accompanying notes to consolidated financial statements (unaudited). -2- American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------ ------------------------------------ 1999 2000 1999 2000 ---- ---- ---- ---- Revenues: Direct premiums earned $ 1,703,655 $ 5,217,079 $ 3,113,706 $ 9,372,912 Assumed premiums earned: Affiliate 773,437 1,232,805 1,584,153 2,228,541 Nonaffiliates 2,208,279 3,016,536 3,787,280 5,671,582 ----------- ----------- ----------- ----------- Total assumed premiums earned 2,981,716 4,249,341 5,371,433 7,900,123 ----------- ----------- ----------- ----------- Ceded premiums earned: Affiliate 912,709 1,203,557 2,003,404 2,049,645 Nonaffiliates 172,281 2,206,330 426,570 3,864,279 ------------ ----------- ----------- ----------- Total ceded premiums earned 1,084,990 3,409,887 2,429,974 5,913,924 ----------- ----------- ----------- ----------- Net premiums earned 3,600,381 6,056,533 6,055,165 11,359,111 ----------- ----------- ----------- ---------- Net investment income 714,430 604,905 1,413,765 1,334,007 Interest on notes receivable 581,460 440,375 1,507,562 874,969 Brokerage commission income 63,367 722,128 494,234 952,638 Management fees from affiliate 384,454 351,346 725,588 718,346 Net realized gains (losses) 98,975 (79,664) 97,857 (205,711) Other income 382,528 42,244 461,049 698,406 ----------- ------------ ---------- ---------- Total revenues 5,825,595 8,137,867 10,755,220 15,731,766 ----------- ----------- ---------- ---------- Expenses: Loss and loss adjustment expenses incurred 2,100,175 4,023,727 3,419,530 6,820,826 Acquisition expenses 347,972 1,247,401 671,416 2,782,831 Payroll and related expenses 1,339,051 1,953,834 2,342,687 3,582,058 Other expenses 705,261 1,696,065 1,315,003 2,806,375 Expense due to rescission - - - 3,541,848 ----------- ------------ ------------ ----------- Total expenses 4,492,459 8,921,027 7,748,636 19,533,938 ----------- ------------ ----------- ---------- Earnings before income taxes 1,333,136 (783,160) 3,006,584 (3,802,172) Income taxes (108,261) (291,063) (153,991) (1,361,322) ----------- ------------- ----------- ----------- Net earnings (loss) $1,441,397 $(492,097) $3,160,575 $(2,440,850) ----------- ------------- ---------- ------------ Net earnings per share: Basic $ 0.24 $ (0.09) $ 0.52 $ (0.43) ========= =========== ========== =========== Diluted $ 0.24 $ (0.09) $ 0.52 $ (0.43) ========= =========== ========== =========== Common shares used in computing earnings per share: Basic 6,064,010 5,525,804 6,070,823 5,726,229 ========= ========= ========= ========= Diluted 6,087,809 5,525,804 6,099,941 5,728,900 ========= ========= ========= =========
See accompanying notes to consolidated financial statements (unaudited). -3- American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Cash Flow (Unaudited)
Six months ended June 30, 1999 2000 ---- ---- Cash flow from operating activities: Net earnings $ 3,160,575 $(2,440,850) Adjustments to reconcile net earnings to net cash provided by operating activities: Realized losses on sale of investments (98,975) 205,711 Amortization (deferral) of acquisition costs 534,709 (908,447) Change in: Accrued investment and interest income (856,411) (588,119) Premiums receivable (4,401,481) (6,880,213) Commissions receivable (278,936) (16,844) Escrow Deposits - 4,294,839 Reinsurance recoverable and ceded unearned premiums (622,560) (7,601,048) Funds held by reinsured (298,000) 581,747 Due from affiliate 656,577 1,328,101 Income taxes (276,786) (1,787,246) Unpaid losses and loss adjustment expenses 2,891,523 4,490,206 Unearned premiums 1,237,152 8,667,753 Liability for deductible fees held (447,026) (48,375) Ceded premiums payable 316,267 8,499,829 Due to affiliate 490,723 (1,538,170) Accounts payable and accrued expenses (494,233) 3,012,498 Collateral 328,728 203,985 Prepaid items - (1,496,380) Other, net (12,207) 285,430 ---------- ----------- Net cash provided by operating activities 1,829,639 8,264,407 ---------- ----------- Cash flow from investing activities: Purchases of fixed maturities (2,773,345) (47,267) Purchases of Equity Investments (787,292) (5,350,818) Proceeds from maturity and redemption of fixed maturities 1,050,645 150,242 Proceeds from sale of fixed maturities 2,103,289 6,531,178 Proceeds of sale of common stock 1,062 4,601,317 Purchase of Trafalgar Insurance Company - (7,050,877) Decrease (increase) in short-term investments (328,948) 1,910,559 Proceeds from notes receivable - related parties 280,000 1,530,000 Advances in notes receivable - other (4,584,376) (1,009,366) Increase in investment in real estate - (1,315,543) Purchase of fixed assets, net (879,283) (223,216) ----------- ----------- Net cash used in investing activities (5,918,248) (273,791) ----------- ----------- Cash flow from financing activities: Proceeds from sale of common stock 1,276 - Purchase of treasury stock (114,354) (3,183,933) Loan Payable - 1,375,584 ---------- ---------- Net cash used in financing activities (113,078 (1,808,349) ---------- ----------- Net increase (decrease) in cash (4,201,687) 6,182,267 Cash at beginning of period 4,737,132 427,154 ---------- ---------- Cash at end of period $ 535,445 $6,609,421 ========== ========== Noncash items operating activities: Change in accrued interest income 980,120 - Recoverable due to rescission in other assets - (1,323,000) Change in prepaid items - (170,000) Investing activities: Decrease in notes receivable-other 9,162,777 - Purchase of real estate (10,142,897) - Financing activities: Issuance of common stock - 1,323,000 Notes Receivable related parties - 170,000 ------------- --------- Net noncash adjustments - - ============= =========
See accompanying notes to consolidated financial statements (unaudited). -4- American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Comprehensive Earnings (Unaudited)
Three months ended Six months ended June 30, June 30, ------------------------------- ------------------------------- 1999 2000 1999 2000 --------------- --------------- ----------------- ------------- Net earnings $1,441,397 $ (492,097) $3,160,575 $(2,440,850) Other comprehensive earnings before income taxes: Unrealized gains (losses) on securities available for sale (538,553) 172,712 (1,122,885) 441,719 Reclassification adjustment for realized gains (loss) included in net earnings 6,929 (79,664) 5,811 (205,711) ------------- ------------ ------------- --------- Total other comprehensive earnings (loss) before taxes (531,624) 93,048 (1,117,074) 236,008 Income tax benefit related to items of comprehensive income (87,668) (58,817) (111,676) (175,446) ------------- ------------- ------------ --------- Other comprehensive earnings (loss) net of income taxes 443,956 34,231 (1,005,398) 411,454 ------------ ----------- ----------- ----------- Total comprehensive earnings (loss) $ 997,441 $ (457,866) $2,155,177 $(2,029,396) ============ ============ ========== ============
See accompanying notes to consolidated financial statements (unaudited). -5- American Safety Insurance Group, Ltd. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited interim consolidated financial statements of American Safety Insurance Group, Ltd. ("American Safety") and its subsidiaries (collectively, the "Company") are prepared in accordance with generally accepted accounting principles of the United States and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim period presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, based on the best information available, in recording transactions resulting from business operations. The balance sheet amounts that involve a greater extent of accounting estimates and actuarial determinations subject to future changes are the Company's liabilities for unpaid losses and loss adjustment expenses. As additional information becomes available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results. While management believes that the liability for unpaid losses and loss adjustment expenses is adequate to cover the ultimate liability, such estimates may be more or less than the amounts actually paid when claims are settled. The results of operations for the six months ended June 30, 2000 may not be indicative of the results that may be expected for the full year ending December 31, 2000. These unaudited interim consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of the Company for the year ended December 31, 1999. The unaudited interim consolidated financial statements include the accounts of American Safety and each of its subsidiaries. All significant intercompany balances have been eliminated. Note 2 - Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, is effective for years beginning after June 15, 2000. The standard requires that all derivatives be recorded as an asset or liability, at estimated fair value, regardless of the purpose or intent for holding the derivative. If a derivative is not utilized as a hedge, all gains or losses from the change in the derivative's estimated fair value are recognized in earnings. The gains or losses from the change in estimated fair value of certain derivatives utilized as hedges are recognized in earnings or other comprehensive income depending on the type of hedge relationship. The Company expects that adoption of SFAS No. 133, as amended by statement 138, will have an immaterial impact on the Company's consolidated financial position and results of operations. -6- Note 3 - Nature of Operations The following is a description of certain risks facing the Company: (a) Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates which will create additional expenses not anticipated by the insurer in pricing its products and beyond those recorded in the financial statements. Regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the Company operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the Company beyond those recorded in the financial statements. The Company attempts to mitigate this risk by writing insurance business in several states, thereby spreading this risk over a large geographic area. (b) Potential Risk of United States Taxation of Bermuda Operations. Under current Bermuda law, American Safety is not required to pay any taxes in Bermuda on either income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda that will exempt American Safety from taxation until the year 2016 in the event of any such taxes being imposed. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States. Whether a foreign corporation is engaged in a United States trade or business or is carrying on an insurance business in the United States depends upon the level of activities conducted in the United States. If the activities of a foreign company are "continuous, regular, and considerable," the foreign company will be deemed to be engaged in a United States trade or business. Due to the fact that American Safety will continue to maintain an office in Bermuda and American Safety and its Bermuda subsidiary's business is reinsuring contracts via treaty reinsurance agreements, which are all signed outside of the United States, American Safety does not consider itself to be engaged in a trade or business in the United States and, accordingly, does not expect to be subject to United States income taxes. This position is consistent with the position taken by various other entities that have a similar operational structure as American Safety. However, because the Internal Revenue Code of 1986, as amended, the Treasury Regulations and court decisions do not definitively identify activities that constitute being engaged in a United States trade or business, and because of the factual nature of the determination, there can be no assurance that the Internal Revenue Service will not contend that American Safety or its Bermuda subsidiary are engaged in a United States trade or business. In general, if American Safety or its Bermuda subsidiary are considered to be engaged in a United States trade or business, it would be subject to (i) United States Federal income tax on its taxable income that is effectively connected with a United States trade or business at graduated rates and (ii) the 30 percent branch profits tax on its effectively connected earnings and profits deemed repatriated from the United States. -7- (c) Credit Risk is the risk that issuers of securities owned by the Company or secured notes receivable will default or that other parties, including reinsurers that have obligations to the insurer, will not pay or perform. The Company attempts to mitigate this risk by adhering to a conservative investment strategy, by obtaining sufficient collateral for secured note obligations and by maintaining sound reinsurance, credit and collection policies. (d) Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company attempts to mitigate this risk by attempting to match the maturities of its assets with the expected payouts of its liabilities. Note 4 - Investments The amortized cost and estimated fair values of investments at December 31, 1999 and June 30, 2000 are as follows:
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 and agencies $17,475,473 $ - $ 624,997 $16,850,476 $16,850,476 Obligations of states and political subdivision 6,526,137 38,835 104,972 6,460,000 6,460,000 Corporate securities 14,623,165 2,427 519,015 14,106,577 14,106,577 Mortgage-backed securities 3,433,949 209 156,655 3,277,503 3,277,503 ------------ ------- --------- ----------- ----------- Total fixed maturities 42,058,724 41,471 1,405,639 40,694,556 40,694,556 Equity investments - common stocks 169,448 - 5,480 163,968 163,968 ----------- ------- --------- ----------- ------------ Total $42,228,172 $ 41,471 $1,411,119 $40,858,524 $40,858,524 ========== ======== ========= ========== ========== June 30, 2000: Securities available for sale: Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $18,960,066 $ 15,145 $ 527,953 $18,447,258 $18,447,258 Obligations of states and political subdivisions 11,547,322 81,980 79,495 11,549,807 11,549,807 Corporate securities 9,712,680 - 612,571 9,100,109 9,100,109 Mortgage-backed securities 577,945 577 11,323 567,199 567,199 ----------- ------- --------- ----------- ----------- Total fixed maturities 40,798,013 97,702 1,231,342 39,664,373 39,664,373 Equity investments - common stocks 821,511 - - 821,511 821,511 ------------ ------- --------- ----------- ----------- Total $41,619,524 $ 97,702 $1,231,342 $40,485,884 $40,485,884 ========== ======= ========= ===========
-8- Note 5 - Segment Information (a) Factors used to identify the Company's reportable segments: The Company's United States and Bermuda operating segments were identified by management as separate operating segments based upon the regulatory environments of each of these countries. Significant differences exist under United States and Bermuda law concerning the regulation of insurance entities including differences in: types of permissible investments, minimum capital requirements, solvency monitoring, pricing, corporate taxation, etc. (b) Products and services from each reportable segment: The Company's United States and Bermuda operating segments, develop, underwrite, manage and market primary casualty insurance and reinsurance programs in the alternative insurance market for environmental remediation risks, employee leasing and staffing industry risks, and other specialty risks. The Company has expertise in developing specialty insurance coverages and custom designed risk management programs not generally available in the standard insurance market. The Company is also involved in the development of the Harbour Village Golf and Yacht Club in Ponce Inlet, Florida, as discussed in Note 7, and this item is reflected in the segment United States-Real Estate. The United States operating segment's specialty insurance programs provide insurance and reinsurance for general, pollution and professional liability exposures, for workers' compensation and surety, as well as custom designed risk management programs for contractors, consultants and other business and property owners who are involved with environmental remediation, employee leasing and staffing, and other specialty risks. Through its United States brokerage and management services subsidiaries, the Company provides specialized insurance program development, underwriting, risk and reinsurance placement, program management, brokerage, loss control, claims administration and marketing services. The Company also insures and places risks through its United States insurance subsidiary, as well as its non-subsidiary risk retention group affiliate and other unaffiliated insurance and reinsurance companies. Through its Bermuda operating segment, the Company places and reinsures a portion of the risks underwritten directly by its United States segment, its risk retention group affiliate and other insurers. -9- (c) Information about segment profit or loss and assets:
Six Months Ended June 30, 1999 2000 ---- ---- United States - Insurance Net Premiums Earned - All Other 4,645,659 10,183,517 Net Premiums Earned - Intersegment (1,748,609) (3,457,748) Net investment income and interest on notes receivable 365,582 787,127 Other revenues 1,635,712 2,036,113 --------- ---------- Total Revenues 4,898,344 9,549,009 Depreciation and amortization expense 46,397 79,746 Equity in net loss of subsidiaries (584,498) (1,362,271) Income taxes (153,991) (1,296,417) Segment loss (283,867) (2,321,284) Significant noncash items other than depreciation and amortization - - Property, plant and equipment 221,169 555,992 Total investments 13,721,473 38,158,198 Total assets 35,637,228 88,698,731 Total policy and contract liabilities 16,324,038 35,812,150 Total liabilities 26,213,971 62,063,640 United States - Real Estate Net Premiums Earned - All Other - - Net Premiums Earned - Intersegment - - Net investment income and interest on Notes - - Other revenues - - --------- ---------- Total revenues - - Depreciation and amortization - - Equity in net loss of subsidiaries - - Income Taxes - (64,905) Segment loss - (120,538) Significant noncash items - - Property, plant and equipment - 70,721 Total investments - - Total assets - 13,885,759 Total policy and contract liabilities - - Total liabilities - 4,341,611 Bermuda Net Premiums Earned - All Other 1,409,506 1,175,594 Net Premiums Earned - Intersegment 1,748,609 3,457,748
-10-
Six Months Ended June 30, 1999 2000 ---- ---- Net investment income and interest on notes receivable 2,555,745 1,421,849 Other revenues 9,679 558,963 ----------- --------- Total revenues 5,723,539 6,614,154 Depreciation and amortization expense - 10,063 Equity in net loss of subsidiaries 1,399,159 (1,695,369) Income Taxes - - Segment profit 3,444,442 972 Significant noncash items other than depreciation and amortization - - Property, plant and equipment - 830,797 Total investments - 52,231,003 Total assets 62,070,289 83,935,949 Total policy and contract liabilities 12,224,831 14,871,557 Total liabilities 16,000,494 17,815,445 Intersegment Eliminations Net Premiums Earned - All Other - - Net Premiums Earned - Intersegment - - Net investment income and interest on notes - - receivable Other revenues (236,216) (431,397) --------- --------- Total revenues (236,216) (431,397) Depreciation and amortization expense - - Equity in net earnings of subsidiaries (814,661) 3,067,640 Income taxes - - Segment profit (loss) - - Significant noncash items other than depreciation and amortization - - Property, plant and equipment - - Total investments (25,204,992) (45,134,085) Total assets (34,895,147) (57,942,504) Total policy and contract liabilities (5,825,153) (7,616,170) Total liabilities (10,543,376) (12,808,419) Total Net Premiums Earned - All Other 6,055,165 11,359,111 Net Premiums Earned - Intersegment - - Net investment income and interest on notes receivable 2,921,327 2,208,976 Other revenues 1,409,175 2,163,679 ---------- ---------
-11-
Six Months Ended June 30, 1999 2000 ---- ---- Total revenues 10,385,667 15,731,766 Depreciation and amortization expense - 89,809 Equity in net earnings of subsidiaries - - Income taxes (153,991) (1,361,322) Segment profit (loss) 3,160,575 (2,440,850) Significant noncash items other than depreciation and amortization - - Property, plant and equipment 221,169 1,457,510 Total investments 50,586,770 45,255,116 Total assets 92,982,481 128,577,935 Total policy and contract liabilities 22,723,716 43,067,537 Total liabilities 31,671,089 71,412,277
Note 6 - Shareholder Matters During the quarter ended June 30, 2000, the Company repurchased 498,775 common shares at a total price of $2,518,814 in open market transactions pursuant to its share repurchase program. Note 7 - Investment in Real Estate The Company's investment in the development of the Harbour Village Golf and Yacht Club ("Harbour Village") project is comprised of 173 acres of property in Ponce Inlet, Florida which was acquired through foreclosure on April 13, 1999. At the date of foreclosure, the Company evaluated the carrying value of its investment in real estate by comparing the fair value of the foreclosed collateral to the book value of the underlying loan and accrued interest. As the book value of the loan and accrued interest was less than the fair value of the collateral, no loss was recognized on foreclosure and the book balance of the loan and accrued interest became the basis of the real estate. The Company has incurred additional capitalizable development costs of approximately $4.5 million during 1999 and 2000. The Company announced on March 10, 2000, its plans to complete development of the Harbour Village project through its subsidiary, Ponce Lighthouse Properties, Inc. Note 8 - Acquisitions On March 24, 2000, the Company purchased Trafalgar Insurance Company, an Oklahoma licensed insurance company, which has authority to operate as an excess and surplus lines insurance company in 34 states and the District of Columbia. Trafalgar Insurance Company's stock was acquired from Houston Casualty Company for a purchase price of $16.3 million cash, and Trafalgar had, at closing, cash of $9.3 million and investments of $5.7 million creating $1.3 million of goodwill. The net cash outlay for this acquisition was $7.0 million. Prior to closing, Trafalgar entered into a bulk assumption reinsurance agreement with Houston Casualty, under which -12- Houston Casualty assumed all of Trafalgar's prior and existing insurance business. Trafalgar has been renamed American Safety Indemnity Company. On January 6, 2000, the Company acquired (i) the stock of L&W Holdings, Inc. and its wholly-owned subsidiary, RCA Syndicate #1, Ltd., an Illinois licensed insurance carrier operating on the INEX (formerly the Illinois Insurance Exchange), (ii) the stock of Principal Management, Inc., an insurance program development and management company headquartered in Okemos, Michigan, and in a related transaction, the Company also acquired (iii) the stock of Pegasus Insurance, a Cayman Islands licensed insurance carrier. The transactions were structured as stock acquisitions, with the purchase price paid by the Company consisting of $3,500,000 plus 200,000 American Safety common shares and earnout provisions for up to an additional 254,000 American Safety common shares over a five-year period. Of the purchase price, $1,000,000 of cash and 109,086 shares of stock are held in escrow to secure the obligations of the sellers. The Company also obtained a security interest in a real estate condominium in the Cayman Islands with an estimated value of $600,000 to secure the obligations of the sellers. On April 21, 2000, the Company filed a lawsuit to rescind these acquisitions based upon the sellers' misrepresentations as to the business affairs and financial condition of the acquired companies, and recognized an expense, net of recoverables, of $3.5 million for such rescission. Note 9 - Income Taxes Total income tax (benefit) for the six months ended June 30, 1999 and 2000 were allocated as follows:
Six Months Ended June 30, 1999 2000 ---- ---- Tax benefit attributable to: Income from continuing operations $(153,991) $(1,361,322) Unrealized losses on securities available for sale (82,996) (222,781) -------- ------------ Total $(236,987) $ (1,584,103) ========= ============
U.S. Federal and state income tax expense from continuing operations consists of the following components:
Current Deferred Total June 30, 1999 (264,235) 110,244 (153,991) June 30, 2000 (1,379,755) 18,433 (1,361,322)
-13- The state income tax components aggregated $94,803 and $(17,750) for the six months ended June 30, 1999 and 2000, respectively. Income tax expense for the period ended June 30, 1999 and 2000 differed from the amount computed by applying the U.S. Federal income tax rate of 34% to earnings before Federal income taxes as a result of the following:
June 30, 1999 2000 ---- ---- Expected income tax expense $1,022,238 $(1,292,738) Foreign earned income not subject to U.S. taxation (1,171,110) (330) Tax-exempt interest (47,738) (59,599) State taxes and other 42,619 (8,655) ------------ ------------ $ (153,991) $(1,361,322) =========== ===========
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:
December 31, June 30, 1999 2000 ---- ---- Deferred tax assets: Loss reserve discounting $ 509,011 $ 602,991 Unearned premium reserves 185,459 429,251 Unrealized loss on securities 80,844 303,625 Net operating loss carry forward - 1,409,325 ------- ---------- Gross deferred tax assets 775,314 2,745,192 ------- ---------- Deferred tax liabilities: Deferred acquisition costs 42,087 361,426 -------- ---------- Gross Deferred tax liabilities 42,087 361,426 -------- --------- Net deferred tax asset $ 733,227 $2,383,766 ======= =========
A valuation allowance has not been established as the Company believes it is more likely than not that the deferred tax asset will be realized. The Company believes it will have sufficient future income to offset the net operating loss carry forward. -14- Note 10. Notes Receivable American Safety, as the lender, entered into two term loan agreements in 1997 and 1999 with American Darico, L.L.C. for the borrower to purchase dairy cattle herds. The loans were secured by payment guaranty bonds from Acceptance Insurance Company, an affiliate of the St. Paul Insurance Companies, and the dairy herds. The borrower defaulted under the loans on June 30, 2000 after filing for bankruptcy following the death of the borrower's principal owner, Raymond McAnally. At the time of the default, the borrower owed $750,000 and $970,000, respectively, and American Safety holds $1,800,000 in payment guaranty bonds and a security interest in 36 herds of cattle. American Safety has made claims against the payment guaranty bonds and has filed a claim in the bankruptcy court as well as a claim against the estate of Raymond McAnally. The Company believes it should not experience a loss from the default. Note 11. Related Party Transaction. During the second quarter of 2000, the Company capitalized $246,301 of a loan and other advances previously made by the Company to an employee of its financial services subsidiary in connection with the restructuring of the employee's compensation arrangment. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General American Safety is a specialty insurance and financial services holding company which, through its subsidiaries, develops, underwrites, manages and markets primary casualty insurance and reinsurance programs in the alternative insurance market for environmental remediation risks, employee leasing and staffing industry risks, and other specialty risks, as well as provides a broad range of financial services and products to middle market businesses. During the past ten years, the Company has operated in a soft market cycle which is characterized by excess insurance capacity and declining insurance premium rates. The Company's reported combined ratio for its insurance operations may not provide an indication of the Company's overall profitability from insurance and reinsurance programs due to the exclusion of fee and commission income and expenses generated in related management and agency subsidiaries. Forward Looking Statements This Report contains certain forward-looking statements within the meaning of United States' securities laws which are intended to be covered by the safe harbors created thereby. Forward-looking statements involve risks and uncertainties which may cause actual results to differ, and are subject to change based on various factors, including the outcome of the Company's lawsuit -15- for rescission of the acquisition of an insurance agency and two related insurance companies, competitive conditions in the insurance industry, unpredictable developments in loss trends, adequacy and changes in loss reserves, market acceptance of new coverages and enhancements, changes in insurance regulatory requirements and tax statutes, changes in levels of general business activity and economic conditions, and the Company's ability to integrate and operate acquired businesses and the risks associated with such businesses. With respect to the development of the Harbour Village Golf and Yacht Club project, such forward-looking statements involve risks and uncertainties which may cause actual results to differ, and are subject to change based on various real estate development industry factors, including competitive housing conditions in the local market area, risks inherent in new construction, changes in interest rates and the availability of mortgage financing for prospective purchasers of condominium units and boat slips, and changes in local and national levels of general business activity and economic conditions. All statements, other than statements of historical facts, included or incorporated by reference in this Report that address activities, events or developments that the Company expects or anticipates will or may occur in the future constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained in this Report are reasonable, any of the assumptions could over time prove to be inaccurate and therefore, there can be no assurance that the forward-looking statements included in this Report will themselves prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this Report, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. -16- Results of Operations The following table sets forth the Company's consolidated revenues:
Three Six Months Months Three Months Six Months Ended Ended Ended June 30, Ended June 30, June 30, June 30, ---------------------------- --------------------------- ------------- -------------- 1999 to 1999 to 1999 2000 1999 2000 2000 2000 ------------- ------------- ------------- ------------- ------------- -------------- (Dollars in thousands) -------------------------------------------------------------------------------------- Net Premiums earned: Reinsurance: Workers' compensation $1,807 $3,024 $3,202 $5,631 67.3% 75.9% General liability and excess and surplus from affiliate 1,171 1,043 1,814 1,787 (10.9) (1.5) Auto Liability 9 - 22 - (100.0) (100.0) --------- --------- ------- ---------- ----- ----- Total reinsurance 2,987 4,067 5,038 7,418 36.2 47.2 Primary insurance: Prepaid Legal - - - 8 - - Excess and Surplus - 28 - 28 - - Commercial Line - 547 - 825 - - Workers' compensation - 92 - 162 - - Surety 613 1,323 1,017 2,918 115.8 186.9 ------- ----- ------- ------- Total primary insurance 613 1,990 1,017 3,941 224.6 287.5 ------- ----- ------- ------- ------- ----- Total net premiums earned 3,600 6,057 6,055 11,359 68.3 87.6 ------ ----- ------- ------ ------- ---- Net investment income 715 605 1,414 1,334 (15.4) (5.7) Interest on notes receivable 582 440 1,508 875 (24.4) (42.0) Commission and fee income: Brokerage commission income 63 722 494 953 1,046.0 92.9 Management fees from affiliate 385 352 726 719 (8.6) (1.0) ------- ------- ------- -------- ------- ----- Total commission and fee income 448 1,073 1,022 1,672 139.7 37.0 ------- ------ ------- ------- ------- ----- Net realized gains (losses) 99 (80) 98 (206) (180.8) (310.2) Other income 382 42 461 698 (89.0) 51.4 ------- -------- ------- -------- ------- ---- Total Revenues $5,826 $8,138 $10,756 $15,732 39.7% 46.3% ------- -------- ------- ------ -------- -----
The following table sets forth the components of the Company's GAAP combined ratio for the periods indicated:
Three months ended Six months ended June 30, June 30, -------- -------- 1998 1999 2000 1998 1999 2000 ---- ---- ---- ---- ---- ---- Insurance operations: Loss and loss adjustment expense ratio 52.0% 58.3% 66.4% 57.8% 56.5% 60.0% Expense ratio 12.4 13.7 23.6 11.4 14.8 33.3 ---- ---- ---- ---- ---- ---- Combined ratio 64.4 72.0% 90.0% 69.2% 71.3% 93.3% ---- ---- ---- ---- ---- ----
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999 Net Premiums Earned. Net premiums earned increased 68.3% from $3.6 million in the quarter ended June 30, 1999 to $6.1 million in the quarter ended June 30, 2000. The principal factor contributing to the increase was the Company's assumption of workers' compensation reinsurance business from an unaffiliated insurance carrier, which increased from $1.8 million in the quarter ended June 30, 1999 to $3.0 million in the quarter ended June 30, 2000. This increase was a result of new business generated from employee leasing and staffing industry risks as well as an increase in the Company's surety business by 115.8% from $613,000 in the quarter ended June 30, 1999 to $1.3 million in the quarter ended June 30, 2000. The increase in surety business is attributable to new business from increased marketing efforts and the Company's bail bond program. Also contributing to the increase is the Company's new commercial lines and excess and surplus lines business which generated net earned premiums of $547,000 and $253,000, respectively, in the quarter ending June 30, 2000. Net Investment Income. Net investment income decreased 15.3% from $714,000 in the quarter ended June 30, 1999 to $604,000 in the quarter ended June 30, 2000 due to a decrease in the Company's bond portfolio which was caused by expenditures on acquisitions, real estate and treasury stock. The average pre-tax yield on investments was 5.3% in the quarter ended June 30, 1999 and 5.3% in the quarter ended June 30, 2000. The average after-tax yield on investments was 5.4% in the quarter ended June 30, 1999 and 4.2% in the quarter ended June 30, 2000. The reduction in the after tax yield is primarily due to the acquisition of Trafalgar Insurance Company which resulted in a substantial portion of the Company's bond portfolio being held by a United States subsidiary. Interest from Notes Receivable. Interest from notes receivable decreased 24.3% from $581,000 in the quarter ended June 30, 1999 to $440,375 in the quarter ended June 30, 2000 as a result of lower yields on the notes and lower average outstanding balances as well. Brokerage Commission Income. Brokerage commission income increased 1,040% from $63,000 in the quarter ended June 30, 1999 to $722,000 in the quarter ended June 30, 2000 as a result of increased commissions from excess and surplus lines revenue production. Management Fees. Management fees decreased 8.6% from $384,000 in the quarter ended June 30, 1999 to $351,000 in the quarter ended June 30, 2000. These fees are derived from services provided by the Company to its risk retention group affiliate, which services remained consistent as compared to the prior period. Net Realized Gains. Net realized gains decreased from $99,000 in the quarter ended June 30, 1999 to a loss of $80,000 for the quarter ended June 30, 2000 due to additional sale of bonds for the purchase of Trafalgar Insurance Company. -17- Other Income. Other income decreased from $383,000 in the quarter ended June 30, 1999 to $42,000 for the quarter ended June 30, 2000 as a result of lower fees generated by the Company's financial service subsidiary. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 91.6% from $2.1 million in the quarter ended June 30, 1999 to $4.0 million in the quarter ended June 30, 2000 . The increase in loss and loss adjustment expense was primarily due to increased premium volume over the prior period and loss and loss and adjustment expense on the Company's commercial lines and excess and surplus lines business. Workers' compensation contributed approximately $1.0 million to the increase and the Company recorded additional surety case reserves of approximately $600,000 in the second quarter. Acquisition Expenses. Policy acquisition expenses increased 258.5% from $348,000 in the quarter ended June 30, 1999 to $1.2 million in the quarter ended June 30, 2000 primarily as a result of increased premium production. Surety earned premiums increased 115.8% which have approximately 30% acquisition expense. Workers' compensation and bail acquisition expenses increased approximately $414,000 and $155,000, respectively, for the quarter. Payroll and Other Expenses. Payroll and other expenses increased 78.5% from $2.0 million in the quarter ended June 30, 1999 to $3.6 million in the quarter ended June 30, 2000 as a result of increases in salary, benefits and operating expense primarily due to increased staffing for new and existing programs, increased premium tax expense on new insurance business, and expenses related to the development of the Harbour Village project. Income Taxes. Federal and state income taxes decreased from a benefit of $108,000 in the quarter ended June 30, 1999 to a benefit of $291,000 in the quarter ended June 30, 2000 due to decreased taxable income in the Company's U.S. subsidiaries. The decrease in taxable income was primarily due to increased non-deferrable expenses associated with the production of new insurance business. Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Net Premiums Earned. Net premiums earned increased 87.6% from $6.1 million in the six months ended June 30, 1999 to $11.4 million in the six months ended June 30, 2000. The principal factor contributing to the increase was the Company's assumption of workers' compensation reinsurance business from an unaffiliated insurance company, which increased net premiums by 75.9% from $3.2 million in the six months ended June 30, 1999 to $5.6 million in the six months ended June 30, 2000. Another factor contributing to the increase was an increase of the Company's surety business by 186.9% from $1.0 million in the six months ended June 30, 1999 to $2.9 million in the six months ended June 30, 2000, which was attributable to increased marketing efforts and increased bail bond production. Also contributing to the increase was the Company's new commercial lines and excess and surplus lines business which generated net earned premiums of $825,000 and $360,000, respectively, in the six months ended June 30, 2000. -18- Net Investment Income. Net investment income decreased 5.6% from $1.41 million in the six months ended June 30, 1999 to $1.33 million in the six months ended June 30, 2000 due to a reduction in the investment portfolio, as a result of expenditures on acquisitions, real estate and treasury stock. The average annual pre-tax yield on investments was 5.6% in the six months ended June 30, 1999 and 5.7% in the six months ended June 30, 2000. The average annual after-tax yield on investments was 5.3% in the six months ended June 30, 1999 and 4.8% in the six months ended June 30, 2000. The decrease in the after tax yield is related to the sale of bonds for the purchase of Trafalgar Insurance Company. Interest from Notes Receivable. Interest from notes receivable decreased 42.0% from $1.5 million in the six months ended June 30, 1999 to $875,000 in the six months ended June 30, 2000 as a result of lower yields on the notes and the loss of interest income as a result of the acquisition by foreclosure on the Harbour Village project. Brokerage Commission Income. Income from insurance brokerage operations increased 92.8% from $494,000 in the six months ended June 30, 1999 to $953,000 in the six months ended June 30, 2000 as a result of increased commissions from excess and surplus lines premium production. Management Fees. Management fees decreased 1.0% from $726, 000 in the six months ended June 30, 1999 to $718,000 in the six months ended June 30, 2000. These fees are derived from services provided by the Company to its risk retention group affiliate, which services remained consistent as compared to the prior period. Net Realized Gains. Net realized gains decreased 310.2% from a gain of $98,000 in the six months ended June 30, 1999 to a loss of $206,000 in the six months ended June 30, 2000. The decrease is related to the sale of bonds for the purchase of Trafalgar Insurance Company. Other Income. Other income increased from $466,000 in the six months ended June 30, 1999 to $698,000 for the six months ended June 30, 2000. The increase principally relates to a commitment fee from the proposed sale of the Harbour Village project. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 91.6% from $2.1 million in the quarter ended June 30, 1999 to $4.0 million in the quarter ended June 30, 2000 . The increase in loss and loss adjustment expense was primarily due to increased premium volume over the prior period and loss and loss and adjustment expense on the Company's commercial lines and excess and surplus lines business. Workers' compensation contributed approximately $1.0 million to the increase and the Company recorded additional surety case reserves for prior periods of approximately $600,000 in the second quarter. Acquisition Expenses. Policy acquisition expenses increased 314.5% from $671,000 in the six months ended June 30, 1999 to $2.8 million in the six months ended June 30, 2000 as a result of increased premium production. Surety earned premiums increased 186.9% and carry -19- approximately 30% acquisition expense. Workers' compensation and bond acquisition expenses increased approximately $634,000 and $1.0 million, respectively, for the six months ended June 30, 2000. Expense Due to Rescission. Expense due to rescission was $3.5 million and relates to the rescission of the acquisition of a group of companies. See Note 8. Payroll and Other Expenses. Payroll and other expenses increased 74.7% from $3.7 million in the six months ended June 30, 1999 to $6.4 million in the six months ended June 30, 2000 as a result of increases in salary, benefits and operating expense primarily due to increased staffing for new and existing programs, increased premium tax expense on new business, and expenses related to the development of the Harbour Village project. Income Taxes. Federal and state income taxes decreased from a benefit of $154,000 in the six months ended June 30, 1999 to a benefit of $1.4 million in the six months ended June 30, 2000 due to decreased taxable income in the Company's U.S. subsidiaries. The decrease in taxable income was primarily due to expenses relating to rescission of the acquisition of a group of companies and non-deferrable expenses associated with the production of new business. The Company has not set up a valuation allowance as it believes it will generate sufficient future taxable income to recover the net operating loss carryforward. Liquidity and Capital Resources The Company historically has met its cash requirements and financed its growth principally through cash flows generated from operations. The Company's primary sources of cash flow are proceeds from the sale or maturity of invested assets, premiums earned, investment income, commission income and management fees. The Company's short-term cash requirements are primarily for claims payments, reinsurance premiums, commissions, salaries, employee benefits and other operating expenses, and the purchase of investment securities, which have historically been satisfied from operating cash flows. Due to the uncertainty regarding settlement of unpaid claims, the long-term liquidity requirements of the Company may vary, and the Company has attempted to structure its investment portfolio to take into account the historical payout patterns. Management believes that the Company's current cash flows are sufficient for its short-term needs and the Company's invested assets are sufficient for its long-term needs. The Company also purchases reinsurance to mitigate the effect of large claims and to stabilize demands on its liquidity. The Company expects that net operating losses will continue through the end of the current fiscal year or through the first quarter of fiscal year 2001 as a result of general administrative expenses relating to the Company's investment in new operating units exceeding revenue production, and non-capitalizable expenses incurred in the development and construction of the Harbour Village project. During the quarter ended June 30, 2000, the Company repurchased 498,775 common shares in open market transactions pursuant to its share repurchase program. -20- On a consolidated basis, net cash provided from operations was $1.8 million for the six months ended June 30, 1999 and $8.3 million for the six months ended June 30, 2000. The positive cash flows for both periods were primarily attributable to net premiums written, and increases in reserves for unpaid losses. For the period ended June 30, 2000 additional cash flows came from increases in accrued expenses and escrow deposits. Because workers' compensation and general liability claims may be paid over an extended period of time, the Company has established loss reserves for such lines of business. The assets supporting the Company's loss reserves continue to earn investment income until claims payments are made. Total assets increased from $104.4 million at December 31, 1999 to $128.6 million at June 30, 2000, primarily due to increases in premiums receivable, reinsurance recoverables, deferred income tax, real estate investments and goodwill from the purchase of Trafalgar Insurance Company. Cash, invested assets and notes receivable were $73.0 million at December 31, 1999 and $77.5 million at June 30, 2000. The increase in cash, invested assets and notes receivable was primarily due to receipt of escrow deposits. Other assets increased from $114,000 at December 31, 1999 to $1.6 million at June 30, 2000 as a result of $1.3 million collateral held which lowered the expense due to the Company's rescission of the acquisition of a group of companies. American Safety is an insurance and financial services holding company whose principal assets are its investment portfolio and its investment in the capital stock of its subsidiaries. As an insurance holding company, American Safety's ability to pay dividends to its shareholders will depend, to a significant degree, on the ability of the Company's subsidiaries to pay dividends to American Safety. The jurisdictions in which American Safety and its insurance and reinsurance subsidiaries are domiciled place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers. In January 1997, the Securities and Exchange Commission approved rule amendments regarding disclosures concerning derivative financial instruments, other financial instruments and derivative commodity instruments (the "Release"). The Release requires inclusion in the footnotes to the financial statements of extensive detail about the accounting policies followed by a company in connection with its accounting for derivative financial instruments and derivative commodity instruments. As of June 30, 2000, the Company had no investments in derivative instruments. Harbour Village Development. The Company announced in March 2000 its plans to complete development of the Harbour Village Golf and Yacht Club ("Harbour Village"), located in Ponce Inlet, Florida, consisting of 786 residential condominium units, a marina containing 142 boat slips, a par 3 golf course and beach club. The project acquired by the Company through foreclosure in April 1999, has been under development through its Ponce Lighthouse Properties, Inc. subsidiary. As of June 30, 2000, the Company's marketing efforts had generated in excess of $51 million of pre- construction sales. It is anticipated that Harbour Village will be developed in three phases over the next three to five years, depending on future sales activities and economic conditions that may impact the -21- marketing of the condominium units. In July 2000, the Company closed a $37 million acquisition, development and construction loan facility in order to commence construction of Phase I of three phases of the Harbour Village project. The anticipated construction cost for the entire Harbour Village project is in excess of $160 million over a three to five year period. Phase I of the development consists of construction of all site work including a 142-boat slip marina, 372 residential units, and amenities. No assurance can be given, however, as to either future sales activities of the condominium units or the impact of local and national economic conditions on the Company's marketing efforts for the development of the Harbour Village project. Management believes that the bank credit facility, together with anticipated cash flows from marketing and sales operations, will meet the liquidity needs for the construction and development of Phase I of the Harbour Village project during the first 24 months of development. There can be no assurance, however, that the amounts available from the Company's sources of liquidity will be sufficient to meet the Company's future capital needs. Income Taxes American Safety is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts American Safety and its shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance until March 28, 2016. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States. Inflation Property and casualty insurance premiums are established before the amounts of losses and loss adjustment expenses are known and therefore before the extent by which inflation may affect such expenses is known. Consequently, the Company attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, the Company may be limited in raising its premiums consistent with anticipated inflation, in which event the Company, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the Company's investment portfolio with a corresponding effect on the Company's investment income. -22- Combined Ratio The combined ratio of an insurance company measures only the underwriting results of insurance operations and not the profitability of the overall company. The Company's reported combined ratio for its insurance operations may not provide an accurate indication of the Company's overall profitability from insurance and reinsurance programs due to the exclusion of fee and commission income and expenses generated in related management and agency subsidiaries. Depending on the Company's mix of business going forward, the combined ratio may fluctuate from time to time and may not reflect the overall profitability of insurance programs to the Company. Reserves Certain of the Company's insurance policies and reinsurance assumed, including general and pollution liability policies covering environmental remediation risks, as well as workers' compensation policies, may be subject to claims brought years after an incident has occurred or the policy period has ended. The Company is required to maintain reserves to cover its estimated liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred. The Company engages an independent internationally recognized actuarial consulting firm to provide reserve studies, opinions and rate studies. Reserves are estimates at a given time, which are established from actuarial and statistical projections by the Company of the ultimate settlement and administration costs of claims occurring on or prior to such time, including claims that have not yet been reported to the insurer. The establishment of appropriate loss reserves is an inherently uncertain process, and there can be no assurance that the ultimate payments will not materially exceed the Company's reserves. Item 3. Quantitative and Qualitative Disclosures About Market Risks. The Company's market risk has not changed materially since December 31, 1999. [The remainder of this page is intentionally left blank] -23- PART II - OTHER INFORMATION Item 1. Legal Proceedings. See Item 6(b) of this Part II. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. The Annual General Meeting of Shareholders of the Company was held on June 23, 2000 in Hamilton, Bermuda. Proxies for the Annual General Meeting were solicited by the Board of Directors pursuant to applicable Bermuda law. The Company's shareholders (1) elected Cody W. Birdwell, Thomas W. Mueller and Timothy E. Walsh as directors to serve three year terms expiring at the Annual General Meeting of Shareholders in 2003 and (2) approved an amendment to increase the number of common shares authorized for issuance under the 1998 Incentive Stock Option Plan. The votes for the directors totaled 4,511,627 and 105,288 votes withheld authority to elect the directors. The votes for the amendment to the 1998 Incentive Stock Option Plan totaled 2,896,392, with ]891,387 votes against, 1,997 votes abstaining and 827,139 broker non-votes. In addition, the Company's shareholders ratified the appointment of KPMG, LLP as the independent public accountants for the Company's fiscal year ending December 31, 2000. The votes for such ratification totaled 4,528,724, with 29,191 votes against and 59,000 votes abstaining. Item 5. Other Information. Not applicable. -24- Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as part of this Report: Exhibit No. Description 11 Computation of Earnings Per Share 27 Financial Data Schedule (b) Reports on Form 8-K. The Company filed a Form 8-K on April 28, 2000 regarding the Company's filing of a lawsuit to rescind the previously announced (see the Company's Form 8-K filed on January 17, 2000) acquisition of a Michigan insurance agency and two related insurance companies specializing in insurance program business. The Company's lawsuit was filed in the United States District Court for the Northern District of Georgia to rescind the acquisitions based upon the sellers' breach of representations and warranties made concerning the business affairs and financial condition of the acquired companies. -25- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of August 2000. American Safety Insurance Group, Ltd. By: /s/ Lloyd A. Fox ------------------ Lloyd A. Fox President and Chief Executive Officer By: /s/ Steven B. Mathis --------------------- Steven B. Mathis Chief Financial Officer (Principal Financial Officer) -26- Exhibit 11 American Safety Insurance Group, Ltd. and subsidiaries Computation of Earnings Per Share
Three Months Ended Six Months Ended -------------------- ----------------- June 30 June 30 June 30 June 30 1999 2000 1999 2000 ---- ---- ---- ---- Basic: Earnings Available to Common Shareholders.................... $1,441,397 $(492,097) $3,160,575 $(2,440,850) ========== ========== ========== ============ Weighted Average Common Shares Outstanding..................... 6,064,010 5,525,804 6,070,823 5,726,229 Basic Earnings (Loss)Per Common Shares ......................... $ .24 $ (.09) $ 52 $ (.43) ========= ========== ========== ========== Diluted: Earnings Available to Common Shareholders.................... $1,441,397 $(492,097) $3,160,575 $(2,440,850) ========== ========== ========== =========== Weighted Average Common Shares Outstanding..................... 6,064 5,525,804 6,070,823 5,726,229 Weighted Average Common Shares Equivalents Associated with Options......................... 23,799 - 29,118 2,671 Total Weighted Average Common Shares.......................... 6,087,809 5,525,804 6,099,941 5,728,900 ========= ========= ========= ========= Diluted Earnings per Common Shares.......................... $ .24 $ ( .09) $ .52 $ ( .43) ========= ========== ========= ==========
-27- EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
7 1,000 6-MOS DEC-31-2000 DEC-31-1999 JUN-30-2000 39,664 0 0 821 0 13,355 58,611 6,609 16,838 1,183 128,578 24,903 18,164 0 0 1,376 0 0 63 57,103 128,578 11,359 1,334 (206) 698 6,821 2,783 9,930 (3,802) (1,361) (2,441) 0 0 0 (2,441) (.43) (.43) 14,348 0 0 0 0 16,380 0
-----END PRIVACY-ENHANCED MESSAGE-----