10-K

                                              UNITED STATES
                                    SECURITIES AND EXCHANGE COMMISSION
                                        WASHINGTON,D.C. 20549
                                            ------------------

                                                FORM 10-K

                              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                                  OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2006                        Commission file number 1-14795


                                 AMERICAN SAFETY INSURANCE HOLDINGS, LTD.
                          (Exact name of registrant as specified in its charter)

                            Bermuda                                   Not applicable
                     (State of incorporation                        (I.R.S.  Employer
                        or organization)                            Identification No.)

                        44 Church Street
                        P.O. Box HM 2064
                      Hamilton,  Bermuda
            (Address of principal executive offices)                         HM HX
                                                                         (Zip Code)


Registrant's telephone number: (441) 296-8560

Securities registered pursuant to Section 12(b) of the Act:


                    Title of each class                 Name of each exchange on which registered
               Common Stock, $0.01 par value                  New York Stock Exchange, Inc.


Securities to be registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well known seasoned issuer as defined in Rule 405 of the
Securities Act.                                              Yes   ___    No _X_

Indicate by check mark if the  registrant is not required to file reports  pursuant to Section 13 or 15(d)
of the Act.                                                 Yes____    No   X

Indicate by check mark whether the 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  and (2) has been
subject to such filing requirements for the past 90 days.  Yes X     No ___

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405 of Regulation  S-K is not
contained herein, and will not be contained,  to the best of registrant's  knowledge,  in definitive proxy
or  information  statements  incorporated  by reference in Part III of this Form 10-K or any  amendment to
this Form 10-K.  __

Indicate by check mark whether the registrant is a large  accelerated  filer,  an  accelerated  filer or a
non-accelerated filer.      Large Accelerated Filer ___Accelerated Filer   X        Non-accelerated
Filer ____

Indicate by check mark whether the  registrant  is a shell  company (as defined in Rule 12b-2 of the Act).
Yes ___   No X

The aggregate  market value of registrant's  voting common stock held by  non-affiliates  on June 30, 2006
was  $112,097,997.  For the purposes of this  calculation,  shares of common stock of the Registrant  held
by directors,  executive  officers and persons who hold more than 5% of the  outstanding  shares have been
excluded.

The number of shares of registrant's common stock outstanding on March 9, 2007 was 10,556,449.

Documents  Incorporated  by  Reference:  Part III of this  Form 10-K  incorporates  by  reference  certain
information  from  Registrant's  Proxy Statement for the 2007 Annual General  Meeting of the  Shareholders
(the "2007 Proxy Statement").



                          [The Remainder of this Page Intentionally Left Blank]

                                 AMERICAN SAFETY INSURANCE HOLDINGS, LTD.
                                            Table of Contents

                                                      PART I
Item 1.          Business....................................................................................    1
Item 1A.         Risk Factors................................................................................   26
Item 1B.         Unresolved Staff Comments...................................................................   38
Item 2.          Properties..................................................................................   38
Item 3.          Legal Proceedings...........................................................................   38
Item 4.          Submission of Matters to a Vote of Security Holders.........................................   39
                                                     PART II
Item 5.          Market for Registrant's Common Equity, Related Stockholder Matters
                     and Issuer Purchase of Equity Securities................................................   42
Item 6.          Selected Financial Data.....................................................................   43
Item 7.          Management's Discussion and Analysis of Financial Condition
                      and Results of Operations .............................................................   46

Item 7A.         Quantitative and Qualitative Disclosures About Market Risk.................................    67
Item 8.          Financial Statements and Supplementary Data.................................................   68
Item 9.          Changes in and Disagreements with Accountants on
                     Accounting and Financial Disclosure.....................................................   68
Item 9A.         Control and Procedures .....................................................................   68

Item 9B.         Other Information ..........................................................................   69
                                                     PART III
Item 10.         Directors , Executive Officers and Corporate Governance of Registrant.......................   72
Item 11.         Executive Compensation......................................................................   72
Item 12.         Security Ownership of Certain Beneficial Owners
                     and Management and Related Stockholder Matters.............................................72
Item 13.         Certain Relationships and Related Transactions, and Director Independence...................   72
Item 14.         Principal Accountant Fees and Services......................................................   72
                                                     PART IV
Item 15.         Exhibits and Financial Statements and Schedules.............................................   73

PART I

Item 1. Business

        In this Report, the terms “we,” “our,” “us,” “Company” and “American Safety Insurance” refer to American Safety Insurance Holdings, Ltd. and, unless the context requires otherwise, includes our subsidiaries.

        We maintain a web site at www.amsafety.com that contains additional information regarding the Company. Under the caption Investor Relations — “SEC Filings” on our website, we provide access, free of charge, to our filings with the Securities and Exchange Commission (“SEC”), including Forms 3, 4 and 5 filed by our officers and directors as soon as reasonably practical after electronically filing such material with the SEC.

Who We Are

        We are a specialty insurance company that provides customized insurance products and solutions to small and medium-sized businesses in industries that we believe are underserved by the standard insurance market. For twenty years, we have developed specialized insurance coverages and alternative risk transfer products not generally available to our customers in the standard insurance market because of the unique characteristics of the risks involved and the associated needs of the insureds. We specialize in underwriting these products for insureds with environmental risks and construction risks, as well as in developing programs for other specialty classes of risk.

        We were formed in 1986 as an insurance company in Bermuda and began our operations providing insurance solutions to environmental remediation businesses in the U.S. at a time when insurance coverage for these risks was virtually unavailable. Since then, we have continued to identify opportunities in other industry sectors underserved by the standard insurance carriers where we believe we can achieve strong and consistent returns on equity. We capitalize on these opportunities by (i) leveraging our strong relationships with agents and brokers, which we refer to as producers, among whom we believe we have a recognized commitment to the specialty insurance market, (ii) charging a higher premium for the risks we underwrite and the services we offer due to the limited availability of insurance coverages for these risks and (iii) mitigating our loss exposure through customized policy terms, specialized underwriting and proactive loss control and claims management.

        We insure and place risks primarily through our two U.S. insurance subsidiaries, American Safety Casualty Insurance Company (“American Safety Casualty”) and American Safety Indemnity Company (“American Safety Indemnity”), and through, American Safety Risk Retention Group, Inc. (“American Safety RRG”) a variable interest entity which is consolidated in our financial statements in accordance with Financial Accounting Standard Board (FASB), Interpretation 46 (FIN46). We reinsure a portion of these risks through our Bermuda reinsurance subsidiary, American Safety Reinsurance, Ltd. (“American Safety Re”) and our Bermuda segregated account captive, American Safety Assurance Ltd. (“American Safety Assurance”). American Safety Assurance serves as a risk sharing vehicle for program managers and insureds. Our Bermuda subsidiaries also facilitate the allocation of risk among our insurance subsidiaries and provide us with greater flexibility in managing our capital. Our subsidiary American Safety Insurance Services, Inc. (“ASI Services”) provides a range of insurance management and administrative services for American Safety Casualty, American Safety Indemnity and American Safety RRG.

Our Market

        We actively participate in both the excess and surplus lines (“E&S”) and the alternative risk transfer (“ART”) insurance markets.

Excess and Surplus Lines

        Excess and surplus lines insurers provide coverage for difficult-to-place risks that do not fit the underwriting criteria of insurance companies operating in the standard insurance market. In the standard insurance market, policies must be written by insurance companies that are licensed to transact business as admitted carriers by the state insurance regulators in the state in which the policy is issued. Standard insurance market policy rates and forms are highly regulated and coverages are largely uniform. In contrast, excess and surplus lines insurers are less restricted by these rate and form filing regulations, thereby providing them with more flexibility over the premiums they can charge and the policy terms and conditions they can offer.

        Also included in our description of the excess and surplus lines market is the specialty admitted market. Insurance carriers operating in the specialty admitted market underwrite complex risks similar to excess and surplus lines carriers, but are licensed by the insurance regulators in the states in which they operate as admitted insurance companies. Although they are admitted in the jurisdictions in which they operate, specialty admitted carriers are typically less restricted by policy rate and form regulations than standard admitted carriers due to the complexity of the risks being underwritten, the absence of standard market coverage, or the nature of the coverages provided. Some insureds with complex insurance needs require coverage from an admitted insurance company due to regulatory, legal, marketing or other factors. We currently underwrite specialty admitted policies in our environmental business line in StateCalifornia, StateIllinois, StateNew Jersey, StateTexas and New York. We also write a small portion of our specialty program business on a specialty admitted basis. All of our surety bonds are written on an admitted basis in accordance with standard industry practice.

        The property and casualty insurance industry has historically been a cyclical industry consisting of both “hard market” periods and “soft market” periods. The excess and surplus lines market historically has tended to move in response to the underwriting cycles in the standard insurance market. Hard market periods are characterized by shortages of underwriting capacity, limited availability of capital, less competition and higher premium rates. Typically, during hard markets, as rates increase and coverage terms become more restrictive, business shifts from the standard insurance market to the excess and surplus lines market as standard insurance market carriers rely on traditional underwriting techniques and focus on their core business lines. In soft markets, business shifts from the excess and surplus lines market to the standard insurance market as standard insurance market carriers tend to loosen underwriting standards and seek to expand market share by moving into business lines traditionally characterized as “surplus lines.”

        Since 2000, the excess and surplus lines market has grown substantially, both in terms of available premium as well as in relation to the overall U.S. commercial property and casualty market. According to A.M. Best, from 2000 to 2003, the excess and surplus lines market grew at a 29.5% compounded annual growth rate and increased as a percentage of the overall U.S. commercial property and casualty insurance market from 7.6% to 13.7%. However, from 2003 to 2004, the latest year for which industry data is available from A.M. Best, the year-over-year growth rate was 0.7% as competition increased and the rate of price increases slowed. In 2004, country-regionU.S. excess and surplus lines direct premiums written totaled over $33.0 billion and represented approximately 14.9% of the total U.S. commercial property and casualty insurance market.

        Since 2004, we believe the property and casualty insurance market has started to soften and that the number of insurers competing for premium in the excess and surplus lines market has increased. These competitors include several start-up companies as well as larger standard market insurers looking to capture market share by moving from the admitted market to the excess and surplus lines market. This increased competition has caused rates to modestly decline in some of our targeted markets. Despite this modest softening trend, we believe that the current market environment is favorable and believe there are profitable growth opportunities from which we can benefit.

Alternative Risk Transfer

        The alternative risk transfer market, or ART market, provides insurance and risk management products for insureds who want more control over the claims administration process and who pay very high insurance premiums or are unable to find adequate insurance coverage. The ART market originated during the 1980s when obtaining various types of commercial liability insurance coverages was difficult for businesses in certain industries due to the nature of their operations or the industries in which they operated. To meet the risk management or insurance needs of these businesses, new alternative risk transfer solutions were developed, such as captive insurance companies and risk retention groups. Captive insurance companies are risk sharing vehicles, the assets of which are contributed by one interest or a group of related interests so as to provide insurance coverage for their business operations. Risk retention groups are companies that are owned by their insureds that, while being licensed only in the state of their formation, are able to write insurance in all states through the Federal Liability Risk Retention Act. These alternative risk transfer arrangements blend risk transfer and risk retention mechanisms and, along with self-insurance, form the ART market.

        The ART market has grown substantially over the past five years through the creation of additional captives and risk retention groups. According to A.M. Best, net premiums written in the ART market grew approximately 47% between 2000 and 2006, for a cumulative annual growth rate (CAGR) of 8%. Net premiums written grew 5.8% from 2005 to 2006. During this time, the ART market expanded to include a wider range of risk sharing vehicles, and benefited from more favorable regulation in certain jurisdictions in the U.S. The ART market has responded effectively to the strategic needs of insureds for better financial management, improved claims handling, more effective risk management, customized insurance programs and access to reinsurance markets.

        The ART market has traditionally been inversely correlated to the standard market’s underwriting cycle, expanding in hard market periods and retracting in soft market periods. We believe, however, that this correlation has become less meaningful in recent years as ART solutions have become more accessible and better managed, evidenced by a sharp increase in the number of captive formations and more domestic and offshore domiciles, such as Vermont and Bermuda, offering regulatory environments conducive to captive formations and operations. While this continued growth has contributed to the competitive environment in the ART market, customers in certain industries, such as healthcare and construction, continue to experience difficulty obtaining adequate and affordable coverages that meet their needs.

Our Products

        Our core product segments include excess and surplus lines and alternative risk transfer products:

Excess and Surplus Lines. We focus our excess and surplus lines segment on small to medium-sized businesses in industries such as environmental remediation and construction because we believe that, due to the complex risk profile of those businesses and their smaller account sizes, there is less competition in the market to underwrite these risks. We provide the following excess and surplus lines products in the following industries:

Environmental. We underwrite various types of environmental risks including contractors’ pollution liability, environmental consultants’ professional liability and environmental impairment liability. We do not provide coverage for manufacturers or installers of products containing asbestos, but instead insure the contractors who remediate asbestos. For the year ended December 31, 2006, we had gross premiums written of $51.8 million and net premiums written of $37.8 million in our environmental business line, representing 21.6% and 24.0% of our total gross and net premiums written, respectively. From 2000 through 2006, we achieved a compound annual growth rate in gross premiums written of 29.5% in our environmental business line.

   The environmental risks we underwrite are as follows:

Contractors’Pollution Liability. Includes general and pollution liability coverage for third party claims for bodily injury and property damage, including clean-up costs resulting from pollution conditions. Many of these contractors operate in the pollution remediation industry, engaging in activities such as hazardous waste remediation, soil remediation, emergency response and storage tank installation or removal. This coverage is offered on either an occurrence basis or a claims made and reported basis. Coverage written on an occurrence basis provides coverage to the insured for occurrences during the coverage period while coverage written on a claims made and reported basis provides coverage to the insured only for losses reported during the coverage period. For the year ended December 31, 2006, contractors’ pollution liability represented 6% of our total environmental gross premiums written.

Environmental Consultants’ Professional Liability. Includes professional liability coverage for the unique exposures inherent to environmental professionals including consultants, engineers, design professionals and laboratories. We provide coverage for third party claims resulting from professional services rendered by the insured. This coverage is written on a claims made and reported basis. For the year ended December 31, 2006, environmental consultants’ professional liability represented 5% of our total environmental gross premiums written.

Environmental Impairment Liability. Includes coverage for both off-site and on-site third party bodily injury, property damage and clean-up costs arising from pollution conditions emanating from or at sites owned or operated by an insured. Our typical insureds for this coverage include waste treatment and disposal facilities, manufacturing facilities, chemical manufacturers and blenders, electric utilities, recyclers, owners and operators of storage tank facilities, dry cleaners, convenience stores, gasoline stations, trucking and distribution centers and petroleum marketers. Coverage is written on a claims made and reported basis. For the year ended December 31, 2006, environmental impairment liability represented 89% of our total environmental gross premiums written

Construction. We underwrite various types of residential and commercial construction risks. Our construction insurance coverages consist mostly of primary general and excess general liability coverages for insureds located primarily in the western U.S., although we are expanding our geographic coverage in this line of business. For the year ended December 31, 2006, we had gross premiums written of $96.9 million and net premiums written of $92.5 million in our construction business line, representing 40.4% and 58.8% of our total gross premiums written and net premiums written, respectively. From 2000 through 2006, we achieved a compound annual growth rate in gross premiums written of 28.0% in our construction business line.

        The construction risks we underwrite include:

Residential Construction. We provide coverage for contractors involved with the construction and remodeling of residential properties. The types of residential contractors we insure primarily include graders, framers, concrete workers, drywall installers and general contractors. For the year ended December 31, 2006, residential construction represented 71% of our total construction gross premiums written.

Commercial Construction. The commercial contractors we insure primarily include framers (predominantly for apartments), concrete workers and graders. Many of the commercial contractors we insure derive a portion of their revenues from residential construction work, and consequently, most standard market insurance companies will not offer them coverage. Due to our understanding of the residential construction market, we are able to fill a market void for certain commercial contractors and can insure these contractors for an attractive premium per dollar of risk and with customized policy terms. For the year ended December 31, 2006, commercial construction represented 24% of our total construction gross premiums written.

Other Construction. Also included in our construction business line are other excess and surplus lines coverages for underserved markets, including general liability for building owners and equipment dealers and products liability for product manufacturers and distributors. The gross premiums written associated with these excess and surplus lines policies represented 5% of our total construction gross premiums written for the year ended December 31, 2006.

Non-Construction. In 2006, the Company began to write selected non-construction general and products liability business, offering both primary and excess products to small to middle market accounts. For the year ended December 31, 2006, non-construction represented less than 1%of our total gross premiums written.

Excess. The Company’s excess product is focused primarily in the construction and products liability area. In 2006, the Company added a new underwriting office in Middletown, New Jersey, which has allowed the Company to expand its excess liability product to write over other carriers’ primary polices and to offer umbrella liability coverage. The Company also increased the available policy limits up to $5.0 million. For the year ended December 31, 2006, excess represented 1.6% of our total gross premiums written.

Surety. “Surety” is a contract under which an insurer guarantees certain obligations of a second party to a third party. We are listed as an acceptable surety on federal bonds, commonly known as a “Treasury-listed” or “T-listed” surety, primarily providing contract performance and payment bonds to environmental contractors and general construction contractors in 47 states and the District of Columbia. For the year ended December 31, 2006, we had gross premiums written of $4 million and net premiums written of $3 million in our surety business line, representing 1.7% and 1.9% of our gross premiums written and net premiums written, respectively.

Alternative Risk Transfer. We provide the following alternative risk transfer products:

Specialty Programs. Working with third party program managers, reinsurance intermediaries and reinsurers, we target small and medium-sized businesses with homogenous groups of specialty risks where the principal insurance requirements are general, professional or pollution liability. We outsource the underwriting and program administration duties for these programs to program managers with established underwriting expertise in the specialty program area. Our specialty programs consist primarily of casualty insurance coverages for construction contractors, pest control operators, small auto dealers, real estate brokers, apartment owners, restaurant owners and tavern owners and bail bondsmen and Hawaii taxi cab operators.

We differentiate ourselves from our program competitors primarily in two ways. First, we typically require the originators of the business, the program managers, to share in the risk and profits of the business they produce by assuming a portion of the premiums and the losses on the coverage being offered through the provision of collateral. Our Bermuda segregated account captive, American Safety Assurance, facilitates the risk sharing position of the program manager by providing a vehicle for the program manager to collateralize its portion of the risk. The requirement to share a portion of the risk encourages the program manager to focus on underwriting profitability rather than solely on the production of commission income through premium volume. Second, we choose to focus on smaller programs where there are fewer competitors, thereby allowing us to obtain terms and conditions more favorable to us.

In 2006, we had gross premiums written of $80.6 million and net premiums written of $21.8 million in our specialty programs business line, representing 33.8% and 13.8% of our total gross and net premiums written, respectively. We also earn fee income on the specialty program business that we write. From 2000 through 2006, we have achieved a compounded annual growth rate in gross premiums written of 12.4% in our specialty program business lines.

Fully-Funded. Fully-funded policies allow us to meet the needs of insureds that, due to the nature of their businesses, pay very high insurance premiums or are unable to find adequate insurance coverage. Typically, our insureds are required to maintain insurance coverage to operate their business and the fully-funded product allows these insureds to provide evidence of insurance, yet at the same time maintain more control over insurance costs and handling of claims. Our fully-funded product accomplishes this by giving our insureds the ability to fund their liability exposures via a self-insurance vehicle, such as our segregated account captive, American Safety Assurance, or through another captive vehicle established by the insured. We do not assume underwriting risk on these policies, but instead earn a fee for providing the policies. Policy limits are set based on the requirements of the insured, and the insured funds the entire aggregate limit through a combination of cash and irrevocable letters of credit. These cash amounts are accounted for as a liability. The aggregate policy limit caps the total damages payable under the policy, including all defense costs. We write fully-funded general and professional liability policies for businesses operating primarily in the healthcare and construction industries. During 2006, we generated $2.1 million in fees from fully-funded business.

Partially-Funded. We introduced a partially funded product during the fourth quarter of 2006 to complement our fully funded product. This product is used for entities that want to self insure a portion of their risk and combines a level of underwriting risk with a self insured component. We believe this product will increase our fee income growth potential.

Runoff Lines

        When certain business lines do not meet our profit or production expectations, we take corrective actions, which may include exiting those business lines. When we exit a business line, we no longer renew or write any new policies in that business line, although we do continue to service existing policies until they expire and administer any claims associated with those policies. The business lines we have exited since 2002 are:

Workers’ Compensation. In 1994, we began writing workers’ compensation insurance for environmental contractors. During 2003, we placed this business line into runoff due to unfavorable loss experience as well as the high expenses associated with servicing this business line. The claims associated with this business line are being administered by a third party. At December 31, 2006, we were carrying net reserves of $7.6 million related to this business line.

Excess Liability Insurance for Municipalities. We began writing excess liability insurance for municipalities in 2000. During 2003, we placed this business line into runoff due to a lack of premium production and difficulty in obtaining affordable reinsurance coverage. At December 31, 2006, we were carrying net reserves of $10.7 million related to this business line.

Commercial Lines. Prior to 2002 the Company wrote commercial lines insurance primarily for habitational and manufacturing risks. At December 31, 2006, we are carrying net reserves of $900,000 related to this business line.

Our Competition

        The property and casualty insurance market is highly competitive with respect to a number of factors, including overall financial strength of a given insurer, ratings of insurance companies by rating agencies, premium rates, policy terms and conditions, services offered, reputation and commission rates. We believe competition in the sectors of the specialty insurance market we target is fragmented and not dominated by one or more competitors. We frequently encounter competition from other insurance companies that insure risks in business lines that may encompass the specialty markets in which we operate, as well as from standard insurance carriers as they try to gain market share and become more comfortable underwriting the risks in the markets which we serve. The insurance companies with which we compete vary by the industries we target and the types of coverage we offer.

        We believe our “A” (Excellent) rating from A.M. Best, focus on underserved markets, strong relationships with producers and versatile corporate structure are competitive advantages for us and are important factors in providing opportunities for growth.

Rating

        In September 2006, A.M. Best, the most widely recognized insurance company rating agency, affirmed its rating of “A” (Excellent) on a group basis of American Safety Insurance, including our two country-regionU.S. insurance subsidiaries, our Bermuda reinsurance subsidiary and our U.S. non-subsidiary risk retention group affiliate. A. M. Best also revised the rating outlook to “stable” from “negative” An “A” (Excellent) rating is the third highest of fifteen ratings assigned by A.M. Best to companies that have, in the opinion of A.M. Best, an excellent ability to meet their ongoing obligations to policyholders.

        Some policyholders are required to obtain insurance coverage from insurance companies that have an “A-” (Excellent) rating or higher from A.M. Best. Additionally, many producers are prohibited from placing insurance with insurance companies that are rated below “A-” (Excellent) by A.M. Best. A.M. Best assigns ratings that represent an independent opinion of an insurer’s ability to meet its obligations to policyholders that is of concern primarily to policyholders, insurance brokers and agents and its rating and outlook should not be considered an investment recommendation.

        We have also been assigned a financial size category of Class VIII by A.M. Best. A financial size category of Class VIII is assigned by A.M. Best to companies with adjusted policyholder surplus of $100 million to $250 million, which, on a statutory basis of accounting, is the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets.

Distribution

        The specific distribution channels we use vary by business line. We market our excess and surplus products through approximately 250 producers in all 50 states and the District of Columbia. Within our excess and surplus lines segment, our environmental insurance products are written through a mix of retailers and wholesalers, while our construction insurance products are marketed exclusively through wholesale brokers. The only producers that produce greater than 10% of our construction business line total gross premiums written are Cooney, Rikard & Curtain Insurance Services, Inc. and Brown & Brown, Inc. which produced approximately 23% and 15% of our total gross premiums written for the year ended December 31, 2006, respectively. Both of these producers produce business on a national basis. Our alternative risk transfer specialty program products are distributed through active solicitation by program managers and managing general agents with established underwriting expertise in a specialty program area, to whom we outsource the underwriting and program administration duties. In addition to program managers, reinsurance intermediaries and brokers also serve as a distribution source of program business. Our fully-funded or partially funded products are marketed primarily through retail brokers, particularly those with a sophisticated understanding of the alternative risk transfer market.

Technology

        We seek to improve the efficiency of our operations by integrating data throughout the organization and by moving data entry functions closer to the source of the information by providing our producers access to our systems via the Internet. We utilize two primary information processing systems that are an integral part of our operations and are discussed below. Utilmately we believe these investments in technology will result in a decline in our expense ratio by enabling us to increase premium volume without requiring significant additional staff. Our information technology department consists of eleven full-time employees, as well as third-party vendors who support our existing technology platform. We continue to review and reinvest in technology to improve our competitiveness and operational efficiency.

ProStar.Launched in 2001, ProStar is an online electronic submission, rating and quoting system used to process new and renewal business submissions for smaller businesses with environmental risks. The policies we process through ProStar are combined general, professional and pollution liability policies designed for environmental contractors and consultants with annual revenues of $3.0 million or less. ProStar increases product distribution for smaller environmental accounts while reducing associated underwriting and operating costs. In 2006, gross premiums written generated through ProStar totaled approximately $21.2 million, representing a 15.0% increase from 2005. In addition, policy counts were up 6.1% in 2006 as compared to 2005. We believe this technology is scalable to other products and can be modified to accommodate our growth.

Integrated Software Package. We purchased an integrated software package in 2003 that addresses underwriting, premium accounting, claims and forms processing functions and is a secure and consolidated collection of primary insurance data that feeds a data warehouse for management reporting and analysis. The system has been implemented in our construction and environmental business lines, and we believe it is scalable to other products as they are developed.

Underwriting

Excess and Surplus Lines

        Our underwriting staff handles the insurance underwriting functions for all excess and surplus lines products, with specific underwriting authority related to the experience and knowledge level of each underwriter. Risks that are perceived to be more difficult and complex are underwritten by experienced staff and reviewed by management. The principal factors we use for underwriting these risks include the professional experience of the insured, its operating history, and its loss history and, in the case of renewals, its demonstrated commitment to effective loss control and risk management practices.

        Most of our underwriters have approximately 20 years of underwriting experience and in excess of ten years of underwriting experience in the specialty areas we target. We differentiate ourselves from other companies by individually underwriting and pricing each risk, as opposed to the general classification pricing practices which are often performed by larger insurance companies. We seek to instill a culture of underwriting profitability over premium volume and our underwriters’ incentive compensation is based on underwriting profits rather than premium growth. We also enforce an internal quality control standard through periodic audits of underwriter files. Underwriters meet monthly to discuss the status of renewal business with members of the claims department, who adjust claims as reported under a policy.

        An important part of the underwriting and risk control process is the use of customized policy forms and contract wording to limit our ultimate exposure on many of the specialty risks we insure and to adequately respond to evolving claims trends in our core product lines. These trends are often identified through the monthly meetings among claims, loss control and underwriting personnel. Policy terms and conditions are crafted in cooperation with legal counsel to avoid or restrict coverage for certain high exposure risks. Standard, or admitted, carriers do not have the same flexibility to control policy language because they are more heavily regulated by the individual states in which they operate, and are generally required to use standard insurance forms that are broader in coverage.

Alternative Risk Transfer

        We perform an extensive due diligence process which involves detailed reviews of underwriting, policy pricing practices, claims handling, management expertise, information systems and distribution networks on every new program we develop. Based on the results of the due diligence, underwriting guidelines are developed that are specific to each program, and must be adhered to by program managers. We also perform an actuarial analysis on each program, to ensure that the business projections meet our profitability requirements, as well as to determine the appropriate level of risk participation by us and the program manager. After the program is implemented, we utilize our internal underwriting, claims, accounting and regulatory personnel to conduct semi-annual audits of each program’s underwriting, actuarial, claim handling and insurance processing functions to ensure adherence to established guidelines and to assess the long-term profit potential of the program.

Claims Management

Excess and Surplus Lines

        The specialty risks that we underwrite are complex and the claims reported by our insureds often involve coverage issues, or may result in litigation that requires handling by a claims professional with specialized knowledge and claims management expertise. Accordingly, we employ experienced claims professionals with broad backgrounds, many with more than 20 years of experience in resolving the types of claims that typically arise from the specialty risks we underwrite. Our Chief Claims Officer has more than 25 years of diverse experience in claims management for specialty risks including specific experience with claims involving complex coverage issues and has managed claims operations with as many as 1,000 employees. We believe our claims management approach, which is focused on achieving the best possible financial outcome through prompt case evaluation and proactive litigation management practices, combined with our industry expertise is integral to controlling our losses and loss adjustment expenses. We also utilize the knowledge and expertise that we gain through the claims management process to enhance our underwriting and marketing activities through frequent interaction among the claims, underwriting and loss control staffs.

        With the exception of construction defect claims associated with our construction business line, claims arising out of policies issued in our excess and surplus lines segment are handled primarily by our internal claims adjustors. Because construction defect claims require specialized knowledge of local markets and regulations, since 2004 the majority of our construction defect claims have been handled by third party administrators (“TPAs”) located in California. However, as a result of premium growth in the construction business line and our decision to take a larger risk position on the construction policies we underwrite, in February 2006 we established an internal claims handling office in California to manage our construction defect claims. The agreement with the TPA’s handling our construction defect claims were terminated in 2006. This office is staffed with eight adjustors with an average of more than 15 years experience managing construction defect claims. We believe that the establishment of this office will enhance our market presence in the western U.S. and enable us to more effectively and profitably manage our construction defect claims.

        We have established claims management best practices, which emphasize the thorough investigation of claims, prompt settlement of valid claims, aggressive defense against claims we believe to be without merit and the accurate establishment of reserves. We recently established a quality assurance unit that is responsible for establishing and maintaining claims handling best practices and monitoring the uniform and consistent application of these practices. This is accomplished primarily through monthly audits of claims files as well as broader departmental audits, as necessary. The audit process includes a detailed evaluation of all facets of the claims management process including investigation, litigation and reserving. These audits are used to measure both departmental and individual performance and identify areas for improvement.

        We have a claims committee, comprised of claims adjusting staff and claims management, that meets on a bi-weekly basis to discuss high exposure and complex claims to address litigation management strategies, coverage issues and the setting of reserves above established authority levels.

Alternative Risk Transfer

        Claims management also plays an important role in achieving our profitability goals in our alternative risk transfer segment. We use TPAs to handle the majority of the claims arising from policies written in our alternative risk transfer segment. In some cases, the program manager responsible for the development and management of a particular program has established claims management expertise in the business line written under the program and will act as the TPA for the program. By utilizing TPAs, we gain immediate access to the required claims handling expertise in the unique business lines we underwrite. Our selected TPAs undergo a rigorous pre-qualification process and are closely monitored and regularly audited. We select only TPAs with claims personnel experienced in handling claims for the types of risks typical of our specialty programs and fully-funded accounts.

        To assist us in our selection and monitoring of TPAs, we employ an internal claims staff responsible for both selecting the TPAs as well as ensuring the quality of claims adjudication by the TPAs. Our internal program claims staff pre-qualifies TPAs based on a detailed process that considers, among other characteristics, expertise in a particular business line, reserving philosophy, litigation management philosophy and management controls.

        Once a TPA is qualified and selected, it is given limited reserve and settlement authority. We approve every claim in excess of a TPA’s established settlement authority. Additionally, all coverage issues or disputes are required to be reported to our internal staff. To ensure that the TPAs we employ meet our performance standards, we conduct regular on-site claims audits. Recommendations arising from the claims audits are communicated to the TPA and an agreed upon action plan is implemented. Compliance with the action plan is closely monitored by our staff to ensure acceptable resolution to all recommendations.

Loss Control

        Loss control is not a widely utilized risk management tool by excess and surplus lines companies. We believe that loss control can provide value to our underwriters as part of their risk selection process, and to our insureds in the improvement of their risk management practices. Our loss control services assist insureds and our underwriters with regulatory compliance monitoring, the identification and analysis of risk exposures and the selection and implementation of effective risk management practices. Loss control services are utilized most often by our environmental and construction underwriting units as part of their account evaluation and maintenance process. Loss control reports are generated on selected individual accounts and reviewed by underwriters as part of their underwriting evaluation. Our loss control services for individual accounts include an initial assessment of regulatory policies and procedures, and risk management practices and targeted physical inspections, which are performed by outside professional loss control services companies.

        Within our construction and environmental business lines, the only business lines for which we perform loss control, our inspection process, includes an office interview with company management to assess the written policies and procedures as well as the overall corporate approach toward risk management processes. In our environmental business line, we have developed specific work standards or “guidelines” to which insureds must adhere. In our construction business line, we review standard contracts utilized for projects as part of our risk management analysis. A jobsite survey is also performed to assess the implementation and adherence to company, state and federal regulations.

Reinsurance

        Reinsurance is a contractual arrangement under which one insurer (the ceding company) transfers to another insurer (the reinsurer) a portion of the liabilities that the ceding company has assumed under an insurance policy it has issued. A ceding company may purchase reinsurance for any number of reasons, including obtaining, through the transfer of a portion of its liabilities, greater underwriting capacity than its own capital resources would otherwise support, to stabilize its underwriting results, to protect against catastrophic loss and to enter into or withdraw from a business line. Reinsurance can be written on either a quota share basis (where premiums and losses are shared proportionally) or excess of loss basis (where losses are covered if they exceed a certain amount), under either a treaty (involving more than one policy) or facultative (involving only one policy) reinsurance agreement.

        Our philosophy is to utilize reinsurance for asset protection against business and capital risks where economically appropriate and to maximize our use of capital. A description of our reinsurance structure for our business is as follows:

    Environmental.        Our reinsurance treaty for environmental products operates on an excess of loss basis. Effective April 1, 2006 the Company renewed this treaty maintaining the same reinsurance structure as the expiring treaty but increased its retention on a per occurrence basis from $500,000 to $837,500. The balance of the risk, up to $10.2 million in excess of the Company’s retention is ceded to unaffiliated reinsurers.

    Construction.        Effective July 1, 2005, we discontinued purchasing reinsurance on the primary general liability portion of our construction business line. We made this decision after performing a loss cost and dynamic financial analysis, and concluding that our reinsurance purchases were uneconomical. We believe retaining this exposure will enhance our financial results and returns on capital. Prior to July 1, 2005, the reinsurance treaty for our primary general liability portion of our construction business line operated on an excess of loss basis providing reinsurance of $650,000 for each occurrence in excess of a $350,000 per occurrence retention. We continue to maintain a reinsurance treaty for our excess liability construction insurance business line that provides reinsurance coverage of $2.0 million for each occurrence in excess of a primary general liability policy that provides $1.0 million of coverage. Previously we maintained a 25% quota share participation in such excess coverages, which is now in runoff.

        Excess and non-construction. Effective July 1, 2006 we entered into a quota share reinsurance agreement for the excess and non-construction business with a maximum retention of $1.0 million per occurrence.

        Specialty Programs. The majority of our program business is reinsured under separate quota share and excess of loss reinsurance treaties that are purchased for each program.

    Surety.        For our surety business, we entered into a quota share reinsurance treaty during the second quarter of 2004 which provided reinsurance for a single bond limit not to exceed $3.0 million, subject to a maximum for any one principal of $6.0 million. We retained a 50% participation in this treaty with the balance reinsured by unaffiliated reinsurers. Effective June 1, 2006 this treaty was non renewed based on our belief that retaining this exposure will enhance our financial results and returns on capital.

    Other.        We also purchase reinsurance coverage on certain products that protects us from claims associated with bad faith allegations, improper claims handling and multiple insureds being involved in the same occurrence. This reinsurance provides limits of $5.0 million per occurrence, subject to an aggregate limit of $15.0 million.

        We do not have any exposures that exceed the limits stated above. We may decide to purchase reinsurance that exceeds this coverage for certain programs. For the year ended December 31, 2006, we ceded $82.3 million of premium (34.4% of direct premiums written) to unaffiliated third party reinsurers, as compared to $97.3 million of premium (40.9% of direct premium written) in 2005. Ceded reinsurance premiums from the specialty programs business line were 71.4% of this amount in 2006. We monitor the reinsurance market and will increase or decrease our reliance on reinsurance depending on available coverage and rates.

Our Reinsurers

        While reinsurance obligates the reinsurer to reimburse us for a portion of our losses, it does not relieve us of our primary liability to our insureds. If our reinsurers are either unwilling or unable to pay some or all of the claims made by us on a timely basis, we bear the financial exposure. We have written reinsurance security procedures that establish financial requirements for reinsurance companies that must be met prior to reinsuring any of the business we write. Among these requirements is a stipulation that reinsurance companies must have an A.M. Best rating of at least “A-” (Excellent) and a financial size category of Class VIII or greater at the time of writing any reinsurance, unless sufficient collateral has been provided at the time we enter into our reinsurance agreement. The A.M. Best ratings of reinsurers are subject to change in the future, and may cause one or more of our reinsurers to be below our stated requirments. A financial size category of Class VIII is assigned by A.M. Best to companies with adjusted policyholder surplus of $100 million to $250 million, which, on a statutory basis of accounting, is the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. We have also established an internal reinsurance security committee, consisting of members of senior management, which meets quarterly to discuss and monitor our reinsurance coverage.

        To protect against our reinsurers’ inability to satisfy their contractual obligations to us, our reinsurance contracts stipulate a collateral requirement for reinsurance companies that do not meet the financial strength and size requirements described above. These collateral requirements can be met through the issuance of unconditional letters of credit, the establishment and funding of escrow accounts for our benefit or cash advances paid into a trust account. Collateral may also include amounts we owe reinsurers for premium in the ordinary course of business. The following table is a listing of our largest reinsurers ranked by reinsurance recoverables and includes the collateral posted by these reinsurance companies as of December 31, 2006:

                                                                         Total
                                                                      Recoverables
                                                                           at         Collateral at   Net Exposure at
                                                         A.M. Best      December 31,    December 31,     December 31,
   Reinsurers                                           Rating (1)        2006(3)            2006           2006(4)
                                                                        (In thousands of dollars)
Berkley Insurance Company                                   A          $  39,049     $       358          $ 38,691
American Constantine (2)                                  N/A             20,791          22,093             ____-
Alea Group of Companies                                   N/A             17,021           8,172             8,849
Folksamerica Reinsurance Company                           A-             15,961           1,085            14,876
Partner Reinsurance Company                                A+             12,219           1,658            10,561
QBE Reinsurance Corporation                                 A             12,011           1,513            10,498
Transatlantic Reinsurance Company                          A+             11,307           2,517             8,790
Aspen Insurance UK Limited                                  A             10,618           2,344             8,274
Daimler Chrysler Insurance Company                          A              9,693           3,215             6,478
Louisiana Pest Control Insurance Company                  N/A              8,993           8,755               238
Munich Reinsurance America, Ltd.                            A              5,875             950             4,925
Odyssey American Reinsurance Corporation                    A              5,344              98             5,246
Other                                                                     53,343          26,820            26,523
Total                                                                  $ 222,225        $ 79,578          $143,949
Less Valuation Allowance                                                   1,318               -             1,318
Total Reinsurance Recoverable                                           $220,907        $ 79,578          $142,631
                                                                        ========        ========          ========

(1)        The A.M. Best rating is as of March 8, 2007.
(2)        Constitutes a captive supporting risk positions assumed by program managers on certain
              specialty programs.
(3)        Total recoverables includes recoverable amounts for paid losses, case reserves, incurred but
              not reported reserves and ceded unearned premiums..
(4)        For purposes of this table, for a reinsurer who is over collateralized, net exposure will be
              reflected as zero

For more information on the financial exposure we bear with respect to our reinsurers, see “Risk Factors.”

Selected Operating Information

         Gross Premiums Written.

        The following table sets forth our gross premiums written and percentage of total gross written premiums by business line for the years ended December 31, 2004, 2005 and 2006.

                                                           Year Ended December 31,

                                              2004                      2005                       2006
                                                              (Dollars in thousands)
Excess & Surplus Lines
   Environmental                     $44,157     20.0%            $51,014      21.8%           $51,805     21.6%
   Construction                       94,747     43.0              93,315      39.9             96,918     40.4
   Non  Construction                       -        -                   -         -              2,344      0.9
   Excess                              2,158      0.9               2,091       0.9              3,946      1.6
   Surety                              1,725      0.8               2,581       1.1              4,004      1.7
     Total                           142,787     64.7             149,001      63.7            159,017     66.2

Alternative Risk Transfer
  Specialty Programs                  76,264     34.6              85,138      36.3             80,590     33.8
Runoff                                 1,243      0.7                 (81)      0.0               -         0.0

Total                               $220,294    100.0%           $234,058     100.0%          $239,607     100.0%
                                    ========    =====            ========     =====           ========     ======

Net Premiums Written.

        The following table sets forth our net premiums written and the percentage of total net written premiums by business line for the years ended December 31, 2004, 2005 and 2006:

                                                           Year Ended December 31,
                                              2004                  2005                        2006
                                                          (Dollars in thousands)
Excess & Surplus Lines
   Environmental                     $35,024     26.6%            $41,477      30.0%           $37,746    24.0%
   Construction                       77,462     58.8              77,639      56.1             92,530     58.8
   Non  Construction                       -        -                   -         -              1,524      1.1
   Excess                                432      0.3                 387       0.3                670      0.4
   Surety                              1,174      0.9               1,345       1.0              3,042      1.9
     Total                           114,092     86.6             120,848      87.4            135,512      86.2

Alternative Risk Transfer
  Specialty Programs                  17,273     13.1              19,712     14.0              21,756      13.8
Runoff                                   299      0.3              (2,045)    (1.4)                  -       0.0
Total                               $131,664    100.0%           $138,515   100.0%           $157,268    100.0%
                                    ========    ======           ========   ======           ========    ======

         Combined Ratio.

        The combined ratio is a standard measure of a property and casualty insurer’s performance in managing its losses and expenses. Underwriting results are generally considered profitable when the combined ratio is less than 100%. On a GAAP basis, the combined ratio is determined by adding losses and loss adjustment expenses incurred and acquisition and other underwriting insurance expenses and dividing the sum of those numbers by net premiums earned. Our GAAP combined ratio was 102.8% in 2004, 98.6% in 2005 and 98.6% in 2006.

        The combined ratio of an insurance company measures only the underwriting results of insurance operations and not the profitability of the overall company. Our reported combined ratio for our insurance operations may fluctuate from time to time depending on our mix of business and may not reflect the overall profitability of our insurance operations.

Losses and Loss Adjustment Expenses Reserves

        We are required to maintain reserves to cover the unpaid portion of our ultimate liability for losses and loss adjustment expenses with respect to (i) reported claims and (ii) incurred but not reported (IBNR) claims. A full actuarial analysis is performed to estimate our unpaid losses and loss adjustment expenses under the terms of our contracts and agreements. In evaluating whether the reserves are reasonable for unpaid losses and loss adjustment expenses, it is necessary to project future losses and loss adjustment expenses payments. It is probable that the actual future losses and loss adjustment expenses will not develop exactly as projected and may, vary significantly from the projections. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding our historical losses and loss adjustment expenses.

        With respect to reported claims, reserves are established on a case-by-case basis. The reserve amounts on each reported claim are determined by taking into account the circumstances surrounding each claim and policy provisions relating to the type of loss. Loss reserves are reviewed on a regular basis, and as new information becomes available, appropriate adjustments are made to reserves.

        As of December 31, 2006, approximately $231.9 million, or 83%, of our net reserves, related to our excess and surplus lines segment, $27.4 million, or 10%, of our net reserves were attributable to our alternative risk transfer segment and the balance of our net reserves, or $19.2 million, was allocated among our runoff segment.

        In establishing reserves, we employ several methods in determining our ultimate losses: (i) the expected loss ratio method; (ii) the loss development method based on paid and reported losses; and (iii) the Bornhuetter-Ferguson method based on expected loss ratios, paid losses and reported losses. The expected loss ratio method incorporates industry expected losses which are adjusted for our historical loss experience. The loss development method relies on industry payment and reporting patterns to develop our estimated losses. The Bornhuetter-Ferguson method is a combination of the other two methods, using expected loss ratios to produce expected losses, then applying loss payment and reporting patterns to our expected losses to produce our expected IBNR losses. We review the ultimate projections from all three methods and, based on the merits of each method, determine our estimated ultimate losses. In response to the reserve development experienced in the first two quarters of 2004 in our construction line and management’s concern that existing reserves for this segment might be inadequate, we commenced an actuarial reserve evaluation. This evaluation analyzed reserves by specific risk categories within our construction line, such as general liability for building owners and California contractors, in addition to analyzing by as a single risk category for the entire construction business line. The results of the specific risk analysis were then compared to the results of the single risk analysis in determining the final carried reserves. The establishment of appropriate loss reserves is an inherently uncertain process and there can be no assurances our ultimate liabilities will not materially exceed our reserves.

        All of the methods used, as described above, are generally accepted actuarial methods and rely in part on loss reporting and payment patterns while considering the long term nature of some of the coverages and inherent variability in projected results from year-to-year. The patterns used are generally based on industry data with supplemental consideration given to our experience as deemed warranted. Industry data is also relied upon as part of the actuarial analysis, and is used to provide the basis for reserve analysis on newer business lines. Provisions for inflation are implicitly considered in the reserving process. Our reserves are carried at the total estimate for ultimate expected losses and loss adjustment expenses, without any discount to reflect the time value of money. Reserve calculations are reviewed regularly by management and periodically by regulators. Our in house actuarial department reviews the reserve adequacy of our major lines on a quarterly basis. A full actuarial analysis is performed by an independent third party actuarial firm annually, assessing the adequacy of statutory reserves established by our management. A statutory actuarial opinion is filed by management in which our insurance and reinsurance subsidiaries and our non-subsidiary risk retention group affiliate are licensed. “Statutory reserves” are reserves established to provide for future obligations with respect to all insurance policies as determined in accordance with statutory accounting principles (“SAP”), the rules and procedures prescribed or permitted by state insurance regulatory authorities for recording transactions and preparing financial statements. Based upon the practices and procedures employed by us described above, management believes that our reserves are adequate.

        The net carried reserves at December 31, 2005 and December 31, 2006 are as follows (in thousands):

                                               December 31,               December 31,
                                                   2005                        2006

Excess & Surplus Lines                         $ 45,205                   $ 51,317
   Environmental                                142,919                    180,434
   Construction                                     220                        174
   Surety                                       188,344                    231,925
Alternative Risk Transfer
   Programs                                      21,412                     27,445
Runoff                                           24,222                     19,157
Total                                          $233,978                   $278,527
                                               ========                   ========

        The following table provides a reconciliation of beginning and ending losses and loss adjustment expenses reserve liability balances on a GAAP basis for the years indicated:

                                               Year Ended December 31,
                                           2004         2005         2006
                                                  (In thousands)
Gross reserves, beginning of year      $ 230,104     $321,038      $393,493
Ceded reserves, beginning of year        115,061      136,998       159,515
Net reserves, beginning of year          115,043      184,040       233,978

Incurred related to:
Current accident year                     79,101       81,800        89,731
Prior accident years                      14,402        2,606         2,598
Total incurred                            93,503       84,406        92,329

Claim payments related to:
Current accident year                      2,567        2,501         5,959
Prior accident years                      21,939       31,967        41,821
Total claim payments                      24,506       34,468        47,780

Net reserves, end of year                184,040      233,978       278,527
Ceded reserves, end of year              136,998      159,515       161,149
Gross reserves, end of year            $ 321,038    $ 393,493     $ 439,673
                                       =========    =========     =========

The net prior year reserve development for 2004, 2005 and 2006 occurred in the following business lines:

                                         Year Ended December 31,
                                     2004            2005           2006
                                                (In thousands)

Excess and Surplus Lines          $       94        $  (754)         $  56
   Environmental                       7,700          2,204          2,425
   Construction                           37            311           (224)
   Surety                              7,831          1,761          2,257
Alternative Risk Transfer
   Programs                            1,496           (266)           641

Runoff                                 5,075           1,111          (300)

Total                               $ 14,402         $ 2,606       $ 2,598
                                    ========         =======       =======

        The 2006 prior year development in the construction line primarily relates to development in layers that were previously reinsured, but the reinsurance treaty was commuted in 2005. The development in the programs primarily relates to an increase in certain case reserves on polices written in 2004 and 2005. This development is partially offset by reserve reductions in our surety and run-off lines.

In 2005, the Company commuted two excess of loss reinsurance treaties with a former reinsurer. The negotiated commutation price was approximately $1 million less than the recoverable from the reinsurer which was recorded in the second quarter of 2005. Additionally, in the fourth quarter 2005, the accident year 2001 losses from commercial and residential contractors’ claims other than the construction defect risk category developed adversely. Additionally in the fourth quarter 2005, the Company engaged an actuarial consulting firm to provide construction defect claim count development patterns based on a group of companies writing construction contractors business since the early 1990s in California and other states. We implemented these claim count development patterns, which were based on a larger number of claims and a longer development history than we previously had used in estimating future construction defect claim counts. In 2005, the runoff lines’ reserve development for prior years was due to $1.2 million of increases in reserves on the Company’s excess municipality program.

Reserve development for prior years in the construction line in 2004 was attributable to developing losses on (i) certain New York contractor risks written in 2001 and (ii) a change in actuarial reserving methodologies to reflect risk categories. Exposure to New York contractor risks in our construction line was significantly reduced during 2002 and 2003. The runoff lines’ reserve development for accident years prior to 2005 was primarily due to $2.9 million of increases in workers’ compensation reserves and $1.6 million of increases in reserves on our excess municipality program.

        The following table shows the gross, ceded and net development of the reserves for unpaid losses and loss adjustment expenses from 1996 through 2006 for our primary insurance and reinsurance subsidiaries and our non-subsidiary risk retention group affiliate on a GAAP basis. The top line of the table shows the liabilities at the balance sheet date for each of the indicated years and reflects the estimated amounts for losses and loss adjustment expenses for claims arising in that year and all prior years that are unpaid at the balance sheet date, including IBNR losses. In the gross and ceded sections of the table, the second line shows the re-estimated amount of previously recorded liabilities based on experience as of the end of each succeeding year. The lower portion of the table in the net section shows the cumulative amounts subsequently paid as of successive years with respect to the liabilities. The estimates change as more information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the re-estimated liabilities at each December 31 is less (greater) than the prior liability estimate. The cumulative redundancy (deficiency) depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years.

                                                            Year Ended December 31, (1)
                            1996    1997    1998     1999    2000    2001    2002    2003      2004      2005     2006

                                                                  (In thousands)
Gross reserves             $ 8,914 $11,572 $14,701  $20,413 $50,509 $137,391 $179,164 $230,104 $321,038 $393,493  $439,673
Re-estimated at 12/31/06    11,251  11,721  12,638   27,451 104,026  223,476  271,946  333,345  374,131  419,497
Cumulative redundancy
(deficiency) on gross
reserves                   (2,337)   (149)   2,063  (7,038)(53,517) (86,685)  (92,782)(103,241) (53,093)   (26,004)

Ceded reserves                 45     779    1,842    6,065  27,189  89,697 109,543 115,061   136,998    159,515  161,149
Re-estimated at 12/31/06     3,579   1,285   1,022   11,009  71,039 145,444 162,930 184,959   180,534    182,921
Cumulative redundancy
(deficiency) on ceded
reserves                   (3,534)   (506)     820   (4,944)(43,850)(55,747)   (53,387) (69,898)  (43,536)   (23,406)
Net reserves for unpaid
losses and loss
adjustment expenses          8,869  10,793  12,860   14,348  23,320  47,734  69,621 115,043   184,040    233,978  278,527
Net Reserves re-estimated
at December 31:
1 year later                 9,850  11,460  12,298   15,498  24,837  49,469  74,857 129,445   186,646    236,576
2 years later                9,926  12,244  12,967   15,541  26,853  53,912  93,943 144,083   193,597          -
3 years later                9,606  12,550  12,677   16,452  29,242  67,072 106,264 148,386         -          -
4 years later                9,767  11,556  13,054   16,510  28,708  75,899 109,016       -         -          -
5 years later                8,677  11,558  11,995   16,208  30,235  78,072       -       -         -          -
6 years later                8,646  10,505  11,697   16,503  32,987       -       -       -         -          -
7 years later                7,952  10,303  12,018   16,442       -       -       -       -         -          -
8 years later                7,862  10,383  11,617        -       -       -       -       -         -          -
9 years later                7,822  10,436       -        -       -       -       -       -         -          -
10 years later               7,672       -       -        -       -       -       -       -         -          -
Cumulative redundancy
(deficiency) on net
reserves                     1,197     357   1,243   (2,094) (9,667)(30,338)(39,395)(33,343)  (9,557)    (2,598)
Cumulative amount of net
liability paid through
December 31:
1 year later                 1,827   2,880   3,612    5,243  10,514  15,406  17,873  21,939    31,967     41,821
2 years later                3,506   6,057   6,565    9,616  15,865  28,577  35,642  48,426    70,241          -
3 years later                4,918   7,443   9,058   11,060  22,750  38,290  55,094  77,685         -          -
4 years later                6,034   8,991   9,086   13,558  24,131  47,756  72,668       -         -          -
5 years later                6,638   8,479   9,895   13,646  25,739  56,123       -       -         -          -
6 years later                6,362   9,320   9,816   14,173  27,992       -       -       -         -          -
7 years later                7,017   9,073  10,301   14,584       -       -       -       -         -          -
8 years later                7,016   9,267  10,146        -       -       -       -       -         -          -
9 years later                7,029   9,468       -        -       -       -       -       -         -          -
10 years later               7,027       -       -        -       -       -       -       -         -          -

Net reserves December 31     8,869  10,793  12,860   14,348  23,320  47,734  69,621 115,043   184,040    233,978  278,527
Ceded Reserves                  45     779   1,841    6,065  27,189  89,657 109,543 115,061   136,998    159,515  161,149
Gross Reserves             $ 8,914 $11,572 $14,701  $20,413 $50,509$137,391 $179,164 $230,104  $321,038  $393,493  $439,673
                           ======= ======= =======  ======= =============== ======== ========   =======  ========  ========

(1)        Only years ended December 31, 2001,  2002,  2003,  2004, 2005 and 2006 include the consolidated
         values of American Safety RRG.

Investments

        The Company’s investment portfolio is managed to optimize total economic return, with due consideration for the preservation of principal, operating income targets and the Company’s overall asset/liability strategy.

        Our investment portfolio is managed by an independent, nationally recognized investment management company that manages our investment portfolio pursuant to the investment policies and guidelines established by our Board of Directors. We have investment policies which limit the maximum duration and maturity of individual securities within the portfolio and set target levels for average duration and maturity of the entire portfolio. The maturity structure and duration target for our investment portfolio takes into account the need to manage a part of the portfolio to produce cash flow to cover operational needs while allowing flexibility to manage our assets. Our investment guidelines limit the percentage of our portfolio that is permitted to be invested in any one market sector. The guidelines further limit the amount that may be invested by issuer quality rating. Additionally, we use specific criteria to judge the credit quality and liquidity of our investments and use a variety of credit rating services to monitor these criteria. In conjunction with our investment policy, guidelines and strategy, we have invested predominantly in investment grade fixed income securities. Our investment portfolio consists primarily of government and government agency securities and high quality marketable corporate securities which are rated investment grade or better. We also invest in common equity securities that track the S&P 500. At December 31, 2006, common equity securities represented 17.3% of our prior year-end GAAP shareholders’ equity which is in compliance with our investment guidelines. At December 31, 2006, we had $8.1 million invested in dividend paying preferred stocks to increase our investment yield.

        Pursuant to our investment guidelines, we have general limitations on the type of investments that may be made, including, among others, prohibitions on investments in certain types of securities, credit quality limitations and maturity and duration requirements without prior approval from management.

        At December 31, 2005 and 2006, the fair value of our cash and invested assets totaled approximately $438.8 million and $562.5 million, respectively, and were classified as follows:

                  Type of Investment                      Fair Value          Amortized Cost              Percent of
                                                        At December 31,        At December 31,           Amortized Cost
                                                             2005                 2005                    Portfolio
                                                                                (In thousands)
           Cash and short-term investments                 $48,617                 $48,617                  11.0%
                                                   ------------------------------------------------------------------------
           Fixed income securities:
             U.S. government securities                     85,976                  86,740                    19.7
           States of the U.S. and
           political subdivisions of the states             64,628                  64,740                    14.7
           Mortgage-backed securities                      130,469                 132,992                    30.1
           Corporate securities                             83,784                  84,764                    19.2
                                                   -------------------------------------------------------------------------
           Subtotal                                       $364,857              $  369,236                    83.7
           Common and preferred stocks                      25,313                  23,484                     5.3
                                                   ------------------------------------------------------------------------
           Total                                          $438,787                $441,337                    100%
                                                   ========================================================================

               Type of Investment
                                                      Fair Value           Amortized Cost              Percent of
                                                    At December 31,     At December 31,                Amortized Cost
                                                         2006                 2006                      Portfolio
                                                                          (In thousands)
Cash and short-term Investments                          $51,899              $ 51,899                      9.2%
                                                  -------------------- ------------------------ ------------------------
Fixed income securities:
  U.S.Government Securities                              122,380               123,391                      21.9
States of the U.S.and political
  subdivision of the states                                7,389                 7,584                       1.3
Mortgage backed securities                               228,791               230,080                      40.9
Corporate securities                                     131,472               131,470                      23.4
                                                   -------------------- ------------------------ ------------------------
Subtotal                                                 490,032               492,525                      87.5

Common and preferred stocks                               20,521                18,165                       3.3
                                                   -------------------- ------------------------ ------------------------
   Total                                                $562,452              $562,589                    100.0%
                                                  ==================== ======================== ========================

         The fair value of our fixed income  securities  portfolio,  classified by rating,  as of December
31, 2005 and 2006 were as follows:

                                                               Fair Value         Amortized Cost      Percent of
         S&P's/Moody's Rating                             at December 31,    at December 31,     Fair Value
                                                                  2005               2005               Total
                                                        ------------------------------------------------------------
                                                                                 (In thousands)
AAA/Aaa (including U.S. Treasuries of $46,076)                  $276,625          $279,883              75.8%
AA/Aa                                                             16,542            16,644               4.5
A/A                                                               60,718            61,556              16.6
BBB/Baa                                                            8,346             8,374               2.3
Less than BBB/Baa (1)                                              2,626             2,779               0.8
                                                        ------------------------------------------------------------
Total                                                           $364,857          $369,236                100%
                                                        ============================================================

         S&P's/Moody's Rating
                                                             Fair Value         Amortized Cost        Percent of
                                                            at December 31,     at December 31,      Fair Value
                                                                 2006                2006                Total
                                                        ------------------------------------------------------------
                                                                             (In thousands)
AAA/Aaa (including U.S. Treasuries of $35,720)                  $354,388          $357,105              72.3%
AA/Aa                                                             33,279            33,205               6.8
A/A                                                               94,244            94,613              19.2
BBB/Baa                                                            7,344             6,831               1.5
Less than BBB/Baa (1)                                                777               771               0.2
                                                        ------------------------------------------------------------
Total                                                           $490,032          $492,525              100%
                                                        ============================================================

 (1)    The less than BBB/Baa rated securities were rated investment grade at the time of investment.

        The National Association of Insurance Commissioners (the “NAIC”) has a security rating system by which it assigns investments to classes called “NAIC designations” that are used by insurers when preparing their annual financial statements. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with a rating in class 1 being the highest quality. As of December 31, 2006, the majority of our portfolio was invested in securities rated in class 1 or class 2 by the NAIC, which are considered investment grade.

        The weighted average maturity of our bond portfolio at December 31, 2006, was 5.2 years. The maturity distribution of our fixed income portfolio, as of December 31, 2006, based on stated maturity dates with no prepayment assumptions, was as follows:

   Maturity                                   Fair           Amortized
                                             Value             Cost
                                                   (In thousands)
Due in one year or less                      $27,426         $  27,440
Due from one to five years                   148,255           148,763
Due from five to ten years                    74,842            75,799
Due after ten years                           10,718            10,443
Mortgage-backed securities                   228,791           230,080
                                       -----------------------------------
Total                                       $490,032          $492,525
                                       ===================================

        Our mortgage-backed securities are subject to risks associated with the variable prepayments of the underlying mortgage loans.

Our Non-Subsidiary Affiliate

        Enacted in 1986, the Risk Retention Act of 1986 (the “Risk Retention Act”) allowed companies with specialized liability insurance needs not available in the standard insurance market to create a new type of entity called a risk retention group. We assisted in the formation of American Safety RRG in 1988 in order to establish a U.S. insurance company to market and underwrite specialty environmental coverages. The advantage of writing policies through a risk retention group is that it is permitted to write policies without having to qualify to do so in each state.

    .        American Safety RRG a variable interest entity which is consolidated in our financial statements in accordance with FASB, FIN 46. American Safety RRG is authorized to write liability insurance in all 50 states as a result of the Risk Retention Act and is licensed by the Vermont Department of Banking, Insurance, Securities and HealthCare Administration (the “Vermont Department”) under Title 8 of the Vermont Statute Annotated (“the Vermont Captive Act”) as a stock captive insurance company. Presently, four of our directors are also directors of American Safety RRG: David V. Brueggen, Thomas W. Mueller, Cody W. Birdwell and Stephen R. Crim. The directors of American Safety RRG are elected annually by the shareholders/insureds of American Safety RRG.

        We transferred our book of environmental insurance business to American Safety RRG in 1988 to allow us to write that insurance on a domestic basis. Prior to October 2006, our insurance subsidiaries participated in the ongoing business of American Safety RRG through a pooling agreement (whereby we retained 75% of the premiums and risk). Effective October 1, 2006, the Company commuted this pooling agreement with its affiliates. This commutation did not result in any gain or loss to the respective parties involved. Also effective October 1, 2006, American Safety RRG entered into a 90/10 quota share agreement with American Safety Re, on the environmental business.

        In December 2003, the FASB revised Interpretation No. 46, Consolidation of Variable Interest Entities, which requires the consolidation of the financial statements of American Safety RRG into our financial statements. See Note 1(n) to our consolidated financial statements herein for more information relating to this matter. As a result, the financial information presented herein, unless specifically noted, includes balances of American Safety RRG.

Insurance Services

        ASI Services, directly and through its subsidiaries, provides business development, underwriting, accounting, program management, brokerage, claims administration, marketing and administrative services to our U.S. insurance operations and our non-subsidiary risk retention group affiliate.

        ASI Services has developed many of our primary insurance and reinsurance programs. Since 1990, ASI Services has served as the program manager for American Safety RRG, providing it with program management, underwriting, loss control, marketing and accounting services pursuant to guidelines and procedures established by the Board of Directors of American Safety RRG.

        ASI Services provides a number of services to our two U.S. insurance subsidiaries and to American Safety RRG. These services include:

   o    business  development  services for  developing  new producer  relationships  and new business
        opportunities;
   o    program management services for the overall management and administration of a program;
   o    underwriting services for evaluating individual risks or classes of risk;
   o    reinsurance services for placing reinsurance for a program;
   o    loss control  services for evaluating  the risks posed by a particular  class of risk, as well
        as the ability of insureds to control their losses;
   o    claims  administration  services  for the prompt  reporting  and  handling of claims,  and the
        supervision of claims adjusters and TPAs;
   o    marketing services for designing and placing advertisements and other marketing materials,  as
        well as marketing insurance programs to producers; and
   o    administrative services, including policy and endorsement issuance, data processing,  billing,
        collecting and reporting premiums, producing financial reports and paying claims.

Regulatory Environment

Insurance Regulation Generally

        Our insurance operations are subject to regulation under applicable insurance statutes of the jurisdictions or states in which each subsidiary is domiciled and writes insurance. Insurance regulations are intended to provide safeguards for policyholders rather than to protect shareholders of insurance companies or their holding companies.

        The nature and extent of state regulation varies from jurisdiction to jurisdiction, but typically involves prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with an affiliate, approval of premium rates for lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, deposits of securities for the benefit of policyholders and reports with respect to financial condition and other matters. In addition, state regulatory examiners perform periodic examinations of insurance companies. American Safety RRG, American Safety Casualty and American Safety Indemnity are all subject to examination by state regulatory examiners every three years, and the last state regulatory examination for each entity occurred in 2004, 2005 and 2005, respectively. Currently there are ongoing examinations by StateVermont and Oklahoma.

        Although the federal government does not directly regulate the business of insurance in the U.S., federal initiatives often affect the insurance business in a variety of ways. The insurance regulatory structure has also been subject to scrutiny in recent years by the NAIC, federal and state legislative bodies and state regulatory authorities. Various new regulatory standards have been adopted and proposed in recent years. The development of standards to ensure the maintenance of appropriate levels of statutory surplus by insurers has been a matter of particular concern to insurance regulatory authorities. The “statutory surplus” is the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets and is determined in accordance with Statutory Accounting Principles (SAP).

Bermuda Regulation

        Our Bermuda subsidiaries that conduct reinsurance business, American Safety Re and American Safety Assurance, are subject to regulation under The Insurance Act 1978, as amended, of Bermuda and related regulations (the “Bermuda Act”), which provide that no person shall conduct insurance business (including reinsurance) in or from Bermuda unless registered as an insurer under the Bermuda Act by the Supervisor of Insurance (the “Supervisor”). American Safety Re and American Safety Assurance are registered insurers under the Bermuda Act.

        The Bermuda Act requires, among other things, Bermuda insurance companies to meet and maintain certain standards of solvency, to file periodic reports in accordance with the Bermuda Statutory Accounting Rules, to produce annual audited financial statements and to maintain a minimum level of statutory capital and surplus. In general, the regulation of insurers in Bermuda relies heavily upon the auditors, directors and managers of the Bermuda insurer, each of which must certify that the insurer meets the solvency capital requirements of the Bermuda Act. Furthermore, the Supervisor is granted powers to supervise, investigate and intervene in the affairs of insurance companies.

        Neither American Safety Insurance, American Safety Re, nor American Safety Assurance are registered or licensed as an insurance company in any state or jurisdiction in the U.S.

U.S. Regulation

        As a Bermuda insurance holding company, we do not do business in the U.S. Our two U.S. insurance subsidiaries’ operations are subject to state regulation where each is domiciled and where each writes insurance.

        We acquired American Safety Casualty, a country-regionU.S. insurance subsidiary domiciled in Delaware, in 1993. American Safety Casualty is licensed as a property and casualty insurer in 48 states and the District of Columbia. American Safety Casualty is subject to regulation and examination by the Delaware Insurance Department and the other states in which it is an admitted insurer. The Delaware Insurance Department examines American Safety Casualty on a triennial basis. The insurance laws of Delaware restrictions on a change of control of American Safety Insurance as result of our ownership of American Safety Casualty. Under Delaware law, no person may obtain 10% or more of our voting securities without the prior approval of the Delaware Insurance Department.

        American Safety Casualty, as a licensed insurer, is subject to state regulation of rates and policy forms in the various states in which its direct premiums are written. Under these regulations, a licensed insurer may be required to file and obtain prior approval of its policy form and the rates that are charged to insureds. American Safety Casualty is also required to participate in state insolvency funds, or shared markets, which are designed to protect insureds or insurers that become unable to pay claims due to an insurer’s insolvency. Assessments made against insurers participating in these funds are usually based on direct premiums written in the state by participating insurers, as a percentage of total direct premiums written in the state of all participating insurers. “Premiums written” are those premiums written, whether or not earned, during a time period.

        We acquired American Safety Indemnity, a country-regionU.S. insurance subsidiary domiciled in Oklahoma, in 2000. American Safety Indemnity is currently licensed or approved as an excess and surplus lines insurer in 40 states and the District of Columbia. American Safety Indemnity is subject to examination by the Oklahoma Insurance Department and the other states in which it is approved as an excess and surplus lines insurer. The Oklahoma Insurance Department examines American Safety Indemnity on a triennial basis. The insurance laws of Oklahoma restrictions on a change of control of American Safety Insurance as a result of our ownership of American Safety Indemnity. Under Oklahoma law, no person may obtain 10% or more of our voting securities without the prior approval of the Oklahoma Insurance Department.

        The premium rates of American Safety Indemnity, as an excess and surplus lines insurer, are not filed and approved with the various state insurance departments, but certain requirements regarding the types of insurance written by excess and surplus lines insurers still must be met. Generally, excess and surplus lines insurers may only write coverage that is not available in the “admitted” market and strict guidelines regarding the coverages are set forth in various state statutes. Surplus lines brokers are the licensed individuals or entities placing coverage with excess and surplus lines insurers, and in most states, the broker is responsible for the payment of surplus lines taxes which are payable to the state in which the surplus lines risk is located. Surplus lines insurers are exempt from participation in state insolvency funds which are designed to protect insureds if “admitted” insurers become insolvent and are unable to pay claims. While American Safety Indemnity is exempt from the majority of state regulatory requirements, it must be “approved” to write the type of insurance in the states where its surplus business lines insurance is written. The Oklahoma Insurance Department retains primary regulatory authority over American Safety Indemnity, as a licensed and admitted insurance company in Oklahoma.

        Additionally, American Safety Casualty and American Safety Indemnity are required to comply with NAIC risk-based capital (“RBC”) requirements. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business in light of its size and risk profile. The ratio of a company’s actual policyholder surplus to its minimum capital requirements will determine whether any state regulatory action is required. State regulatory authorities use the RBC formula to identify insurance companies which may be undercapitalized and may require further regulatory attention.

Regulation of Our Non-Subsidiary Affiliate

        The Risk Retention Act facilitates the establishment of risk retention groups to insure certain liability risks of its members. The statute applies only to liability insurance and does not permit coverage of personal risk liability or workers’ compensation.

        The Risk Retention Act and Title 8 of the “Vermont Captive Act” require that each insured of American Safety RRG be a shareholder. Each insured is required to purchase one share of American Safety RRG’s common stock upon acceptance as an insured. There is no trading market for the shares of common stock of American Safety RRG and each share is restricted as to transfer. If and when a holder of American Safety RRG common stock ceases to be an insured, whether voluntarily or involuntarily, that holder’s share of common stock is automatically canceled and that person is no longer a shareholder of American Safety RRG. The ownership interests of members in a risk retention group are considered to be exempt securities for purposes of the registration provisions of the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are likewise not considered securities for purposes of any state securities law.

        Congress intended under the Risk Retention Act that the primary responsibility for regulating the financial condition of a risk retention group would rest on the state in which the group is licensed or chartered. American Safety RRG is subject to regulation as a captive insurer under the insurance laws of Vermont and, to a lesser extent, under the laws of each state in which it does business. Any merger or acquisition of American Safety RRG is subject to the prior written approval of the commissioner of the Vermont Department. The Risk Retention Act requires a risk retention group to provide a notice on each insurance policy which it issues to the effect that (i) the policy is issued by a risk retention group; (ii) the risk retention group may not be subject to all of the insurance laws and regulations of the state in which the policy is being issued; and (iii) no state insurance insolvency guaranty fund is available to the policies issued by the risk retention group.

        Additionally, American Safety RRG is also required to comply with NAIC RBC requirements, as discussed above.

Harbour Village Development

        In March 2000, our subsidiary Ponce Lighthouse Properties Inc. and our general contracting subsidiary Rivermar Contracting Company began development of Harbour Village, located in Ponce Inlet, StateFlorida, with 676 condominium units, a marina containing 142 boat slips, a par-3 golf course and beach club. We acquired the Harbour Village property (comprising 173 acres) through foreclosure in April 1999 from an individual to whom the Company had extended a loan in order to satisfy the loan after it was in default. Development of Harbour Village is substantially complete and all of the condominium units and boat slips had been sold and closed by the second quarter of 2005. The Beach club was completed in 2006 and turned over to the home owners association and the Company does not have any more employees at Harbour Village.

Employees

        At December 31, 2006, we employed 138 persons, none of whom were represented by a labor union.

Item 1A. Risk Factors

        Our business is subject to the following risk factors, among others, in addition to the information (including disclosures relative to forward-looking statements) set forth elsewhere in this report.

Risk Factors Relating to American Safety Insurance

A downgrade in our A.M. Best rating or increased capital requirements could impair our ability to sellinsurance policies.

        In September 2006, A.M. Best, the most widely recognized insurance company rating agency, affirmed its rating of “A” (Excellent) on a group basis of American Safety Insurance, including our two country-regionU.S. insurance subsidiaries, our Bermuda reinsurance subsidiary and our U.S. non-subsidiary risk retention group affiliate. A. M. Best also revised the rating outlook to stable from negative An “A” (Excellent) rating is the third highest of fifteen ratings assigned by A.M. Best to companies that have, in the opinion of A.M. Best, an excellent ability to meet their ongoing obligations to policyholders.

        Some policyholders are required to obtain insurance coverage from insurance companies that have an “A-” (Excellent) rating or higher from A.M. Best. Additionally, many producers are prohibited by their internal guidelines from representing insurance companies that are rated below “A-” (Excellent) by A.M. Best. A.M. Best assigns ratings that represent an independent opinion of an insurer’s ability to meet its obligations to policyholders that is of concern primarily to policyholders, insurance brokers and agents and its rating and outlook should not be considered an investment recommendation. Because A.M. Best continually monitors companies with regard to their ratings, our ratings could change at any time, and any downgrade of our current rating could impair our ability to sell insurance policies and, ultimately, our financial condition and operating results.

        If A.M. Best requires us to increase our capital in order to maintain our rating and we are unable to raise the required amount of capital to be contributed to our subsidiaries, A.M. Best may downgrade us.

The exclusions and limitations in our policies may not be enforceable.

        We draft the terms and conditions of our excess and surplus lines policies to manage our exposure to expanding theories of legal liability in business lines such as asbestos abatement, construction defect, environmental and professional liability. Many of the policies we issue include exclusions or other conditions that define and limit coverage. In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than the statutory period under which these claims can be brought against our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted modifying or barring the use of these exclusions and limitations particularly with respect to evolving business lines such as construction defect. This could result in higher than anticipated losses and loss adjustment expenses by extending coverage beyond our underwriting intent or increasing the number or size of claims, which could have a material adverse effect on our operating results. In some instances, these changes may not become apparent until some time after we have issued the insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.

The risks we underwrite are concentrated in relatively few industries. .

        We focus much of our underwriting on specialty risks in the construction and environmental remediation industries. For the year ended December 31, 2006, approximately 62% of our gross premiums written were in these two industries. Accordingly, our operating results could be more exposed than our more diversified competitors to unfavorable changes in business, economic or regulatory conditions, changes in federal, state or local environmental standards and establishment of legal precedents affecting these industries. Similarly, a significant incident impacting one of these industries that has the effect of increasing claims generally (or their settlement value) could negatively impact our financial condition and operating results.

We may respond to market trends by expanding or contracting our underwriting activities in certainbusiness lines, which may cause our financial results to be volatile.

        Although we perform substantial due diligence and risk analysis before entering into a new business line or insuring a new type of risk, and carefully assess the impact of exiting a business line, changing business lines inherently has more risk than remaining in the same business lines over a period of time. Because we actively seek to expand or contract our capacity in the markets we serve in response to factors such as loss experience and premium production, our operating results may experience material fluctuations.

Our industry is highly competitive and we may lack the financial resources to compete effectively.

        We believe that competition in the specialty insurance markets that we target is fragmented and not dominated by one or more competitors. We face competition from several types of companies, such as insurance companies, reinsurance companies, underwriting agencies, program managers and captive insurance companies. Many of our competitors are significantly larger and possess greater financial, marketing and management resources than we do. We compete on the basis of many factors, including coverage availability, claims management, payment terms, premium rates, policy terms, types of insurance offered, overall financial strength, financial strength ratings and reputation. If any of our competitors offer premium rates, policy terms or types of insurance that are more competitive than ours we could lose business. If we are unable to compete effectively in the markets in which we operate or to establish a competitive position in new markets, our financial condition and operating results would be adversely impacted.

Our actual incurred losses may be greater than reserves for our losses and loss adjustment expenses.

        Insurance companies are required to maintain reserves to cover their estimated liability for losses and loss adjustment expenses with respect to both reported and incurred but not reported (“IBNR”) claims. Reserves are estimates at a given time involving actuarial and statistical projections of what we expect to be the cost of the ultimate resolution and administration of claims. These estimates are based on facts and circumstances then known, predictions of future events, estimates of future trends, projected claims frequency and severity, potential judicial expansion of liability precedents, legislative activity and other factors, such as inflation. Our in house actuarial staff reviews the reserves of our major lines on a quarterly basis and a full actuarial analysis of our reserves is performed on an annual basis by an independent third party actuarial firm, which may include reserve studies, rate studies and regulatory opinions.

        Notwithstanding these efforts, the establishment of appropriate reserves for losses and loss adjustment expenses is an inherently uncertain process, particularly in the environmental remediation industry, construction industry and some of the other industries for which we write policies where extensive historical data may not exist or where the risks insured are long-tail in nature, in that claims that have occurred may not be reported to us for long periods of time. For instance, there is little empirical data for residential construction defect claims and hence, traditional actuarial analysis may be inapplicable or less reliable. Due to these uncertainties, our ultimate losses could materially exceed our reserves for losses and loss adjustment expenses, especially in business lines where we have increased or intend to increase our risk retention. For example, during the last two years, we increased our loss reserves as a result of litigation matters specifically related to our construction lines policies and policies written on runoff lines, which lowered our net earnings and shareholders’ equity during these periods.

To the extent that reserves for losses or loss adjustment expenses are estimated in the future to be inadequate, we would have to increase our reserves and incur charges to earnings in the periods in which the reserves are increased. In addition, increases in reserves may also cause additional reinsurance premiums to be payable to our reinsurers in the form off reinstatement premiums. These increases in reserves would adversely impact our financial condition and operating results. To the extent any individual case reserves prove to be inadequate, our financial condition and operating results would be adversely affected. For more information on our losses and loss adjustment expenses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

If we are unable to obtain reinsurance on favorable terms, our ability to write new polices would beadversely affected.

        Reinsurance is a contractual arrangement under which one insurer (the ceding company) transfers to another insurer (the reinsurer) a portion of the liabilities that the ceding company has assumed under an insurance policy it has issued. Our business continues to involve ceding portions of the risks that we underwrite to reinsurers. The availability and cost of reinsurance are subject to prevailing market conditions that are beyond our control and are factors that could materially impact our financial condition and operating results. There is no certainty that reinsurance will continue to be available in the form or in the amount that we require or, if available, at an affordable cost. The availability of reinsurance is dependent not only on reinsurers’ reactions to the specific risks that we underwrite, but also events that impact the overall reinsurance industry, such as the recent hurricanes in 2005. If we are unable to maintain or replace our reinsurance, our total loss exposure would increase and, if we were unwilling or unable to assume that increase in exposure, we would be required to mitigate the increase in exposure by writing fewer policies or writing policies with lower limits or different coverage.

We may be unable to recover amounts due from our reinsurers.

        While reinsurance contractually obligates the reinsurer to reimburse us for a portion of our losses, it does not relieve us of our primary financial liability to our insureds. If our reinsurers are either unwilling or unable to pay some or all of the claims made by us on a timely basis, we bear the financial exposure. As a result, we are subject to credit risk with respect to our reinsurers. The total amount of reinsurance recoverables at December 31, 2006 was $220.9 million, or 112.6% of shareholders’ equity. Of this amount, $68.6 million, or approximately 31% of the total amount recoverable is collateralized by cash or irrevocable letters of credit or other acceptable forms of collateral posted by the reinsurer.

        We purchase reinsurance from reinsurers we believe to be financially sound. We have written reinsurance security procedures that establish financial requirements for reinsurance companies that must be met prior to reinsuring any of the business we write. Among these requirements is a stipulation that reinsurance companies must have an A.M. Best rating of at least “A-” (Excellent) and a financial size category of Class VIII or greater at the time of writing any reinsurance unless sufficient collateral has been provided at the time we enter into our reinsurance agreement. A financial size category of Class VIII is assigned by A.M. Best to companies with adjusted policyholder surplus of $100 million to $250 million, which, on a statutory basis of accounting, is the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. We have also established an internal reinsurance security committee, consisting of members of senior management, which meets quarterly to discuss and approve reinsurance security. To protect against our reinsurers inability to satisfy their contractual obligations to us, our reinsurance contracts stipulate a collateral requirement for reinsurance companies that do not meet the financial strength and size requirements described above. These collateral requirements can be met through the issuance of unconditional letters of credit, the establishment and funding of escrow accounts for our benefit or cash advances paid into a segregated account. In the event collateral is not sufficient, there is no certainty that these reinsurers will be able to provide additional collateral.

        We are unable to ensure the credit worthiness of our reinsurers. For example, in 2005 and 2006, as a result of significant adverse loss reserve development, A.M. Best and Standard and Poor’s, a division of The McGraw Hill Companies, Inc. (“S&P”), downgraded, the financial strength ratings of the insurance and reinsurance operating subsidiaries of Alea Group Holdings (Bermuda) Ltd., including among others, Alea North American Insurance Company and Alea London Limited (“Alea”), one of our reinsurers. Subsequently, Alea requested that A.M. Best withdraw all ratings of Alea. A.M. Best currently has assigned a NR-4 (Company Request) to Alea. As of December 31, 2006, our unsecured estimated net exposure to Alea was approximately $8.8 million primarily in our specialty programs. This estimate is based upon our estimates of losses and will not reflect our exposure if our actual losses differ from those estimates.

We rely on independent insurance agents and brokers to market our products.

        We market most of our insurance products through approximately 250 independent insurance agents and brokers, which we refer to as producers. These producers are not obligated to promote our products and may sell competitors’ products. Our profitability depends, in part, on the marketing efforts of these producers and on our ability to offer insurance products and services while maintaining financial strength ratings that meet the requirements of our producers and their customers. The failure or inability of producers to market our insurance products successfully would have a material adverse effect on our business and operating results. Furthermore, as of December 31, 2006, approximately 38% of our gross premiums written for our excess and surplus lines segment were produced through two producers (who focus on our construction business line). The loss of one or more of these producers could have a material adverse effect on our operating results.

We are subject to credit risk in connection with producers that market our products.

        In accordance with industry practice, when the insured pays premiums for our policies to producers for payment over to us, these premiums are considered to have been paid and, in most cases, the insured is no longer liable to us for those amounts, whether or not we actually have received the premiums. Consequently, we assume a degree of credit risk associated with the producers with whom we choose to do business. To date, we have not experienced any material losses related to these credit risks.

Our growth strategy is dependent on several factors, the failure to achieve any one of which may impairour ability to expand our operations or may prevent us from operating profitably.

        Our growth strategy includes expanding in our existing markets, entering new geographic markets, creating relationships with new producers and developing new insurance products. In order to generate this growth, we are subject to various risks, including risks associated with our ability to:

o identify insurable risks not adequately served by the standard insurance market;
o maintain adequate levels of capital;
o obtain reinsurance on favorable terms;
o obtain necessary regulatory approvals when writing on an admitted basis;
o attract and retain qualified personnel to manage our expanded operations; and
o maintain our financial strength ratings.

Our inability to achieve any of the above objectives could affect our growth strategy and may cause our business and operating results to suffer.

If we lose key personnel or are unable to recruit qualified personnel, our ability to implement ourbusiness strategies could be delayed or hindered.

        Our future success will depend, in part, upon the efforts of our executive officers and other key personnel. Our ability to recruit and retain key personnel will depend upon a number of factors, such as our results of operations, business prospects and the level of competition then prevailing in the market for qualified personnel. The loss of any of these officers or other key personnel or our inability to recruit key personnel could prevent us from fully implementing our business strategies and could materially adversely affect our business, financial condition and operating results.

We routinely evaluate opportunities to expand our business through acquisitions of other companies or business lines. There are many risks associated with acquisitions that we may be unable to control.

        We evaluate potential acquisition opportunities as a means to grow our business. There are a number of risks attendant to any acquisition. These risks include, among others, the difficulty in integrating the operations and personnel of an acquired company; potential disruption of our ongoing business; inability to successfully integrate acquired systems and insurance programs into our operations; maintenance of uniform standards, controls and procedures; possible impairment of relationships with employees and insureds of an acquired business as a result of changes in management; and that the acquired business may not produce the level of expected profitability. As a result, the impact of any acquisition on our future performance may not be consistent with original expectations, and may impair our business, financial condition and operating results.

We may require additional capital in the future, which may not be available or may only be available onunfavorable terms.

        Our future capital requirements depend on many factors, including our ability to write profitable new business, retain existing customers and establish premium rates and reserves at levels sufficient to cover losses and related expenses. Many factors will affect our capital needs and their amount and timing, including our growth and profitability, our claims experience and the availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments. If we have to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result. In the case of debt financings, we may be subject to covenants that restrict our ability to freely operate our business. If we cannot obtain adequate capital on favorable terms or at all, we may not have sufficient funds to implement our operating plans and our business, financial condition and operating results could be adversely affected.

Changes in the value of our investment portfolio may have a material impact on our operating results.

        We derive a significant portion of our net income from our invested assets. As a result, our operating results depend in part on the performance of our investment portfolio. As of, and for the year ended December 31, 2006, the fair value of our investment portfolio was $551.2 million and our income derived from these assets was $21.8 million, or 95.3% of our pre-tax earnings. We also generated net realized gains of $1.2 million in 2006. Our investment portfolio is subject to various risks, including:

o       credit risk, which is the risk that our invested assets will decrease in value due to
                 unfavorable changes in the financial prospects or a downgrade in the credit rating of
                 an entity in which we have invested;
o       interest rate risk, which is the risk that our invested assets may decrease due to changes in
                 interest rates;
o       equity price risk, which is the risk that we will incur economic loss due to a decline in
                 equity prices; and
o       duration risk, which is the risk that our invested assets may not adequately match the
                 duration of our insurance liabilities.

        Our investment portfolio is comprised mostly of fixed-income securities. We do not hedge our investments against interest rate risk and, accordingly, changes in interest rates may result in fluctuations in the value of these investments.

        Our investment portfolio is managed by a professional investment management firm in accordance with detailed investment guidelines established by our Board of Directors that stress diversification of risks, conservation of principal and liquidity. If our investment portfolio is not appropriately matched with our insurance and reinsurance liabilities, we may be forced to liquidate investments prior to their maturity at a significant loss in order to cover these liabilities. This might occur, for instance, in the event of a large or unexpected claim or series of claims. Large investment losses could significantly decrease our asset base, thereby affecting our ability to underwrite new business. For more information about our investment portfolio, see “Business-Investments.”

We rely upon the successful and uninterrupted functioning of our information technology, informationprocessing
and telecommunication systems.

        Our business is highly dependent upon the successful and uninterrupted functioning of our information technology, information processing and telecommunications systems. We rely on these systems to support our marketing operations, process new and renewal business, provide customer service, make claims payments, and facilitate premium collections and policy cancellations. These systems also enable us to perform actuarial and other modeling functions necessary for underwriting and rate development. We have a highly trained staff that is committed to the continual development and maintenance of these systems. However, the failure of these systems could interrupt our operations or materially impact our ability to evaluate and write new business. Because our information technology, information processing and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for this service exceeds capacity or if the third party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to write and process new and renewal business and provide customer service or compromise our ability to pay claims in a timely manner. There can be no guarantee that these systems can effectively support our continued growth. Additionally, some of our systems are not fully redundant, and our disaster recovery planning does not account for all eventualities, which could adversely affect our business.

We are subject to risks related to litigation.

        From time to time, we are subject to lawsuits and other claims arising out of our insurance and real estate operations. We have responded to the lawsuits we face and, although the outcome of these lawsuits cannot be predicted, we believe that there are meritorious defenses and intend to vigorously contest these claims. Adverse judgments in one or more of these lawsuits could require us to change aspects of our operations in addition to paying significant damage amounts. In addition, the expenses related to these lawsuits may be significant. Lawsuits can have a material adverse effect on our business and operating results, particularly where we have not established an accrual or a sufficient accrual for damages, settlements or expenses. For information on the material litigation in which we are involved, see “Item 3 ? Legal Proceedings”.

Risk Factors Related to Taxation

Our Bermuda operations may be subject to U.S. tax.

        American Safety Insurance, its reinsurance subsidiary, American Safety Re and its segregated account captive, American Safety Assurance, are organized in Bermuda. American Safety Insurance, American Safety Re and American Safety Assurance are operated in a manner such that none should be subject to U.S. tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks and U.S. withholding tax on some types of U.S. source investment income) because none of these companies should be treated as engaged in a trade or business within the U.S. (and, in the case of American Safety Re and American Safety Assurance, to be doing business through a permanent establishment within the U.S.). However, because there is considerable uncertainty as to the activities that constitute being engaged in a trade or business within the U.S. (and what constitutes a permanent establishment under the income tax treaty between the U.S. and Bermuda (the “Bermuda Treaty”) as well as the entitlement of American Safety Re and American Safety Assurance to treaty benefits), there can be no assurances that the U.S. Internal Revenue Service (the “IRS”) will not contend successfully that American Safety Insurance, American Safety Re and/or American Safety Assurance is engaged in a trade or business in the U.S. (or that American Safety Re or American Safety Assurance is carrying on business through a permanent establishment in the U.S.). If any of American Safety Insurance, American Safety Re or American Safety Assurance were considered to be engaged in a trade or business in the U.S., it could be subject to U.S. corporate income and additional branch profits taxes on the portion of its earnings effectively connected to such U.S. business, in which case its operating results could be materially adversely affected.

If you acquire 10% or more of the Common Shares, you may be subject to taxation under the “controlled foreign corporation” (“CFC”) rules.

        Under certain circumstances, a “U.S. 10% shareholder” of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during a taxable year must include in gross income for U.S. federal income tax purposes that U.S. 10% shareholder’s “subpart F income,” even if the subpart F income is not distributed to that U.S. 10% shareholder. “Subpart F income” of a foreign insurance corporation typically includes foreign personal holding company income (such as interest, dividends and other types of passive income), as well as insurance and reinsurance income (including underwriting and investment income) attributable to the insurance of risks situated outside the CFC’s country of incorporation.

        We believe that because of the dispersion of our Common Share ownership, provisions in our organizational documents that limit voting power and other factors, no U.S. person who acquires Common Shares directly or indirectly through one or more foreign entities should be required to include our “subpart F income” in income under the CFC rules of the Code. It is possible that the IRS could challenge the effectiveness of these provisions and that a court could sustain that challenge, in which case your investment could be materially adversely affected.

U.S. persons who hold Common Shares may be subject to U.S. federal income taxation at ordinary incomerates on their proportionate share of our “related party insurance income” (“RPII”).

        If the RPII of American Safety Re or American Safety Assurance were to equal or exceed 20% of its gross insurance income in any taxable year and direct or indirect insureds (and persons related to those insureds) own directly or indirectly through entities 20% or more of the voting power or value of American Safety Re or American Safety Assurance, then a U.S. person who owns any Common Shares (directly or indirectly through foreign entities) on the last day of the taxable year would be required to include in income for U.S. federal income tax purposes that person’s pro rata share of that company’s RPII for the entire taxable year, determined as if that RPII were distributed proportionately only to U.S. persons at that date regardless of whether that income is distributed. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income. Neither American Safety Re nor American Safety Assurance expects gross RPII to equal or exceed 20% of its gross income for 2006 or subsequent years, and neither expects its direct or indirect insureds (including related persons) to directly or indirectly hold 20% or more of its voting power or value, but we cannot be certain that this will be the case because some of the factors which determine the extent of RPII may be beyond our control. If these thresholds are met or exceeded, and if you are an affected U.S. person, your investment could be materially adversely affected. The RPII provisions, however, have never been interpreted by the courts or the U.S. Treasury Department (the “Treasury Department”) in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any of those changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. The Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the application thereof to us is uncertain.

U.S. persons who dispose of Common Shares may be subject to U.S. federal income taxation at the ratesapplicable to dividends on a portion of their gain, if any.

        Section 1248 of the Internal Revenue Code of 1986, as amended (the “Code”) provides that if a U.S. person sells or exchanges stock of a foreign corporation and that person owned, directly, indirectly through certain foreign entities or constructively, 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as a dividend to the extent of that person’s share of the CFC’s earnings and profits (determined under U.S. federal income tax principles) during the period that person held the shares and while the corporation was a CFC (with certain adjustments). We believe that because of the dispersion of our Common Share ownership, provisions in our organizational documents that limit voting power and other factors, no U.S. shareholder, other than Fredrick C. Treadway or Treadway Associates, L.P., of American Safety Insurance should be treated as owning (directly, indirectly through foreign entities or constructively) 10% or more of the total voting power of American Safety Insurance. As a result, American Safety Insurance should not be a CFC and Section 1248 of the Code, as applicable under the general CFC rules, should not apply to dispositions of our shares. It is possible, however, that the IRS could challenge these provisions in our organizational documents and that a court could sustain that challenge. To the extent American Safety Insurance is a CFC, a 10% U.S. Shareholder may in certain circumstances be required to report a disposition of Common Shares by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs.

        For purposes of Section 1248 of the Code and the requirement to file Form 5471, special rules apply with respect to a U.S. person’s disposition of shares of a foreign insurance company that has RPII during the five-year period ending on the date of the disposition. In general, if a U.S. person disposes of shares in a foreign insurance corporation in which U.S. persons own 25% or more of the shares (even if the amount of gross RPII is less than 20% of the corporation’s gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition may be treated as a dividend to the extent of that person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that person owned the shares (whether or not those earnings and profits are attributable to RPII). As a result of these special rules and proposed Treasury Department regulations, the IRS may assert that Section 1248 of the Code and the requirement to file Form 5471 apply to dispositions of Common Shares because American Safety Insurance is engaged in the insurance business indirectly through subsidiaries.

U.S. persons who hold Common Shares will be subject to adverse tax consequences if American SafetyInsurance is considered to be a Passive Foreign Investment Company (a “PFIC”) for U.S. federal income tax purposes.

        If American Safety Insurance is considered a PFIC for U.S. federal income tax purposes, a U.S. person who owns Common Shares will be subject to adverse tax consequences, including subjecting the investor to a greater tax liability than might otherwise apply and subjecting the investor to tax on amounts in advance of when tax would otherwise be imposed, in which case your investment could be materially adversely affected. In addition, if American Safety Insurance were considered a PFIC, upon the death of any U.S. individual owning Common Shares, that individual’s heirs or estate would not be entitled to a “step-up” in the basis of the shares which might otherwise be available under U.S. federal income tax laws. American Safety Insurance does not believe that it is, and does not expect to become, a PFIC for U.S. federal income tax purposes. No assurance can be given, however, that American Safety Insurance will not be deemed a PFIC by the IRS. If American Safety Insurance were considered a PFIC, it could have material adverse tax consequences for an investor that is subject to U.S. federal income taxation. There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be forthcoming. We cannot predict what impact, if any, that guidance would have on an investor that is subject to U.S. federal income taxation.

American Safety Insurance, American Safety Re and American Safety Assurance may be come subject to Bermuda taxes in the future.

        Bermuda currently imposes no income taxes on corporations. American Safety Insurance, American Safety Re and American Safety Assurance have received no assurance from the Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended (the “Tax Protection Act”), that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of the tax will not be applicable to American Safety Insurance, American Safety Re or American Safety Assurance until March 28, 2016. No assurance can be given that American Safety Insurance, American Safety Re or American Safety Assurance will not be subject to any Bermuda tax after that date.

The impact of Bermuda’s letter of commitment to the Organization for Economic Cooperation and Development to eliminate harmful tax practices is uncertain and could adversely affect American Safety Insurance’s, American Safety Re’s, and American Safety Assurance’s tax status in Bermuda.

        The Organization for Economic Cooperation and Development (the “OECD”) has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD’s report dated April 18, 2002 and updated as of June 2004, Bermuda was not listed as an uncooperative tax haven jurisdiction because it had previously committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether these changes will subject us to additional taxes.

Risk Factors Relating to the Property and Casualty Insurance Industry

Policy pricing in our industry is cyclical, and our financial results are impacted by that cyclicality.

        The property and casualty insurance industry has historically been a cyclical industry consisting of both “hard market” periods and “soft market” periods. During soft market periods, insurers tend to be more aggressive in writing policies and competitive in the pricing of those policies. Hard market periods are characterized by shortages of underwriting capacity and high premium rates. Beginning in 2000, we believe our industry experienced a hardening market, reflected by increasing rates and more restrictive coverage terms. These trends appeared to have started slowing in 2004. The industry is now experiencing a softening market, where pricing generally has become more competitive and policy terms and conditions have become less restrictive. Therefore, we may not be able to achieve our growth and profitability goals. Because this cyclicality is due in large part to the economy, the particular needs of insureds and the actions of our competitors, we cannot predict the timing or duration of changes in the insurance market cycle.

Our industry is subject to significant and increasing regulatory scrutiny.

        Recently, the insurance industry has been subject to a significant and increasing level of scrutiny by various regulatory bodies, including state attorneys general and insurance departments, concerning certain practices within the insurance industry. These practices include the receipt of contingent commissions by insurance brokers and agents from insurance companies and the extent to which this compensation has been disclosed, bid rigging and related matters. As a result of these and related matters, there have been a number of recent revisions to existing, or proposals to modify or enact new, laws and regulations regarding the relationship between insurance companies and producers. Any changes or further requirements that are adopted by federal, state or local governments could adversely affect our business and operating results.

We operate in a heavily regulated industry, and existing and future regulations may constrain how weconduct our business and could impose liabilities and other obligations upon us.

        Insurance Regulation. Our primary insurance and reinsurance subsidiaries, as well as our non-subsidiary risk retention group affiliate, are subject to regulation under applicable insurance statutes of the jurisdictions in which they are domiciled or licensed and write insurance. This regulation may limit our ability to, or speed with which we can, effectively respond to market opportunities and may require us to incur significant annual regulatory compliance expenditures. Insurance regulation is intended to provide safeguards for policyholders rather than to protect shareholders of our insurance companies. Insurance regulation relates to authorized business lines, capital and surplus requirements, types and amounts of investments, underwriting limitations, trade practices, policy forms, claims practices, mandated participation in shared markets, loss reserve adequacy, insurer solvency, transactions with related parties, changes in control, payment of dividends and a variety of other financial and non-financial components of an insurance company’s business. For instance, our insurance subsidiaries are subject to risk-based capital, or RBC, restrictions. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business in light of its size and risk profile. The ratio of a company’s actual policyholder surplus to its minimum capital requirements will determine whether any state regulatory action is required. State regulatory authorities use the RBC formula to identify insurance companies which may be undercapitalized and may require further regulatory attention. Each of our domestic insurance subsidiaries satisfies its minimum capital requirements and none of them has been identified by any regulatory authority as being undercapitalized or requiring further regulatory attention. A number of legislative initiatives currently are under consideration by Congress. Any changes in insurance laws and regulations could materially adversely affect our operating results. We are unable to predict what additional laws and regulations, if any, affecting our business may be promulgated in the future or how they might be interpreted.

        Dividend Regulation. Like other insurance holding companies, American Safety Insurance relies on dividends from its insurance subsidiaries to be able to pay dividends and fulfill its other financial obligations. The payment of dividends by these subsidiaries and other intercompany transactions are subject to regulatory restrictions and will depend on the surplus and earnings of these subsidiaries. As a result, insurance holding companies may not be able to receive dividends from their subsidiaries at times and in amounts sufficient to pay dividends and fulfill their other financial obligations. Additionally, as a Bermuda holding company, American Safety Insurance is subject to Bermuda regulatory constraints that will affect its ability to pay dividends on the Common Shares and to make other payments. Under the Companies Act 1981, of Bermuda (“the Companies Act”) insurance holding companies may declare or pay a dividend out of distributable reserves only if it has reasonable grounds to believe that it is, and would after the payment be, able to pay liabilities as they become due and if the realizable value of its assets would thereby not be less than the aggregate of its liabilities and issued share capital and share premium accounts. We do not anticipate paying cash dividends on the Common Shares in the near future.

        Environmental Regulation. Environmental remediation activities and other environmental risks are heavily regulated by both federal and state governments. Environmental regulation is continually evolving, and changes in the regulatory patterns at federal and state levels may have a significant effect upon potential claims against our insureds and us. These changes also may affect the demand for the types of insurance offered by and through us and the availability or cost to us of reinsurance. We are unable to predict what additional laws and regulations, if any, affecting environmental remediation activities and other environmental risks may be promulgated in the future, how they might be applied, and what their impact might be.

        The risk factors presented above are all of the ones that we consider to be material as of the date of this annual report on Form 10-K. However, they are not the only risks facing the company. Additional risks not presently known to us, or which we consider immaterial based on our current knowledge or understanding, may also adversely affect us. There may be risks that a particular investor views differently than we do, and our analysis may be incorrect. If any of the risks that we face actually occurs, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or may make. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Our offices are located at 44 Church Street, CityHamilton, Bermuda, and the telephone number is (441) 296-8560. The principal corporate offices of our U.S. subsidiaries are located at 100 Galleria Parkway, Suite 700, Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.

Item 3. Legal Proceedings

        We, through our subsidiaries, are routinely party to pending or threatened litigation or arbitration disputes in the normal course of or related to our business.  Based upon information presently available, in view of legal and other defenses available to our subsidiaries, management does not believe that any pending or threatened litigation or arbitration disputes will have any material adverse effect on our financial condition or operating results, except for the matters discussed below. 

        Warranty Reinsurance Litigation.  We were named as a defendant in several cases, liquidation actions and reinsurance claims, collectively identified as the “National Warranty” issue.  American Safety Re was an excess-of-loss reinsurer through a reinsurance treaty with National Warranty Risk Retention Group (“National Warranty”) that provided insurance coverage to automobile dealerships and other providers that were obligors on automobile warranty contracts they sold to consumers. National Warranty filed for liquidation in the Cayman Islands (the location of its legal creation).  This liquidation had a cascading effect, including the subsequent filing of bankruptcy by various obligors of vehicle service contracts insured by National Warranty.  As a result, there are potentially over one million vehicle service contracts that are not being honored by the obligors.

        The liquidators of National Warranty made claims of $25.4 million pursuant to two reinsurance contracts issued by American Safety Re to National Warranty in 2002 and 2003.  In addition, consumers of vehicle service contracts sued American Safety Re, and the trial court certified that case as a class action, although we appealed that determination.  Lastly, claims have been made by sellers/obligors of the vehicle service contracts who were insured by National Warranty.  There were five sellers/obligors cases against us and other professional services providers, including other reinsurers, relating to National Warranty, with claims in excess of $2.6 million.  All of these claims were based on fraud and/or theories of contractual violations.  We believe that American Safety Re had valid defenses to the claims including, among others, that it had commuted its obligations under reinsurance treaties, its liability is limited to the amount of coverage provided under the policies, which varies based on premium written by National Warranty and it loss ratios, and that most of the claimants cannot make claims directly under the reinsurance contracts. 

        On November 17, 2006, we entered into a settlement agreement pursuant to which all claims, other than claims by City Automotive and Oak Services as described below, against ASI parties were settled for $1.8 million, within the amount previously accrued, in exchange for a complete discharge and release. The settlement with the Joint Official Liquidators for National Warranty requires the approval of the Grand Cayman court. The approval is pending but has not yet been obtained.

          City Automotive and Oak Services. The plaintiffs in these two cases are dealers and marketers of the vehicle service contracts. We have entered into an arbitration agreement with the plaintiffs in exchange for a dismissal of all ASI parties from the pending litigation. Pursuant to the arbitration agreement, there is a floor and a ceiling to the award the arbitrators can award. The ceiling is reduced by a percentage amount equal the percentage that any recovery by City Automotive and Oak Services in their pending litigation against the remaining defendants or in the National Warranty liquidation bears to the plaintiffs’ total damages. The ultimate outcome of these matters cannot now be determined.

        Griggs et al. v. American Safety Reinsurance, Ltd. et al., Case No. 2003-31509, Circuit Court, Seventh Judicial District, Volusia County, StateFlorida.  Seven plaintiffs filed suit against us and three of our subsidiaries seeking to recover a $2.1 million loan made by the plaintiffs in 1986 to Ponce Marina, Inc., the former owner of the Harbour Village property.  The plaintiffs claimed that we were responsible for the repayment of the loan, with interest.  The plaintiffs propounded four theories of liability and the court granted summary judgment for us on three of the theories.  However, the court entered judgment on August 10, 2005 against us for approximately $3.4 million, which includes interest, on the remaining theory.  The court held that we, as a condition of our loan, required Ponce Marina, Inc. to demand that the plaintiffs enter into an agreement with Ponce Marina, Inc., to the detriment of their loans and to our benefit, and thus, we had entered into a quasi-contract with the plaintiffs to repay their loan with interest. 

        We filed an appeal in December 2005, and oral argument on our appeal was heard on December 5, 2006.  The Court has not yet issued a decision on our appeal. Based on the merits of the case and likelihood of ultimate payment, we have not established an accrual for the decision. The ultimate outcome of this matter cannot now be determined.

        Sizemore v. American Safety Insurance Services, Inc. et al., Case No 2005-31704, Circuit Court, Seventh Judicial District, Volusia County, StateFlorida.  American Safety Insurance Services, Inc., its parents and a number of its affiliates are defendants in a suit brought by an individual who contends that defendants are liable to him for a debt owed to him by Ponce Marina, Inc. in the amount of $400,000 plus interest and costs.  The plaintiff also intends to seek class certification on behalf of himself and 21 other unnamed plaintiffs for the case on these claims in excess of $1.7 million plus interest and costs.  On January 27, 2006, the trial court dismissed the case.  The plaintiff was permitted to file an amended complaint on or before March 6, 2006.  The plaintiff filed an amended complaint on March 7, 2006, alleging various theories of recovery, some of which were also alleged in the Griggs case.  On May 4, 2006, the trial court dismissed the case and gave the plaintiff 20 days to file an amended complaint.  The plaintiff filed a third amended complaint and our third Motion to Dismiss was heard on August 22, 2006, and on September 18, 2006, the plaintiff’s case was dismissed with prejudice. On October 17, 2006, the plaintiff filed an appeal of the dismissal. We continue to vigorously defend this case, as we believe that the case is without merit.  Based on the merits of the case and the likelihood of ultimate payment, we have not established an accrual.  The ultimate outcome of this matter cannot now be determined.

Item 4. Submission of Matters to a Vote of Security Holders

        No matter was submitted to a vote of the Company’s security holders during the fourth quarter of the fiscal year ended December 31, 2006.

Executive Officers of the Company

        The following table provides information regarding the executive officers of the Company. Biographical information for each of such persons is set forth immediately following the table.

    Name                        Age      Position
   Stephen R. Crim              43       President, Chief Executive Officer and Director
   Joseph D. Scollo, Jr.        43       Executive Vice President and Chief Operating Officer
   William C. Tepe              49       Chief Financial Officer
   Randolph L. Hutto            58       General Counsel
   Steven B. Mathis             39       Vice President, Planning and Treasurer
   Thomas M. Callahan           42       Senior Vice President

        Stephen R. Crim became President and Chief Executive Officer of the Company in January 2003 and he became President of the Company’s insurance and reinsurance operations effective January 2002. Previously, Mr. Crim had been responsible for all underwriting functions since joining the Company in 1990. Previously, Mr. Crim was employed in the underwriting department of Aetna Casualty and Surety and The Hartford Insurance Co. between 1986 and 1990.

        Joseph D. Scollo, Jr. became Executive Vice President of the Company in January 2003 and was Senior Vice President — Operations since November 1998. Previously, Mr. Scollo served as senior vice president-operations of United Coastal Insurance Company, New Britain, StateConnecticut between 1989 and 1998.

        William C. Tepe became Chief Financial Officer of American Safety Insurance in November 2005. Prior to joining American Safety Insurance, Mr. Tepe was the Chief Financial Officer for GAB Robins Inc., an international insurance claims management and adjusting company. Mr. Tepe has also been employed in senior financial reporting and accounting positions within major property and casualty insurance companies such as W. R. Berkley Corp. and USF&G Corporation. Mr. Tepe is a certified public accountant.

        Randolph L. Hutto became General Counsel and Secretary of the Company in September 2006. Prior to joining the Company, Mr. Hutto served as Executive Vice President, General Counsel and Secretary of NDC Health Corporation, a New York Stock Exchange-listed health care claims processing and information management company, from April 2004 to January 2006 and as Executive Vice President and Chief Financial Officer from November 2000 to April 2004.

        Steven B. Mathis became Vice President, Planning and Treasurer effective November 2005. Previously, he served as Chief Financial Officer of American Safety Insurance since August 1998. He also served as American Safety Insurance’s Controller from 1992 to 1998. Mr. Mathis has 17 years accounting experience in the insurance industry, having held accounting positions with American Insurance Managers, Inc. and American Security Group.

        Thomas M. Callahan became Senior Vice President of American Safety Insurance Holdings Ltd., and American Safety Re in October, 2006. Prior to joining the Company, Mr. Callahan was, for the last five years, Vice President and National Manager of the Primary Facultative Unit of Odyssey America Reinsurance Corp. Previously Mr. Callahan held management positions at American Reinsurance Corp., Swiss Re America, as well as PXRE Group. Mr. Callahan began his insurance career with The Chubb Group in 1985.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity Securities

        The Company’s common shares trade on the New York Stock Exchange, Inc. under the symbol “ASI”. As of March 9, 2006, there were approximately 2,500 holders of the Company’s common shares.

        The following table sets forth the high and low prices per share of the Company’s common shares for the periods indicated.

Fiscal Year Ended December 31, 2005          High               Low           Close
First Quarter                              $16.45            $14.02          $14.90
Second Quarter                              15.75             14.17           15.28
Third Quarter                               17.98             15.17           17.24
Fourth Quarter                              18.00             16.01           16.74

Fiscal Year Ended December 31, 2006          High               Low           Close
First Quarter                              $16.97            $15.60          $16.71
Second Quarter                              17.58             15.30           16.50
Third Quarter                               18.40             15.80           18.30
Fourth Quarter                              19.65             17.40           18.55

        The Company did not pay any cash dividends during fiscal year 2005 and 2006 and does not intend to pay cash dividends in the foreseeable future. Payment of cash dividends in the future will be periodically reviewed by the Board of Directors. As an insurance holding company, the Company’s ability to pay cash dividends to its shareholders will depend, to a significant degree, on the ability of the Company’s subsidiaries to generate earnings from which to pay cash dividends to American Safety Insurance Holdings, Ltd. The Company’s current plans are for its insurance and reinsurance subsidiaries to principally retain their capital for growth.

        The jurisdictions in which American Safety Insurance Holdings, Ltd. 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. See “Regulatory Environment” in Item 1 of this report.

                                   Equity Compensation Plan Information



                             Number of securities to        Weighted-average         Number of securities
                             be issued upon exercise        exercise price of       remaining available for
                             of outstanding options,      outstanding options,       issuance under equity
      Plan category            warrants and rights         warrants and rights        compensation plans
Equity compensation plans
approved by security
holders(1)                            847,765                      $9.33                      360,627
Equity compensation plans
approved by security
holders(2)                             15,800                        N/A                       39,557
Total                                 863,565                                                 400,184



(1)        Includes securities available for future issuance under the 1998 Incentive Stock Option Plan.
(2)        The 15,800 represents shares actually issued to directors under the 1998 Directors Stock
              Award Plan. The 39,557 represents the shares available for future awards under the 1998
              Directors Stock Award Plan.

Item 6. Selected Financial Data

        The following table sets forth selected consolidated financial data with respect to the Company for the periods indicated. The balance sheet and income statement data have been derived from the audited consolidated financial statements of the Company. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and notes thereto included elsewhere in this Report.

                                                       Year Ended December 31


                                   2002          2003          2004           2005           2006
Statement of Operations Data:              (In thousands except per share data and ratios)

Gross premiums written        $159,290         $212,667      $ 221,576      $ 237,880     $ 239,607
Gross premiums earned          145,308          184,403        227,716        231,438       222,257
Net premiums earned             73,582          109,334        136,300        137,580       146,756
Fee income earned                    -                -            210          1,197         1,685
Net investment income            4,388            5,801          9,773         14,316        21,767
Net realized gains (losses)        685            3,139            208            (54)        1,190
Real estate sales               51,780           57,555         67,967          3,000             -
Total revenue                  130,663          175,991        214,656        155,874       171,440
Losses and loss
  adjustment
  expenses incurred             42,031           65,834         93,503         84,406        92,329
Acquisition expenses            15,167           21,818         26,649         28,752        27,378
Real estate expenses            48,527           53,999         55,480          2,439           381
Earnings  before income taxes    3,403           10,090         18,453         16,048        22,846
Net earnings                     2,484            7,414         14,757         14,656        20,532
Net earnings per share:
Basic                           $ 0.52           $ 1.45         $ 2.15          $2.18         $2.35
Diluted                         $ 0.51           $ 1.42         $ 2.01          $2.05         $2.26
Common shares and common share equivalents used in
  computing net basic
  earnings per share             4,736            5,106          6,864          6,737         8,730
Common shares and common
  share equivalents used in
  computing net diluted
  earnings per share             4,871            5,234          7,343          7,164         9,095

Balance Sheet Data (at end
of period):
Total investments,
  excluding real
  estate                     $ 111,926        $ 222,418       $327,037       $415,497      $551,158
Total assets                   389,342          514,260        583,204        694,999       847,131
Unpaid losses and loss
  adjustment expenses          179,164          230,104        321,038        393,493       439,673
Unearned premiums               71,675           99,939         93,082         97,983       115,198
Loans payable                   22,182           30,441         13,019         37,810        38,139
Total liabilities              326,890          418,916        474,425        576,564       650,980
Total shareholders' equity      62,452           95,344        108,780        118,435       196,150

GAAP Underwriting Ratios:
Loss and loss adjustment
  expense ratio (1)               57.1%           60.2%          68.6%         61.4%         62.9%
Expense ratio (2)                 44.2%           36.6%          34.2 %        37.3%         35.7%
Combined ratio (3)               101.3%           96.8%         102.8%         98.6%         98.6%

Other Data:
Return on average
  shareholders' equity (4)         3.3%            6.9%          14.6%         13.0%         12.4%
Debt to total capitalization
ratio (5)                         26.2%           24.2%          10.7%         24.2%         16.3%
Net premiums written to
equity                             1.4X            1.4X           1.2X          1.2X          0.8X

(1)        Loss and loss adjustment expenses ratio: The loss and loss adjustment expenses ratio,
         expressed as a percentage of loss and loss adjustment expenses to net premiums earned, is the
         net of the effects of reinsurance.

(2)        Expense ratio: The expense ratio is the ratio, expressed as a percentage, of acquisition and
         other operating expenses to net premiums earned. Our reported expense ratio excludes certain
         holding company expenses such as interest expense as well as real estate and rescission
         expenses.

(3)        Combined ratio: The combined ratio is the sum of the losses and loss adjustment expenses
         ratio and the expense ratio.

(4)        Return on average shareholders' equity: Return on average shareholders' equity is the ratio,
         expressed as a percentage, of net earnings, excluding realized gains and losses, to the average
         of the beginning of period and end of period total shareholders' equity, excluding accumulated
         other comprehensive income.

(5)        Debt to total capitalization ratio: The debt to total capitalization ratio, is the ratio,
         expressed as a percentage, of total debt to the sum of total debt and shareholders' equity. The
         Company's total debt consists solely of loans payable.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        We are a specialty insurance company that provides customized insurance products and solutions to small and medium-sized businesses in industries that we believe are underserved by the standard insurance market. For twenty years, we have developed specialized insurance coverages and alternative risk transfer products not generally available to our customers in the standard insurance market because of the unique characteristics of the risks involved and the associated needs of the insureds. We specialize in underwriting these products for insureds with environmental risks and construction risks as well as in developing programs for other specialty classes of risks.

        During 2005, we changed our segment reporting to coincide with our strategic direction. In our segment reporting for periods prior to the year ended December 31, 2005, we segregated our business into real estate operations, insurance operations and other (which included realized gains and losses on investments and rescission expenses). We continue to segregate our business into real estate operations, insurance operations and other, but the insurance operations segment is further classified into three additional segments: excess and surplus lines, alternative risk transfer and runoff. For periods beginning with the year ended December 31, 2006 the excess and surplus lines segment is then further classified into five business lines: environmental, construction surety, non-construction and excess The alternative risk transfer segment is further classified into three business lines: specialty programs ,fully funded and partially funded. Prior year amounts have been reclassified to conform to the current year presentation. Our real estate operations consist solely of our development of the Harbour Village property, as described below under “Business-Harbour Village Development”. This project was substantially complete in 2005.

        The following information is presented on the basis of accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with “Business” and “Risk Factors,” and our consolidated financial statements and the related notes included elsewhere in this report. All amounts and percentages are rounded.

        The following table sets forth the Company’s consolidated premium and total revenue information:

                                                         Year Ended December 31,

                                                                                  2005           2006
                                                                                   to             to
                                     2004           2005          2006            2004           2005
                                                         (Dollars in thousands)
Net premiums written:

   Excess and Surplus:
      Environmental               $ 35,024         $  41,477     $  37,746        18.4%          (8.9)%
      Construction                  77,462            77,639        92,530         0.2            19.2
      Non-Construction                   -                 -         1,524           -           100.0
      Excess                           432               387           670       (10.4)           73.1
      Surety                         1,174             1,345         3,042        14.6           126.2
                                   114,092           120,848       135,512         5.9            11.2
  Alternative Risk Transfer:
      Specialty Programs            17,273            19,712        21,756        14.1            10.4
  Runoff                               299                 -             -      (100.0)              -
Total net premiums written        $131,644          $138,515      $157,268         5.2%          13.6%
                                  ========          ========      ========       ======          =====

Net premiums earned:

   Excess and Surplus:
     Environmental               $ 32,152         $ 38,081      $ 35,138        18.4%           (7.7)%
     Construction                  79,559           81,908        88,612         2.9             8.2
     Non-Construction                   -                -           653         -             100.0%
     Excess                           222              457           532       105.9            16.4
     Surety                         1,138            1,148         2,566         0.9           123.5
                                  113,071          121,137       127,501         7.1             5.3
 Alternative Risk Transfer:
   Specialty Programs              16,516           18,297        19,255        10.8             5.2
  Runoff                            6,715           (1,854)            -      (127.6)          100.0
Total net premiums earned         136,302          137,580       146,756         0.9             6.7

Fee Income Earned                     210            1,197         1,685       470.0            40.8
Net investment income               9,773           14,316        21,767        46.5            57.7
Net realized gains                    208              (54)        1,190      (125.9)        2,303.7
Real estate income                 67,967            3,000             -       (95.6)         (100.0)
Other income                          318               76            42       (76.1)          (44.7)
Total Revenues                   $214,778         $156,115      $171,440       (27.3)%          10.0%
                                 ========         ========      ========       =======          =====

        The following table sets forth the Company’s consolidated expenses:

                                                  Year Ended December 31,

                                                                                    2005           2006
                                                                                     to             to
                                     2004             2005          2006            2004           2005
                                                         (Dollars in thousands)

Total Expenses:
  Loss and loss
adjustment
    expenses incurred             $ 93,503         $  84,406      $ 92,329        (9.7)%           9.4%
  Acquisition expenses              26,649            28,752        27,378         7.9            (4.8)
  Payroll expenses                  10,297            12,130        14,896        17.8            22.8
  Real estate expenses              55,480             2,439           381       (95.6)          (84.4)
  Interest expense                   1,076             1,257         3,376        16.8           168.6
  Other expenses                     8,560            11,901        12,106        39.0             1.7
  Minority interest                    988               515        (1,873)      (47.9)         (463.6)
  Rescission expenses                 (229)           (1,334)            -      (482.5)         (100.0)
  Income taxes                       3,696             1,392         2,314       (62.3)           66.2
Total expenses                    $200,020          $141,458      $150,907       (29.3)%           6.7%
                                  ========          ========      =========      =======           ======

The following table sets forth the components of the Company’s insurance operations GAAP combined ratio for the periods indicated:

                                                      Year Ended December 31,
                                                    2004        2005      2006
Insurance operations
      Loss & loss adjustment expense ratio         68.6%       61.4%      62.9%
      Expense ratio                                34.2        37.3       35.7
      Combined ratio                              102.8%       98.6%      98.6%
                                                  ======       =====      =====

Year Ended December 31, 2006 compared to Year Ended December 31, 2005

        Net earnings increased 40% to $20.5 million for the year ended December 31, 2006 compared to $14.7 million for 2005. The increase is primarily due to greater investment income and realized gains on investments. Total revenues increased 9.8% to $171.4 million, as net premiums earned increased 6.7% to $146.8 million. The increase in investment income related to a 30.3% increase in average invested assets and a 16.7% increase in the average yield to 4.5%. Net realized gains on the investment portfolio after taxes were $921,000. Financial results for the year were adversely affected by the accrual of $3.7 million in reinsurance reinstatement premiums and $2.6 million of prior year adverse loss development. The net effect of the accrual and loss development increased the reported combined ratio by 4.1 percentage points in 2006. The year ended December 31, 2005 included $2.6 million of prior year adverse loss development, a $1.3 million allowance related to reinsurance recoverables and a $2.4 million reinsurance reinstatement premium, partially offset by a $1.4 million reversal of the accrual related to the settlement of rescission litigation. In 2006, net book value per share increased 6% to $18.59 for the year ended December 31, 2006.

Net Premiums Earned

Excess and Surplus Lines

    Environmental.        Net premiums earned decreased 7.7% to $35.1 million for the year ended December 31, 2006 compared to $38.1 million for 2005. Net earned premiums decreased due to the $3.7 million accrual of reinstatement premium to reinstate excess limit reinsurance coverage as a result of three large claims, a decline in the Company’s middle market business due to increased competition, and an expected decline in the Company’s book of environmental contractor and consultant premiums in the State of New York. The decline in the New York business is the result of changes in the underwriting process .

    Construction.        Net premiums earned increased 8.2% to $88.6 million for the year ended December 31, 2006 compared to $81.9 million for 2005. Net premiums earned increased due to the non-renewal of the excess of loss reinsurance treaty for this line in July 2005 as well as an increase in premium writings in non-western states (states other than Arizona, California, Colorado, Nevada and Washington) as a result of the Company’s geographic diversification efforts. Premiums written in non-western states increased to $15.3 million in 2006 from $3.7 million in 2005. This increase was partially offset by decreased premiums in the western states due to lower renewals and rate decreases.

    Non-Construction.        The Company’s non-construction general liability product began production in July 2006 with the acquisition of an underwriting team in Middletown, StateNew Jersey producing $653,000 of net premiums earned. The Company experienced strong submission and production activity in this line. The non-construction general liability business plans to offer both primary and excess products to small and middle market accounts. The Company does not intend to write certain high severity classes of risks such as invasive, medical products, pharmaceuticals and neutraceuticals.

    Excess.        Net premiums earned increased 16.4% to $532,000 for the year ended December 31, 2006 compared to 2005. The Company experienced strong submission activity and production continued to increase. The Company’s excess product offering is focused primarily in the construction and products liability area. The addition of the new underwriting team in Middletown, StateNew Jersey has allowed the Company to expand its excess liability product to write over other carriers’ primary policies and to offer umbrella liability coverage. The Company also increased the available policy limits up to $5.0 million during 2006.

    Surety.        Net premiums earned increased 123.5% to $2.6 million for the year ended December 31, 2006 compared to $1.1 million for 2005. In line with the Company’s strategy to increase its retention level, effective June 1, 2006 the Company did not renew the quota share reinsurance treaty in its surety line resulting in an increase in net premiums earned. The increase in Surety premiums is also due to the Company continuing to focus its growth efforts in the environmental contractor surety due to the lack of capacity serving this segment of the market. The Company also recently expanded its offerings to include non-environmental contractor bonds.

Alternative Risk Transfer

        Specialty Programs. Net premiums earned increased 5.2% to $19.3 million for the year ended December 31, 2006 compared to $18.3 million for 2005. Net premiums earned increased primarily due to increased retention levels on selected programs thereby allowing the Company the opportunity to increase its earnings potential from underwriting profits. During 2006 the Company added 5 new programs and had 12 active programs as of December 31, 2006 compared to 9 at the end of 2005. The Company’s focus on its specialty programs business line is on insurance programs that allow the Company to participate in underwriting profits, while also earning fee income as the policy-issuer. See “Business-Our Products-Alternative Risk Transfer-Specialty Programs” in Part I for additional information on our programs.

Runoff

        Net premiums earned were zero for the year ended December 31, 2006 compared to negative $1.9 million for 2005. The negative net premiums earned was due to an accrual of $2.0 million for reinstatement reinsurance premiums on discontinued lines. The Company’s excess municipality and workers’ compensation businesses were put in runoff in 2004.

Fee Income Earned.

        Fee income earned on fully funded polices increased 40.8% to $1.7 million for the year ended December 31, 2006 compared to $1.2 million for 2005. The Company recently added the availability of a fully funded product for property catastrophe exposures due to the limited capacity of affordable insurance for middle market insureds. The Company has seen some adverse impact from the overall market softening on its production efforts in this line as traditional insurance pricing declines provide a cost effective alternative to self-insurance.

         We introduced a partially funded product during the fourth quarter of 2006 to complement our fully funded product. This product is used for entities that want to self insure a portion of their risk and combines a level of underwriting risk with a self insured component.

Net Investment Income

        Net investment income increased 57.7% to $21.8 million for the year ended December 31, 2006 from $14.3 million for 2005 due to an increase in the Company’s invested assets and higher investment yields. The increase in invested assets was due to $70.7 million of cash flow from operations and $53.0 million of net proceeds from the Company’s secondary equity offering completed in June 2006. Average invested assets increased to $483.6 million as of December 31, 2006 from $371.3 million as of December 31, 2005. The average pre-tax investment yield increased from 3.9% to 4.5% from 2005 to 2006.

Net Realized Gains

        Net realized gains and losses from the sale of investments increased to a net gain of $1.2 million for the year ended December 31, 2006 from a net loss of $54,000 for 2005. The Company from time to time may sell securities in response to market conditions or interest rate fluctuations in accordance with its investment guidelines (described under “Business-Investments”) and or to fund the cash needs of individual operating subsidiaries.

Real Estate Income

        The Company did not have any real estate income in 2006 compared to $3.0 million in 2005 when the final condominium units at Harbour Village were sold. See “Business-Harbour Village Development” and Note 3 to the Company’s consolidated financial statements for additional information regarding Harbour Village.

Losses and Loss Adjustment Expenses

The table below sets forth the prior year reserve development made for by the Company for the years ended December 31, 2005 and 2006 (in thousands):

                                   Year Ended December 31,

                                     2006                  2005

Excess & Surplus lines            $   (754)             $    56
   Environmental                     2,204                2,425
   Construction                        311                 (224)
   Surety                            1,761                2,257
Alternative Risk Transfer
   Programs                           (266)                 641
Runoff                               1,111                 (300)
Total                             $  2,606              $ 2,598
                                  ========              =======

        The 2006 prior year development in the construction line primarily relates to development in layers where the reinsurance provided by one of the participants in these layers was commuted in 2005. The development in the programs primarily relates to an increase in certain case reserves on polices written in 2004 and 2005. This development is partially offset by reductions in our surety and run-off lines.

        In 2005, the Company commuted two excess of loss reinsurance treaties with a former reinsurer. The negotiated commutation price was approximately $1 million less than the recoverable from the reinsurer which was recorded in the second quarter of 2005. Additionally, in the fourth quarter of 2005, the accident year 2001 losses from commercial and residential contractors’ claims other than construction defect risk category developed adversely. The Company engaged an actuarial consulting firm in the fourth quarter of 2005 to provide construction defect claim count development patterns based on a group of companies writing construction contractors business since the early 1990s in California and other states. We implemented these claim count development patterns, which were based on a larger number of claims and a longer development history than we previously had used in estimating future construction defect claim counts. In 2005, the runoff lines’ reserve development for prior years was due to $1.2 million of increases in reserves on the Company’s excess municipality program

        See “Business-Losses and Loss Adjustment Expenses Reserves” and Note 12 to the Company’s consolidated financial statements for additional information regarding the Company’s reserves for unpaid losses and loss adjustment expenses.

Acquisition Expenses

        Policy acquisition expenses are amounts that are paid to producers of premium for the Company offset by the ceding commissions we receive from our reinsurers. For our program business, fees typically are earned through ceding commissions and have the effect of lowering our acquisition expenses. Policy acquisition expenses also include amounts paid for premium taxes to the states where we do business on an admitted basis. Policy acquisition expenses decreased to $27.4 million for the year ended December 31, 2006 from $28.8 million for 2005. Policy acquisition expenses as a function of net premiums earned decreased to 18.7% for the year ended December 31, 2006 from 20.8% for 2005, primarily due to increased retention levels which produce higher earned premiums with minimal additional expenses.

Real Estate Expenses

        Real estate expenses associated with the Harbour Village project decreased to $381,000 for the year ended December 31, 2006 from $2.4 million for 2005. The Harbour Village project is substantially completed, as the final units were sold during 2005.

Payroll Expenses

        Payroll expenses increased to $14.9 million for the year ended December 31, 2006 from $12.1 million for 2005. The increase is due to an increased number of employees, the inclusion of FASB Statement 123R option expense of $615,000 and normal salary increases.

Interest and Other Expenses

        Other expenses increased to $15.5 million for the year ended December 31, 2006 from $13.2 million for 2005. The increase is primarily due to interest expense increasing by $2.1 million due to the issuance of $25.0 million of trust preferred securities issued in November 2005.

Minority Interest

        Minority interest expense was negative $1.9 million for the year ended December 31, 2006 compared to $515,000 at December 31, 2005. Our minority interest expense relates to our non subsidiary affiliate, American Safety RRG. In 2006 American Safety RRG had a net loss due to reserve development on its environmental line of business, which produced the negative $1.9 million in minority interest expense.

Rescission Litigation

        During 2005, the Company settled litigation related to the rescission of an acquisition of a brokerage firm and related entities. The settlement was for $1.4 million less than the amount previously accrued. There was no such activity in 2006.

Income taxes

        The effective tax rate increased to 10.1% for the year ended December 31, 2006 from 8.7% for 2005. In 2005, American Safety RRG, reversed $555,000 of its deferred tax asset reserve due to expected profitability. The effects of this reversal are reflected in minority interest on the Company’s consolidated financial statements. Included in tax expense for 2006, is the establishment of a valuation allowance for American Safety RRG for $1.1 million and 2005 provision to return adjustments for permanent differences in the 2005 federal and state income tax returns of $483,000. The establishment of the valuation allowance is reflected in minority interest on the consolidated financial statements. Absent this adjustment, the effective tax rate for 2006 would have been 5.1%. The reduction in the effective rate is due to lower earnings from U.S. operations from the impact of reinstatement premiums and prior-year loss development For 2005 and 2006, the reversal and establishment of the valuation allowance has been included in income tax expense with a corresponding offset in minority interest.

Operations by Geographic Segment

        The Company operates through its subsidiaries in the U.S. and Bermuda.

Significant differences exist in the regulatory environment in each country. The table below describes the Company’s operations by geographic segment for the years ended December 31, 2005 and 2006 (in thousands):

      December 31, 2005                 U.S.            Bermuda             Total
          Income Tax              $    1,392         $       -         $    1,392
         Net earnings                  4,396            10,260             14,656
            Assets                   527,632           167,267            694,999
            Equity                $   59,002         $  59,433         $  118,435


      December 31, 2006                U.S.             Bermuda             Total
          Income Tax              $   2,314          $        -        $     2,314
         Net earnings                 3,491              17,041             20,532
            Assets                  509,552             337,579            847,131
            Equity                $  66,896          $  129,254        $   196,150

        Net Income. Net income from Bermuda operations increased to $17.0 million for the year ended December 31, 2006 compared to $10.3 million for 2005 due to higher investment income as a result of increased invested assets from our $53.0 million secondary offering and an increase in the amount of the Company’s net retentions in Bermuda. Net income from U.S. operations decreased to $3.5 million for the year ended December 31, 2006 compared to $4.4 million for 2005 primarily due to prior year loss development and reinsurance premium reinstatements.

    Assets.        Assets from Bermuda operations increased to $337.6 million at the end of 2006 compared to $167.3 million at the end of 2005. This increase is primarily a result of $53 million raised through a secondary offering in 2006 and loss portfolio transfer from U.S. insurance subsidiaries to our Bermuda reinsurance subsidiary of $34 million of environmental business related to accident years 2002 through 2006. Assets from U.S. operations at the end of 2006 decreased to $509.5 million as compared to $527.6 million at the end of 2005. The primary reason for the decrease is due to the loss portfolio transfer mentioned above.

    Equity.        Equity of the Bermuda operations increased to $129.3 million at the end of 2006 compared to $59.4 million at the end of 2005 due to the secondary offering, higher net income and an improvement in net unrealized gains on the investment portfolio. Equity of country-regionU.S. operations increased to $66.9 million at the end of 2006 from $59.0 million at December 31, 2005 due to capital contributions made to support the growth of our U.S. insurance operations and an increase in net unrealized gains on the U.S. insurance operations invested assets.

Year Ended December 31, 2005 compared to Year Ended December 31, 2004

        Net earnings were $14.7 million, or $2.05 per diluted share, for the year ended December 31, 2005 as compared to $14.8 million, or $2.01 per diluted share, for the year ended December 31, 2004.

        Total revenues for the year ended December 31, 2005 decreased 27.4% to $155.9 million compared to 2004 as a result of lower real estate income. Net premiums earned for the year ended December 31, 2005 increased 1.6% to $138.5 million from 2004 due to increased production in the Company’s core business lines. Investment income increased 46.5% to $14.3 million compared to 2004 as a result of increased invested assets of $88.5 million. Net cash flow from operations decreased to $70.4 million for the year ended December 31, 2005 from $89.8 million for 2004 as a result of increased loss payments, which were anticipated as a result of the long-tail nature of the risks that the Company insures, where, with the maturity of the Company’s business, loss payments are expected to continue to increase.Net book value per share increased 9.4% to $17.54 for the year.

Net Premiums Earned

Excess and Surplus Lines

    Environmental.        Net premiums earned increased 18.4% to $38.1 million for the year ended December 31, 2005 compared to $32.2 million for 2004. Most of the growth in this business line for 2005 was due to an increase in online production, as well as an increase in gross premiums generated as a result of standard premium audits that were performed on certain expired policies. These increases were partially offset by a planned decrease in the State of New York environmental contractor and consultant premiums as a result of changes implemented in its underwriting process, which the Company believes will improve the ultimate profitability of the environmental business line. Premium rates in its ProStar on-line rating and quoting system (“ProStar”) business remained stable year over year.

    Construction.        Net premiums earned increased 2.9% to $81.9 million for the year ended December 31, 2005 compared to $79.6 million for 2004. During 2005, the Company had $14.3 million of gross premiums written generated as a result of audits. Premium rates on the residential construction business have remained relatively stable year to year. However, during 2005 the Company started to experience a slight decline in premium rates on its renewal book of commercial construction business due to increased competition and a general softening of pricing in the market place. The changing market conditions resulted in a decline in the Company’s renewal retention rates and new business volume in 2005. See “Business- Our Market-Excess and Surplus Lines” for a description of these changing conditions. The Company remained committed to its disciplined underwriting approach and the Company also did broaden its policy terms and conditions. During 2005, the Company continued to focus on construction risks in its new business efforts as it believed this area continued to offer modest growth opportunities in selected geographic areas. Effective July 1, 2005, the Company discontinued purchasing reinsurance on the primary PersonNamegeneral liability portion of this business line. The Company made this decision after performing a loss cost and dynamic financial analysis, concluding that its reinsurance purchases were uneconomical. The Company believes retaining this exposure will enhance its financial results and returns on capital.

    Surety.        Net premiums earned remained stable at $1.1 million for the years ended December 31, 2005 and 2004.

Alternative Risk Transfer

        Specialty Programs. Net premiums earned increased 10.8% to $18.3 million for the year ended December 31, 2005 compared to $16.5 million for 2004. The increase in 2005 was due primarily to premiums from three new programs added in late 2004 and the first half of 2005. The Company had 10 active programs at the end of 2005 as compared to 15 at the end of 2004. The Company has focused its efforts on increasing its retention levels on programs, thereby allowing the Company the opportunity to increase its earnings potential from underwriting profits. The Company’s focus on its specialty programs business line is on insurance programs that allow the Company to participate in underwriting profits, while also earning fee income as the policy-issuer. These increased retentions, in part, drove the increase in premiums earned in 2005. See “Business-Our Products-Alternative Risk Transfer Specialty Programs” for additional information on our programs.

Runoff

        Net premiums earned decreased to negative $1.9 million for the year ended December 31, 2005 compared to $6.7 million for 2004. The decrease in runoff net premiums earned was attributable to the Company’s exit from specific business lines that did not meet its profit or production expectations. In addition, in 2005 net premiums earned decreased due to an accrual of $2.0 million for reinsurance premiums on its discontinued workers compensation business, which was put into runoff in 2004. See “Business-Our Products-Runoff Lines” for additional information about our runoff segment.

Fee Income Earned

        Fee income earned on fully funded polices increased to $1.2 million for the year ended December 31, 2005 as compared to $210,000 for 2004. The Company anticipates continued growth opportunities for this business line in the healthcare and residential construction industries, which were primary drivers for the growth mentioned above and new growth opportunities in the product manufacturing industry.

Net Investment Income

        Net investment income increased 46.5% to $14.3 million for the year ended December 31, 2005 from $9.8 million for 2004 due to an increase in the Company’s invested assets and higher investment yields. Average invested assets increased to $371.3 million as of December 31, 2005 from $274.7 million as of December 31, 2004, reflecting approximately $70.4 million in cash flows from operations and $24.4 million in net proceeds from the issuance of trust preferred securities in November 2005. The average pre-tax investment yield increased from 3.5% to 3.9%, from 2004 to 2005.

Net Realized Gains

        Net realized gains and losses from the sale of investments decreased to a net loss of $54,000 for the year ended December 31, 2005 from a net gain of $208,000 for 2004. The Company sold investments in 2005 of fixed income securities and common stock in accordance with its investment policies described under “Business-Investments.”

Real Estate Income

        Real estate income decreased to $3.0 million for the year ended December 31, 2005 as compared to $68.0 million in 2004. The reduction in real estate income was due to the substantial completion of the Harbour Village project. The final condominium units at Harbour Village were sold and closed in the second quarter of 2005. The Company does not expect to engage in any further real estate activities. The funds generated from Harbour Village have been invested into the Company’s insurance operations. See “Business-Harbour Village Development” and Note 3 to the Company’s consolidated financial statements for additional information regarding Harbour Village.

Losses and Loss Adjustment Expenses

        For the year ended December 31, 2005, the Company’s losses and loss adjustment expenses ratio decreased 7.7 percentage points to 60.9% from 68.6% primarily due to improved underwriting results. The table below sets forth the prior year reserve development made for by the Company for the years ended December 31, 2004 and 2005 (in thousands):

                                   Year Ended December 31,

                                    2004           2005

Excess & Surplus lines          $    94        $    (754)
   Environmental                  7,700            2,204
   Construction                      37              311
   Surety                         7,831            1,761
Alternative Risk Transfer
   Programs                       1,496            (266)
Runoff                            5,075            1,111
Total                          $ 14,402        $   2,606
                               ========        =========

        The construction business line experienced reserve development of $2.2 million in 2005 compared to $7.7 million in 2004. During 2005, the Company experienced reserve development of $1.1 million on its runoff segment compared to $5.1 million in 2004. In 2005, the reserve development in this segment consisted of $1.2 million relating to the excess municipality program resulting from aggregate coverage provided. Construction lines reserve development in 2005 was primarily attributable to the commutation of reinsurance contracts with a former reinsurer. This transaction resulted in the Company recognizing losses of $1.0 million in 2005. See “Business-Losses and Loss Adjustment Expenses Reserves” and Note 12 to the Company’s consolidated financial statements for additional information regarding the Company’s reserves for unpaid losses and loss adjustment expenses.

Acquisition Expenses

        Policy acquisition expenses are amounts that are paid to producers for the production of premium for the Company offset by the ceding commissions we retain from our reinsurers. For our program business, fees typically are earned through ceding commissions and have the effect of lowering our acquisition expenses. Policy acquisition expenses also include amounts paid for premium taxes to the states in which we do business on an admitted basis. Policy acquisition expenses increased to $28.5 million for the year ended December 31, 2005 from $26.5 million for 2004. Policy acquisition expenses as a function of net premiums earned increased to 20.6% for the year ended December 31, 2005 from 19.5% for 2004, primarily due to higher earned premiums and lower 2004 acquisition expenses due to the accrual of profit commissions on reinsurance.

Real Estate Expenses

        Real estate expenses associated with the Harbour Village project decreased to $2.2 million for the year ended December 31, 2005 from $55.5 million for 2004. In 2005, the Company received $980,000 for settlement of roof litigation at Harbour Village, which was applied as a reduction to real estate expenses as it had been expensed previously.

Payroll Expenses

        Payroll expenses increased to $12.1 million for the year ended December 31, 2005 from $10.3 million for 2004. This increase reflects an accrual for bonuses based on the Company’s performance and normal salary increases.

Interest and Other Expenses

        Other expenses increased to $13.2 million for the year ended December 31, 2005 from $9.6 million for 2004. In 2004, the Company collected $2.6 million as final settlement of a note receivable, which was applied as a reduction to 2004 other expenses. Absent this $2.6 million receipt, other expenses increased $1.0 million primarily due to the establishment of a $1.3 million reinsurance recoverable allowance.

Rescission Litigation

        In connection with the Company’s 2000 acquisition of a brokerage firm and a related entity, the Company recorded a benefit of $1.4 million in 2005 due to the reversal of an accrual. This compares to a net benefit of $230,000 in 2004 related to the same dispute as a result of settlement of litigation.

Income taxes

        The effective tax rate decreased to 8.7% for the year ended December 31, 2005 from 20.0% for 2004. This decrease was due primarily to the reversal of a deferred tax asset reserve of our non-subsidiary affiliate American Safety RRG of $555,000. Absent this adjustment, the effective tax rate would have been 12.1% for the year ended December 31, 2005. In addition, the effective tax rate was lower due to a decrease in real estate earnings and lower taxable income on the Company’s U.S. insurance subsidiaries.

Operations by Geographic Segment

        The Company operates through its subsidiaries in the country-regionU.S. and Bermuda. Significant differences exist in the regulatory environment in each country. The table below describes the Company’s operations by geographic segment for the years ended December 31, 2004 and 2005 (in thousands):

      December 31, 2004                 U.S.           Bermuda              Total
          Income Tax                $  3,696        $       -           $    3,696
         Net earnings                  5,543            9,214               14,757
            Assets                   448,366          134,838              583,204
            Equity                  $ 56,126        $  52,654           $  108,780


      December 31, 2005                 U.S.           Bermuda              Total
          Income Tax                $   1,392       $       -           $    1,392
         Net earnings                   4,396          10,260               14,656
            Assets                    527,632         167,267              694,999
            Equity                  $  59,002       $  59,433           $  118,435

        Net Income. Net income from Bermuda operations increased to $10.3 million for the year ended December 31, 2005 compared to $9.2 million for 2004. Net income from Bermuda operations increased in 2005 due to improved underwriting results in the Company’s insurance operations. Net income from U.S. operations decreased to $4.4 million for the year ended December 31, 2005 compared to $5.5 million for 2004. This decrease is due to lower real estate income offset by improved insurance operations. U.S. insurance earnings increased by $6.5 million to $4.2 million at December 31, 2005 compared to a loss of $2.3 million at December 31, 2004. Real estate income decreased to $209,000 at December 31, 2005 compared to $7.8 million for the same period of 2004.

    Assets.        Assets from Bermuda operations increased to $167.4 million at the end of 2005 compared to $134.8 million at the end of 2004. This increase resulted from an increase in premium writings assumed from growing U.S. operations. Assets from U.S.

operations at the end of 2005 increased to $527.6 million, compared to $448.4 million at the end of 2004. This increase is a result of the Company issuing a trust preferred security in 2005 raising approximately $25 million and the growth in the Company’s core business lines offset by a decrease in real estate assets as the Harbour Village project is substantially complete.

    Equity.        Equity of the Bermuda operations increased to $59.4 million at the end of 2005 compared to $52.6 million at the end of 2004. This increase was largely due to higher net income offset by a stock repurchase during the second quarter of 2005 and an increase in the net unrealized losses on the Company’s investment portfolio. Equity of the U.S. operations increased to $59.0 million at the end of 2005, compared to $56.1 million at the end of 2004. This increase was a result of higher net income offset by an increase in net unrealized losses on the Company’s investment portfolio.

Liquidity and Capital Resources

        The Company meets its cash requirements and finances its growth principally through cash flows generated from operations. From 2000 through 2004 the Company had operated in a hardening market with increased insurance premium rates for general liability coverages and increased fees for program business opportunities. Since 2004, the Company has experienced a leveling of premiums rates due to entrance of new insurance competitors and overall market conditions. The Company’s primary sources of short-term cash flow are premium writings and investment income. Short-term cash requirements relate to claims payments, reinsurance premiums, commissions, salaries, employee benefits and other operating expenses. Due to the uncertainty regarding the timing and amount of settlements of unpaid claims, the Company’s future liquidity requirements may vary; therefore, the Company has structured its investment portfolio maturities to help mitigate the variations in those factors. The Company believes its current cash flows are sufficient for the short-term needs of its business and its invested assets are sufficient for the long-term needs of its insurance business.

        Net cash provided from operations was $70.7 million for the year ended December 31, 2006, $70.4 million for the year ended December 31, 2005 and $89.8 million for the year ended December 31, 2004. The cash flow from operations remained flat in 2006 compared to 2005 primarily due to increased loss payments which increased to $55.8 million from $46.9 million, due to the maturing of our books of business as well as the impact from several large losses. The decrease in cash flow from operations between 2005 and 2004 was primarily caused by increased loss payments, which increased to $46.9 million from $20.5 million.

        Our ability to pay future dividends to shareholders will depend, to a significant degree, on the ability of our subsidiaries to generate earnings form which to pay dividends. The jurisdiction in which we and our insurance and reinsurance subsidiaries are domiciled places limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers. Given our growth and the capital requirements associated with that growth, we do not anticipate paying dividends on the Common Shares in the near future.

        In June 2006 the Company completed a secondary equity offering of 3,680,000 common shares, raising $53 million net of underwriting expenses. The proceeds of the offering are being used to support the growth in insurance operations. Additionally, in November 2005, in conjunction with American Safety Capital Trust III, the Company issued a 30-year trust preferred obligation in the amount of $25.0 million. This obligation bears a fixed interest rate of 8.31% for the first five years, and a floating rate of three-month LIBOR plus 3.4% thereafter. At the current time, the Company does not anticipate entering into an interest rate swap with respect to this issuance. Interest is payable on a quarterly basis and the securities may be called solely at the Company’s option after five years.

Contractual Obligations

        Our contractual obligations (in thousands of dollars) as of December 31, 2006 were:

                                                        Less than 1         1-3             3-5          More than 5
                                            Total           year           Years           Years            Years
                                        --------------------------------------------------------------------------
Long term debt                           $ 38,139      $         -     $        -      $  38,139        $
Interest (1)                              100,640            3,026          6,470          6,653                -
                                                                                                           84,491
Operating leases                            7,388              877          2,088          1,237            3,186
Gross loss reserves (2)                   439,674           97,987        150,399         90,586          100,702
                                        --------------------------------------------------------------------------
Total contractual obligations            $585,841         $101,890       $158,957       $136,615         $188,379

    (1)        The above table includes all interest payments through the expiration of interest rate swaps as discussed in Note 8 to the Company’s consolidated financial statements. At that time the Company may redeem the debt or continue with variable interest payments. All amounts are reflected based on final maturity dates. Variable rate interest obligations are estimated based on current interest rates. As a result of applying current interest rates to the respective LIBOR for each capital trust, the interest rates were 9.6%, 9.3% and 8.8% for American Safety Capital Trust, American Safety Capital Trust II and American Safety Capital Trust III, respectively s of December 31, 2006. These rates are used to calculate the variable interest rate obligations through maturity. Fixed rates include, where applicable, the effects of interest rate derivatives employed to manage such interest rate risk.

    (2)        The above table includes the expected settlement of our gross loss reserves. The Company relies on reinsurance to reduce current risk exposures. The expected payoff of Gross Loss Reserves net of Reinsurance Recoverables is as follows (in thousands): Total $278,527; $58,909 less than a year, $99,914, 1-3 years, $49,751, 3-5 years $69,953, more than 5 years. More information about our unpaid loss and loss adjustment expenses appears in Note 12 to our consolidated financial statements.

        For these purposes, routine purchases of services, including insurance, that are expected to be used in the ordinary course of the Company’s business have been excluded. More information about our contractual obligations appears in Note 8 to our consolidated financial statements.

Recent Accounting Pronouncements

        See Note 1(n), “Summary of Significant Accounting Polices,” to the Company’s consolidated financial statements included herein for a discussion on recent accounting pronouncements.

Critical Accounting Policies

        The accounting policies described below are those we consider critical in preparing our financial statements. These policies include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used and there is no assurance that actual results will not differ materially from the estimates.

    Investments.        We routinely review our investments that have experienced declines in fair value to determine if the decline is other than temporary. These reviews are performed with consideration of the facts and circumstances of an issuer in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 59, Accounting for Non-Current Marketable Equity Securities; Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities; and Issue No. 03-1, The Meaning of Other-Than-Temporary Impairement and Its Application to Certain Investments; FASB Staff Position No. FAS 115-1 and related guidance. The identification of distressed investments, and the assessment of whether a decline is other than temporary involve significant management judgment and require evaluation of factors including but not limited to:

    o  Percentage decline in value and the length of time during which the decline has occurred,
    o  Recoverability of principal and interest,
    o  Market conditions,
    o  Ability to hold the investment to maturity,
    o  A pattern of continuing operating losses of the issuer,
    o  Rating agency actions that affect the issuer's credit status,
    o  Adverse  changes  in the  issuer's  availability  of  production  resources,  revenue  sources,
       technological conditions, and
    o  Adverse changes in the issuer's economic, regulatory or political environment.

        The Company did not have any impairment charges during 2006. The Company in conjunction with its investment advisor, monitors its investments for potential impairments. See “Business-Investments” for information as to the credit quality of its investment portfolio. At December 31, 2006, 98.3% of the investment portfolio was rated A or better by S&P and Moody’s, with 72.3% being rated AAA.

        If all securities carrying an unrealized loss were determined to be other than temporarily impaired, our future earnings would be reduced by the $4.4 million carried unrealized loss on fixed maturity investments at December 31, 2006. We believe that these unrealized losses are a result of rising interest rates and not from credit issues with the issuer. As a result management concluded that the recoverability of the principal and interest is reasonably assured and no impairment needed to be recognized.

        At December 31, 2006, mortgage backed securities comprised 40.9% of the entire portfolio. All mortgage backed securities are issued by agencies of the U.S. Government. The single largest security in this class is a Fannie Mae investment with an $11.4 million par value. Corporate fixed maturities were the second largest class at 23.4% of the total portfolio, with the largest single security being Eaton Corporation with a par value of $5.0 million. In the corporate sector, the Company has concentrations in the banking area with par value of $24.2 million or 4.3% of the total portfolio, with the largest single security being Bank of America with a par value of $2.0 million. The Company also has concentrations in brokerage houses with $23.3 million or 4.1% of the total portfolio, with the largest single security being Morgan Stanley with a par value of $3.5 million. U.S. Government securities were the third largest class at 21.9% of the total portfolio with the largest security having a par value of $8.5 million. The Company had $777,000, or 0.2% of its portfolio in below investment grade securities, these being Ford Motor Credit Company, which had unrealized losses totaling $6,000.

    Reserves.        Claims made policies provide coverage for claims that are incurred and reported during the policy period. Occurrence form policies provide coverage for claims that occur during the policy period regardless of when they are reported. Certain of our insurance policies and reinsurance assumed, including general and pollution liability policies covering environmental remediation, construction and workers’ compensation risks, are occurrence policies and therefore may be subject to claims brought years after an incident has occurred or the policy period has ended. We are required by our regulators to maintain reserves to cover the unpaid portion of our ultimate liability for losses and loss adjustment expenses with respect to (i) reported claims and (ii) incurred but not reported (IBNR) claims. A full actuarial analysis is performed to estimate all of our unpaid losses and loss adjustment expenses under the terms of our contracts and agreements. In evaluating whether the reserves are reasonable for unpaid losses and loss adjustment expenses, it is necessary to project future losses and loss adjustment expenses payments. It is certain that the actual future losses and loss adjustment expenses will not develop exactly as projected and may, in fact, vary materially from the projections.

        With respect to reported claims, reserves are established on a case-by-case basis. The reserve amounts on each reported claim are determined by taking into account the circumstances surrounding each claim and policy provisions relating to the type of loss. Loss reserves are reviewed on a regular basis, and as new information becomes available, appropriate adjustments are made to reserves. See “Business-Losses and Loss Adjustment Expense Reserves” for a description of reserve methodology.

        The Company does not write a material amount of short-tail business as part of our specialty program business. Short-tail business is defined as business for which claims are received and settled within one year. Total net reserves for short tail business are not material and as of December 31, 2006 were less than 0.1% of total net reserves. In the aggregate, our primary long-tail lines are construction, where we offer general liability insurance to construction contractors and environmental where we offer general liability and professional liability insurance to environmental contractors and consultants.

        Construction: In addition to evaluating the loss reserves on all exposures on a combined basis the actuarial staff evaluated reserves for each of the following exclusive categories: (1) construction defect claims in California; (2) construction defect in all other states; (3) commercial and residential contractors claims other than construction defects; (4) claims in New York state; (5) claims from product liability exposures; (6) claims from habitational risks; (7) claims from miscellaneous risks.

        Construction defect claims in general had a higher frequency, a lower severity and a longer reporting period then other types of claims. The construction defect exposures in California were analyzed separately from other states because of the state’s relatively longer statute which makes the claim reporting period longer, and the litigious environment, which makes the claims more expensive. Other commercial and residential contractors’ claims tended to be high in severity. The Company wrote New York commercial contractor risks in 1999, 2000 and 2001. Due to the short amount of time we wrote this business and the higher severity in New York claims, the reserves for these exposures are calculated separately. Products liability claims tended to be severe and took a longer time to report. The habitational exposures were mostly slips and falls on the insured premises with low severity and frequency.

        Our experience with construction claims remains limited and prior to the fourth quarter of 2005 our reserve calculations were based upon a combination of industry and Company loss development patterns. During that quarter we retained an actuarial consulting firm that provided us with construction defect claim counts based upon a larger population that we now use to calculate reserves.

        Environmental: Most exposures involved common types of bodily injury and property damage claims. These claims tend to be reported sooner but take longer to settle because often times multiple parties are involved in a claim. The loss development patterns and the expected loss ratios are estimated based on our actual emerged losses.

        We deploy several methods in determining our ultimate losses: (i) the expected loss ratio method, (ii) the loss development method based on paid and reported losses and (iii) the Bornhuetter-Ferguson method based on expected loss ratio, paid losses and reported losses. Each of these methods is used to calculate ultimate loss reserves. In each case IBNR is calculated by subtracting cumulative paid claims and case reserves from the ultimate loss reserves.

        Because the Company writes long-tail business, the current year ultimate loss reserve is developed using the expected loss ratio method. The method is appropriate because there are very few claims reported from the most recent accident year for long-tail lines of business. The expected loss ratio is determined based on the review of the projected ultimate loss ratios for the prior accident years. At December 31, 2006 the carried loss and loss adjustment reserves for accident years prior to 2006 were determined largely based on the indications produced by the Bornhuetter-Ferguson method because of the additional claims experience gained as the business line matures.

        On a quarterly basis, the Company’s internal actuary performs a review of lines of business with significant net exposure. The evaluation entails the examination of our current actuarial assumptions compared to actual claim activity. If there is a material deviation from actual emerged losses and the actuarially determined expected losses, further research is completed to determine the cause. Discussions with the claims staff and the underwriting staff about these deviations, in some cases, reveal trends that warrant modifications of the current assumptions about loss development patterns and or expected loss ratios. Based on these latest loss reserve projections, management establishes revised estimates of loss reserves as appropriate.

        As part of our year-end audit, the Company has an external actuarial firm review the analysis, prepared by our internal actuary and issue an actuarial opinion on the insurance operating companies’ reserve adequacy.

        The carried gross loss reserves for material lines of business are as follows (in thousands of dollars):

                                                     December 31, 2005
                                             Loss                Loss Adjustment          Total
     On-Going:                       Case           IBNR         Case     IBNR         Case and IBNR
     Environmental              $  14,141         27,193        2,596       15,716        $  59,646
     Construction                  17,992         96,250        4,950       64,165          183,357
     Surety                       (2,181)            134        1,065          711            (271)
     Programs *                    31,232         21,317       34,362       25,499          112,410
                          -------------------------------------------------------------------------
                                   61,184        144,894       42,973      106,091          355,142
     Run-Off:                      17,426          1,772       16,096        3,057           38,351
                          -------------------------------------------------------------------------
               Total            $  78,610        146,666       59,069      109,148        $ 393,493
                          =========================================================================

                                                 December 31, 2006
                                          Loss                    Loss Adjustment          Total
     On-Going:                    Case            IBNR           Case         IBNR      Case and IBNR
     Environmental            $ 24,398          23,363          5,517       15,576        $  68,854
     Construction               23,146         114,060          4,322       76,039          217,567
     Surety                    (1,961)           1,109        (1,307)          739          (1,420)
     Programs *                 36,944          52,783          3,951       24,933          118,611
                         --------------------------------------------------------------------------
                                82,527         191,315         12,483      117,287          403,612
     Run-Off:                    8,955          14,300          9,778        3,028           36,061
                         --------------------------------------------------------------------------
               Total          $ 91,482         205,615         22,261      120,315        $ 439,673
                         ==========================================================================

                  * Represents 30 different programs with diverse risks. Some programs are in runoff.

Variability of Loss Reserves Based on Reasonably Likely Assumptions

        A number of assumptions were made in the determination of the best reserve estimates for each line of business at December 31, 2006. The key assumptions among them were the expected loss ratios and loss development patterns. If the actual future losses and loss adjustment expenses develop materially differently from those key assumptions, there could be a potential for significant variation in the development of loss reserves. The effect of any specific assumptions can vary by accident year and line of business. We performed sensitivity analyses that tested the effects on the loss reserve position of using alternative loss ratios and loss development patterns rather than those actually used in determining the net carried reserve at December 31, 2006. The tests addressed each major line of business for which a material deviation to the overall reserve position is believed reasonably possible and used what we believed was reasonably likely range of potential deviation for each line of business. If our net carried reserves were to decrease from our best estimate, this would increase our net earnings, while an increase in our net carried reserves would decrease our earnings The following table displays the resulting range of potential deviation of the net carried reserves for each line of business (in thousands of dollars):

                                   Possible Amount Change From The     Possible Percentage Change
                                           Carried Reserves             From The Carried Reserves
                       Net Carried     (Decrease)          Increase       (Decrease)   Increase
                         Reserves
Environmental         $    51,317     $   (4,183)    $     3,041            (8)%          6%
Construction              180,434        (28,081)          6,449           (16)           4
Surety                        174             (5)              4            (3)           2
Programs  (1)              27,445              -               -             -            -
Runoff                     19,157         (1,186)          1,130            (6)           6
                      $   278,527       $(33,455)     $   10,624            (12)%         4%
                         ========        ========      =========           =====         ===

     (1) Represents 30 different programs with diverse risks. Some programs are in runoff. Each individual program is not material to our total net carried reserves therefore no variability has been shown.

    Reinsurance.        Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not relieve us of our legal liability to our policyholders. We continuously monitor the financial condition of our reinsurers. Our policy is to periodically charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from troubled or insolvent reinsurers. We believe that current reserve levels for uncollectible reinsurance are sufficient to cover our exposures.

The following  table depicts the effects on our financial  position and results of operations of our ceded
reinsurance activities (in thousands of dollars):

                                                  2004           2005            2006

Shareholders' equity as reported             $ 108,780      $ 118,435         $196,150

Effects of reinsurance                           5,033         (3,233)          (7,536)

Shareholders' equity without reinsurance     $ 113,813      $ 115,202         $188,614
                                               =======       ========          =======
Net earnings as reported                     $  14,757      $  14,656          $20,532

Effects of reinsurance                           5,033         (3,233)          (7,536)

Net earnings without reinsurance              $ 19,790      $  11,423         $ 12,996
                                               =======       ========          =======
Net cash flow from operations                $  24,404      $  21,640         $  1,044
                                               =======       ========          =======

        Due to increasing reinsurance rates and after completing an analysis of our reinsurance structure prepared by our broker, management decided not to purchase reinsurance in connection with its construction and surety lines of business in July 2005 and June 2006, respectively. We also increased our retention levels on certain programs within our specialty program line and on the first excess of loss layer on the environmental line. These actions will increase our net earned premium and related loss and loss adjusted expense. The impact on our financial statements is expected to be an increase to cash and loss reserve and a decrease to reinsurance recoverables. There were no other material changes to our reinsurance strategy during 2006.

        Policy acquisition costs. We defer commissions and premium taxes that are related to the acquisition of insurance contracts. These costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This would also give effect to the premiums to be earned and anticipated losses and settlement expenses as well as certain other costs expected to be incurred as the premiums are earned. Judgments as to the ultimate recoverability of such deferred costs are highly dependent upon estimated future loss costs associated with the premiums written.

        Deferred Income Taxes. We are required to establish a valuation allowance for the portion of any deferred tax asset that we believe will not be realized. The majority of our deferred tax assets associated with the Harbour Village project were realized in 2006 and prior. The majority of our deferred taxes associated with our premium writings will be realized over the policy period and payout of related claims. We believe it is more likely that not that we will realize the full benefit of our deferred tax assets, except for deferred tax assets associated with American Safety RRG. See Note 6 to the Company’s consolidated financial statements for additional information on deferred tax assets.

        Recognition of Premium Income. Our premiums are primarily estimated based upon the annual revenues of the underlying insureds. Additional or return premiums are recognized for differences between provisional premiums billed and ultimate premiums due when a final audit is complete after the policy has expired. Our premiums are recorded ratably over the policy period with unearned premium calculated on a pro rata basis over the lives of the underlying coverages.

Income Taxes

        We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of the Tax Protection Act, which exempts us and our 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. Exclusive of our country-regionU.S. subsidiaries, we do not consider ourselves to be engaged in a trade or business in the U.S. and accordingly do not expect to be subject to direct U.S. income taxation. Our country-regionU.S. subsidiaries are subject to taxation in the U.S.

        In July 2006, the FASB issued a Staff Position Number FIN 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement Number 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company has reviewed the pronouncement and based on its analysis to date will not have a material impact on its operating results.

Impact of Inflation

        Property and casualty insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such amounts, is known. The Company attempts to anticipate the potential impact of inflation in establishing its premiums and reserves. Substantial future increases in inflation could result in future increases in interest rates, which, in turn, are likely to result in a decline in the market value of the Company’s investment portfolio and resulting unrealized losses and/or reductions in shareholders’ equity.

Combined Ratio

        Our underwriting experience is best indicated by our GAAP combined ratio, which is the sum of (a) the ratio of incurred losses and settlement expenses to net premiums earned (loss ratio) and (b) the ratio of policy acquisition costs and other operating expenses to net premiums earned (expense ratio). A combined ratio below 100% indicates that an insurance company has an underwriting profit, and a combined ratio above 100% indicates an insurer has an underwriting loss. Our reported combined ratio excludes certain holding company expenses such as interest expense as well as real estate and rescission expenses.

Variable Interest Entities (VIE)

        In January 2003, the Financial Accounting Standards Board (the ‘FASB”) issued FASB Interpretation No. 46 (“FIN 46”). This interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the expected residual gains, or both, as a result of ownership, contractual or other financial interests in the entity. In December 2003, the FASB issued a revised version of FIN 46, FIN 46(R), which finalized the accounting guidance for VIEs. As a result of adopting FIN 46(R), the Company consolidated its non-subsidiary affiliate American Safety RRG and deconsolidated its trust subsidiaries American Safety Capital Trust, American Safety Capital Trust II and American Safety Capital Trust III.

Off-Balance Sheet Arrangements

        The Company has guaranteed a $2 million letter of credit to the State of Vermont on behalf of American Safety RRG, its non-subsidiary affiliate. This letter of credit served as initial capitalization of American Safety RRG and may be drawn upon in the event of the insolvency of American Safety RRG.

Forward Looking Statements

        This report contains forward-looking statements. These forward-looking statements reflect the Company’s current views with respect to future events and financial performance, including insurance market conditions, premium growth, acquisitions and new products and the impact of new accounting standards. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially, including competitive conditions in the insurance industry, levels of new and renewal insurance business, developments in loss trends, adequacy and changes in loss reserves and actuarial assumptions, timing or collectibility of reinsurance recoverables, market acceptance of new coverages and enhancements, changes in reinsurance costs and availability, potential adverse decisions in court and arbitration proceedings, the integration and other challenges attendant to acquisitions, and changes in levels of general business activity and economic conditions.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign exchange rates and commodity prices. Our consolidated balance sheets include assets whose estimated fair values are subject to market risk. The primary market risks to us are interest rate and credit risk associated with our investments. We have no direct commodity or foreign exchange risk as of December 31, 2006. The estimated fair value of our investment portfolio at December 31, 2006 was $551.2 million, of which 96.3% was invested in fixed maturities and short-term investments and 3.7% was invested in equities.

        Interest Rate Risk. Our fixed rate holdings are invested predominantly in high quality government, corporate and municipal bonds with relatively short durations. The fixed rate portfolio is exposed to interest rate fluctuations; assuming all other factors remain constant as interest rates rise, their fair values decline and as interest rates fall, their fair values rise. The changes in the fair market value of the fixed rate portfolio are presented as a component of shareholders’ equity in accumulated other comprehensive income, net of taxes.

        We work to manage the impact of interest rate fluctuations on our fixed rate portfolio. The effective duration of the fixed rate portfolio is managed with consideration given to the estimated payout timing of our liabilities. We have investment policies which limit the maximum duration and maturity of individual securities within the portfolio and set target levels for average duration and maturity of the entire portfolio. For additional information on our investments and investment policies, see “Business-Investments.”

        The table below summarizes our interest rate risk and shows the effect of hypothetical changes in interest rates as of December 31, 2006. The selected hypothetical changes do not indicate what would be the potential best or worst case scenarios (dollars in thousands):

                                                                           Estimated Fair
                                   Estimated Fair      Hypothetical          Value after           Hypothetical
                                      Value at      Change in Interest      Hypothetical       Percentage Increase
                                    December 31,           Rate          Change in Interest       (Decrease) in
                                        2006         (bp=basis points)          Rate           Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Total Fixed Maturity                  $530,638      200bp decrease            $547,059                   8.4%
Investments (including                              100bp decrease             540,886                   5.2
short-term investments)                             100bp increase             501,994                 (14.6)
                                                    200bp increase             492,041                 (19.7)

        Interest rate risk related to our loans payable to American Safety Capital Trust and American Safety Capital Trust II, two of our non-consolidated 100% owned subsidiaries, is hedged for the first five years of the debt obligations through the use of interest rate swaps. The interest rate related to our loan payable to American Safety Capital Trust III is fixed for the first five years so no hedge was established.

        Credit Risk. We invest primarily in the debt securities markets, which exposes us to credit risk. Credit risk is a consequence of extending credit and/or carrying investment positions. We require that all securities be rated investment grade at the time of purchase. We use specific criteria to judge the credit quality and liquidity of our investments and use a variety of credit rating services to monitor these criteria. For additional information on our investments and our investment criteria, see “Business — Investments.” The Company’s market rate risk has not changed materially since December 31, 2006.

Item 8. Financial Statements and Supplementary Data

        The Company’s consolidated financial statements required under this Item 8 are included as part of Item 15 of this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

         None.

Item 9A. Controls and Procedures

Management’s Responsibility for Financial Statements

The financial statements presented in this Annual Report have been prepared with integrity and objectivity and are the responsibility of the management of American Safety Insurance Holdings, Ltd. These financial statements have been prepared in conformity with U.S. generally accepted accounting principles and properly reflect certain estimates and judgments based upon the best available information.

The financial statements of the Company have been audited by BDO Seidman LLP, an independent registered public accounting firm. Their accompanying report is based upon an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Audit Committee of the Board of Directors, consisting solely of outside directors, meets a minimum of four times a year with the independent registered public accounting firm, the internal auditors and representatives of management to discuss auditing and financial reporting matters. In addition, a meeting is held prior to each quarterly earnings release. The Audit Committee retains the independent registered public accounting firm and regularly reviews the internal accounting controls, the activities of the independent registered public accounting firm and internal auditors and the financial condition of the Company. Both the Company’s independent registered pubic accounting firm and the internal auditors have access to the Audit Committee at any time.

Evaluation of Disclosure Controls and Procedures

As of December 31, 2006, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a – 15(e) under the Securities Exchange Act of 1934) was carried out on behalf of American Safety Insurance Holdings, Ltd., and its subsidiaries by our management with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon the evaluation, management concluded that these disclosure controls and procedures were effective as of December 31, 2006. Changes in Internal Controls

During the fourth quarter of the year ended December 31, 2006, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

         None.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by BDO Seidman LLP, an independent registered public accounting firm, as stated in its report which is included herein.

       /s/ Stephen R. Crim                            /s/ William C. Tepe
       Stephen R. Crim                                William C. Tepe
       President and Chief Executive Officer          Chief Financial Officer

Report of Independent Registered Public Accounting Firm on

Internal Control Over Financial Reporting

To the Board of Directors

American Safety Insurance Holdings, Ltd.

        We have audited management’s assessment in the accompanying Report of Management on Internal Control over Financial Reporting included in Item 9A, that American Safety Insurance Holdings, Ltd. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO” criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

        Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of American Safety Insurance Holdings, Ltd. and subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of income, changes in shareholders’ equity and cash flows and related schedules for each of the three years in the period ended December 31, 2006 and our report dated March 15, 2007 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

Atlanta, GA
March 15, 2007

PART III

Item 10. Directors, Executive Officers and Corporate Governance of the Registrant

        The information required by this Item 10. regarding directors and executive officers of the Company will be set forth in the Company’s 2007 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by this reference. Additional information required by this Item 10. with respect to executive officers is set forth in Item 4. of this Report.

        The information set forth in the second paragraph of Item 1. of this Report is incorporated herein by reference. The code of business conduct and ethics referenced therein applies to our principal executive officers, principal financial officer, principal and senior accounting officers or controller, or persons performing similar functions.

Item 11. Executive Compensation

        The information required by this Item 11. regarding executive compensation will be set forth in the Company’s 2007 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The information required by this Item 12. regarding security ownership of certain beneficial owners and management of the Company will be set forth in the Company’s 2007 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by this reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

        The information required by this Item 13. regarding certain relationships and related transactions of the Company will be set forth in the Company’s 2007 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by this reference.

Item 14. Principal Accountant Fees and Services

        The information required by this Item 14. regarding principal accountant fees and services will be set forth in the Company’s 2007 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by reference.

                                                     PART IV

Item 15.    Exhibits and Financial Statements Schedules.

       (a) Financial Statements Schedules, and Exhibits

              1.  Financial Statements

                  The following is a list of financial  statements,  together with Reports thereon,  filed
                  as part of this Report:

- -          Report of BDO Seidman, LLP Independent Registered Public Accounting Firm

- -          Consolidated Balance Sheets at December 31, 2005 and 2006

- -          Consolidated Statements of Operations for the Years Ended December 31, 2004, 2005 and 2006

- -          Consolidated  Statements of  Shareholders' Equity for the Years Ended December 31, 2004,  2005
                           and 2006

- -          Consolidated Statements of Cash Flow for the Years Ended December 31, 2004, 2005 and 2006

- -          Consolidated  Statements of Comprehensive  Earnings for the Years Ended December 31, 2004, 2005
                           and 2006

- -          Notes to Consolidated Financial Statements

- -          Selected Quarterly Financial Data

              2.  Financial Statement Schedules and Exhibits

                       The  following is a list of financial  statement  schedules  and exhibits  filed as
                       part of this report:

                       Schedule/Exhibit Number                             Page

            -    Schedule II  - Condensed Financial Statements
                                 (Parent only)                              115
            -    Schedule III - Supplemental Information                    119
            -    Schedule IV - Reinsurance                                  120

Other schedules have been omitted as they are not applicable to the Company, or the required information has been included in the financial statements and related notes.

3. Exhibits

        The following is a list of exhibits required to be filed as part of this Report:

                 Exhibit
                  Number                           Title


                  3.1            Memorandum of Association of American Safety Insurance Holdings,
                                 Ltd. (incorporated by reference to Exhibit 3.1 to Registrant's
                                 Amendment No. 1 to the Registration Statement on Form S-1 filed
                                 January 27, 1998 (Registration No. 333-42749)) and the Certificate
                                 of Incorporation of Change of Name.

                  3.2            Bye-Laws of American Safety Insurance Holdings, Ltd. (incorporated
                                 by reference to Exhibit 3.2 to Registrant's Amendment No. 1 to
                                 Registration Statement on Form S-1 filed January 27, 1998
                                 (Registration No. 333-42749))

                  4.2            Amended and Restated Declaration of Trust of American Safety
                                 Capital Trust dated as of May 22, 2003 among Wilmington Trust
                                 Company, as institutional trustee,  American Safety Holdings Corp.,
                                 as sponsor, American Safety Insurance Holdings, Ltd. (formerly
                                 known as American Safety Insurance Group, Ltd.), as guarantor,
                                 Steven B. Mathis, Stephen R. Crim and Fred J. Pinckney, as
                                 administrators.  (incorporated by reference to the Exhibits to the
                                 Current Report on Form 8-K dated May 22, 2003 (File No. 001-14795))

                  4.3            Indenture dated as of May 22, 2003 between American Safety Holdings
                                 Corp., American Safety Insurance Holdings, Ltd. (formerly known as
                                 American Safety Insurance Group, Ltd.), as guarantor, and
                                 Wilmington Trust Company, as trustee (incorporated by reference to
                                 the Exhibits to the Current Report on Form 8-K dated May 22, 2003
                                 (File No. 001-14795))

                  4.4            Guarantee Agreement dated as of May 22, 2003, between
                                 American Safety Insurance Holdings, Ltd. (formerly known as
                                 American Safety Insurance Group, Ltd.), as guarantor, and
                                 Wilmington Trust Company, as trustee (incorporated by reference to
                                 the Exhibits to the Current Report on Form 8-K dated May 22, 2003
                                 (File No. 001-14795))

                  4.5            Amended and Restated Trust Agreement of American Safety Capital
                                 Trust II dated as of September 30, 2003 among American Safety
                                 Holdings Corp., as depositor, JPMorgan Chase Bank, as property
                                 trustee, Chase Manhattan Bank USA, National Association, as
                                 Delaware trustee, and Steven B. Mathis, Stephen R. Crim and Fred J.
                                 Pinckney, as administrative trustees (incorporated by reference to
                                 the Exhibits to the Current Report on Form 8-K dated September 30,
                                 2003 (File No. 001-14795))

                  4.6            Junior Subordinated Indenture dated as of September 30, 2003
                                 between American Safety Holdings Corp. and JPMorgan Chase Bank, as
                                 trustee. (incorporated by reference to the Exhibits to the Current
                                 Report on Form 8-K dated September 30, 2003 (File No. 001-14795))

                  4.7            Guarantee Agreement dated as of September 30, 2003 among American
                                 Safety Holdings Corp., as guarantor, American Safety Insurance
                                 Holdings, Ltd., as parent guarantor and JPMorgan Chase Bank, as
                                 guarantee trustee  (incorporated by reference to the Exhibits to
                                 the Current Report on Form 8-K dated October 15, 2003 (File No.
                                 001-14795))

                  4.8            Common Securities  Subscription  Agreement dated as of September 30,
                                 2002 between  American  Safety  Holdings Corp.  and American  Safety
                                 Capital Trust II,  together as offerors  (incorporated  by reference
                                 to the Exhibits to the Current  Report on Form 8-K filed October 15,
                                 2003 (File No. 1-14795))

                                 Amended  and  Restated  Declaration  of  Trust  of  American  Safety
                  4.9            Capital  Trust III dated as of  November  17,  2005  among  American
                                 Safety Holdings Corp.,  Wilmington  Trust Company,  as institutional
                                 trustee and  Delaware  trustee,  and Steven B. Mathis and Stephen R.
                                 Crim, as  administrators  (incorporated by reference to the Exhibits
                                 to the Current  Report on Form 8-K dated November 16, 2006 (File No.
                                 001-14795))

                 4.10            Indenture dated as of November 17, 2006 between American Safety
                                 Holdings Corp. and Wilmington Trust Company as trustee
                                 (incorporated by reference to the Exhibits to the Current Report on
                                 Form 8-K dated November 16, 2005 (File No. 001-14795)).

                 4.11            Guarantee  Agreement dated as of November 17, 2006 between  American
                                 Safety Holdings  Corp., as guarantors and Wilmington  Trust Company,
                                 as guarantee trustee,  (incorporated by reference to the Exhibits to
                                 the  Current  Report on Form 8-K dated  November  16, 2005 (File No.
                                 001-14795))
                  4.12           Parent  Guarantee  Agreement  dated as of November  17, 2005 between
                                 American  Safety  Insurance  Holdings,  Ltd.  and  Wilmington  Trust
                                 Company  (incorporated  by  reference to the Exhibits to the Current
                                 Report on Form 8-K dated November 16, 2006 (File No. 001-14795))

                  4.13           Subscription  Agreement dated as of November 17, 2005 among American
                                 Safety Capital Trust III,  American Safety Holdings Corp. and Keefe,
                                 Bruyette & Woods,  Inc.  (incorporated  by reference to the Exhibits
                                 to the Current  Report on Form 8-K dated November 16, 2006 (File No.
                                 001-14795))

                  10.1           Incentive Stock Option Plan (incorporated by reference to the
                                 Exhibit 10.2 to Registrant's Amendment No. 1 to Registration
                                 Statement on Form S-1 filed with the SEC January 27, 1998
                                 (Registration No. 333-42749))

                  10.2           First Amendment to Incentive Stock Option Plan (incorporated by
                                 reference to Exhibit 10.4(b) to the Registration Statement filed
                                 with the SEC on Forms S-1 September 25, 2002  (File No. 333-100065))

                  10.3           1998 Director Stock Award Plan (as amended through June 23, 2005)
                                 (incorporated by reference to Exhibit 10.3 to the Form 10-K of
                                 American Safety Insurance Holdings, Ltd. For the year ended
                                 December 31, 2005 (File No. 001-14795))

                  10.4           Amended and Restated Program Management Agreement among American
                                 Safety Insurance Services, Inc., American Safety Casualty Insurance
                                 Company, American Safety Indemnity Company and American Safety Risk
                                 Retention Group, Inc. (incorporated by reference to the Exhibits to
                                 the Registration Statement filed September 25, 2002 on Form S-1
                                 (File No. 333-100065))

                  10.5+          Employment Agreement between American Safety Insurance Services,
                                 Inc. and Stephen R. Crim (incorporated by reference to Exhibit 10.1
                                 to the Current Report on Form 8-K dated March 21, 2005 (File No.
                                 1-14795)).

                  10.6+          Employment Agreement between American Safety Insurance Services,
                                 Inc. and Joseph D. Scollo (incorporated by reference to Exhibit
                                 10.2 to the Current Report on Form 8-K dated March 21, 2005 (File
                                 No.1-14795)).

                  10.6(a)+       Amendment No. 1 to Employment Agreement between American Safety
                                 Insurance Services, Inc. and Joseph D. Scollo (incorporated by
                                 reference to Exhibit 10.1 to the Form 8-K dated January 1, 2006
                                 (File No. 1-14795).

                  10.6(b)+       Amendment No. 2 to Employment Agreement between American Safety
                                 Insurance Services, Inc and Joseph D. Scollo (incorporated by
                                 reference to Exhibit 10.1 to the Current Report on Form 8-K dated
                                 January 3, 2007 (File no. 1-14795))

                  10.7+          Employment  Agreement  between American Safety  Insurance  Services,
                                 Inc. and William C. Tepe  (incorporated by reference to Exhibit 10.1
                                 to the Company's  Current Report on Form 8-K dated November 15, 2005
                                 (File No.1-14795))

                  10.8           Office Lease Agreement between ORT, and StateOhio general
                                 partnership, and American Safety Insurance Services, Inc., dated
                                 October 18, 2006, for space in Atlanta,
                                 Georgia.

                  11             Computation of Earnings Per Share

                  12             Ratio of Earnings to Fixed Charges

                  14             Code of Business Conduct and Ethics (incorporated by reference to
                                 Exhibit 14 to Form 10K of American Safety Insurance Holdings, Ltd.
                                 For the year ended December 31, 2003 (File No. 001 14795)

                  21             Subsidiaries of the Company

                  23.1           Consent of BDO Seidman, LLP

                  31.1           Certification of Chief Executive Officer

                  31.2           Certification of Chief Financial Officer

                  32.1           Certifications  of  Chief  Executive  Officer  and  Chief  Financial
                                 Officer

                  +Management contract or compensatory plan or arrangement.

                                                       SIGNATURES

         Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,  the Registrant has duly
caused this Report to be signed on its behalf by the  undersigned,  thereunto duly authorized on March 15,
2007.

                                                                AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

                                                                By: /s/ Stephen R. Crim
                                                                    Stephen R. Crim
                                                                    President

         Pursuant  to the  requirements  of the  Securities  Exchange  Act of 1934,  this  Report has been
signed by the following persons in the capacities indicated on March 15, 2007.

    Signature                                                          Title

/s/ Stephen R. Crim                                           President and Director
- -------------------------------------------                   (Principal Executive Officer)
Stephen R. Crim

/s/ William C. Tepe                                           Chief Financial Officer
- -------------------------------------------                   (Principal Financial Officer and Principal
William  C. Tepe                                              Accounting Officer)

/s/ Cody W. Birdwell                                          Chairman of the Board of Directors
- -------------------------------------------
Cody W.  Birdwell

/s/ David V. Brueggen                                         Director
- -------------------------------------------
David V.  Brueggen

/s/ Lawrence I. Geneen                                        Director
- -------------------------------------------
Lawrence I. Geneen

/s/ Frank D.Lackner                                           Director
- -------------------------------------------
Frank D. Lackner

/s/ Steven L. Groot                                           Director
- -------------------------------------------
Steven L. Groot

/s/ Thomas W. Mueller                                         Director
- -------------------------------------------
Thomas W.  Mueller

/s/ William A. Robbie                                         Director
- -------------------------------------------
William A. Robbie

/s/ Jerome D. Weaver                                          Director
- -------------------------------------------
Jerome D. Weaver

AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2005 and 2006

With Independent Auditors’ Report Thereon

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of DirectorsAmerican
Safety Insurance Holdings, Ltd.

We have audited the accompanying consolidated balance sheets of American Safety Insurance Holdings, Ltd and subsidiaries as of December 31, 2005 and 2006 and the related consolidated statements of operations, shareholders’ equity, cash flows and comprehensive income for each of the three years in the period ended December 31, 2006. We have also audited Schedules II, III, and IV as of and for each of the three years in the period ended December 31, 2006. These consolidated financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Safety Insurance Holdings, Ltd. and subsidiaries at December 31, 2005 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related schedules present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of American Safety Insurance Holdings, Ltd.‘s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2007 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

Atlanta, Georgia
March 15, 2007

AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2005 and 2006

                                                         2005                       2006
                Assets

Investments:
Fixed maturity securities available-for-sale,
at fair value                                           $364,856,826             $490,031,666
Common stock, at fair value                               21,706,103               12,402,957
Preferred stock, at fair value                             3,607,000                8,118,060
Short-term investments                                    25,326,648               40,605,672
      Total investments                                  415,496,577              551,158,355
Cash and cash equivalents                                 23,289,927               11,293,296
Accrued investment income                                  4,037,573                4,299,678
Premiums receivable                                       17,315,778               21,747,908
Ceded unearned premium                                    28,870,656               35,897,446
Reinsurance recoverable                                  172,110,582              185,010,493
Deferred income taxes                                     11,933,791               10,115,869
Deferred policy acquisition costs                         10,882,478               12,402,764
Property, plant and equipment, net                         4,489,608                5,644,629
Other assets                                               6,572,007                9,560,230

      Total assets                                      $694,998,977             $847,130,668
                                                        ============             ============

Liabilities and Shareholders' Equity

Liabilities:
Unpaid losses and loss adjustment expenses               $393,493,107           $439,673,496
Unearned premiums                                          97,982,908            115,197.804
Ceded premiums payable                                     16,505,732             25,462,908
Deferred revenues                                           1,501,741              1,192,705
Accounts payable and accrued expenses                      13,066,758             11,810,962
Funds held                                                 11,190,989             16,328,609
Loans payable                                              37,810,099             38,138,804
Minority interest                                           5,012,396              3,175,200
      Total liabilities                                   576,563,730            650,980,488

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,
   2005  6,753,731  shares,  and at December 31, 2006
   10,554,200 shares                                            67,537              105,542
Additional paid-in capital                                  49,460,019          104,514,200
Retained earnings                                           70,457,352           90,989,550
Accumulated other comprehensive (loss) income,
    net                                                     (1,549,661)             540,888
      Total shareholders' equity                           118,435,247          196,150,180

      Total liabilities and shareholders' equity          $694,998,977         $847,130,668
                                                           ============         ===========

See accompanying notes to consolidated financial statements.

                      AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES

                                  Consolidated Statements of Operations

                               Years ended December 31, 2004, 2005 and 2006

                                                         2004                2005                 2006

Revenues:
Direct premiums earned                            $223,052,339          $229,238,078         $222,257,131
Assumed premiums earned                              4,000,601               (81,311)             135,000
Ceded premiums earned                              (90,752,226)          (91,576,899)         (75,636,276)
      Net premiums earned                          136,300,714           137,579,868          146,755,855

Net investment income                                9,772,722            14,315,891           21,766,562
Net realized gains (losses)                            208,135               (54,101)           1,190,328
Real estate income                                  67,967,125             3,000,078                    -
Fee Income                                             210,172             1,196,505            1,684,889
Other income                                           317,784                76,286               42,476
      Total revenues                               214,776,652           156,114,527          171,440,110

Expenses:
Losses and loss adjustment expenses incurred        93,503,285            84,406,158           92,329,283
Acquisition expenses                                26,648,980            28,751,979           27,378,292
Payroll and related expenses                        10,297,037            12,130,136           14,896,180
Real estate expenses                                55,480,408             2,439,022              381,243
Interest expense                                     1,075,715             1,257,064            3,376,124
Other expenses                                       8,559,668            11,900,940           12,105,188
Minority interest                                      988,202               515,233           (1,872,690)
Expenses recovered from rescission                   (229,568)           (1,334,162)                   -
      Total expenses                               196,323,727           140,066,370          148,593,620

      Earnings before income taxes                  18,452,925            16,048,157           22,846,490

Income taxes                                         3,695,950             1,391,747            2,314,292

      Net earnings                               $  14,756,975           $14,656,410          $20,532,198
                                                  ============            ==========          ===========
Net earnings per share:
Basic                                                    $2.15                 $2.18                $2.35
Diluted                                                  $2.01                 $2.05                $2.26

Weighted average number of shares outstanding
Basic                                                6,863,619             6,736,938            8,729,734
Diluted                                              7,342,879             7,163,892            9,095,423

See accompanying notes to consolidated financial statements.

                        AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES

                             Consolidated Statements of Shareholders' Equity

                               Years ended December 31, 2004, 2005 and 2006
                                                         2004           2005           2006 

Common stock - number of shares:
   Balance at beginning of period                    6,910,766        6,781,721       6,753,731
   Issuance of common shares                            87,855          173,583       3,800,469
   Repurchase of common shares                        (219,900)        (201,573)              -
   Balance at end of period                          6,781,721        6,753,731      10,554,200
                                                     =========        =========      ==========
Common stock:
   Balance at beginning of period                      $69,108          $67,817         $67,537
   Issuance of common shares                               879            1,735          38,005
   Repurchase of common shares                          (2,170)          (2,015)              -
   Balance at end of period                            $67,817          $67,537        $105,542

Additional paid-in capital:
   Balance at beginning of period                  $52,744,720      $51,067,506     $49,460,019
   Issuance of common shares                           805,825        1,336,211      54,439,295
   Repurchase of common shares                      (2,483,039)      (2,943,698)              -
     Share based compensation                                -                -         614,886
   Balance at end of period                        $51,067,506      $49,460,019    $104,514,200

Retained earnings:
   Balance at beginning of period                  $41,043,967      $55,800,942     $70,457,352
   Net earnings                                     14,756,975       14,656,410      20,532,198
   Balance at end of period                        $55,800,942      $70,457,352     $90,989,550

Accumulated other comprehensive income:
   Balance at beginning of period                   $1,485,328       $1,843,418     $(1,549,661)
   Unrealized gain (loss) during the period
      (net of deferred tax benefit (expense)
      of $(65,933), $783,353, and $197,928,
      respectively)                                    358,090       (3,393,079)      2,090,549
   Balance at end of period                         $1,843,418      $(1,549,661)       $540,888

         Total shareholders' equity               $108,779,683     $118,435,247    $196,150,180
                                                   ===========      ===========     ===========

See accompanying notes to consolidated financial statements

                        AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES

                                  Consolidated Statements of Cash Flows

                               Years ended December 31, 2004, 2005 and 2006

                                                             2004                2005                    2006

Cash flow from operating activities:
Net earnings                                            $  14,756,975          $14,656,410          $20,532,198
Adjustments  to reconcile  net earnings to net cash
   provided by operating activities:
   Realized (gains) losses on sale of investments            (208,135)              54,101           (1,190,328)
   Depreciation expense                                     1,174,770            1,116,386            2,113,540
    Stock Based Compensation Expense                                -                    -              614,886
   Amortization of deferred acquisition costs, net            401,307              855,639           (1,520,016)
   Reinsurance recoverable allowance                                -            1,318,000                    -
   Amortization of investment premium                       2,450,153            2,326,835            1,534,636
     Deferred income taxes                                  1,889,988           (1,509,401)             478,015
   Change in operating assets and liabilities:
      Accrued investment income                              (536,772)            (729,110)            (262,105)
      Premiums receivable                                   6,850,698            3,778,032           (4,432,130)
      Reinsurance recoverable                             (18,537,761)         (34,975,997)         (12,899,911)
        Ceded unearned premiums                             1,654,444           (3,965,139)          (7,026,790)
      Funds held                                            3,383,326            2,856,195            5,137,620
      Unpaid losses and loss adjustment expenses           91,519,976           72,454,712           46,180,389
      Unearned premiums                                    (6,140,184)           4,901,286           17,214,896
      Ceded premiums payable                               (5,870,903)           4,653,704            8,957,176
      Accounts payable and accrued expenses                 1,109,634           (2,303,685)          (1,015,796)
      Deferred revenue                                     (1,817,775)           1,155,229             (309,036)
      Other, net                                           (2,243,973)           4,246,580           (3,436,605)
Net cash provided by operating activities                  89,835,768           70,358,811           70,670,639

Cash flow from investing activities:
Purchase of fixed maturities                             (107,194,605)        (150,861,495)        (388,133,860)
Purchase of common stock                                  (12,854,116)          (7,106,043)          (4,043,980)
Purchase of preferred stocks                                        -           (3,500,900)          (4,405,720)
Proceeds from sales of fixed maturities                    27,752,791            3,584,528          230,496,120
Proceeds from matured securities                            4,420,000           60,635,000           34,000,000
Proceeds from sales of equity securities                    1,380,010            1,195,954           13,772,938
Decrease (increase) in short-term investments             (20,217,314)             571,483          (15,279,024)
Decrease in notes receivable                                1,435,000                    -                    -
Decrease of investment in real estate                      35,850,109            2,005,440                    -
Purchases of fixed assets                                    (980,480)          (1,705,521)           (3,268,561)
Net cash used in investing activities                     (70,408,605)         (95,181,554)        (136,862,087)

                                                              2004               2005                   2006

Cash flow from financing activities:
Proceeds from sale of common stock                             638,495          1,218,455            54,194,817
Stock repurchase payments                                   (2,485,209)        (2,945,714)                    -
Proceeds from (repayment of) loan payable                  (17,421,859)        24,996,193                     -
Proceeds from redemption of escrow deposits                 (9,091,347)          (144,500)                    -
Withdrawals from restricted cash, net                        1,623,114            144,500                     -

Net cash (used in) provided by financing activities        (26,736,806)        23,268,934            54,194,817

Net decrease in cash                                        (7,309,643)        (1,553,809)         (11,996,631)
Cash and cash equivalents at beginning of period            32,153,379         24,843,736            23,289,927

Cash and cash equivalents at end of period                 $24,843,736        $23,289,927           $11,293,296
                                                            ===========       ===========           ===========
Supplemental disclosure of cash flow:
   Income taxes paid                                      $  3,525,270           $287,617            $2,697,684
                                                            ==========           ========             =========
   Interest paid                                          $  1,121,713           $983,195            $3,211,736
                                                            ==========           ========             =========

See accompanying notes to consolidated financial statements.

                        AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES

                             Consolidated Statements of Comprehensive Income

                               Years ended December 31, 2004, 2005 and 2006

                                                                  2004                2005                 2006

Net earnings                                                   $14,756,975        $14,656,410         $20,532,198

Other comprehensive income (loss):

Unrealized  gains  (losses) on securities  available-for
sale,   net  of   minority   interest   of   $(108,334),
$(259,129)   and  $11,815  for  2004,   2005  and  2006,
respectively                                                       463,260         (4,541,890)          3,616,606

Unrealized gains (losses) on hedging transactions                   81,912            311,359            (103,200)

Reclassification adjustment for realized (gains)
losses included in net earnings, net of minority
interest of $(86,986), $(0) and $(25,530)  for
2004, 2005 and 2006 respectively.                                 (121,149)            54,101          (1,215,858)


Total other comprehensive income (loss) before
income taxes                                                       424,023         (4,176,430)          2,297,548

Income tax expense (benefit) related to items of other
comprehensive income, net of minority interest of
$0 for 2004, $(5,534) for 2005 and $9,071 for 2006
   respectively.                                                    65,933           (783,351)            206,999

Other comprehensive income (loss)                                  358,090         (3,393,079)          2,090,549

Total comprehensive income                                     $15,115,065        $11,263,331         $22,622,747
                                                                ==========        ===========          ==========

See accompanying notes to consolidated financial statements.

AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2006

(1) Summary of Significant Accounting Policies

      (a) Basis of Presentation

The accompanying consolidated financial statements of American Safety Insurance Holdings, Ltd. (“American Safety”) and its subsidiaries and American Safety Risk Retention Group Inc. (“American Safety RRG”), a non-subsidiary risk retention group affiliate (collectively, the “Company”) are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP 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/or actuarial determinations subject to future changes are the Company’s invested assets, deferred income taxes, and the 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 these estimates are adequate, such estimates may change in the future.

      (b) Description of Common Stock — Voting and Ownership Rights

The authorized share capital of the Company is 20 million shares, consisting of 15 million common shares, par value $.01 per share (“Common Shares”), and 5 million preferred shares, par value $.01 per share (“Preferred Shares”). The Common Shares are validly issued, fully paid, and non-assessable. There are no provisions of Bermuda law or the Company’s Bye-Laws which impose any limitations on the rights of shareholders to hold or vote Common Shares by reason of such shareholders not being residents of Bermuda. Holders of Common Shares are entitled to receive dividends ratably when and as declared by the Board of Directors out of funds legally available therefore.

Each holder of Common Shares is entitled to one vote per share on all matters submitted to a vote of the Company’s shareholders, subject to the 9.5% voting limitation described below. All matters, including the election of directors, voted upon at any duly held shareholders meeting shall be authorized by a majority of the votes cast at the meeting by shareholders represented in person or by proxy, except (i) approval of a merger, consolidation or amalgamation; (ii) the sale, lease, or exchange of all or substantially all of the assets of the Company; and (iii) amendment of certain provisions of the Bye-Laws, which each require the approval of at least 66-2/3% of the outstanding voting shares (in addition to any regulatory or court approvals). The Common Shares have non cumulative voting rights, which means that the holders of a majority of the Common Shares may elect all of the directors of the Company and, in such event, the holders of the remaining shares will not be able to elect any directors.

The Bye-Laws contain certain provisions that limit the voting rights that may be exercised by certain holders of Common Shares. The Bye-Laws provide that each holder of Common Shares is entitled to one vote per share on all matters submitted to a vote of the Company’s shareholders, except that if, and so long as, the Controlled Shares (as defined below) of any person constitute 9.5% or more of the issued and outstanding Common Shares, the voting rights with respect to the Controlled Shares owned by such person shall be limited, in the aggregate, to a voting power of 9.5%, other than the voting rights of Frederick C. Treadway or Treadway Associates, L.P., affiliates of a founding shareholder of the Company. “Controlled Shares” mean (i) all shares of the Company directly, indirectly, or constructively owned by any person and (ii) all shares of the Company directly, indirectly, or beneficially owned by such person within the meaning of Section 13(d) of the Exchange Act (including any shares owned by a group of persons, as so defined and including any shares that would otherwise be excluded by the provisions of Section 13(d)(6) of the Exchange Act). Under these provisions, if, and so long as, any person directly, indirectly, or constructively owns Controlled Shares having more than 9.5% of the total number of votes exercisable in respect of all shares of voting stock of the Company, the voting rights attributable to such shares will be limited, in the aggregate, to 9.5% of the total number of votes.

No holder of Common Shares of the Company shall, by reason only of such holder, have any preemptive right to subscribe to any additional issue of shares of any class or series nor to any security convertible into such shares.

      (c) Principles of Consolidation

The consolidated financial statements include the accounts of American Safety Insurance Holdings, Ltd., a Bermuda company, American Safety Reinsurance, Ltd. (“American Safety Re”), American Safety Assurance Ltd., (“ASA”) two 100%-owned licensed Bermuda insurance companies, American Safety Holdings Corp. (“American Safety Holdings”), a 100%-owned insurance holding company and American Safety Risk Retention Group, Inc. (“American Safety RRG”), a non-subsidiary risk retention group affiliate. American Safety Holdings in turn wholly owns American Safety Casualty Insurance Company (“American Safety Casualty”), a property and casualty insurance company, American Safety Insurance Services, Inc. (“ASI Services”), an underwriting and administrative subsidiary, Ponce Lighthouse Properties, Inc. (“CityPonce”), the development company of the Harbour Village project, and Rivermar Contracting Company (“Rivermar”), the general contractor of the Harbour Village project. American Safety Casualty owns 88% of American Safety Indemnity Company, a property and casualty excess and surplus lines insurance company. The remaining 12% is owed by American Safety Holdings. ASI Services wholly owns the following subsidiaries: Sureco Bond Services, Inc. (“Sureco”), a bonding agency; Environmental Claims Services, Inc. (“ECSI”), a claims service firm; American Safety Financial Corp., a financial services subsidiary; and American Safety Purchasing Group, Inc., which acts as a purchasing group for the placement of certain business with American Safety Casualty.

In accordance with FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities (VIEs) and FASB Interpretation No. 46 Revised (FIN 46R), the accompanying financial statements consolidate American Safety RRG, based on its status as VIE and the Company’s status as the primary beneficiary of the VIE. A minority interest has been established for the equity holders of American Safety RRG. The accompanying financial statements also de-consolidate American Safety Capital Trust, American Safety Capital Trust II and American Safety Capital Trust III (“American Safety Capital”, “American Safety Capital II” and “American Safety Capital III”, respectively) based on their status as variable interest special purpose entities of the Company’s status as not being the primary beneficiary. American Safety Capital, American Safety Capital II and American Safety Capital III are accounted for under the equity method.

All significant intercompany balances have been eliminated, as appropriate, in consolidation.

      (d) Business Environment

                        The following is a description of certain risks facing the Company and its subsidiaries:

Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products and beyond those recorded in the financial statements. That is, regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the insurer operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the insurer beyond those recorded in the financial statements. The Company attempts to mitigate this risk by actively writing insurance business in several states, thereby spreading this risk over a large geographic area.

The Potential Risk of country-regionUnited States Taxation of Bermuda Operations. Under current Bermuda law, American Safety is not required to pay any taxes in Bermuda on either income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda that will exempt American Safety from taxation until the year 2016 in the event of any such taxes being imposed. Whether a foreign corporation is engaged in a country-regionUnited States trade or business or is carrying on an insurance business in the country-regionUnited 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’s, American Safety Re’s and American Safety Assurance’s sole business is reinsuring contracts via treaty reinsurance agreements, which are all signed outside of the United States, American Safety does not consider itself to be engaged in a trade or business in the United States and, accordingly, does not expect to be subject to United States income taxes. This position is consistent with the position taken by various other entities that have similar operational structures as American Safety.

However, because the Internal Revenue Code of 1986, as amended, the Treasury Regulations and court decisions do not definitively identify activities that constitute being engaged in a United States trade or business, and because of the factual nature of the determination, there can be no assurance that the Internal Revenue Service will not contend that American Safety or its Bermuda insurance subsidiary are engaged in a United States trade or business. In general, if American Safety or its Bermuda insurance subsidiaries 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. Certain subsidiaries of American Safety are, however, subject to U.S. Federal and state income tax, as they are domiciled and conduct business in the United States.

Credit Risk is the risk that issuers of securities owned by the insurer or secured notes receivable will default or that other parties, including reinsurers that have obligations to the insurer, will not pay or perform. The Company attempts to mitigate this risk by adhering to a conservative investment strategy, by obtaining sufficient collateral for secured note obligations and by maintaining sound reinsurance, credit and collection policies.

Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer’s investments. The Company attempts to mitigate this risk by attempting to match the maturities of its assets with the expected payouts of its liabilities.

      (e) Investments

Fixed maturity securities for which the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” and are reported at amortized cost. Fixed maturity and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as “trading” and are reported at fair value, with unrealized gains and losses included in earnings. Fixed maturity and equity securities not classified as either held to maturity or trading are classified as “available for sale” and are reported at fair value, with unrealized gains and losses (net of deferred taxes) charged or credited as a component of accumulated other comprehensive income.

While it is the Company’s intent to hold fixed maturity securities until the foreseeable future or until maturity, it may sell such securities in response to, among other things, market conditions, liquidity needs, or interest rate fluctuations. At December 31, 2005 and 2006, the Company considered all of its fixed maturity securities as “available for sale”

The Company notes that it has the ability and intent to hold securities with unrealized losses until they mature or recover in value. However, all investment securities are characterized as “available for sale”, and the Company may, from time to time, sell securities in response to market conditions or interest rate fluctuations in accordance with its investment guidelines or to fund the cash needs of individual operating subsidiaries. When a decision is made to sell a security that has an unrealized loss, the loss is recognized at the time of the decision.

Investment income is recorded as earned on the accrual basis and includes amortization of premiums and accretion of discounts using the interest method. Realized gains or losses on disposal of investments are determined on a specific identification basis and are included in revenues. Investments in real estate are carried at the lower of cost or fair value plus capitalized development costs. Premiums and discounts arising from the purchase of mortgage-backed securities are treated as yield adjustments over their estimated lives. The Company’s portfolio managers routinely monitor and evaluate the difference between the cost and fair value of our investments. Additionally, credit analysis and/or credit rating issues related to specific investments may trigger more intensive monitoring to determine if a decline in market value is other than temporary. For investments with a market value below cost, the process includes evaluating the length of time and the extent to which cost exceeds market value, the prospects and financial condition of the issuer, and evaluation for a potential recovery in market value, among other factors. This process is not exact andfurther requires consideration of risks such as credit risk, which to a certain extent can be controlled, and interest rate risk, which cannot be controlled. Therefore, if an investment’s cost exceeds its market value solely due to changes in interest rates, impairment may not be appropriate. If, after monitoring and analysis, the Company believes that a decline in fair value is other than temporary, the Company adjusts the amortized cost of the security and reports a realized loss in the consolidated statements of earnings.

      (f) Recognition of Premium Income

General liability premiums are primarily estimated based upon the annual revenues of the underlying insureds. Additional or return premiums are recognized for differences between provisional premiums billed and estimated ultimate general liability premiums due when the final audit is complete after the policy has expired. General liability, surety, commercial auto, other commercial lines and workers’ compensation premiums are recorded ratably over the policy period with unearned premium calculated on a pro rata basis over the lives of the underlying coverages.

      (g) Deferred Policy Acquisition Costs

The costs of acquiring business, primarily commissions and premium tax expenses, are deferred (to the extent they are recoverable from future premium income) and amortized to earnings in relation to the amount of premiums earned. If necessary, investment income is considered in the determination of the recoverability of deferred policy acquisition costs. Deferred revenue results when reinsurance ceding commissions received exceed the related deferred acquisition costs for direct and assumed business.

        An analysis of deferred policy acquisition costs follows:

                                                                Years ended December 31,   
                                                         2004            2005              2006

             Balance, beginning of period            $ 12,006,478    $ 11,738,117      $ 10,882,478
             Acquisition costs deferred, net           26,380,619      27,725,425        28,982,877
             Costs amortized during the period        (26,648,980)    (28,581,064)      (27,462,591)

             Balance, end of period                  $11,738,117    $ 10,882,478       $12,402,764
                                                       ==========      ==========        ==========

       (h) Unpaid Losses and Loss Adjustment Expenses

The Company provides a liability for unpaid losses and loss adjustment expenses based upon aggregate case estimates for reported claims and estimates for incurred but not reported losses. Because of the length of time required for the ultimate liability for losses and loss adjustment expenses to be determined for certain lines of business underwritten, the Company has limited experience upon which to base an estimate of the ultimate liability. For these lines, management has established loss and loss adjustment expense reserves based on actuarial methods that determine ultimate losses and loss adjustment expenses utilizing a combination of both industry and the Company’s reporting and settlement patterns, as appropriate. One primary set of actuarial methods utilized, Bornhuetter-Ferguson, entails developing an initial expected loss ratio based upon gross ultimate losses from prior accident years, estimating the portion of ultimate losses expected to be reported and unreported, and adding the actual reported losses to the expected unreported losses to derive the indicated ultimate losses. However, the net amounts that will ultimately be paid to settle the liability may be more or less than the estimated amounts provided.

       (i) Income Taxes

For subsidiaries subject to taxation, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. When the Company does not believe that, on the basis of available information, it is more likely than not deferred tax assets will be recovered it recognizes a valuation allowance against its deferred tax assets.

       (j) Reinsurance

Reinsurance contracts do not relieve the Company from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. Reinsurance recoverables on unpaid losses and prepaid reinsurance represent amounts recoverable from reinsurers for unpaid losses and unearned ceded reinsurance premiums, respectively.

       (k) Goodwill and Intangibles

The Company adopted SFAS 142 on January 1, 2002. Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Prior to adoption, the Company amortized goodwill over a 20 year period. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life).

                                              At December 31, 2005 and 2006, the Company had $1,467,000 of goodwill.

In accordance with the disclosure requirements of SFAS 142 goodwill and intangibles there was no amortization recorded in net income for the years ended December 31, 2004, 2005 and 2006 respectively.

         (l) Net Earnings Per Share

Basic earnings per share and diluted earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding for the period (basic EPS) plus dilutive shares attributable to stock options (diluted EPS).

                                               Earnings per share are as follows:

                                                                  2004             2005                2006


             Weighted average shares outstanding              6,863,619          6,736,938             8,729,734
             Shares attributable to stock options               479,260            426,954               365,689

             Weighted average common and common
             equivalents                                      7,342,879          7,163,892             9,095,423
                                                              =========          =========             ==========
             Earnings per share:

             Basic                                                $2.15             $ 2.18                $ 2.35

             Diluted                                             $ 2.01             $ 2.05                $ 2.26

         (m) Employee Stock Options

The Company’s stock option plan grants stock options to employees. The majority of the options outstanding under the plan generally vest evenly over a three year period and have a term of 10 years. The Company uses the Black-Scholes option pricing model to value stock options. This plan is described further in Note 13.

The Company applied the recognition and measurement principles of SFAS No. 123R, Share Based Payments under modified prospective application method, commencing in the first quarter of 2006. Compensation expense relating to stock options of $614,886 is reflected in earnings for the twelve months ended December 31, 2006.

         (n) Accounting Pronouncements

During the last two years, the Financial Accounting Standard Board (FASB) has issued a number of accounting pronouncements with various effective dates.

In November 2005, the FASB issued Staff Position Number FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”). FSP 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and was effective January 1, 2006. The adoption of this pronouncement did not have a material impact on the Company’s financial statements.

In April 2006, the FASB issued a Staff Position Number FIN 46(R)-6, Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R) (“FSP 46R-6”).

FSP 46R-6 responds to the need for guidance on the relevant risks and rewards that must be identified and evaluated in order to apply FIN 46(R) and is effective for fiscal periods beginning after June 15, 2006. This pronouncement will have no impact on the Company as it already consolidates its non-subsidiary affiliate American Safety RRG.

In July 2006, the FASB issued a Staff Position Number FIN 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB statement number 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company has reviewed the pronouncement and, based on its analysis to date does not expect it to have a material impact on its operating results.

In September 2006, the FASB issued Statement Number 157, Fair Value Measurements. Prior to this statement, there were different definitions of “fair value” in GAAP. Moreover, that guidance was dispersed among the many accounting pronouncements that require fair value measurements. This statement creates a single set of guidelines for measuring fair value. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. At the present time it is expected that this statement will not have a material impact on the Company’s financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among registrants, SAB 108 expresses staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. The Company does not believe SAB 108 will have a material impact on the Company’s financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards Number 159, The Fair Value Option For Financial Assets and Liabilities. This statement allows companies to carry the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded into earnings. This statement is effective for fiscal years beginning after November 15, 2007. The Company expects that this statement will not have a material impact on the Company’s financial statements.

         (o) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, money market instruments and other debt instruments with a maturity of 90 days or less when purchased.

        (p) Derivatives

The Company has limited activity with derivative financial instruments. They are not used for trading purposes, nor does the Company engage in leveraged derivative transactions. At December 31, 2006, the Company’s outstanding derivative contracts were interest swaps related to certain of its trust preferred obligations. See Note 8. The Company recognizes unrealized gain or loss on these interest rate swaps as interest rates change. The net after tax derivative loss included in accumulated other comprehensive income at December 31, 2006 will be reclassified into interest expense in conjunction with the recognition of interest payments on trust preferred debt through October 2010, with $186,000 of after tax net los expected to be recognized in interest expense within the next year.

        (q) Reclassifications

Certain items in the prior periods’ financial statements have been reclassified to conform to the 2006 presentation. In 2006 the Company changed its segment presentation. See Note 10 for additional information.

(2) Investments

       Net investment income is summarized as follows:


                                                                   Years ended December 31,
                                                     2004                   2005                   2006


      Fixed maturities                              $ 9,695,664           $ 13,567,965           $ 19,018,642
      Common stock securities                           195,009                367,697                415,635
      Preferred stock securities                              -                 23,149                332,322
      Short-term investments and cash                   298,305                914,171              2,595,463

                                                     10,188,978             14,872,982             22,362,062
      Less investment expenses                          416,256                557,091                595,500

      Net investment income                          $9,772,722            $14,315,891            $21,766,562
                                                      =========             ==========             ==========
                 Realized and unrealized gains and losses were as follows:

                                                                     Years ended December 31,
                                                        2004               2005              2006

      Realized gains:
          Fixed maturities                            $ 182,336          $ 91,077       $   1,175,769
          Common stock securities                       118,952           154,906           2,789,933
          Total gains                                   301,288           245,983           3,965,702

      Realized losses:
          Fixed maturities                              (66,977)         (250,383)         (2,223,096)
          Common stock securities                       (26,176)          (49,701)           (552,278)
          Total losses                                  (93,153)         (300,084)         (2,775,374)

      Net realized gains (losses)                   $   208,135         $ (54,101)       $  1,190,328
                                                        =======          =========        ===========
      Changes in unrealized gains (losses):
          Fixed maturities                           $ (758,834)      $(5,496,515)      $   1,886,180
          Common stock securities                       905,625           643,499             421,389

          Preferred stock securities                          -           106,100             105,340

      Net change in unrealized gains (losses)         $ 146,791       $(4,746,916)       $  2,412,909
                                                       ========        ===========        ===========

At December 31, 2005 and 2006, the Company did not hold fixed-maturity securities, which individually exceeded 10% of shareholders’ equity, except U.S. government, and government agency securities.

The amortized cost and estimated fair values of investments at December 31, 2005 and 2006 are as follows:

                                                                     Gross              Gross
                                               Amortized          unrealized          unrealized         Estimated
                                                  Cost               gains              losses           fair value
                                           =================   ================   =================  =================

          December 31, 2005
              Fixed maturities:
              U.S. Treasury securities
                and obligations of U.S.
                Government corporations
                and agencies                  $ 86,740,033        $  547,669        $1,311,628           $85,976,073
              States of the
                U.S
                and political
                subdivisions of the
                states                          64,740,408           386,303           498,465            64,628,246
              Corporate securities              84,763,525           618,765         1,598,413            83,783,877
              Mortgage-backed securities       132,992,335            56,265         2,579,971           130,468,629

              Total fixed maturities          $369,236,301       $ 1,609,002       $ 5,988,477         $ 364,856,826
                                               ===========         =========         =========           ===========
              Common stock                   $  19,983,174       $ 2,721,304      $    998,374            21,706,103
                                               ===========         =========         =========           ===========
              Preferred Stock                $   3,500,900       $   106,100      $          -         $   3,607,000
                                               ===========        ==========         =========           ===========
          December 31, 2006
              Fixed maturities:
              U.S. Treasury securities
                and obligations of U.S
                Government corporations
                and agencies                 $ 123,390,583      $   386,236       $  1,378,807         $  122,380,012
              States of the
                U.S.
                and political
                subdivisions of the
                states                           7,584,447            42,338           238,041             7,388,744
              Corporate securities             131,469,859           814,574           812,477           131,471,956
              Mortgage-backed securities       230,080,072           731,214         2,020,332           228,790,954

              Total fixed maturities         $ 492,524,961       $ 1,956,362       $ 4,449,657         $ 490,031,666
                                               ===========         ==========       ==========           ===========
              Common stock                   $  10,258,638       $ 2,491,431       $   347,112            12,402,957
                                               ============        ==========       ==========           ===========
              Preferred stock                $   7,906,620       $   221,830       $    10,390        $    8,118,060
                                               ============        ==========       ==========           ===========

The amortized cost and estimated fair values of fixed maturities at December 31, 2006 by contractual maturity are shown below. Expected maturities may differ from contractual maturities as certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalty.

                                                               Amortized              Estimated
                                                                  cost               fair value

       Due in one year or less                              $   27,439,286         $   27,425,880
       Due after one year through five years                   148,763,529            148,254,566
       Due after five years through ten years                   75,799,419             74,842,208
       Due after ten years                                      10,442,655             10,718,058
       Mortgage-backed securities                              230,080,072            228,790,954

                     Total                                    $492,524,961           $490,031,666
                                                               ===========            ===========

Fixed income securities with an amortized cost of $34,405,204 and $26,694,924 were on deposit with insurance regulatory authorities at December 31, 2005 and 2006 in accordance with statutory requirements.

The fair value of the investments in debt securities can fluctuate greatly as a result of changes in interest rates. The Company believes that the declines in fair value noted below primarily resulted from changes in interest rates rather then credit issues. (See Critical Accounting Polices under Part II, Item 7 for more information on investments)

Therefore, the Company has no concern regarding the ultimate collectibility of the security value, and accordingly, has not recorded any impairment write-down. The tables below show the securities the Company is holding which have been held at a loss for less than 12 months and greater than 12 months at December 31, 2005 and December 31, 2006 respectively.

       December 31, 2005

                                         Less than 12 months          12 months or longer                Total
                                                      Unrealized                 Unrealized    Fair Value     Unrealized
                                      Fair Value        Losses       Fair Value    Losses                       Losses
                                   -----------------------------------------------------------------------------------------
       US Treasury Securities &
           other government
           corporations and
           agencies                    $39,303,992      $(546,902)   $25,829,191  $(764,727)    $65,133,183    $(1,311,628)
       States of the US and political
           subdivisions of the states   27,795,435       (329,164)     5,921,758   (169,302)     33,717,193       (498,465)

       Corporate securities             30,765,595       (614,456)    34,496,894   (983,957)     65,262,490     (1,598,413)

       Mortgage-backed securities       85,185,338     (1,360,455)    34,261,657 (1,219,516)    119,446,995     (2,579,971)

       Subtotal, fixed maturities      183,050,361     (2,850,976)   100,509,500 (3,137,501)    283,559,861     (5,988,477)

       Common stock                     4,590,179       (502,397)     1,994,090   (495,977)      6,584,269       (998,374)

       Total temporarily impaired
           securities                 $187,640,540    $(3,353,372)  $102,503,590 $(3,633,479) $290,144,130     $(6,986,851)
                                       ===========     ===========   ===========  ===========  ===========      ===========

       December 31, 2006

                                         Less than 12 months          12 months or longer                Total
                                                      Unrealized                 Unrealized    Fair Value     Unrealized
                                      Fair Value        Losses      Fair Value     Losses                       Losses
                                   -----------------------------------------------------------------------------------------
       US Treasury Securities &
           other government
           corporations and
           agencies                    $53,077,690      $(218,138)  $36,967,250  $(1,160,669)  $90,044,939    $(1,378,807)
       States of the
           US and political
           states                                -              -     6,409,615    (238,041)     6,409,615       (238,041)
           subdivisions of the
       Corporate securities             59,749,175       (412,465)   20,291,277    (400,012)    80,040,453       (812,477)

       Mortgage-backed securities       95,741,114       (466,246)   67,439,424  (1,554,086)   163,180,538     (2,020,332)

       Subtotal, fixed maturities      208,567,979     (1,096,849)  131,107,566  (3,352,808)   339,675,545     (4,449,657)

       Common stock                        913,738       (103,126)    1,091,057    (243,986)     2,004,795       (347,112)

       Preferred Stock                   1,467,260        (10,390)            -           -      1,467,260        (10,390)

       Total temporarily impaired
           securities                 $210,948,977    $(1,210,365) $132,198,623  $(3,596,794) $343,147,600    $(4,807,159)
                                       ===========     ==========   ===========   ===========  ===========     ===========

      (3) Investment in Real Estate

The Company’s investment in real estate is known as Harbour Village Golf and Yacht Club (“Harbour Village”) comprised of 173 acres of property in Ponce Inlet, StateFlorida that was acquired in foreclosure during April 1999. At the date of foreclosure the Company evaluated the carrying value of its investment in real estate by comparing the fair value of the foreclosed collateral to the book value of the underlying loan and accrued interest. As the book value of the loan and accrued interest was less than the fair value of the collateral, no loss was recognized on foreclosure and the book balance of the loan and accrued interest became the basis of the real estate.

The Harbour Village project is substantially complete as all units are sold and closed. The Company does not expect to engage in any further real estate activities. No additional revenue from Harbour Village is expected. There will be some ongoing expenses for the project associated with legal, insurance and other matters.

      (4) Financial Instruments

The carrying amounts for short-term investments, cash, premiums receivable, commissions receivable, accrued investment income, ceded premiums payable, funds held, collateral held and accounts payable and accrued expenses approximate their fair values due to the short-term nature of these instruments and obligations.

Estimated fair values for fixed maturities were provided by outside consultants using market quotations, prices provided by market makers or estimates of fair values obtained from yield data relating to investment securities with similar characteristics.

      (5) Reinsurance

      Excess and Surplus Lines

            Environmental

The Company has excess of loss reinsurance treaties with various reinsurers for the Company’s general liability line of business. These treaties provide varying levels of reinsurance protection depending on the date the underlying insurance policy was written.

            Construction

The Company previously had excess of loss treaties with various reinsurers for the Company’s construction line of business. These treaties provide varying levels of reinsurance protection depending on the date the underlying insurance policy was written.

Effective July 1, 2005, the Company discontinued purchasing excess of loss reinsurance on our construction line. The Company made this decision after performing a loss cost and dynamic financial analysis and concluding that our reinsurance purchases were uneconomical. The Company believes that based upon reinsurance market pricing at the time of the decision, retaining this exposure and not ceding a large percentage of premiums to the reinsurance market will enhance our balance sheet.

            Surety

For our surety business, we entered into a quota share reinsurance treaty during the second quarter of 2004 which provides reinsurance for a single bond limit not to exceed $3.0 million, subject to a maximum for any one principal of $6.0 million. We retained a 50% participation in this treaty with the balance reinsured by unaffiliated reinsurers. Effective June 1, 2006 this treaty was non- renewed.

      Alternative Risk Transfer

            Specialty Programs

The Company’s program business division buys various forms of reinsurance on both a quota share basis as well as an excess of loss basis. These treaties cover the majority of risks written by the Company in this division. In addition, we require our program managers to share in the underwriting risks on many of our programs. Where appropriate, collateral is obtained from the reinsurers and program managers to secure their obligations.

            Runoff

            Workers’ Compensation

The Company has excess of loss treaties with various reinsurers. These treaties provide varying levels of reinsurance protection depending on the date the underlying insurance policy was written.

The approximate effects of reinsurance on the financial statement accounts listed below are as follows:

                                                                Years ended December 31,
                                                              2004        2005            2006
                                                           --------------------------------------
                                                                           (In thousands)

             Written premiums:
                 Direct                                 $220,452       $ 234,139       $ 239,472
                 Assumed                                    (158)            (81)            135
                 Ceded                                   (88,630)        (95,543)        (82,339)

                           Net                         $ 131,664       $ 138,515       $ 157,268
                                                         =======         =======         =======

             Earned premiums:
                 Direct                                $ 223,052        $229,238        $222,257
                 Assumed                                   4,000             (81)            135
                 Ceded                                   (90,751)        (91,577)        (75,636)

                           Net                        $  136,301       $ 137,580       $ 146,756
                                                         ========       ========        ========
             Losses and loss adjustment expenses
                 incurred
                 Direct                                $ 153,167       $ 159,668       $ 159,920
                 Assumed                                   4,379           2,031               -
                 Ceded                                   (64,043)        (77,293)        (67,591)

                           Net                        $   93,503       $  84,406       $  92,329
                                                          =======        =======        ========
             Unpaid loss and loss adjustment
             expenses:
                 Direct                                $ 306,600       $ 377,952       $ 425,342
                 Assumed                                  14,438          15,541          14,331
                 Ceded                                  (136,998)       (159,515)       (161,146)

                           Net                       $   184,040       $ 233,978       $ 278,527
                                                        ========        ========         =======

      (6) Income Taxes

       Total income tax expense for the years ended December 31, 2004, 2005 and 2006 was allocated as follows:

                                                            2004                    2005                  2006

          Tax expense attributable to:
          income from continuing operations            $  3,695,950              $ 1,391,747          $ 2,314,292
          Unrealized gain on hedging
          transactions                                       27,851                  105,861             (35,087)
          Unrealized gain (losses) on securities
          available-for-sale                                 38,082                 (894,746)             233,015

                 Total                                   $3,761,883             $    602,862         $  2,512,220
                                                          =========                =========            =========

   U.S.  Federal and state income tax expense  (benefit) from  continuing  operations  consists of the
       following components:

                                                             2004                  2005                   2006

          Current                                       $ 2,300,361           $ 3,455,663              $ 694,298

          Deferred                                        1,889,988            (1,509,401)               478,015

          (Reversal) Establishment of
          valuation allowance                             (494,399)              (554,515)             1,141,979

          Total                                          $3,695,950            $1,391,747             $2,314,292
                                                          =========             =========              =========

The state income tax components aggregated $677,840, $307,485 and $(17,825) for the years ended December 31, 2004, 2005 and 2006, respectively.

Income tax expense from continuing operations for the years ended December 31, 2004, 2005 and 2006 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:

                                              2004           2005             2006

Expected income tax                        $ 6,273,995     $ 5,456,373      $ 7,767,807
Foreign earned income not subject
to direct taxation                          (3,132,853)     (3,488,277)      (5,793,898)
(Reversal)Establishment of Valuation
    allowance                                 (494,399)       (554,515)       1,141,979
Tax exempt interest                           (275,681)       (385,621)        (639,064)
State taxes and other                        1,324,888         363,787         (162,532)

Total income tax                          $  3,695,950      $1,391,747       $2,314,292
                                             ==========      =========        =========

In 2004, given the historical loss position of American Safety RRG, it had established a 100% valuation allowance on its net deferred tax assets totaling $554,515. In 2005, American Safety RRG reduced income tax expense by reversing this valuation allowance as the realizability of the deferred tax assets changed due to American Safety RRG’s profitability. This reduction in income tax expense was offset by an increase in minority interest expense and had no overall effect on the earnings or shareholders’ equity of the Company. However in 2006, American Safety RRG’s profitability changed and the Company believes it will not realize the full benefit of the deferred tax assets, therefore a 100% valuation allowance of $1,141,979 was established at December 31, 2006. For 2005 and 2006, the reversal and establishment of the valuation allowance has been included in income tax expense with a corresponding offset in minority interest.

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,
                                                             2005            2006
       Deferred tax assets:
          Loss reserve discounting                         $ 9,288,244     $ 8,095,876
          Unearned premium reserves                          3,118,965       2,365,798

          Warranty reserve                                     154,980         152,475
          Unrealized loss on securities                        500,823         434,144
          NOL Carryforward                                           -         817,709
          Other                                                348,009         332,602

      Gross deferred tax assets                             13,411,021      12,198,604

          Valuation allowance                                        -     (1,141,979)

      Gross deferred tax assets after valuation allowance   13,411,021      11,056,625

      Deferred tax liabilities:
          Deferred acquisition costs                         1,477,230         809,507
          Unrealized gain on securities                              -         131,249

      Gross deferred tax liabilities                         1,477,230         940,756

      Net deferred tax assets                              $11,933,791     $10,115,869
                                                            ==========      ==========

      (7) Insurance Accounting

The consolidated financial statements have been prepared in conformity with GAAP which vary in certain respects, for the Company, American Safety Casualty, American Safety Indemnity and American Safety RRG, from statutory accounting practices prescribed or permitted by regulatory authorities. Statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (the “NAIC”). The NAIC membership adopted the Codification of Statutory Accounting Principles Project (the “Codification”) as the NAIC-supported basis of accounting. The Codification was approved with a provision allowing for commissioner discretion in determining appropriate statutory accounting for insurers. Accordingly, such discretion will continue to allow prescribed or permitted accounting practices that may differ from state to state.

The maximum amount of dividends the Company’s insurance subsidiaries can pay out without prior written approval from the subsidiaries’ domicile state insurance commissioners, is limited to the greater of 10% of surplus as regards to policyholders or net income, excluding realized capital gains of the preceding year. Dividends are also limited to the amount of unassigned surplus.

The NAIC has established risk-based capital (“RBC”) requirements to help state regulators monitor the financial strength and stability of property and casualty insurers by identifying those companies that may be inadequately capitalized. Under the NAIC’s requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses coverage-related issues and anticipated frequency and severity of losses when pricing and designing insurance coverages; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks.

American Safety Casualty, American Safety Indemnity and American Safety RRG have calculated their RBC level and have determined that their capital and surplus is in excess of threshold requirements.

The Bermuda Insurance Act of 1978 and related regulations (the “Act”) requires American Safety Re to meet a minimum solvency margin. American Safety Re’s statutory capital and surplus as of December 31, 2004, 2005 and 2006 was $30,292,863, $38,586,734 and $76,447,031, respectively, and the amounts required to be maintained by the Company were $9,576,055, 12,868,524 and $21,633,238, respectively. American Safety Assurance, Ltd (ASA) capital and surplus as of December 31, 2005 and 2006 was $623,425 and $659,750 respectively. ASA is required to maintain a minimum of $120,000 in capital. In addition, a minimum liquidity ratio must be maintained whereby relevant assets, as defined by the Act, must exceed 75% of relevant liabilities. Once these requirements have been met, there is no restriction on the remaining retained earnings available for distribution.

      (8) Loans Payable

      Trust Preferred Offerings

In 2003 American Safety Capital and American Safety Capital II, both non-consolidated, wholly-owned subsidiaries of the Company, issued $8 million and $5 million, respectively, of variable rate 30-year trust preferred securities. The proceeds are being used by the Company to support the growth of its insurance business. The securities require interest payments on a quarterly basis calculated at a floating rate of LIBOR + 4.2% and LIBOR + 3.95% for American Safety Capital and American Safety Capital II, respectively. The securities can be redeemed at the Company’s option commencing five years from the date of original issuance.

In 2005, the American Safety Capital Trust III, a non-consolidated wholly-owned subsidiary of the Company, issued a 30-year trust preferred obligation in the amount of $25 million. This obligation bears a fixed interest rate of 8.31% for the first five years and LIBOR plus 3.4% thereafter. Interest is payable on a quarterly basis and the securities may be redeemed at the Company’s option commencing five years from the date of original issuance.

The underlying debt obligations between the Company and American Safety Capital and American Safety Capital II expose the Company to variability in interest payments due to changes in interest rates. Management entered into an interest rate swap for these trust preferred offerings to manage that variability. Under each interest rate swap, the Company receives variable interest payments and makes fixed interest rate payments to the applicable capital trust entity, thereby creating fixed rate long-term debt. The overall effective fixed rate expense as a result of this hedge is 7.1% and 7.6% for American Safety Capital and American Safety Capital II, respectively, over the first five years of the obligation.

Interest expense for the twelve months ended December 31, 2005 and December 31, 2006 includes no gains or losses from the interest rate swaps. Changes in fair value of the interest rate swaps designated as hedging instruments of the variability of cash flow associated with a floating rate, long-term debt obligation are reported in accumulated other comprehensive income. The gross unrealized gains on the interest rate swaps at December 31, 2005 and December 31, 2006 were $347,481 and $263,973 for American Safety Capital and $141,742 and $122,052 for American Safety Capital II, respectively. The interest rate swaps are 100% effective at December 31, 2006.

      (9) Related Party and Affiliate Transactions

ASI Services, American Safety’s underwriting and administrative services subsidiary leased office from an entity which was owned by certain directors, officers and shareholders of the Company. The lease commenced on March 1, 2001 with an original term through August 31, 2007. This lease was terminated in 2006. The Company paid rent associated with the former space of $519,814 and $533,093 in 2006 and 2005, respectively. See Part I, Item 2, Properties for more information about the Company’s offices.

      (10) Segment Information

During 2006, we changed our segment reporting to coincide with our strategic direction. In our segment reporting for periods prior to the year ended December 31, 2006 we segregated our business into real estate operations, insurance operations and other (which included realized gains and losses on investments and rescission expenses). We continue to segregate our business into real estate operations, insurance operations and other, but the insurance operations segment is further classified into three additional segments: excess and surplus lines, alternative risk transfer and runoff. The excess and surplus lines segment is further classified into five business lines: environmental, construction, non construction, excess and surety. The alternative risk transfer segment is further classified into two business lines: specialty programs and fully-funded. Prior year amounts have been reclassified to conform to the current year presentation. Our real estate operations consist solely of our development of the Harbour Village property as described below under “Business – Harbour Village Development.”

In our E&S line, Environmental Specialty writes insurance coverages for the environmental remediation industry. Construction provides commercial casualty insurance coverages, generally in the area of residential and commercial. Non-construction and excess provides general and products liability business for primary and excess products. Surety provides payment and performance bonds to the environmental remediation industry.

In our ART line, Specialty Programs facilitates the offering of insurance to homogeneous niche groups of risks. Fully funded provides a mechanism for insureds to post collateral and self-insure all or a portion of their risks. We are paid a fee for arranging this type of transaction.

The Other segment consists of amounts associated with realized gains and losses on investments and also for rescission expenses.

The Company measures all segments using net income, total assets and total equity. The Reportable Insurance Operations segments are measured by net premiums earned, incurred losses and loss adjustment expenses and acquisition expenses. Assets are not allocated to the Reportable Insurance Operations segments. The following table presents key financial data by segment for years ended December 31, 2004, December 31, 2005 and December 31, 2006 (in thousands):

- -------------------------- --------- ------------------------------------------------------------------------------- ------- --------
                             Real
    December 31, 2004       Estate                                     Insurance                                      Other    Total
- -------------------------- --------- -------------------------------------------------- ------------------ --------- ------- --------
                                                            E&S                             ART          Runoff
- -------------------------- --------- -------------------------------------------------- ------------------ --------- ------- --------
                                        Env.    Const.   Non-Const.  Excess     Surety   Specialty    FF
                                                                                          Programs
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------
 Gross premiums written           -    44,157   94,747          -      2,158     1,725     76,264             1,243       -   220,294
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------
  Net premiums written            -    35,024   77,462          -        432     1,174     17,273               299       -   131,664
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------
   Fee income written             -         -        -          -          -         -          -     257         -       -       257
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------
   Net premiums earned            -    32,152   79,559          -        222     1,138     16,516             6,714       -   136,301
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------
    Fee income earned             -         -        -          -          -         -          -     210         -       -       210
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------
      Losses &loss
       adjustment
        expenses                       15,094   55,998          -        133       477     10,929       -    10,872       -    93,503
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------
  Acquisition expenses            -     7,729   17,716          -         51       249        324       -       579       -    26,648
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------
   Underwriting profit
         (loss)                   -     9,329    5,845          -         38       412      5,263     210    (4,737)     -     16,360
- --------------------------- --------- ------------------------------------------------------------------------------- ------- -------
   Income tax expense         4,670                                    1,368)                                          394      3,696
        (benefit)
- -------------------------- --------- ------------------------------------------------------------------------------- ------- --------
   Net earnings (loss)        7,816                                    4,263                                         2,678     14,757
- -------------------------- --------- ------------------------------------------------------------------------------- ------- --------
         Assets               8,729                                  574,192                                           283    583,204
- -------------------------- --------- ------------------------------------------------------------------------------- ------- --------
         Equity               5,547                                  103,319                                          (86)    108,780
- -------------------------- --------- ------------------------------------------------------------------------------- ----------------

- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
    December 31, 2005        Real                                      Insurance                                     Other    Total
                            Estate
- -------------------------- --------- -------------------------------------------------- ------------------ --------- ------- ---------
                                                            E&S                                ART          Runoff
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
                                       Env.    Const.   Non-Const.  Excess     Surety   Specialty    FF
                                                                                        Programs
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
 Gross premiums written           -    51,014   93,315          -      2,091     2,581     85,138       -      (81)        -   234,058
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
  Net premiums written            -    41,477   77,639          -        387     1,345     19,712       -   (2,045)       -   138,515
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
   Fee income written             -         -        -          -          -         -          -   1,722         -       -      1722
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
   Net premiums earned            -    38,081   81,451          -        457     1,148     18,297       -   (1,854)       -   137,580
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
    Fee income earned             -         -        -          -                    -          -   1,196                       1,196
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
      Losses & loss               -    19,253   51,651                                     10,298       -     1,519       -    84,406
       adjustment
        expenses                                                -        274     1,411
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
  Acquisition expenses            -     9,848   17,888          -      (143)       342      1,112        -    (295)       -    28,752
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
   Underwriting profit                                          -        326
                                  -     8,980   11,912                           (605)      6,887   1,196   (3,078)       -    25,618
- ------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
   Income tax expense                                                                                                437    $1,392
        (benefit)               351                                                                           604
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
   Net earnings (loss)          209                                     13,618                                        829    14,656
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
         Assets               3,031                                     691,968                                           -  694,999
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
         Equity                 756                                      117,679                                     -       118,435
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------





- --------------------------------------------------------------------------------------------------------------------------------------
December 31, 2006           Real                                      Insurance                                     Other    Total
                            Estate
- -------------------------- --------- -------------------------------------------------- ------------------ --------- ------- ---------
                                                            E&S                                ART          Runoff
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
                                       Env.    Const.   Non-Const.  Excess     Surety   Specialty    FF
                                                                                        Programs
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
 Gross premiums written           -    51,805   96,918      2,344      3,946     4,004     80,590       -         -       -    239,607
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
  Net premiums written            -    37,746   92,530      1,524        670     3,042     21,756       -         -       -    157,268
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
   Fee income written             -         -        -          -          -         -          -   2,124         -       -      2,124
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
   Net premiums earned            -    35,138   88,612        653        532     2,566     19,255       -         -       -    146,756
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
    Fee income earned             -         -        -          -          -         -          -   1,685         -       -      1,685
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
   Losses &loss
       adjustment
        expenses                  -    20,221   58,824        456        319       674     12,135       -      (300)     -      92,329
- -------------------------- -------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ----------
  Acquisition expenses            -    10,390   16,555        122       (130)      569      (128)       -        -       -      27,378
- -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------
   Underwriting profit            -     4,527   13,233         75        343     1,323     7,248    1,685       300      -      28,734
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
   Income tax expense
        (benefit)               124                                    1,922                                           268       2,314
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
   Net earnings (loss)        (506)                                    20,117                                          921      20,532
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
         Assets                 918                                    846,213                                           -     847,131
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
         Equity                 250                                    196,001                                        (101)   196,150
- -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------

Additionally, the Company conducts business in the following geographic segments: country-regionUnited States and Bermuda. Significant differences exist in the regulatory environment in each country. Those differences include laws regarding the measurable information about the insurance geographic segments for the years ended December 31, 2004, December 31, 2005 and December 31, 2006 (in thousands):

    December 31, 2004                  United States                    Bermuda                    Total
Income tax                               3,696                              -                       3,696
Net earnings                             5,543                          9,214                      14,757
Assets                                 448,366                        134,838                     583,204
Equity                                  56,126                         52,654                     108,780

      December 31, 2005                United States                   Bermuda                    Total
Income tax                               1,392                              -                       1,392
Net earnings                             4,396                         10,260                      14,656
Assets                                 527,632                        167,367                     694,999
Equity                                  59,002                         59,433                     118,435

        December 31, 2006              United  States                   Bermuda                    Total
Income tax                               2,314                              -                       2,314
Net earnings                             3,491                         17,041                      20,532
Assets                                 509,552                        337,579                     847,131
Equity                                  66,896                        129,254                     196,150

       (11) Commitments and Contingencies

At December 31, 2005 and 2006, the Company had aggregate outstanding irrevocable letters of credit which had not been drawn amounting to $2,000,000 in favor of the Vermont Department of Banking, Insurance, Securities and Health Care Administration. Investments in the amount of $2,000,000 have been pledged as collateral to the issuing bank.

The Company entered into a lease for approximately 47,000 rentable square feet for its headquarters. The term of the lease is eighty-six months, commencing on February 1, 2007 and extending through March 31, 2014.

The yearly minimum base rent for all operating leases is payable according to the following schedule:

                2007       $   877,505

                2008        $1,108,316

                2009       $   979,815

                2010       $   988,065

                2011       $   248,983

                Thereafter $ 3,185,548

      (12) Liability for Unpaid Loss and Loss Adjustment Expenses

Activity in the liability for unpaid claims and claim adjustment expenses is summarized as follows:

                                                                                 Years Ended December 31,
                                                                       2004               2005                2006
                                                                                      (In thousands)

      Unpaid loss and loss adjustment expenses, January 1             $ 230,104        $  321,038           $  393,493
      Reinsurance recoverable on unpaid losses and loss
          adjustment expenses January 1                                 115,061           136,998              159,515

      Net unpaid loss and loss adjustment expenses, January 1         115,043           184,040              233,978

      Incurred related to:
          Current year                                                   79,101            81,800               89,731
          Prior years                                                    14,402             2,606                2,598

      Total incurred                                                   93,503            84,406               92,329

      Paid related to:
          Current year                                                    2,567             2,501                5,959
          Prior years                                                    21,939            31,967               41,821

      Total paid                                                        24,506            34,468              47,780

      Net unpaid loss and loss adjustment expenses, December 31         184,040           233,978              278,527

      Reinsurance recoverable on unpaid loss and loss
          adjustment expenses, December 31                              136,998           159,515             161,149

      Unpaid loss and loss adjustment expenses,
          December 31                                                 $ 321,038          $ 393,493           $439,673

The net prior year reserve development for 2004, 2005 and 2006 occurred in the following business lines:

                                                            Year Ended December 31,
                                                      2004            2005          2006
                                                                 (In thousands)

         Excess and Surplus Lines                  $       94       $   (754)         $   56
              Environmental                             7,700          2,204           2,425
              Construction                                 37            311            (224)
              Surety                                    7,831          1,761           2,257
         Alternative Risk Transfer
             Programs                                   1,496           (266)            641

          Runoff                                        5,075          1,111            (300)

          Total                                      $ 14,402        $ 2,606         $ 2,598
                                                      =======        =======         =======

The 2006 prior year development in the construction line primarily relates to development in layers where the reinsurance provided by one of the participants in these layers was commuted in 2005. The development in the programs primarily relates to an increase in certain case reserves on polices written in 2004 and 2005. This development is partially offset by reductions in our surety and run-off lines.

In 2005, the Company commuted two excess of loss reinsurance treaties with a former reinsurer. The negotiated commutation price was approximately $1 million less than the recoverable from the reinsurer which was recorded in the second quarter of 2005. Additionally, in the fourth quarter 2005, the accident year 2001 losses from commercial and residential contractors’ claims other than construction defect risk category developed adversely. The Company engaged an actuarial consulting firm in the fourth quarter of 2005 to provide construction defect claim count development patterns based on a group of companies writing construction contractors business since the early 1990s in California and other states. We implemented these claim count development patterns, which were based on a larger number of claims and a longer development history than we previously had used in estimating future construction defect claim counts.

Management continually attempts to improve its loss estimation process by refining its ability to analyze loss development patterns, claims payments and other information, but many reasons remain for potential adverse development of estimated ultimate liabilities. For example, the uncertainties inherent in the loss estimation process have become increasingly subject to changes in legal trends. In recent years, this trend has expanded the liability of insureds, established new liabilities and reinterpreted contracts to provide unanticipated coverage long after the related policies were written. Such changes from past experience significantly affect the ability of insurers to estimate the liabilities for unpaid losses and related expenses.

Management recognizes the higher variability associated with certain exposures and books of business and considers this factor when establishing liabilities for losses. Management currently believes the Company’s gross and net liabilities are adequate.

The net liabilities for losses and loss adjustment expenses maintained by the Company’s insurance subsidiaries are equal under both statutory accounting practices and GAAP.

      (13) Stock Options

The Company’s stock option plan grants incentive stock options to employees. The options generally have a term of 10 years. The exercise price is equal to the fair market value at the date of grant. The majority of our options generally vest over three years. At December 31, 2006, 430,627 shares were available for future grants.

The Company applied the recognition and measurement principles of SFAS No. 123R, Share Based Payments, commencing in the first quarter of 2006. Compensation expense relating to stock options of $614,886 is reflected in earnings for the twelve months ended December 31, 2006. The weighted average fair value of the options was $7.00 at December 31, 2006.

The following table illustrates the effect on earnings and earnings per share, assuming we had applied the fair value recognition provisions of SFAS No. 123R, Accounting for Share Based Payments, for the twelve months ended December 31, 2004 and 2005.

                                     Year Ending December 31,
                                              2004             2005
                                  (In thousands, except per share amounts)

     Net earnings
         As reported                        $ 14,757        $ 14,656
         Effect of stock options                (199)           (454)

                   Pro forma net earnings    $14,558         $14,202
                                              =======         ======
     Net earnings per share:
         Basic - as reported                   $2.15           $2.18
         Basic - pro forma                     $2.12           $2.11

         Diluted - as reported                 $2.01           $2.05
         Diluted - pro forma                   $1.98           $1.99

The following table shows the stock option activity for the Company during 2004, 2005 and 2006.

                                                                               Weighted average
                                                         Option Shares          exercise price



       Outstanding at December 31, 2003                    1,010,050                  $ 7.57

       2004 activity:
           Granted                                           136,500                   13.68
           Exercised                                         (77,005)                      -
           Canceled                                          (20,764)                      -

       Outstanding at December 31, 2004                  1,048,781                  $ 8.25
                                                          ==========                 =======
       2005 activity:
           Granted                                            31,000                   16.26
           Exercised                                        (165,768)                      -
           Canceled                                          (32,580)                      -

       Outstanding at December 31, 2005                      881,433                  $ 8.62
                                                             =======                  ======
       2006 activity:
           Granted                                            80,000                   17.04
           Exercised                                        (103,668)                      -
           Canceled                                          (10,000)                      -

       Outstanding at December 31, 2006                       847,765                 $ 9.33
                                                             ========                =======

       Of the 1,048,781 outstanding options at December 31, 2004, 633,615 were exercisable.
       Of the 881,433 outstanding options at December 31, 2005, 599,183 were exercisable.
       Of the 847,765 outstanding options at December 31, 2006, 570,766 were exercisable.

The following table summarizes information about stock options outstanding at December 31, 2006:

            Range of          Number            Weighted        Weighted      Grant            Number
                                                average
                                               remaining         average
            exercise                          contractual       exercise
              price         outstanding           life            price         Year        exercisable

             $ 11.00          45,000              1.13           $11.00           1998          45,000
                9.50          58,450              2.13             9.50           1999          58,450
                6.00          43,200              4.11             6.00           2000          43,200
                6.00         244,000              4.04             6.00           2001         244,000
                8.85          53,416              5.17             8.85           2002          53,416
                6.75          47,116              8.04             6.75           2003          47,116
                8.57         170,000              8.46             8.57           2003               -
               13.62             500              7.42            13.62           2004             334
               13.77          10,000              7.58            13.77           2004           6,667
               13.67          70,583              7.08            13.67           2004          70,583
               15.99           1,000              8.08            15.99           2005             333
               16.72           5,000              8.75            16.72           2005           1,667
               16.18          25,000              8.90            16.18           2005               -
              16.40           44,500              9.13            16.40           2006               -
              16.00            4,000              9.13            16.00           2006               -
              17.80           10,000              9.70            17.80           2006               -
              18.50            6,000              9.75            18.50           2006               -
              19.05           10,000              9.80            19.05           2006               -
                          ----------------                                                  -------------

          $6.00-19.05        847,765              5.88           $ 9.33                        570,766
          ==============  ================   ===============   ============                 =============

For the pro-forma information presented in Note 1(m), the fair value of each option granted during 2004, 2005 and 2006 was estimated on the date of grant using the Black-Scholes multiple option approach with the following assumptions: dividend yield of 0.0% in 2004, 2005 and 2006, respectively; expected volatility of 41.33%, 39.29% and 37.97% in 2004, 2005 and 2006, respectively; risk-free interest rate of 3.5% for 2004 through 2006 and expected life from the grant dates ranging from 0.50 years to 10.00 years. The weighted average fair value of the options during 2004, 2005 and 2006 were $7.86, $9.32 and $9.43 respectively.

The Company expects to grant additional awards in future years. The Company granted options in 2004, 2005 and 2006 at an amount deemed to be fair market value at the date of grant. See Note 1(m) for more information.

      (14) Litigation

        We, through our subsidiaries, are routinely party to pending or threatened litigation or arbitration disputes in the normal course of or related to our business.  Based upon information presently available, in view of legal and other defenses available to our subsidiaries, management does not believe that any pending or threatened litigation or arbitration disputes will have any material adverse effect on our financial condition or operating results, except for the matters discussed below. 

        Warranty Reinsurance Litigation.  We were named as a defendant in several cases, liquidation actions and reinsurance claims, collectively identified as the “National Warranty” issue.  American Safety Reinsurance, Ltd. (“American Safety Re”) was an excess-of-loss reinsurer through a reinsurance treaty with National Warranty Risk Retention Group (“National Warranty”) that provided insurance coverage to automobile dealerships and other providers that were obligors on automobile warranty contracts they sold to consumers. National Warranty filed for liquidation in the Cayman Islands (the location of its legal creation).  This liquidation had a cascading effect, including the subsequent filing of bankruptcy by various obligors of vehicle service contracts insured by National Warranty.  As a result, there are potentially over one million vehicle service contracts that are not being honored by the obligors.

        The iquidators of National Warranty made claims of $25.4 million pursuant to two reinsurance contracts issued by American Safety Re to National Warranty in 2002 and 2003.  In addition, consumers of vehicle service contracts sued American Safety Re, and the trial court certified that case as a class action, although we appealed that determination.  Lastly, claims have been made by sellers/obligors of the vehicle service contracts who were insured by National Warranty.  There were five sellers/obligors cases against us and other professional services providers, including other reinsurers, relating to National Warranty, with claims in excess of $2.6 million.  All of these claims were based on fraud and/or theories of contractual violations.  We believe that American Safety Re had valid defenses to the claims including, among others, that it had commuted its obligations under reinsurance treaties, its liability is limited to the amount of coverage provided under the policies, which varies based on premium written by National Warranty and it loss ratios, and that most of the claimants cannot make claims directly under the reinsurance contracts. 

        On November 17, 2006, we entered into a settlement agreement pursuant to which all claims, other than claims by City Automotive and Oak Services as described below, against ASI parties were settled for $1.8 million, within the amount previously accrued, in exchange for a complete discharge and release. The settlement with the Joint Official Liquidators for National Warranty requires the approval of the Grand Cayman court. The approval is pending but has not yet been obtained.

        City Automotive and Oak Services. The plaintiffs in these two cases are dealers and marketers of the vehicle service contracts. We have entered into an arbitration agreement with the plaintiffs in exchange for a dismissal of all ASI parties from the pending litigation. Pursuant to this arbitration agreement, there is a floor and a ceiling to the award the arbitrators can award. The ceiling is reduced by a percentage amount equal the percentage that any recovery by City Automotive and Oak Services in their pending litigation against the remaining defendants or in the National Warranty liquidation bears to the plaintiffs’ total damages. The ultimate outcome of these matters cannot now be determined.

        Griggs et al. v. American Safety Reinsurance, Ltd. et al., Case No. 2003-31509, Circuit Court, Seventh Judicial District, Volusia County, StateFlorida.  Seven plaintiffs filed suit against us and three of our subsidiaries seeking to recover a $2.1 million loan made by the plaintiffs in 1986 to Ponce Marina, Inc., the former owner of the Harbour Village property.  The plaintiffs claimed that we were responsible for the repayment of the loan, with interest.  The plaintiffs propounded four theories of liability and the court granted judgment for us on three of the theories.  However, the court entered judgment on August 10, 2005 against us for approximately $3.4 million, which includes interest, on the remaining theory.  The court held that we, as a condition of our loan, required Ponce Marina, Inc. to demand that the plaintiffs enter into an agreement with Ponce Marina, Inc., to the detriment of their loans and to our benefit, and thus, we had entered into a quasi-contract with the plaintiffs to repay their loan with interest. 

        We filed an appeal in December 2005, and oral argument on our appeal was heard on December 5, 2006.  The Court has not yet issued a decision on our appeal. Based on the merits of the case and likelihood of ultimate payment, we have not established an accrual for the decision. The ultimate outcome of this matter cannot now be determined.

        Sizemore v. American Safety Insurance Services, Inc. et al., Case No 2005-31704, Circuit Court, Seventh Judicial District, Volusia County, Florida.  American Safety Insurance Services, Inc., its parents and a number of its affiliates are defendants in a suit brought by an individual who contends that defendants are liable to him for a debt owed to him by Ponce Marina, Inc. in the amount of $400,000 plus interest and costs.  The plaintiff also intends to seek class certification on behalf of himself and 21 other unnamed plaintiffs for the case on these claims in excess of $1.7 million plus interest and costs.  On January 27, 2006, the trial court dismissed the case.  The plaintiff was permitted to file an amended complaint on or before March 6, 2006.  The plaintiff filed an amended complaint on March 7, 2006, alleging various theories of recovery, some of which were also alleged in the Griggs case.  On May 4, 2006, the trial court dismissed the case and gave the plaintiff 20 days to file an amended complaint.  The plaintiff filed a third amended complaint and our third Motion to Dismiss was heard on August 22, 2006, and on September 18, 2006, the plaintiff’s case was dismissed with prejudice. On October 17, 2006, the plaintiff filed an appeal of the dismissal. We continue to vigorously defend this case, as we believe that the case is without merit.  Based on the merits of the case and the likelihood of ultimate payment, we have not established an accrual. The ultimate outcome of this matter cannot now be determined. 

                                   AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

                                    SELECTED QUARTERLY FINANCIAL DATA

                                               (UNAUDITED)


         The following table presents the quarterly  results of consolidated  operations for 2005 and 2006
(dollars in thousands, except per share amounts):

           2005                    Mar. 31                June 30          Sept. 30                Dec. 31


Total  revenues                     $ 40,207             $ 38,623          $ 35,029                 $ 42,256
Income before taxes                    3,897                3,431             4,430                    4,290
Net earnings                           3,646                3,139             3,347                    4,524
Comprehensive income                     147                7,002               344                    3,770


Net earnings  per share:
Basic                                $ 0.54                $ 0.47            $ 0.50                   $ 0.67
Diluted                                0.50                  0.44              0.47                     0.63

Common stock price ranges:
         High                      $  16.45               $ 15.75           $ 17.98                  $ 18.00
         Low                          14.02                 14.17             15.17                    16.01


           2006                    Mar. 31                June 30         Sept. 30                Dec. 31


Total  revenues                    $ 40,105              $ 40,376          $ 45,021                 $ 45,938
Income before taxes                   4,117                 5,227             5,731                    7,772
Net earnings                          4,100                 4,627             5,388                    6,416
Comprehensive income                    944                 1,455            14,036                    6,187


Net earnings  per share:
Basic                                $ 0.61                $ 0.65            $ 0.52                   $ 0.61
Diluted                                0.57                  0.62              0.50                     0.59

Common stock price ranges:
         High                      $  16.97               $ 17.58           $ 18.40                  $ 19.65
         Low                          14.27                 15.30             15.80                    17.40

                            AMERICAN SAFETY INSURANCE HOLDINGS, LTD. (PARENT ONLY)

                                  SCHEDULE II CONDENSED BALANCE SHEETS

                                        DECEMBER 31, 2005 AND 2006

                                                             2005                         2006
Assets

Investment in subsidiaries                                $ 104,160,885          $ 155,219,686
Other investments:
    Fixed maturities                                          4,753,607             27,596,656
    Common stock                                              9,125,625             10,252,812
    Short term investments                                      110,231                729,437
    Secured note receivable from affiliate                    2,500,000              2,500,000
    Total other investments                                  16,489,463            196,298,591
Cash and cash equivalents                                         1,518                 73,340
Accrued investment income                                        48,615                280,402
Other assets                                                     21,570                273,175
Total assets                                               $120,722,051           $196,925,508


Liability and shareholders' equity
Due to related party                                     $    2,107,973                      -
Accounts payable and accrued expenses                            78,831                675,328
Total liabilities                                             2,186,804                675,328

Preferred stock                                                 100,000                100,000

Common stock                                                     67,537                105,542
Additional paid in capital                                   49,460,019            104,514,210
Accumulated other comprehensive earnings (losses), net       (1,549,661)               540,888
Retained earnings                                            70,457,352             90,989,540
Total shareholders' equity                                  118,435,247            196,150,180

Total liabilities and shareholders' equity                 $120,722,051           $196,925,508
                                                            ===========            ===========
See accompanying independent auditors' report.

                          AMERICAN SAFETY INSURANCE HOLDINGS, LTD. (PARENT ONLY)
                             SCHEDULE II CONDENSED STATEMENTS OF OPERATIONS
                               YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

                                                         2004             2005              2006
     Revenues:

         Investment income                            $515,024             $314,437       $1,754,182
         Realized gains (losses) on sales of
           investments                                   7,283              (20,140)          91,399

     Total Revenues                                    522,304              294,297        1,845,581

     Expenses:
         Other underwriting expenses                 1,792,178            1,398,267        1,942,383
             Total Expenses                          1,792,178            1,398,267        1,942,383

     Net loss before equity in net earnings
         of subsidiary                              (1,269,874)          (1,103,970)         (96,802)
         Equity in net earnings of
             subsidiary                             16,026,849           15,760,380       20,629,000
     Net earnings                                  $14,756,975         $ 14,656,410     $ 20,532,198
                                                    ==========          ===========       ==========
See accompanying independent auditors' report.

                          AMERICAN SAFETY INSURANCE HOLDINGS, LTD. (PARENT ONLY)
                                  SCHEDULE II - STATEMENTS OF CASH FLOW
                               YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006



                                                         2004                      2005                      2006

Cash flow from operating activities:
  Net loss  before equity in earnings of
    subsidiary                                   $   (1,269,874)          $    (1,103,970)             $    (96,802)
  Adjustments to reconcile net earnings
    (loss) to net cash provided by (used in)
    operating activities:
  Change in operating assets and liabilities:
    Accrued investment income                           104,179                    35,522                   231,787
    Premiums receivable/payable                               -                         -                         -
    Due from/to affiliate                              (752,043)                 (214,583)               (2,107,973)
    Unpaid losses and loss adjustment expenses                -                         -                         -
    Accounts payable and accrued expenses              (176,678)                   70,375                   842,029
    Assumed loss and LAE payable                              -                         -                         -
  Other, net                                            797,694                   135,766                   399,944
 Net cash used in operating activities               (1,296,722)               (1,076,890)               (1,194,589)

Cash flow from investing activities:
  Decrease (increase) in investments                  7,428,345                 2,456,282               (22,309,200)
  Investment in subsidiary                           (4,307,242)                        -               (30,000,000)
  Decrease (increase) in short term
     investments                                         52,796                   282,345                  (619,206)
Net cash provided by (used in) investing
    activities                                        3,173,899                 2,738,627               (52,928,406)

Cash flow from financing activities:
  Proceeds from sale of common stock                    638,495                 1,218,455                54,194,817
  Stock repurchase payments                          (2,485,209)               (2,945,714)                        -
Net cash provided by (used in) financing
    activities                                       (1,846,714)               (1,727,259)               54,194,817

Net (decrease) increase in cash                          30,463                   (65,522)                   71,822
  Cash and cash equivalents, beginning of year           36,577                    67,040                     1,518
  Cash and cash equivalents, end of year         $       67,040          $          1,518        $           73,340
                                                      =========                    ======                    ======
See accompanying independent auditors' report.

                          AMERICAN SAFETY INSURANCE HOLDINGS, LTD. (PARENT ONLY)
                        SCHEDULE II -CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
                               YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006



                                                          2004                    2005                      2006

   Net earnings                                      $ 14,756,975          $  14,656,410             $  20,532,198


   Other comprehensive income (loss):
   Unrealized   gains   (losses)  on  securities
   available-for  sale, net of minority interest
   of  $(108,334)  $11,815  and  $(259,129)  for
   2004, 2005 and 2006, respectively.                     463,260             (4,541,890)                3,616,606

   Unrealized gains (losses) on hedging
   transactions                                            81,912                311,359                  (103,200)

   Reclassification adjustment for realized
   (gains) losses included in net earnings,
   net of minority interest of $(86,986), $0
   and $25,530 for 2004, 2005 and 2006,
   respectively.                                         (121,149)                54,101                (1,215,858)

   Total other comprehensive income (loss)
   before income taxes.                                   424,023             (4,176,430)                2,297,548

   Income tax expense (benefit) related to
   items of other comprehensive income, net of
   minority interest of $0 for 2004, $(5,534)
   for 2005 and $9,071 for 2006 respectively.              65,933               (783,351)                  206,999

   Other comprehensive income (loss)                      358,090             (3,393,079)                2,090,549

   Total comprehensive income                        $ 15,115,065           $ 11,263,331              $ 22,622,747
                                                       ============          ===========               ===========
See accompanying independent auditors' report.

                                 AMERICAN SAFETY INSURANCE HOLDINGS, LTD.
                            SCHEDULE III - SUPPLEMENTAL INFORMATION CONCERNING
                                  PROPERTY-CASUALTY INSURANCE OPERATIONS
                                          (dollars in thousands)

                  Column B    Column C   Column D   Column E   Column F    Column G       Column H         Column I    Column J  Column K

                             Reserves
                                for                                                   Claims and Claim   Amortization
                               Unpaid    Discount,                                       Adjustment           of
                  Deferred   Claims and  if any,                                          Expenses         Deferred
                   Policy      Claim     Deducted      Net        Net        Net      Incurred Related      Policy     Other        Net
                 Acquisition Adjustment  in         Unearned    Earned    Investment         to          Acquisition   operating Premiums
                   Costs      Expenses   Column C   Premiums   Premiums   Income (1)                        Costs      expenses   Written
                                                                                                                         (1)

                                                                                      Current    Prior
                                                                                        Year     Years


2004
E&S
Environmental     $4,107      $32,889        -       $19,384    $32,152        -     $15,000   $   94       $ 5,714          -   $35,024
Construction       7,400      107,282        -        41,895     79,559        -      48,298    7,700        19,283          -    77,462
Excess               (63)         132        -           208        222        -         133        -            69          -       432
Surety                38          270        -           195      1,138        -         440       37           249          -     1,174
                  11,482      140,573                 60,972    113,071               63,871    7,831        25,315              114,092

ART
 Programs            256       18,810        -         6,993     16,516        -       9,433    1,496       (2,910)          -    17,273

Runoff                 -       24,657        -           211      6,714        -       5,797    5,075        4,244           -       299

Total            $11,738     $184,040                 $68,176  $136,301   $9,773     $79,101  $14,402      $26,649     $19,932  $131,664
                 =======     ========                 ======== =========  =======    =======  ========     ========   ========= ========

2005
E&S
Environmental     $4,569      $45,205        -       $27,779    $38,081        -     $20,007    $(754)     $9,848           -    $41,477
Construction       6,372      142,512        -        37,161     81,451        -      49,447    2,204      17,745           -     77,639
Excess                85          407        -           349        457        -         274        -           -           -        387
Surety                91          220        -           391      1,148        -       1,100      311         342           -      1,345
                  11,117      188,344                 60,680    121,138               70,828    1,761      27,935                120,848

ART
 Programs          (235)       21,412        -        8,432      18,297        -      10,375     (266)        941           -     19,712

Runoff                -        24,222        -            -      (1,854)       -         408     1,111       (295)          -    (2,045)

Total           $10,882      $233,978               $69,112    $137,580   $14,316     $81,800   $2,606     $28,581    $23,970   $138,515
                =======      ========               ========   ========= ========    ========  ========   ========    ========  ========

2006
E&S
Environmental     $5,117      $51,316        -       $22,579    $35,235         -     $20,165   $   56     $10,398          -   $ 37,746
Construction       7,544      179,282        -        41,288     88,612         -     $56,398    2,425      16,555          -     92,530
Non-Construction     (15)         424        -           871        653                   456        -         122                 1,524
Excess              (181)         726        -           278        532         -         319        -        (130)         -        670
Surety               213          174        -           867      2,566         -         898     (224)        569          -      3,042
                  12,678      231,922                 65,883    127,598               $78,236   $2,257     $27,514             $ 135,512

ART
 Programs           (275)      27,269        -        13,417     19,255         -      11,495      641        (52)          -     21,756

Runoff                 -       19,336        -             -          -         -           -    (300)          -           -          -

Total            $12,403     $278,527                $79,300   $146,853    $1,767     $89,731   $2,598    $27,462     $30,377   $157,298
                  =======    ========                ========  ========    =======    =======   ======    ========    ========  ========


(1) The  Company  does not  allocate  net  investment  income or other  operating  expenses to the various
business segments.

See accompanying independent auditors' report.

                                 AMERICAN SAFETY INSURANCE HOLDINGS, LTD.
                                        SCHEDULE IV - REINSURANCE
                               YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
                                          (Dollars in thousands)



                                                                        Assumed from                   Percentage of
                                                           Ceded to         Other                         Amount
              Property-Liability             Gross          Other         Companies         Net         Assumed to
           Insurance Premiums Earned        Amount        Companies                        Amount           Net
        -------------------------------- -------------- --------------- -------------- --------------- --------------

        United States                     $ 223,052        $ 90,751       $   4,000    $  136,301             2.9
        December 31, 2004
        December 31, 2005                 $ 229,238        $ 91,577       $    (81)   $  137,580            (0.1)
        December 31, 2006                 $ 222,257        $ 75,636       $     135    $  146,756             0.1

        Bermuda
        December 31, 2004                         -               -               -             -               -
        December 31, 2005                         -               -               -             -               -
        December 31, 2006                         -               -               -             -               -

        Combined Total
        December 31, 2004                 $ 223,052        $ 90,751       $   4,000    $  136,301             2.9
        December 31, 2005                 $ 229,238        $ 91,517       $     (81)   $  137,580           (0.1)
        December 31, 2006                 $ 222,257        $ 75,636       $     135    $  146,756             0.1

       See accompanying independent auditors' report.

EX-11

                                                                 EXHIBIT 11
                                                      COMPUTATION OF EARNINGS PER SHARE


                                                      For the Years Ended December 31,

                                                        2004        2005              2006

       Basic:

       Earnings available to common
       Shareholders...........................     $14,756,975      $14,656,410       $20,532,198
                                                   ===========      ===========      ============
       Weighted average common shares
       Outstanding............................       6,863,619        6,736,938         8,729,734

       Basic earnings per common share...          $      2.15      $      2.18       $      2.35
                                                   ===========      ===========      ============
       Diluted:

       Earnings available to common
       Shareholders...........................     $14,756,975      $14,656,410       $20,532,198
                                                   ===========      ===========       ===========
       Weighted average common shares
       Outstanding...........................        6,863,619        6,736,938         8,729,734

       Weighted average common shares
       Equivalents associated with options.            479,260          426,954           365,689

       Total weighted average common
       Shares....................................    7,342,879        7,163,892         9,095,423
                                                   ============       ==========       ==========
       Diluted earnings per common
       Share....................................  $       2.01      $      2.05      $      2.26
                                                  ============      ===========      ============

EX-12

AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

EXHIBIT 12

RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)

                                          2004            2005             2006  

      Earnings
      Pre-tax earnings                 $   18,453       $ 16,048         $22,846
      Plus: Interest expense
      recognized                            1,398          1,433           3,635
      Total earnings                       19,851         17,481          26,481

      Fixed charges
      Interest expenses for the
      period                                1,291          1,433           3,635
      Total fixed charges             $     1,291       $  1,433        $  3,635

      Coverage Ratio                        15.38          12.20            7.29

EX-21

AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

Exhibit 21

SUBSIDIARIES OF THE COMPANY

American Safety Insurance Holdings, Ltd

         American Safety Assurance, Ltd

         American Safety Reinsurance Ltd

         American Safety Holdings Corp

                  American Safety Casualty Insurance Company

                           American Safety Indemnity Company

                  Ponce Lighthouse Properties Inc

                  RiverMar Contracting Company

                  American Safety Insurance Services, Inc.

                           Environmental Claims Service, Inc

                           Sureco Bond Services, Inc

                           American Safety Financial Corp

                           American Safety Purchasing Group, Inc

                  American Safety Capital Trust

                  American Safety Capital Trust II

                  American Safety Capital Trust III

                     American Safety Risk Retention Group, Inc (non-subsidiary risk retention
                     group affiliate)

EX-10

                                                            EXHIBIT 10.2

                                                             GALLERIA
                                                             ATLANTA

                                                        OFFICE LEASE AGREEMENT
                                               AMERICAN SAFETY INSURANCE SERVICES, INC.

                                                        TABLE OF CONTENTS
                                                                                               Page

PARAGRAPH                  1          TERM AND POSSESSION                                        1
                           2          MONTHLY RENTAL                                             2
                           3          SECURITY DEPOSIT                                           6
                           4          OCCUPANCY AND USE                                          6
                           5          COMPLIANCE WITH LAWS                                       6
                           6          ALTERATIONS                                                7
                           7          REPAIR                                                     7
                           8          LIENS                                                      8
                           9          ASSIGNMENT AND SUBLETTING                                  8
                           10         INSURANCE AND INDEMNIFICATION                              9
                           11         WAIVER OF SUBROGATION                                      10
                           12         SERVICE AND UTILITIES                                      10
                           13         ESTOPPEL CERTIFICATE                                       12
                           14         HOLDING OVER                                               12
                           15         SUBORDINATION                                              12
                           16         RE-ENTRY BY LANDLORD                                       12
                           17         INSOLVENCY OR BANKRUPTCY                                   13
                           18         DEFAULT AND REMEDIES                                       13
                           19         DAMAGE BY FIRE                                             15
                           20         CONDEMNATION                                               16
                           21         placeCitySALE BY LANDLORD                                  17
                           22         RIGHT OF LANDLORD TO PERFORM                               17
                           23         SURRENDER OF PREMISES                                      17
                           24         WAIVER                                                     17
                           25         NOTICES                                                    18
                           26         CERTAIN RIGHTS RESERVED TO LANDLORD                        18
                           27         ABANDONMENT                                                18
                           28         SUCCESSORS AND ASSIGNS                                     18
                           29         ATTORNEY´S FEES                                      18
                           30         CORPORATE AUTHORITY                                        19
                           31         MORTGAGE APPROVALS                                         19
                           32         MISCELLANEOUS                                              19
                           33         LANDLORD´S LIEN                                      19
                           34         QUIET ENJOYMENT                                            20
                           35         LANDLORD´S LIABILITY                                 20
                           36         RIGHT TO RELOCATE                                          20
                           37         NO ESTATE                                                  20
                           38         LEASE EFFECTIVE DATE                                       20
                           39         RULES AND REGULATIONS                                      20
                           40         SPECIAL STIPULATIONS                                       21
                           41         GUARANTY                                                   21
                           42         CONDITION                                                  21
                           43         BROKERAGE COMMISSIONS                                      21
                           44         EXCULPATION                                                21

EXHIBIT                    A          RULES AND REGULATIONS
                           B          WORK LETTER AGREEMENT
                           C          ESTOPPEL CERTIFICATE
                           D          FLOOR PLAN OF DEMISED PREMISES
                           E          SPECIAL STIPULATIONS
                           F          GUARANTY
                           G          INSURANCE

                                                               GALLERIA
                                                             A T L A N T A

                                                        OFFICE LEASE AGREEMENT


         THIS LEASE is made as of the ______  day of _________, 2006 between OTR, an Ohio general partnership (hereinafter
called "Landlord"), and AMERICAN SAFETY INSURANCE SERVICES, INC., a Georgia corporation (hereinafter called
"Tenant").

                                                              WITNESSETH:

         Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those premises (hereinafter called "Premises") shown
on Exhibit "D" attached hereto and made a part thereof, being located in Atlanta Galleria Office Tower No. 100, a multistory office
building (the "Building") constructed on a parcel of land (the "Property") bounded by I-285 on the North, I-75 on the East, U.S. 41
on the West and Akers Mill Road on the South.  Tenant´s Federal Tax Identification Number is _________________.

Premises:         Atlanta Galleria-Office Tower No. 100,
                  Street100 Galleria Parkway
                  Atlanta, Cobb County,Georgia
                  Square Feet:  46,978  Suite Number: 700 and 800
                  Floor(s):  7th and 8th

1.   Term and         1.   (a)   The term of the Lease shall be for eighty-six (86) months (or until
     Possession.      sooner terminated as herein provided) (the "Lease Term"), beginning on (i) February 1, 2007 or (ii) the
                      "Commencement Date" (as hereinafter defined), whichever shall last occur, except that if the Commencement Date is
                      other than the first day of a calendar month, the term hereof shall be extended for the remainder of that
                      calendar month.

                           (b)   The Commencement Date shall be the earlier of (i) the date upon which the Premises have been
                      substantially completed in accordance with the plans and specifications of Landlord (other than any work which
                      cannot be completed on such date provided such incompletion will not substantially interfere with Tenant's use
                      of the Premises) but which shall not be deemed to have occurred earlier than February 1, 2007 regardless of the
                      status of completion, or (ii) the date on which Tenant takes possession of a portion of or all of the Premises;
                      provided, however, that if Landlord shall be delayed in such substantial completion as a result of any of the
                      foregoing (each, a “Tenant Delay”): (1) Tenant's failure to agree to plans, specifications, or cost estimates
                      before the date referred to in the Work Letter Agreement attached hereto as Exhibit "B" and made a part hereof;
                      (2) Tenant's request for materials, finishes or installations other than Landlord's standard; (3)Tenant's
                      changes in plans; or (4) the performance or completion by a party employed by Tenant, the Commencement Date and
                      the payment of rent hereunder shall be accelerated by the number of days of such delay.

                           (c)   Landlord agrees to perform the "Building Standard Work" or "Building Nonstandard Work" in the
                      Premises as provided in the Work Letter Agreement with diligence, subject to events and delays due to causes
                      beyond its reasonable control.  The Premises shall be deemed substantially completed and possession delivered
                      when Landlord has substantially completed the work to be constructed or installed pursuant to the provisions of
                      the Work Letter Agreement, subject only to the completion of items on Landlord's punch list (and exclusive of
                      the installation of all telephone and other communications facilities and equipment and other finish work to be
                      performed by or for Tenant) and a temporary or permanent certificate of occupancy has been issued allowing
                      Tenant to take possession of the entire Premises.

                           (d)   The taking of possession by Tenant shall be deemed conclusively to establish that the Building, other
                      improvements, and the Premises have been completed in accordance with the plans and specifications and are in
                      good and satisfactory condition as of when possession was so taken, subject to latent defects as to which Tenant
                      notifies Landlord within six (6) months after the Commencement Date and to punch list items.

                           (e)   Landlord shall use commercially reasonable efforts to substantially complete the Premises so that
                      Tenant may occupy the Premises on or before February 1, 2007.

                           (f)   Notwithstanding the foregoing provisions to the contrary, if the Commencement Date does not occur
                      prior to June 1, 2007 as a result of any Landlord Delay (as hereinafter defined), then the Lease Term and
                      Tenant´s obligation to pay rent hereunder shall not occur until the occurrence of the Commencement Date.  For
                      purposes of this Lease, “Landlord Delay” shall mean any of the following:  (i) Landlord´s failure to perform
                      its obligations under Paragraph 1 of this Lease, the Work Letter Agreement, or any other provisions hereof
                      relating to Landlord´s duty to construct the initial improvements to the Premises; or (ii) Landlord´s failure
                      to take any other action required to be taken by Landlord under any other provision of this Lease or the Work
                      Letter Agreement within the period specified therefor; provided, however, that any such failure is not a result
                      of Tenant Delay or an event of default by Tenant under this Lease.




2.   Monthly          2.   (a)   Beginning five (5) months following the Commencement
     Rental.          Date (the “Rental Start Date”), Tenant shall pay to Landlord throughout the term of this Lease rental as set
                      forth below, payable in equal monthly rental installments and payable in advance on the first day of each month
                      during every year of the term hereby demised in lawful money of the United States, without deduction or offset
                      whatsoever, to Landlord or to such other firm as Landlord may from time to time designate in writing.  Until
                      notified otherwise, Tenant shall submit all payments using one of the following methods:

                      Preferred Method
                      Automated Clearing House (ACH)
                      Account # 71908884
                      Bank Name:     Fifth Third Bank
                      Routing & Transit:  042 000 314
                      Account: OTR Nominee of State Teachers Retirement System of Ohio
                      Reference:  _______________________

                      Tenant must notify Landlord of ACH wire using one of the following methods:
                      Fax:  Childress Klein Properties, Attn:  Vicki Smith, (770) 859-1299 or
                      E-mail:  Vicki.Smith@childressklein.com
                      ACH Wiring instructions are subject to change upon notification from Landlord.

                      Alternate Method
                      Issue a check
                      OTR Nominee of State Teachers Retirement System of placeStateOhio
                      P.O. Box 633212
                      Cincinnati, StateOH  PostalCode45263-3212

                      Please note Wire Transfers are not an approved form of payment.  Said rental is subject to adjustments as
                      provided hereinbelow.  If this Lease commences on a day other than the first day of a calendar month, the
                      monthly rental for the fractional month shall be appropriately prorated.

                      Landlord shall have no obligation to provide invoices to Tenant for the monthly rental payments due under this
                      Lease, and each such monthly rental payment shall be paid by Tenant when due as set forth herein whether or not
                      Tenant receives an invoice for such payment.

                      The rental due and payable under this Paragraph 2(a) shall be as follows:

                                                 Annual Rent      Annual           Monthly
                      Period                     Per RSF          Rent             Rent
                      Rental Start Date -        $19.25           $904,326.50      $75,360.54
                          03/31/08
                      04/01/08 ¬ 03/31/09        $19.88           $933,922.64      $77,826.89
                      04/01/09 ¬ 03/31/10        $20.53           $964,458.34      $80,371.53
                      04/01/10 ¬ 03/31/11        $21.20           $995,933.60      $82,994.47
                      04/01/11 ¬ 03/31/12        $21.89         $1,028,348.42      $85,695.70
                      04/01/12 ¬ 03/31/13        $22.60         $1,061,202.80      $88,475.23
                      04/01/13 ¬ Last Day of     $23.33         $1,095,996.74      $91,333.06
                          Lease Term

                           (b)   Tenant recognizes that late payment of any rent or other sum due hereunder from Tenant to Landlord
                      will result in administrative expense to Landlord, the extent of which additional expense is extremely
                      difficult and economically impractical to ascertain.  Tenant therefore agrees that if rent or any other payment
                      due hereunder from Tenant to Landlord remains unpaid five (5) days after said amount is due, the amount of such
                      unpaid rent or other payment shall be increased by a late charge to be paid to Landlord by Tenant in an amount
                      equal to five percent (5%) of the amount of the delinquent rent or other payment.  The amount of the late
                      charge to be paid to Landlord by Tenant for any month shall be computed on the aggregate amount of delinquent
                      rents and other payments, including all accrued late charges then outstanding, and shall be deemed to be rental
                      for all purposes hereunder.  Tenant agrees that such amount is a reasonable estimate of the loss and expense to
                      be suffered by Landlord as a result of such late payment by Tenant and may be charged by Landlord to defray
                      such loss and expense.  The provisions of this paragraph in no way relieve Tenant of the obligation to pay rent
                      or other payments on or before the date on which they are due, nor do the terms of this paragraph in any way
                      affect Landlord's remedies pursuant to Paragraph 18 of this Lease in the event said rent or other payment is
                      unpaid after the date due.








                          (c)   The monthly rental payable hereunder shall be subject to adjustment each calendar year during the
                      term of this Lease, commencing January 1, 2008, in the following manner:

                                    (i)     Tenant shall pay to Landlord as additional rent Tenant's proportionate share of the amount
                           by which the Direct Operating Expenses (as hereinafter defined) incurred by Landlord in the operation of the
                           Building during each calendar year of the Lease Term exceeds the Direct Operating Expenses for the base year
                           2007 (hereinafter called the “Base Year”).  Tenant's Proportionate Share of Direct Operating Expenses (as
                           hereinafter defined) shall be prorated on a daily basis using a 365-day calendar year, as necessary for any
                           year during which this Lease is in effect for less than the full twelve month calendar year.  Direct
                           Operating Expenses shall be calculated on an accrual basis.  For the purpose of estimating the Direct
                           Operating Expenses during each subsequent year after the Base Year, Landlord shall reasonably estimate such
                           expenses (assuming ninety-five percent (95%) occupancy of the Building if the actual occupancy is less than
                           ninety-five percent) based on the actual Direct Operating Expenses for the preceding year, any then-known
                           cost changes or additional expenses which can be reasonably anticipated to occur within the year for which
                           such expenses are estimated, Landlord's experience with similar office buildings, the costs of contracts
                           already entered, quotes obtained, representations of providers of the services and equipment, consultation
                           with specialists such as insurers, and other factors a prudent landlord would use to make a fair and
                           accurate estimate of operating costs.  Notwithstanding anything contained in this Lease to the contrary, for
                           purposes of determining Direct Operating Expenses for the Base Year and each calendar year subsequent to the
                           Base Year, in the event actual occupancy of the Building is less than ninety-five percent (95%) during any
                           calendar year, the actual Direct Operating Expenses for such calendar year shall be increased to the amount
                           which Landlord reasonably estimates would have been incurred for such calendar year had the occupancy of the
                           Building been ninety-five percent (95%) throughout such year, and the amount so estimated shall be deemed to
                           be the Direct Operating Expenses for such calendar year.

                                    (ii)    "Tenant's Proportionate Share of Direct Operating Expenses" shall mean, for each calendar
                           year (or portion thereof), the product of (i) the Operating Expense Amount (defined below) multiplied by
                           (ii) a fraction, the numerator of which is the number of square feet contained in the Premises (46,978) and
                           the denominator of which is the number of rentable square feet contained in the Building (410,571).  As
                           used herein, the "Operating Expense Amount" shall mean, for each calendar year (or portion thereof), the
                           amount by which the Direct Operating Expenses (defined below) exceeds the Base Year's Direct Operating
                           Expenses.

                                    (iii)   For purposes of this Lease, the term "Direct Operating Expenses" shall consist of all
                           "operating costs" (as hereinafter defined) for the Building, and the Building’s share of all operating
                           costs for any parking area and common area serving the Building, and the Property (the Building, such
                           parking area, common area and the Property being hereinafter referred to collectively as the "Project").
                           For purposes of this Lease, the term "operating costs" shall mean all reasonable expenses, costs and
                           disbursements computed on the accrual basis, relating to or incurred or paid in connection with the
                           operation, maintenance and repair of the Project, including, but not limited to the following:

                                    a.      Building personnel costs, including, but not limited to, salaries, wages, fringe
                                    benefits, social security taxes and other direct and indirect costs of Senior Property Manager,
                                    Engineering Manager, Building Managers, Accounting Manager, Construction Manager, Promotions
                                    Manager, Security Manager, and each department’s supporting personnel and administrative
                                    assistants, engineers, construction department, superintendents, watchmen, porters and any other
                                    personnel engaged in the operation and maintenance of the Project and associated overhead.

                                    b.      The cost of all supplies, tools, equipment and materials used in the operation and
                                    maintenance of the Project.










                                    c.      The cost of water, sewer, gas, heating, lighting, ventilation, electricity, air
                                    conditioning, and any other utilities supplied or paid for by Landlord for the Project and the
                                    costs of maintaining the systems supplying the same, including, but not limited to, any utility
                                    and service costs incurred by Landlord.

                                    d.      The cost of all agreements for maintenance and service of the Project and the equipment
                                    therein, including, but not limited to, agreements relating to security service, window cleaning,
                                    elevator maintenance, chiller maintenance, Building management, janitorial service, pest control
                                    and landscaping maintenance.

                                    e.      The cost of maintaining sprinkler systems, fire extinguishers and fire hoses, emergency
                                    systems and equipment that may be now or hereafter required by the Americans With Disabilities Act,
                                    and the cost of all security services and protective services or devices rendered to or in
                                    connection with the Project or any part thereof; any costs incurred in order to comply with any law,
                                    statute, ordinance, or governmental rule, regulation or requirement now in force or which may
                                    hereafter be enacted or promulgated; and the costs incurred in order to comply with requirements of
                                    any insurer or mortgagee, where such requirements concern safety or structural features of the
                                    Building and are commercially reasonable in light of requirements generally imposed in the insurance
                                    or real estate lending industries with respect to similar buildings.

                                    f.      Insurance premiums for insurance for the Project required to be maintained by Landlord
                                    hereunder or which a prudent owner would carry, including, but not limited to, premiums for
                                    insurance maintained by Landlord, business interruption or rental abatement insurance, garage
                                    keeper´s insurance, and liability insurance.

                                    g.      The cost of repairs and general maintenance of the Project (excluding repairs,
                                    alterations and general maintenance paid by proceeds of insurance or attributable solely to
                                    tenants of the Project other than Tenant, but including deductibles paid by Landlord), including,
                                    but not limited to: any management fees charged by Landlord; promotional or seasonal expenses;
                                    maintenance and cleaning of common areas and facilities; lawn mowing, gardening, landscaping, and
                                    irrigation of landscaped areas; line painting, pavement repair and maintenance, sweeping, and
                                    sanitary control; removal of snow, trash, rubbish, garbage, and other refuse; the cost of
                                    personnel to implement such services, to direct parking, and to patrol the common areas; the cost
                                    of exterior and interior painting of common areas; all maintenance and repair costs; and the cost
                                    of maintenance of sewers and utility lines.

                                    h.      The amortization amount (including interest at a market rate) necessary to amortize the
                                    cost of capitalized alterations or improvements, including, but not limited to, the replacement of
                                    existing furniture, fixtures, equipment or systems that have become obsolete or do not function
                                    efficiently and effectively or as they were originally intended for a first class office building.
                                    The amortization period selected by the Landlord shall reflect the useful life of the alteration or
                                    improvement.

                                    i.      All taxes, assessments, and governmental or other charges, general or special, ordinary
                                    or extraordinary, foreseen or unforeseen (including, but not limited to, Community Improvement
                                    District assessments), which are levied, assessed, or otherwise imposed against the Project,
                                    street lights, personal property or rents, or on the right or privilege of leasing the Project,
                                    collecting rents therefrom or parking vehicles thereon, by any federal, state, county, or
                                    municipal government or by any special sanitation district or by any other governmental or
                                    quasi-governmental entity that has taxing or assessment authority, and any other taxes and
                                    assessments, excluding any interest and penalties thereon resulting from Landlord’s failure to
                                    timely pay such amounts, attributable to the Project or its operation (herein collectively called
                                    the "Impositions"), but exclusive of federal, state and local income taxes of Landlord,
                                    inheritance taxes, estate taxes, gift taxes, transfer taxes, excess profit taxes and any taxes
                                    imposed in lieu of such taxes.  If at any time during the Lease Term, the present method of
                                    taxation or assessment shall be so changed that the whole or any part of the Impositions now
                                    levied, assessed or imposed on real estate and the improvements thereon shall be discontinued and
                                    as a substitute therefor, or in lieu of and in addition thereof, taxes, assessments, levies,
                                    impositions or charges shall be levied, assessed and/or imposed wholly or partially as a capital
                                    levy or otherwise on the rents received from the Project or the rents reserved herein or any part
                                    thereof, then such substitute or additional taxes, assessments, levies, impositions or charges, to
                                    the extent so levied, assessed or imposed, shall be deemed to be included within the Impositions
                                    and the operating costs.  Tenant will be responsible for ad valorem taxes on its personal property
                                    and on the value of the leasehold improvements in the Premises to the extent the same exceed
                                    building standard allowances (and if the taxing authorities do not separately assess Tenant's
                                    leasehold improvements, Landlord may make a reasonable allocation of the ad valorem taxes
                                    allocated to the Project to give effect to this sentence).










                                    j.      All assessments (if any) assessed against the Project during the Lease Term pursuant to
                                    any protective covenants, easement agreements or common area maintenance agreements now or
                                    hereafter of record against the Project including, but not limited to, any common area maintenance
                                    charges assessed pursuant to that certain Common Area Maintenance Agreement dated July 2, 1985, as
                                    said Agreement has been and may be amended from time to time.

                                    k.      Fees of accountants, attorneys and other consultants, professionals or advisors incurred
                                    by Landlord with respect to operational issues at the Project.

                                    l.      Any other costs or expenses incurred by Landlord in the operation of the Project that would
                                    be considered an expense of maintaining, operating or repairing the Project, all such costs and
                                    expenses being recorded on an accrual basis in accordance with accepted principles of sound
                                    management and accounting practices applicable to first class office building complexes and
                                    consistently applied.

                                    Direct Operating Expenses shall not include the following items:

                                    Leasing commissions, finders’ fees, brokerage fees, and costs incurred with the negotiation of
                                    leases (but not management fees); Rent under any ground leases; Costs of furnishing services to
                                    other tenants or occupants to the extent that such services are materially and substantially in
                                    excess of services Landlord offers to all tenants at Landlord’s expense; Lease takeover costs
                                    incurred by Landlord in connection with new leases at the Property; Costs and expenses of the sale
                                    of all or any portion of the Property; Costs incurred by Landlord with respect to repairs, goods and
                                    services (including utilities sold and supplied to tenants and occupants of the Property) to the
                                    extent that Landlord is entitled to reimbursement for such costs from the tenants; Costs incurred by
                                    Landlord due to the violation by Landlord of the terms and conditions of any lease of space in the
                                    Property; Costs incurred by Landlord with respect to disputes with tenants under the Leases
                                    including, without limitation, dispossessory proceedings; Capital Costs other than as provided for
                                    in paragraph 2(c)(iii)h hereof; Capital Costs of correcting any non-compliance of the Building,
                                    existing as of the date of this Lease, with the Americans With Disabilities Act as currently
                                    existing and as currently interpreted; Costs in excess of customary maintenance costs incurred to
                                    encapsulate, remove or otherwise handle any Hazardous Materials found in the Building or the
                                    Property; Interest, points and fees on debt or amortization or for any mortgage or mortgages
                                    encumbering the Property, or any part thereof, and all principal, escrow deposits and other sums
                                    paid on or in respect to any indebtedness (whether or not secured by a mortgage lien) and on any
                                    equity participations of any lender or lessor, and all costs incurred in connection with any
                                    financing, refinancing or syndication of the Property, or any part thereof; Costs of the original
                                    construction of the Property; Income, franchise, transfer, inheritance, capital stock, estate,
                                    profit, gift, gross receipts or succession taxes; Costs of repairs or replacements incurred by
                                    reason of fire or other casualty or condemnation in excess of the insurance deductible; Costs for
                                    performing tenant installations for any individual tenant or for performing work or furnishing
                                    services to or for individual tenant at such tenant’s expense and any other contribution by Landlord
                                    to the cost of tenant improvements.

                                    (iv)    Nothing contained in this Section shall imply any duty on the part of Landlord to pay any
                           expense or provide any service not otherwise imposed by the express terms of this Lease.

                                    (v)     On or about December 31 of each calendar year during the Lease Term, Landlord shall
                           estimate the amount of Direct Operating Expenses and Tenant's Proportionate Share of Direct Operating
                           Expenses for the ensuing calendar year or (if applicable) fractional part thereof and notify Tenant in
                           writing of such estimate.  Such estimate shall be made by Landlord in the exercise of its discretion, and
                           shall not be subject to dispute by Tenant.  The amount of additional rent specified in such notification
                           shall be paid by Tenant to Landlord in equal monthly installments in advance on the first day of each month
                           of such ensuing calendar year, at the same time and in the same manner as base rent.








                                    (vi)    Within One Hundred Eighty (180) days after December 31 of any calendar year during the
                           Lease Term for which additional rent is due under this Section, Landlord shall advise Tenant in writing, of
                           the amount of actual Direct Operating Expenses for such calendar year.  If the Direct Operating Expenses for
                           such calendar year prove to be greater than the amount previously estimated, Landlord shall invoice Tenant
                           for the deficiency as soon as practicable after the amount of underpayment has been determined, and Tenant
                           shall pay such deficiency to Landlord within thirty (30) days following its receipt of such invoice.  If,
                           however, Direct Operating Expenses for such calendar year are lower than the amount previously estimated,
                           Tenant shall receive a credit (or in the event the term of this Lease has then expired, Tenant shall receive
                           a cash refund) toward the next ensuing monthly payment or payments of the estimated amount of Tenant's
                           Proportionate Share of Direct Operating Expenses in the amount of such overpayment until depleted, but in no
                           event shall Tenant's Proportionate Share of Direct Operating Expenses be deemed to be less than zero.

3.   Security         3.   Tenant hereby deposits with Landlord on the date hereof the sum of Seventy
     Deposit.         Seven Thousand Eight Hundred Twenty Six and 89/100 Dollars ($77,826.89), which sum shall be held by Landlord,
                      without obligation for interest, as security for the full, timely and faithful performance of Tenant's covenants
                      and obligations under this Lease.  It is understood and agreed that such deposit is not an advance rental
                      deposit or prepayment of the last month’s rent due hereunder, and is not a measure of Landlord's damages in case
                      of Tenant's default.  Upon the occurrence of any default or event of default by Tenant which is not cured within
                      any applicable notice and/or cure period, Landlord may, from time to time, without prejudice to any other remedy
                      provided herein or provided by law, use such funds to the extent necessary to make good any arrears of rent or
                      other payments due Landlord hereunder, and any other damage, injury, expense or liability caused by any event of
                      Tenant's default; and Tenant shall pay to Landlord on demand the amount so applied in order to restore the
                      security deposit to its original amount.  Although the security deposit shall be deemed the property of
                      Landlord, any remaining balance of such deposit shall be returned by Landlord to Tenant or Tenant's last
                      permitted assignee at such time after termination of this Lease when Landlord shall have determined that all
                      Tenant's obligations under this Lease have been fulfilled.  Landlord shall not be required to keep any security
                      deposit separate from its general funds.  Upon the occurrence of any events of default or default as described
                      in this Lease which is not cured within any applicable notice and/or cure period, said security deposit shall
                      become due and payable to Landlord.  Subject to the other terms and conditions contained in this Lease, if the
                      Building is conveyed by Landlord, said deposit may be turned over to Landlord's grantee, and if so, Tenant
                      hereby releases Landlord from any and all liability with respect to said deposit and its application or return.
                      Notwithstanding the foregoing, Landlord and Tenant acknowledge and agree that the foregoing security deposit, if
                      not previously applied to Tenant’s obligations under this Lease in accordance with this Paragraph 3, shall be
                      applied to rent due under this Lease for the month of April, 2008.

4.   Occupancy        4.   (a)   Tenant shall use and occupy the Premises for general office purposes
     and Use.         and for no other use or purpose without the prior written consent of Landlord.

                           (b)   Tenant shall not do or permit anything to be done in or about the Premises which will in any way
                      obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them,
                      nor use or allow the Premises to be used for any improper, immoral, unlawful, or objectionable purposes or for
                      any business, use or purpose deemed to be disreputable or inconsistent with the operation of a first class
                      office building, nor shall Tenant cause or maintain or permit any nuisance in, on, or about the Premises.
                      Tenant shall not commit or suffer the commission of any waste in, on, or about the Premises.

5.   Compliance       5.   (a)   Tenant shall not use the Premises or permit anything to be done in or about
     with Laws.       the Premises which will in any way conflict with any law, statute, ordinance, or governmental rule, regulation or
                      requirement now in force or which may hereafter be enacted or promulgated.  Tenant shall not do or permit
                      anything to be done on or about the Premises or bring or keep anything therein which will in any way increase the
                      rate of any insurance upon the Building in which the Premises are situated or any of its contents or cause a
                      cancellation of said insurance or otherwise affect said insurance in any manner, and Tenant shall at its sole
                      cost and expense promptly comply with all laws, statutes, ordinances, and governmental rules, regulations, or
                      requirements now in force or which may hereafter be in force and with the requirements of any board of fire
                      underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use, or
                      occupancy of the Premises.  Notwithstanding anything contained in this paragraph to the contrary, Tenant shall
                      not be responsible for ensuring that the common areas of the Building comply with applicable laws.









                           (b)   Tenant shall not use, handle, store, deal in, discharge, or fabricate any Hazardous Materials (as
                      herein defined) on or about the Premises (except for typical office supplies maintained in compliance with all
                      applicable laws and ordinances).  Tenant shall indemnify Landlord (and anybody claiming by, through, or under
                      Landlord) from and against any and all claims, damages, losses, costs, and expenses (including reasonable
                      attorneys´ fees and court costs) incurred by Landlord or anybody claiming by, through, or under Landlord as a
                      result of the existence of any Hazardous Materials on or about the Premises or any environmental problems
                      relating to the Premises which are caused by or related to the delivery, deposit or creation of Hazardous
                      Materials on or about the Premises during the term of this Lease.  As used herein, "Hazardous Materials" means
                      any petroleum or chemical liquids or solids, liquid or gaseous products, contaminants, oils, radioactive
                      materials, asbestos, PCB's, urea-formaldehyde, or any toxic or hazardous waste or hazardous substances, as those
                      terms are used in (A) the Resources Conservation Recovery Act, as amended by the Hazardous and Solid Waste
                      Amendments of 1984, 42 U.S.C. § 6901 et seq.; (B) the Comprehensive Environmental Response, Compensation, and
                      Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. § 9601
                      et seq.; (C) the Clean Water Act, 33 U.S.C. § 1251 et seq.; (D) the Toxic Substances and Control Act, 15 U.S.C.
                      § 2601 et seq.; (E) the Clean Air Act, 42 U.S.C. § 7401 et seq.; (F) any and all applicable environmental laws
                      and regulations of the State of Georgia; and (G) any and all other applicable federal, state or local law or
                      regulation governing hazardous substances or workplace health or safety, as such laws may be amended from time
                      to time.

6.   Alterations.     6.   Tenant shall not make or suffer to be made any alterations, additions, or improvements in, on, or to the
                      Premises or any part thereof without the prior written consent of Landlord, and no such alterations, additions
                      or improvements shall be made without the supervision of Landlord´s designated agent or representative;
                      provided, however, that Landlord’s consent shall not be required for any alterations or additions that satisfy
                      the following criteria (“Cosmetic Alterations”):  (1) are of a cosmetic nature such as painting, wallpapering,
                      hanging pictures or installing carpeting; (2) are not visible from the exterior of the Premises or the Building;
                      (3)do not affect any structural components of, or mechanical, electrical or other building systems in, the
                      Premises or the Building; and (4) do not require work to be performed inside the demising walls of the
                      Premises.  However, even though consent is not required for Cosmetic Alterations, the performance of Cosmetic
                      Alterations shall be subject to all other applicable provisions of this Paragraph 6, and Tenant shall give
                      Landlord written notice of any proposed Cosmetic Alterations at least ten (10) days prior to commencement of
                      such Cosmetic Alterations.  In the event Landlord consents to the making of any such alterations, additions, or
                      improvements by Tenant, the same shall be made by Tenant, at Tenant's sole cost and expense, in accordance with
                      all applicable laws, ordinances, and regulations and all requirements of Landlord's and Tenant's insurance
                      policies.  All work shall be performed in accordance with plans and specifications approved by Landlord, and
                      each contractor and subcontractor must first be approved in writing by Landlord, or, at Landlord's option, the
                      alteration, addition or improvement shall be made by Landlord for Tenant's account, and Tenant shall reimburse
                      Landlord for the cost thereof upon demand.  If, but only if, Tenant requests that Landlord provide assistance,
                      management or oversight for any alterations, additions or improvements to the Premises by Tenant, then (except
                      with respect to the construction of the initial tenant improvements pursuant to the Work Letter Agreement)
                      Landlord shall have the right to charge a fee for any and all construction supervision provided by Landlord´s
                      designated agents or representatives in connection with such alterations, additions, or improvements to the
                      Premises by Tenant.  Such fee, at Landlord´s option, shall be either a fixed fee or a fee calculated on an
                      hourly basis, considering the time expended by Landlord´s agents or representatives in supervising Tenant´s
                      construction.

7.   Repair.          7.   By taking possession of the Premises, Tenant accepts the Premises as being in the condition in which Landlord
                      is obligated to deliver them and otherwise in good order, condition and repair.  Tenant shall, at all times
                      during the term hereof at Tenant's sole cost and expense, keep the Premises and every part thereof in good order,
                      condition and repair, excepting ordinary wear and tear, damage thereto by fire, acts of terrorism, earthquake,
                      act of God or the elements.  Tenant shall upon the expiration or sooner termination of the term hereof, unless
                      Landlord demands otherwise as in Paragraph 23 hereof provided, surrender to Landlord the Premises and all
                      repairs, changes, alterations, additions and improvements thereto in the same condition as when received, or when
                      first installed, ordinary wear and tear, damage by fire, earthquake, act of God, or the elements excepted.  It is
                      hereby understood and agreed that Landlord has no obligation to alter, remodel, improve, repair, decorate, or
                      paint the Premises or any part thereof except as specified in the Work Letter Agreement, and that no
                      representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant,
                      except as specifically herein set forth.








8.   Liens.           8.   Tenant shall keep the Premises free from any liens arising out of any work performed, material furnished,
                      or obligations incurred by Tenant.  In the event that Tenant shall not, within twenty (20) days following the
                      recordation of any such lien, cause the same to be released of record by payment or posting of a proper bond,
                      Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the
                      obligation, to cause the same to be released by such means as it shall deem proper, including payment of the
                      claim giving rise to such lien.  All such sums paid by Landlord and all expenses incurred by it in connection
                      therewith shall be considered additional rent and shall be payable to Landlord by Tenant on demand and with
                      interest at the rate of four percentage points higher than the prime commercial lending rate from time to time
                      of SunTrust Bank in Atlanta, Georgia, provided, however, that if such rate exceeds the maximum rate permitted
                      by law, the maximum lawful rate shall apply; the interest rate so determined is hereinafter called the "Agreed
                      Interest Rate".  Landlord shall have the right at all times to post and keep posted on the Premises any notices
                      permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the
                      Premises, the Building, and any other party having an interest therein, from mechanics' and materialmen's
                      liens, and Tenant shall give to Landlord at least five (5) business days prior notice of commencement of any
                      construction on the Premises.

9.   Assignment       9.   (a)   Tenant shall not sell, assign, encumber or otherwise transfer by operation
     and Subletting.  of law or otherwise this Lease or any interest herein, sublet the Premises or any portion thereof, or suffer any
                      other person to occupy or use the Premises or any portion thereof, without the prior written consent of Landlord
                      as provided herein, which consent shall not be unreasonably withheld, conditioned or delayed, nor shall Tenant
                      permit any lien to be placed on the Tenant's interest by operation of law.  Tenant shall, by written notice,
                      advise Landlord of its desire from and after a stated date (which shall not be less than thirty (30) days nor
                      more than ninety (90) days after the date of Tenant's notice) to sublet the Premises or any portion thereof for
                      any part of the term hereof; and supply Landlord with such information, financial statements, verifications and
                      related materials as Landlord may request or desire to evaluate the written request to sublet; and in such event
                      Landlord shall have the right, to be exercised by giving written notice to Tenant within ten (10) days after
                      receipt of Tenant's notice and all said information, financial statements, verifications and related materials
                      requested by Landlord, to terminate this Lease as to the portion of the Premises described in Tenant's notice
                      and such notice shall, if given, terminate this Lease with respect to the portion of the Premises therein
                      described as of the date stated in Tenant's notice.  Said notice by Tenant shall state the name and address of
                      the proposed subtenant, and Tenant shall deliver to Landlord a true and complete copy of the proposed sublease
                      with said notice.  If said notice shall specify all of the Premises and Landlord shall give said termination
                      notice with respect thereto, this Lease shall terminate on the date stated in Tenant's notice.  If, however,
                      this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as
                      defined and reserved hereinabove and as adjusted pursuant to Paragraph 19(c), shall be adjusted on a pro rata
                      basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue thereafter in
                      full force and effect.  If Landlord, upon receiving said notice by Tenant with respect to any of the Premises,
                      shall not exercise its right to terminate, Landlord will not unreasonably withhold or grant its consent to
                      Tenant's subletting the Premises specified in said notice.  Tenant shall, at Tenant's own cost and expense,
                      discharge in full any outstanding commission obligation on the part of Landlord with respect to this Lease, and
                      any commissions which may be due and owing as a result of any proposed assignment or subletting, whether or not
                      the Lease is terminated pursuant hereto and rented by Landlord to the proposed subtenant or any other tenant.
                      Tenant agrees to pay to Landlord, promptly after request therefor, (i) the amount of all attorneys´ fees and
                      expenses incurred by Landlord in connection with any assignment or subletting issues or review of documentation
                      relating thereto, and (ii) $500.00 as an administrative fee for Landlord´s time and effort in connection with
                      any assignment or subletting issues.

                           (b)   Any subletting or assignment hereunder by Tenant shall not result in Tenant being released or
                      discharged from any liability under this Lease.  As a condition to Landlord's prior written consent as provided
                      for in this paragraph, the assignee or subtenant shall agree in writing to comply with and be bound by all of
                      the terms, covenants, conditions, provisions and agreements of this Lease, and Tenant shall deliver to Landlord
                      promptly after execution, an executed copy of each sublease or assignment and an agreement of said compliance
                      by each sublessee or assignee.  Notwithstanding any provision to the contrary contained herein, any subletting
                      or assignment by Tenant hereunder shall result in all rights of first refusal, rights of first offer, rights to
                      expand, and renewal options granted herein being forfeited by Tenant and its assignee or subtenant.  Tenant
                      expressly acknowledges that Landlord intends for all of such rights to be personal and exclusive to Tenant, and
                      that such rights are not subject to transfer to any other party.








                           (c)   Landlord's consent to any sale, assignment, encumbrance, subletting, occupation, lien or other
                      transfer shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any
                      subsequent occurrence.  Any sale, assignment, encumbrance, subletting, occupation, lien or other transfer of this
                      Lease which does not comply with the provisions of this Paragraph 9 shall be void.

                           (d)   For purposes of this Section, an assignment of stock or other direct or indirect ownership interest in
                      Tenant which constitutes a controlling interest in Tenant shall be deemed an assignment within the meaning of and
                      be governed by this Section; provided, however, that this provision shall not apply to the transfer of publicly
                      traded stock of Tenant, if any.

                           (e)   Notwithstanding any provision contained herein, Tenant agrees that it shall not sell, assign,
                      encumber or otherwise transfer by operation of law or otherwise this Lease or any interest herein, or sublet
                      the Premises or any portion thereof, to any tenant who currently leases space in the Building.

                           (f)   If this Lease is assigned, or if the Premises or any part thereof are sublet or occupied by anyone
                      other than Tenant during the Lease Term (with or without Landlord´s consent), Landlord shall be entitled to
                      fifty percent (50%) of all rents, fees and other considerations paid by such subtenant, assignee or occupant
                      with respect to the Premises, including, but not limited to, all amounts paid in excess of the rental specified
                      in this Lease.

                           (g)   Notwithstanding the foregoing provisions of this Paragraph 9, such consent of Landlord shall not be
                      necessary or required in connection with any assignment or subletting to any firm, person, corporation,
                      partnership or other entity (an“Affiliate”), now or hereafter directly or indirectly in control of, controlled
                      by or under common control with Tenant, or indirectly in control of, controlled by or under common control with
                      Tenant, or which or with which Tenant shall merge or consolidate (collectively, an “Affiliate Transfer”),
                      provided that Tenant shall remain liable for performance of its obligations hereunder and, if Tenant shall not
                      survive any such Affiliate Transfer as a separate, on-going business entity, the then creditworthiness of any
                      successor to Tenant is at least substantially equal to the then creditworthiness of Tenant, as determined in
                      Landlord´s reasonable judgment.  Tenant shall provide to Landlord at least ten (10) business days prior written
                      notice of any proposed Affiliate Transfer, including information regarding the creditworthiness of the proposed
                      transferee.

10. Insurance and     10.  (a)   Landlord shall not be liable to Tenant and Tenant hereby waives all
    Indemnification.  claims against Landlord for any injury or damages to any person or property in or about the Premises by or from
                      any cause whatsoever, without limiting the generality of the foregoing, whether caused by water leakage of any
                      character from the roof, walls, basement, or other portion of the Premises or the Building, or caused by gas,
                      fire, or explosion of the Building or the complex of which it is a part or any part thereof, except to the extent
                      arising from the gross negligence or willful misconduct of Landlord.

                           (b)   Tenant shall hold Landlord harmless from and defend and indemnify Landlord against any and all
                      claims or liability for any injury or damage to any person or property whatsoever: (i) occurring in, on or
                      about the Premises or any part thereof, (ii) occurring in, on, or about any facilities (including, without
                      limitation, elevators, stairways, passageways or hallways), the use of which Tenant may have in conjunction
                      with other tenants of the Building, when such injury or damage shall be caused in part or in whole by the act,
                      neglect, fault of, or omission of any duty with respect to the same by Tenant, its agents, servants, employees,
                      or invitees.  Tenant further agrees to indemnify, defend and save harmless Landlord against and from any and
                      all claims in any manner relating to any work or thing whatsoever done by Tenant in or about, or any
                      transactions of Tenant concerning, the Premises, and will further indemnify, defend and save Landlord harmless
                      against and from any and all claims arising from any breach or default on the part of Tenant in the performance
                      of any covenant or agreement on the part of Tenant to be performed pursuant to the terms of this Lease, or
                      arising from any act or negligence of Tenant, or any of its agents, contractors, servants, employees and
                      licensees, and from and against all costs, counsel fees, expenses and liabilities incurred in connection with
                      any such claim or action or proceeding brought thereon.  Furthermore, in case any action or proceeding be
                      brought against Landlord by reason of any claims or liability, Tenant agrees to defend such action or
                      proceeding at Tenant's sole expense by counsel reasonably satisfactory to Landlord.  The provisions of this
                      Lease with respect to any claims or liability occurring prior to the termination or expiration of this Lease
                      shall expressly survive such termination or expiration of this Lease.









                           (c)   Tenant agrees to purchase at its own expense and to keep in force during the term of this Lease all
                      insurance coverages reasonably required by Landlord to be maintained by tenants in the Building generally,
                      including, but not limited to, the policies of insurance specified on Exhibit “G” attached to this Lease.
                      Tenant´s insurance must be in force upon Tenant taking possession of the Premises, or upon the Commencement
                      Date, whichever is earlier, and shall continue throughout the Lease Term.

                           (d)   Landlord shall hold Tenant harmless from and defend and indemnify Tenant against any and all claims or
                      liabilities for any injury or damage to any person or property whatsoever occurring in, on or about the Building
                      or the Property,  to the extent such injury or damage shall be caused by the grossly negligent acts or omissions
                      of Landlord or Landlord´s agents, employees or contractors.  Landlord further agrees to indemnify, defend and
                      save Tenant harmless against any and all claims arising from any breach or default on the part of Landlord in the
                      performance of any covenant or agreement on the part of Landlord to be performed pursuant to the terms of this
                      Lease.  The indemnifications by Landlord set forth in this Paragraph 10(d) are subject to any limitations
                      contained in Paragraph 11 or elsewhere in this Lease.  Furthermore, in case any action or proceeding be brought
                      against Tenant by reason of any claims or liability, Landlord agrees to defend such action or proceeding at
                      Landlord´s sole expense by counsel reasonably satisfactory to Tenant.  The provisions of this Lease with respect
                      to any claims or liability occurring prior to the termination or expiration of this Lease shall expressly survive
                      such termination or expiration of this Lease.

                      (e)  Landlord shall maintain in force, at its sole cost and expense (but subject to reimbursement as Direct
                      Operating Expenses), "All Risk" (sometimes known as "Special Causes of Loss") property insurance, covering the
                      Building, for not less than its full replacement cost.  Such insurance may include such other coverages, such
                      as rental interruption insurance, as Landlord may deem reasonably necessary, and may contain an endorsement
                      naming Landlord's mortgagee as loss payee, as its interests may appear.

11.  Waiver of        11.  Each of Landlord and Tenant hereby releases the other from any and all liability
     Subrogation.     or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for
                      any loss or damage to property caused by fire or any other perils insured in policies of insurance covering
                      such property, even if such loss or damage shall have been caused by the fault or negligence of the other
                      party, or anyone for whom such party may be responsible, including any other tenants or occupants of the
                      remainder of the Building in which the Premises are located; provided, however, that this release shall be
                      applicable and in force and effect only to the extent that such release shall be lawful at that time and in any
                      event only with respect to loss or damage occurring during such time as the releasor's policies shall contain a
                      clause or endorsement to the effect that any such release shall not adversely affect or impair said policies or
                      prejudice the right of the releasor to coverage thereunder and then only to the extent of the insurance
                      proceeds payable under such policies.  Each of Landlord and Tenant agrees that it will request its insurance
                      carriers to include in its policies such a clause or endorsement.  If extra cost shall be charged therefor,
                      each party shall advise the other thereof and of the amount of the extra cost, and the other party, at its
                      election, may pay the same, but shall not be obligated to do so.  If such other party fails to pay such extra
                      cost, the release provisions of this Paragraph shall be inoperative against such other party to the extent
                      necessary to avoid invalidation of such releasor's insurance.

12.  Service and      12.  (a)   Landlord shall maintain the public and common areas of the Building,
     Utilities.       including lobbies, stairs, elevators, corridors and restrooms, the windows in the Building, the mechanical,
                      plumbing and electrical equipment serving the Building, and the structure itself, the roof, foundations,
                      exterior walls (including glass), grounds and parking areas in reasonably good order and condition typical for
                      a first-class office building in metropolitan Atlanta, Georgia, except for damage occasioned by the act of
                      Tenant, which damage shall be repaired by Landlord at Tenant's expense.  In the event Tenant requires or needs
                      to have one or more separate systems of either heating, ventilating, air conditioning or other similar systems
                      over and above that provided by Landlord, the installation, care, expenses and maintenance of each such system
                      shall be borne by and paid for by Tenant.

                           (b)   Provided the Tenant shall not be in default hereunder, and subject to the provisions elsewhere herein
                      contained and to the rules and regulations of the Building, Landlord agrees to furnish to the Premises during
                      ordinary business hours (being 8:00 a.m. until 7:00 p.m. Eastern time Monday through Friday, and 8:00 a.m. until
                      1:00 p.m. Eastern time on Saturday) of generally recognized business days, to be determined by Landlord (but
                      exclusive, in any event, of Sundays and legal holidays), heat and air-conditioning typical for a first-class
                      office building in metropolitan Atlanta, Georgia for the comfortable use and occupation of the Premises,
                      replacement of bulbs for building standard fluorescent lights and non-building standard lights, provided Tenant
                      stocks the bulbs for all of Tenant's non-building standard lights, janitorial services during the times (but not
                      less than five (5) times per week) and in the manner that such services are, in Landlord's judgment, customarily
                      furnished in comparable office buildings in the immediate market area, and elevator service.








                           To the extent within Landlord´s reasonable control, Landlord shall provide additional or after-hours heating
                      or air-conditioning at Tenant's request, provided that Tenant shall pay to Landlord a reasonable charge for such
                      services as determined from time to time by Landlord.  Tenant agrees to keep and cause to be kept closed all
                      window coverings, if any, when necessary because of the sun's position, and Tenant also agrees at all times to
                      cooperate fully with Landlord and to abide by all the regulations and requirements which Landlord may prescribe
                      for the proper functioning and protection of said heating, ventilating, and air-conditioning system and to
                      comply with all laws, ordinances and regulations respecting the conservation of energy.  Wherever
                      heat-generating machines, excess lighting or equipment are used in the Premises which affect the temperature
                      otherwise maintained by the air-conditioning system, Landlord reserves the right to install supplementary air
                      conditioning units in the Premises, and the cost thereof, including the cost of electricity and/or water
                      therefor, shall be paid by Tenant to Landlord upon demand by Landlord.  Landlord agrees to furnish to the
                      Premises electricity for general office purposes and water for lavatory and drinking purposes, subject to the
                      provisions of subparagraph 12(c) below.  Landlord shall in no event be liable for any interruption or failure of
                      utility services on the Premises, but Landlord will exercise due diligence to furnish uninterrupted service.

                           (c)   Tenant will not without the written consent of Landlord use any apparatus or device in the Premises,
                      including without limitation, electronic data processing machines, computers, and machines using excess lighting
                      or current which will in any way increase the amount of electricity or water usually furnished or supplied for
                      use of the Premises as general office space; nor connect with electric current, except through existing
                      electrical outlets in the Premises, or water pipes, any apparatus or device for the purposes of using electrical
                      current or water.  If Tenant in Landlord's judgment shall require water or electric current or any other resource
                      in excess of that usually furnished or supplied for use of the Premises as general office space (it being
                      understood that such an excess may result from the number of fixtures, apparatus and devices in use, the nature
                      of such fixtures, apparatus and devices, the hours of use, or any combination of such factors), Tenant shall
                      first procure the consent of Landlord, which Landlord may refuse, to the use thereof, and Landlord may cause a
                      special meter to be installed in the Premises so as to measure the amount of water, electric current or other
                      resource consumed for any such other use.  The cost of any such meters and of installation, maintenance, and
                      repair thereof shall be paid for by Tenant, and Tenant agrees to pay Landlord promptly upon demand by Landlord
                      for all such water, electric current or other resource consumed, as shown by said meters, at the rates charged by
                      the local public utility furnishing the same, plus any additional expense incurred in keeping account of the
                      water, electric current or other resource so consumed.  Landlord shall not be in default hereunder or be liable
                      for any damages directly or indirectly resulting from, nor shall the rental herein reserved be abated by reason
                      of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of
                      the foregoing utilities and services, (ii) failure to furnish or delay in furnishing any such utilities or
                      services when such failure or delay is caused by acts of God or the elements, labor disturbances of any
                      character, any other accidents, acts of terrorism, or other conditions beyond the reasonable control of Landlord,
                      or by the making of repairs or improvements to the Premises or to the Building, (iii) the limitation,
                      curtailment, rationing or restriction on use of water or electricity, gas or any other form of energy or any
                      other service utility whatsoever serving the Premises or the Building.  Furthermore, Landlord shall be entitled
                      to cooperate voluntarily in a reasonable manner with the efforts of national, state or local governmental
                      agencies or utilities suppliers in reducing energy or other resources consumption.

                           (d)   Any sums payable under this Paragraph 12 shall be considered additional rent and may be added to any
                      installment of rent thereafter becoming due, and Landlord shall have the same remedies for a default in payment
                      of such sums as for a default in the payment of rent.

                           (e)   Tenant shall not provide any janitorial services without Landlord's written consent and then only
                      subject to supervision of Landlord and by a janitorial contractor or employees at all times satisfactory to
                      Landlord.  Any such services provided by Tenant shall be at Tenant's sole risk and responsibility.

                           (f)      It shall be Tenant's responsibility and expense to install, move, maintain, adjust, and repair its
                      property and fixtures, including but not limited to, its: signage, pictures, bulletin boards, plaques,
                      furniture, filing cabinets, computer cables, computer equipment, business machines, draperies, blinds, kitchen
                      appliances, special water heaters, kitchen cabinets, private restroom fixtures, special air conditioning or
                      power conditioning equipment, locks for furniture and filing cabinets, paging systems, modular furniture
                      components (including task lighting, flat wiring, and power distribution cables), combination locks, specialty
                      electrical devices, exhaust fans, fire extinguishers, carpet squares, and/or other furniture, fixtures, or
                      equipment installed by Tenant, or which were supplied, specified, or requested by Tenant and installed by
                      Landlord.









13.  Estoppel         13.  Within seven (7) days following the Commencement Date or any written
     Certificate.     request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord a certificate
                      substantially in the form attached hereto as Exhibit "C" and made a part hereof, indicating thereon any
                      exceptions thereto which may exist at that time.  Failure of Tenant to execute and deliver such certificate
                      shall at Landlord´s option constitute a default hereunder or constitute an acceptance of the Premises and
                      acknowledgment by Tenant that the statements included in Exhibit "C" are true and correct without exception.
                      Landlord and Tenant intend that any statement delivered pursuant to this paragraph may be relied upon by
                      Landlord or by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest
                      therein or anyone to whom Landlord may provide said certificate.

14.  Holding Over.    14.  Tenant will, at the termination of this Lease by lapse of time or otherwise, yield up immediate possession
                      to Landlord.  If Tenant retains possession of the Premises or any part thereof after such termination, then
                      Landlord may, at its option, serve written notice upon Tenant that such holding over constitutes the creation of
                      a tenancy of sufferance, in any case upon the terms and conditions set forth in this Lease; provided, however,
                      that the daily rental shall, in addition to all other sums which are to be paid by Tenant hereunder, whether or
                      not as additional rent, be equal to 150% of the rental being paid monthly to Landlord under this Lease
                      immediately prior to such termination (prorated on the basis of a 365 day year for each day Tenant remains in
                      possession).  If no such notice is served, then a tenancy at sufferance shall be deemed to be created at the
                      rent in the preceding sentence.  Tenant shall also pay to Landlord all damages sustained by Landlord resulting
                      from retention of possession by Tenant, including the loss of any proposed subsequent tenant for any portion of
                      the Premises.  The provisions of this paragraph shall not constitute a waiver by Landlord of any right of
                      reentry as herein set forth; nor shall receipt of any rent or any other act in apparent affirmance of the
                      tenancy operate as a waiver of the right to terminate this Lease for a breach of any of the terms, covenants, or
                      obligations herein on Tenant's part to be performed.

15.  Subordination.   15.  Without the necessity of any additional document being executed by Tenant for the purpose of effecting a
                      subordination, this Lease shall be subject and subordinate at all times to: (a) all ground leases or underlying
                      leases which may now exist or hereafter be executed affecting the Building, the land upon which the Building or
                      any common areas are situated, and (b) the lien or interest of any mortgage or deed to secure debt which may
                      now exist or hereafter be executed in any amount for which said Building, land, ground leases or underlying
                      leases, or Landlord's interest or estate in any of said items is specified as security.  Notwithstanding the
                      foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or
                      underlying leases or any such liens or interests of mortgages or deeds to secure debt to this Lease.  In the
                      event that any ground lease or underlying lease terminates for any reason or any mortgage or deed to secure
                      debt is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding
                      any subordination, attorn to and become the Tenant of the successor in interest to Landlord at the option of
                      such successor in interest.  Tenant agrees to execute such non-disturbance and attornment agreements as the
                      holder of any mortgage or deed to secure debt on the Building may reasonably require.  Tenant covenants and
                      agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional
                      documents evidencing the priority or subordination of this Lease with respect to any such ground leases or
                      underlying leases or the lien of any such mortgage or deed to secure debt.  Tenant hereby irrevocably appoints
                      Landlord as attorney-in-fact of Tenant to execute, deliver and record any such documents in the name and on
                      behalf of Tenant.  At Tenant´s request, Landlord shall use good faith efforts to obtain from the holder of any
                      mortgage or deed to secure debt that may now or hereafter encumber the Building a non-disturbance agreement for
                      the benefit of Tenant.

16.  Re-Entry         16.  Landlord reserves and shall, during normal business hours following at least 24-
     By Landlord.     hour advance verbal notice to Tenant (except in the event of an emergency or in the provision of normal
                      building services, in which case such entry may be after normal business hours and shall not require prior
                      notice to Tenant), have the right to re-enter the Premises to inspect the same, to supply janitor service and
                      any other service to be provided by Landlord to Tenant hereunder, to show said Premises to prospective
                      purchasers, mortgagees or tenants, to post notices of nonresponsibility, and to alter, improve, or repair the
                      Premises and any portion of the Building of which the Premises are a part or to which access is conveniently
                      made through the Premises, without abatement of rent, and may for that purpose erect, use, and maintain
                      scaffolding, pipes, conduits, and other necessary structures in and through the Premises where reasonably
                      required by the character of the work to be performed, provided that entrance to the Premises shall not be
                      blocked thereby, and further provided that the business of Tenant shall not be interfered with unreasonably.
                      Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's
                      business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby,
                      unless resulting from the gross negligence or willful misconduct of Landlord.  For each of the aforesaid
                      purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors, in, upon,
                      and about the Premises, and Landlord shall have the right to use any and all means which Landlord may deem
                      necessary or proper to open said doors in an emergency, in order to obtain entry to any portion of the
                      Premises, and any entry to the Premises, or portions thereof obtained by Landlord by any of said means, or
                      otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or
                      a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any
                      portions thereof.  Landlord shall also have the right at any time, without the same constituting an actual or
                      constructive eviction and without incurring any liability to Tenant therefor, to change the arrangement and/or
                      location of entrances or passage ways, doors and doorways, and corridors, elevators, stairs, toilets, or other
                      public parts of the Building and to change the name, number or designation by which the Building is commonly
                      known; provided, however, that such changes do not materially and adversely affect Tenant´s access to the
                      Building or the Premises.








17.  Insolvency or    17.  The appointment of a receiver to take possession of all or substantially all of the
     Bankruptcy.      assets of Tenant, or an assignment of Tenant for the benefit of creditors, or any action taken or suffered by
                      Tenant under any insolvency, bankruptcy, or reorganization act, shall at Landlord's option constitute a breach
                      of this Lease by Tenant.  Upon the happening of any such event or at any time thereafter, this Lease shall
                      terminate five (5) days after written notice of termination from Landlord to Tenant.  In no event shall this
                      Lease be assigned or assignable by operation of law or by voluntary or involuntary bankruptcy proceedings or
                      otherwise and in no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under
                      any bankruptcy, insolvency, or reorganization proceedings.

18.  Default and      18.  The following events shall be deemed to be events of default by Tenant under
     Remedies.        this Lease:

                           (a)   Tenant shall fail to pay when or before due any sum of money becoming due to be paid to Landlord
                      hereunder, whether such sum be any installment of the rent herein reserved, any other amount treated as
                      additional rent hereunder, or any other payment or reimbursement to Landlord required herein, whether or not
                      treated as additional rent hereunder, and such failure shall continue for a period of five (5) days after
                      written notice of such failure from Landlord to Tenant; provided, however, notwithstanding the foregoing,
                      Landlord shall not be required to give such notice to Tenant more than two (2) times in any calendar year with
                      respect to Tenant´s obligation to make any monetary payment under this Lease, and after Landlord shall have
                      given two (2) such notices in any given calendar year, Tenant shall not be entitled to any notice or cure
                      period for any subsequent default within such calendar year; or

                           (b)   Tenant shall fail to comply with any term, provision or covenant of this Lease other than by failing
                      to pay when or before due any sum of money becoming due to be paid to Landlord hereunder, and shall not cure
                      such failure within (i)twelve (12) hours after written notice to Tenant if the failure involves a condition
                      hazardous or dangerous to life or property or (ii)thirty (30) days after written notice to Tenant in the case
                      of any other failure provided, however, in the event such failure is of a nature that it cannot be cured within
                      a 30-day period, then Tenant shall not be in default so long as Tenant commences to cure such failure within
                      such 30 days and thereafter diligently pursues such cure to completion; or

                           (c)   Tenant shall create or allow to be created in or about the demised Premises any condition or
                      circumstance constituting a hazard to people or property, a nuisance, a trespass, or other condition offensive
                      to Landlord or others, whether or not such condition or circumstance rises to the level of a civil or criminal
                      law violation or action; or

                           (d)   Tenant shall fail to vacate the Premises immediately upon termination of this Lease, by lapse of
                      time or otherwise, or upon termination of Tenant's right to possession only;

                           (e)   If, in spite of the provisions hereof, the interest of Tenant shall be levied upon under execution
                      or be attached by process of law or Tenant shall fail to contest diligently the validity of any lien or claimed
                      lien and give sufficient security to Landlord to insure payment thereof or shall fail to satisfy any judgment
                      rendered thereon and have the same released, and such default shall continue for twenty (20) days after written
                      notice thereof to Tenant; or








                           (f)   Tenant shall assign, sublet or transfer its interest hereunder in violation of this Agreement.

                           Upon the occurrence of any such events of default described in this paragraph or elsewhere in this Lease,
                      Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand
                      whatsoever:

                                 (aa)       Landlord may, at its election, terminate this Lease or terminate Tenant's right to
                      possession only, without terminating the Lease.

                                 (bb)       Upon any termination of this Lease, whether by lapse of time or otherwise, or upon any
                      termination of Tenant's right to possession without termination of the Lease, Tenant shall surrender possession
                      and vacate the Premises immediately, and deliver possession thereof to Landlord, and Tenant hereby grants to
                      Landlord full and free license to enter into and upon the Premises in such event with or without process of law
                      and to repossess the Premises and to expel or remove Tenant and any others who may be occupying or within the
                      Premises and to remove any and all property therefrom, without being deemed in any manner guilty of trespass,
                      eviction or forcible entry or detainer, and without incurring any liability for any damage resulting therefrom;
                      Tenant hereby waiving any right to claim damage for such reentry and expulsion, and without relinquishing
                      Landlord's right to rent or any other right given to Landlord hereunder or by operation of law.

                                 (cc)       Upon termination of this Lease, whether by lapse of time, by or in connection with a
                      dispossessory proceeding or otherwise, Landlord shall be entitled to recover as Landlord's actual accrued
                      damages, all rent, including any amount treated as additional rent hereunder, and other sums due and payable by
                      Tenant on the date of termination, plus, as Landlord's liquidated damages for the balance of the stated term
                      hereof and not as a forfeiture or penalty, the sum of: (i) an amount equal to the then present value of the
                      rent, including any amounts treated as additional rent hereunder, and other sums provided herein to be paid by
                      Tenant for the residue of the stated term hereof, less the fair rental value of the Premises for such residue
                      (taking into account the time and expenses necessary to obtain a replacement tenant or tenants, including
                      expenses hereinafter described in subparagraph (dd)(ii) relating to recovery of the Premises, preparation for
                      reletting and for reletting itself), and (ii) the cost of performing any other covenants which would have
                      otherwise been performed by Tenant.

                                 (dd)       (i)  Upon termination of the Lease or Tenant's right to possession of the demised Premises,
                      regardless of whether such termination occurs as a result of a dispossessory proceeding, distraint proceeding,
                      exercise of right of termination, re-entry, lease expiration or otherwise, Tenant shall remain liable for payment
                      of all rent thereafter accruing and for performance of all obligations thereafter performable under this Lease.
                      Landlord may, at Landlord's option, enter the Premises, remove Tenant's signs and other evidences of tenancy, and
                      take and hold possession thereof as provided in subparagraph (bb) above, without such entry and possession
                      releasing Tenant from any obligation, including Tenant's obligation to pay rent, including any amounts treated as
                      additional rent, hereunder for the full term of the Lease.

                                            (ii)  Landlord may, but need not, relet the Premises or any part thereof for such rent and
                      upon such terms as Landlord in its sole discretion shall determine (including the right to relet the Premises for
                      a greater or lesser term than that remaining under this Lease, the right to relet the Premises as a part of a
                      larger area, and the right to change the character and use made of the Premises) and Landlord shall not be
                      required to accept any tenant offered by Tenant or to observe any instructions given by Tenant about such
                      reletting.  In any such case, Landlord may make repairs, alterations and additions in or to the Premises, and
                      redecorate the same to the extent Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the
                      cost thereof, together with Landlord's expenses for reletting, including, without limitation, any broker’s
                      commission incurred by Landlord.  If the consideration collected by Landlord upon any such reletting plus any
                      sums previously collected from Tenant are not sufficient to pay the full amount of all rent, including any
                      amounts treated as additional rent hereunder and other sums reserved in this Lease for the remaining term hereof,
                      together with the costs of repairs, alterations, additions, redecorating, and Landlord’s expenses of reletting
                      and the collection of the rent accruing therefrom (including attorneys' fees and broker's commissions), Tenant
                      shall pay to Landlord, as Landlord's liquidated damages and not as a forfeiture or penalty, the amount of such
                      deficiency upon demand and Tenant agrees that Landlord may file suit to recover any sums falling due under this
                      section from time to time.

                                 (ee)       Landlord may, at Landlord's option, enter into and upon the Premises, with or without
                      process of law, if Landlord determines in its sole discretion that Tenant is not acting within a commercially
                      reasonable time to maintain, repair or replace anything for which Tenant is responsible hereunder, and correct
                      the same, without being deemed in any manner guilty of trespass, eviction or forcible entry and detainer and
                      without incurring any liability for any damage resulting therefrom, and Tenant agrees to reimburse Landlord, on
                      demand, as additional rent, for any expenses which Landlord may incur in thus effecting compliance with
                      Tenant's obligations under this Lease.

                                 (ff)       Any and all property which may be removed from the Premises by Landlord pursuant to the
                      authority of the Lease or of law, to which Tenant is or may be entitled, may be handled, removed and stored, as
                      the case may be, by or at the direction of Landlord at the risk, cost and expense of Tenant, and Landlord shall
                      in no event be responsible for the value, preservation or safekeeping thereof.  Tenant shall pay to Landlord,
                      upon demand, any and all expenses incurred in such removal and all storage charges against such property so long
                      as the same shall be in Landlord's possession or under Landlord's control.  Any such property of Tenant not
                      retaken by Tenant from storage within thirty (30) days after removal from the Premises shall, at Landlord's
                      option, be deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale without further payment
                      or credit by Landlord to Tenant.

                           Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein
                      provided or any other remedies provided by law or available in equity (all such remedies being cumulative), nor
                      shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord
                      hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and
                      covenants herein contained.  No act or thing done by Landlord or its agents during the term hereby granted
                      shall be deemed a termination of this Lease or an acceptance of the surrender of the Premises, and no agreement
                      to terminate this Lease or accept a surrender of said Premises shall be valid unless in writing signed by
                      Landlord.  No waiver by Landlord of any violation or breach of any of the terms, provisions and covenants
                      herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of
                      the terms, provisions and covenants herein contained.  Landlord's acceptance of the payment of rental or other
                      payments hereunder after the occurrence of an event of default shall not be construed as a waiver of such
                      default, unless Landlord so notifies Tenant in writing.  Forbearance by Landlord in enforcing one or more of
                      the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver
                      of such default or of Landlord's right to enforce any such remedies with respect to such default or any
                      subsequent default.  If, on account of any breach or default by Tenant in Tenant's obligations under the terms
                      and conditions of this Lease, it shall become necessary or appropriate for Landlord to employ or consult with
                      an attorney concerning or to enforce or defend any of Landlord's rights or remedies hereunder, Tenant agrees to
                      pay reasonable attorneys' fees so incurred.

                           Without limiting the foregoing, to the extent permitted by law, Tenant hereby: (i) appoints and designates
                      the Premises as a proper place for service of process upon Tenant, and agrees that service of process upon any
                      person apparently employed by Tenant upon the Premises or leaving process in a conspicuous place within the
                      Premises shall constitute personal service of such process upon Tenant (provided, however, Landlord does not
                      hereby waive the right to serve Tenant with process by any other lawful means); (ii) expressly waives any right
                      to trial by jury; and (iii)expressly waives the service of any notice under any existing or future law of the
                      State of Georgia applicable to landlords and tenants.

19.  Damage by        19.  (a)   If the Building, improvements, or Premises are rendered partially or
     Fire, Etc.       wholly untenantable by fire or other casualty, and if such damage cannot, in Landlord's reasonable estimation,
                      be materially restored within one hundred eighty (180) days of such damage, then Landlord or Tenant may, at its
                      sole option, terminate this Lease as of the date of such fire or casualty.  Landlord or Tenant shall exercise
                      its option provided herein by written notice to the other within sixty (60) days of such fire or other
                      casualty.  For purposes hereof, the Building, improvements, or Premises shall be deemed "materially restored"
                      if they are in such condition as would not prevent or materially interfere with Tenant's use of the Premises
                      for the purpose for which it was then being used.

                           (b)   If this Lease is not terminated pursuant to Paragraph 19(a), then to the extent of available
                      insurance proceeds, Landlord shall proceed with all due diligence to repair and restore the Building,
                      improvements or Premises, as the case may be (except that Landlord may elect not to rebuild if such damage
                      occurs during the last year of the term of this Lease exclusive of any option which is unexercised at the date
                      of such damage).








                           (c)   If this Lease shall be terminated pursuant to this Paragraph 19, the term of this Lease shall end on
                      the date of such damage as if that date had been originally fixed in this Lease for the expiration of the term
                      hereof.  If this Lease shall not be terminated by Landlord or Tenant pursuant to this Paragraph 19 and if the
                      Premises is untenantable in whole or in part following such damage, the rent payable during the period in which
                      the Premises is untenantable shall be reduced to such extent, if any, as may be fair and reasonable under all of
                      the circumstances.  In the event that Landlord shall fail to complete such repairs and material restoration
                      within two hundred seventy (270) days after the date of such damage, Tenant may at its option and as its sole
                      remedy terminate this Lease by delivering written notice to Landlord, whereupon the Lease shall end on the date
                      of such notice as if the date of such notice were the date originally fixed in this Lease for the expiration of
                      the term hereof; provided, however, that if construction is delayed because of changes, deletions, or additions
                      in construction requested by Tenant, strikes, lockouts, casualties, acts of God, war, material or labor
                      shortages, governmental regulation or control or other causes beyond the reasonable control of Landlord, the
                      period for restoration, repair or rebuilding shall be extended for the amount of time Landlord is so delayed.

                           In no event shall Landlord be required to rebuild, repair or replace any part of the partitions, fixtures,
                      additions or other improvements which may have been placed in or about the Premises by Tenant.  Any insurance
                      which may be carried by Landlord or Tenant against loss or damage to the Building or Premises shall be for the
                      sole benefit of the party carrying such insurance and under its sole control except that Landlord's insurance
                      may be subject to control by (i) the holder or holders of any indebtedness secured by a mortgage or deed to
                      secure debt covering any interest of Landlord in the Premises, the Building, or the Property, and/or (ii) the
                      ground lessor of any portion of the Property.

                           (d)   Notwithstanding anything herein to the contrary, in the event the holder of any indebtedness secured
                      by a mortgage or deed to secure debt covering the Premises, Building or Property, or the ground lessor of the
                      Property, requires that any insurance proceeds be paid to it, then Landlord shall have the right to terminate
                      this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such
                      requirement is made by any such person, whereupon the Lease shall end on the date of such damage as if the date
                      of such damage were the date originally fixed in this Lease for the expiration of the term.

                           (e)   In the event of any damage or destruction to the Building or the Premises by any peril covered by the
                      provisions of this Paragraph 19, Tenant shall, upon notice from Landlord, remove forthwith, at its sole cost and
                      expense, such portion or all of the property belonging to Tenant or its licensees from such portion or all of the
                      Building or the Premises as Landlord shall request and Tenant hereby indemnifies, defends and holds Landlord
                      harmless from any loss, liability, costs, and expenses, including attorneys' fees, arising out of any claim of
                      damage or injury as a result of such removal and any alleged failure to properly secure the Premises prior to
                      such removal.

20. Condemnation.     20.  (a)   If any substantial part of the Premises should be taken for any public or quasi-public use under
                      governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu
                      thereof, and the taking would prevent or materially interfere with the use of the Premises for the purpose for
                      which it is then being used, this Lease shall terminate effective when the physical taking shall occur in the
                      same manner as if the date of such taking were the date originally fixed in this Lease for the expiration of
                      the term hereof.  As used herein, “substantial part” shall mean more than ten percent (10%).

                           (b)   If part of the Premises shall be taken for any public or quasi-public use under any governmental
                      law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this
                      Lease is not terminated as provided in the subparagraph above, this Lease shall not terminate but the rent
                      payable hereunder during the unexpired portion of this Lease shall be reduced to such extent, if any, as may be
                      fair and reasonable under all of the circumstances and Landlord shall undertake to restore the Premises to a
                      condition suitable for Tenant's use, as near to the condition thereof immediately prior to such taking as is
                      reasonably feasible under all circumstances.

                           (c)   Tenant shall not share in any condemnation award or payment in lieu thereof or in any award for
                      damages resulting from any grade change of adjacent streets, the same being hereby assigned to Landlord by
                      Tenant; provided, however, that Tenant may separately claim and receive from the condemning authority, if
                      legally payable, compensation for Tenant's removal and relocation costs and for Tenant's loss of business
                      and/or business interruption.

                           (d)   Notwithstanding anything to the contrary contained in this paragraph, if the temporary use or
                      occupancy of any part of the Premises shall be taken or appropriated under power of eminent domain during the
                      term of this Lease, this Lease shall be and remain unaffected by such taking or appropriation and Tenant shall
                      continue to pay in full all rent payable hereunder by Tenant during the term of this Lease; in the event of any
                      such temporary appropriation or taking, Tenant shall be entitled to receive that portion of any award which
                      represents compensation for the use of or occupancy of the Premises during the term of this Lease, and Landlord
                      shall be entitled to receive that portion of any award which represents the cost of restoration of the Premises
                      and the use and occupancy of the Premises after the end of the term of this Lease.











21.  Sale by          21.  In the event of a sale or conveyance by Landlord of the Building, the same
     Landlord.        shall operate to release Landlord from any future liability upon any of the covenants or conditions, express or
                      implied, herein contained in favor of Tenant arising after such sale or conveyance, and in such event Tenant
                      agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease.
                      Tenant agrees to attorn to the purchaser or assignee in any such sale.

22.  Right of         22.  All covenants and agreements to be performed by Tenant under any of the
     Landlord to      terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense
     Perform.         and without any abatement of rent.  If Tenant shall fail to perform any acts, covenants or agreements to be
                      performed by Tenant under any of the terms of this Lease or to pay any sum of money, other than rent, required
                      to be paid by it hereunder, and such failure shall continue for fifteen (15) days after written notice thereof
                      by Landlord, Landlord may, but shall not be obligated so to do, and without waiving or releasing Tenant from
                      any obligations of Tenant, make any such payment or perform any such act, covenant or agreement on Tenant's
                      part to be made or performed as in this Lease provided.  All sums so paid by Landlord or costs related to
                      Landlord's performance of such acts, covenants or agreements and all necessary incidental costs, together with
                      interest thereon at the Agreed Interest Rate as defined in Paragraph 8 hereof from the date of such payment by
                      Landlord, shall be payable as additional rent to Landlord on demand, and Tenant covenants to pay any such sums,
                      and Landlord shall have, in addition to any other right or remedy of the Landlord, the same rights and remedies
                      in the event of nonpayment thereof by Tenant as in the case of default by Tenant in the payment of the rent.

23.  Surrender        23.  (a)   Tenant shall, at least one hundred eighty (180) days before the last day of
     of Premises.     the term hereof, give to Landlord a written notice of intention to surrender the Premises on that date, but
                      nothing contained herein or in the failure of Tenant to give such notice shall be construed as an extension of
                      the term hereof or as consent of Landlord to any holding over by Tenant.

                           (b)   At the end of the Lease Term,  Tenant  agrees to peaceably  deliver up to the Landlord  possession  of
                      the Premises,  in the same  condition as received on the  Commencement  Date,  ordinary wear and tear,  damage by
                      fire,  earthquake,  and other acts of God  excepted.  Upon request by  Landlord,  unless  otherwise  agreed to in
                      writing by Landlord,  Tenant shall remove, at Tenant's sole cost, any or all permanent  improvements or additions
                      to the Premises  installed by or at the expense of Tenant and all movable  furniture,  equipment and computer and
                      telephone  cabling  belonging  to Tenant  which may be left by Tenant and repair any damage  resulting  from such
                      removal.  Any  property  not so removed  shall be deemed  abandoned  by the  Tenant,  and title to the same shall
                      thereupon  pass to  Landlord.  Landlord  shall have the right to remove and dispose of such  abandoned  property,
                      and the costs associated therewith shall be promptly reimbursed by Tenant.

                           (c)   The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall
                      not work a merger, and shall, at the option of the Landlord, terminate all or any existing subleases or
                      subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or
                      subtenancies.

24.  Waiver.          24.  If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this
                      Lease, such waiver shall not be deemed to be a waiver of any subsequent breach of the same or any other term,
                      covenant or condition contained herein.  Furthermore, the acceptance of rent by Landlord shall not constitute a
                      waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of
                      Landlord's knowledge of such preceding breach at the time Landlord accepted such rent.  Failure by Landlord to
                      enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to
                      waive or to decrease the right of Landlord to insist thereafter upon strict performance by Tenant.  Waiver by
                      Landlord of any term, covenant or condition contained in this Lease may only be made by a written document
                      signed by Landlord.








25.  Notices.         25.  Whenever any notice, demand or request is required or permitted hereunder, such notice, demand or request
                      shall be hand-delivered in person, by reputable courier service or sent by United States Mail, registered,
                      postage prepaid, to the addresses set forth below:

                      If to Landlord:       OTR
                                            c/o Childress Klein Properties
                                            addressStreet300 Galleria Parkway, Suite 600
                                            placeCityAtlanta, country-regionGeorgia 30339

                      If to Tenant:         American Safety Insurance Services, Inc.
                                            addressStreet100 Galleria Parkway, Suite 800
                                            placeCityAtlanta, country-regionGeorgia 30339
                                            Attn:  General Counsel

                           Any notice, demand or request which shall be served upon either of the parties in the manner aforesaid
                      shall be deemed sufficiently given for all purposes hereunder (i) at the time such notices, demands or requests
                      are hand-delivered in person or (ii) on the third day after the mailing of such notices, demands or requests in
                      accordance with the preceding portion of this paragraph.

                           Either Landlord or Tenant shall have the right from time to time to designate by written notice to the
                      other party such other places in the United States as Landlord or Tenant may desire written notice to be
                      delivered or sent in accordance herewith; provided, however, at no time shall either party be required to send
                      more than an original and two copies of any such notice, demand or request required or permitted hereunder.

                           Notwithstanding the foregoing, all rental payments under this Lease shall be sent to the address specified
                      in paragraph 2(a) above.

26.  Certain Rights   26.  Landlord reserves and may exercise the following rights without affecting
     Reserved to      Tenant's obligations hereunder:
     the Landlord.
                           (a)   To change the name of the Building;
                           (b)   To designate all sources furnishing sign painting and lettering, ice, drinking water, towels, coffee
                      cart service and toilet supplies, lamps and bulbs used in the Premises;
                           (c)   To retain at all times pass keys to the Premises;
                           (d)   To grant to anyone the exclusive right to conduct any particular business or undertaking in the
                      Building which does not conflict with Tenant´s use of the Premises;
                           (e)   To close the Building after regular work hours and on legal holidays subject, however, to Tenant's
                      right to admittance, under such reasonable regulations as Landlord may prescribe from time to time, which may
                      include by way of example but not of limitation, that persons entering or leaving the Building register and
                      provide sufficient forms of identification to a watchman and that said persons establish their right to enter
                      or leave the Building; and
                           (f)   To take any and all measures, including inspections, repairs, alterations, decorations, additions
                      and improvements to the Premises or the Building, and identification and admittance procedures for access to
                      the Building as may be necessary or desirable for the safety, protection, preservation or security of the
                      Premises or the Building or Landlord's interest, or as may be necessary or desirable in the operation of the
                      Building.

                      Landlord may enter upon the Premises and may exercise any or all of the foregoing rights hereby reserved
                      without being deemed guilty of an eviction or disturbance of Tenant's use or possession and without being
                      liable in any manner to Tenant and without abatement of rent or affecting any of Tenant's obligations hereunder.

27.  Abandonment.     27.  Tenant shall not vacate or abandon the Premises at any time during the term, and if Tenant shall abandon,
                      vacate, or surrender said Premises or be dispossessed by process of law, or otherwise, any personal property
                      belonging to Tenant and left on the Premises shall, at the option of Landlord, be deemed to be abandoned and
                      title thereto shall thereupon pass to Landlord.

28.  Successors       28.  Subject to the provisions of Paragraph 9 hereof, the terms, covenants, and
     and Assigns.     conditions contained herein shall be binding upon and inure to the benefit of the heirs, successors, executors,
                      administrators and assigns of the parties hereto.

29.  Attorneys´      29.  In the event that any action or proceeding is brought to enforce any term,
     Fees.            covenant or condition of this Lease on the part of Landlord or Tenant, the prevailing party in such litigation
                      shall be entitled to reasonable attorneys' fees to be fixed by the Court in such action or proceeding.









30.  Corporate        30.  If Tenant signs as a corporation, each of the persons executing this Lease on
     Authority.       behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing corporation,
                      that Tenant has and is qualified to do business in country-regionplaceGeorgia, that the corporation has full
                      right and authority to enter into this Lease, and that each and both of the persons signing on behalf of the
                      corporation were authorized to do so.  Upon Landlord's request, Tenant shall provide Landlord with evidence
                      reasonably satisfactory to Landlord confirming the foregoing covenants and warranties.  If Tenant signs as any
                      other legal entity, Tenant shall provide Landlord with reasonable evidence of authority.

31.  Mortgage         31.  Any provisions of this Lease requiring the approval or consent of Landlord shall
     Approvals.       not be deemed to have been unreasonably withheld if any mortgagee (which shall include the holder of any deed
                      to secure debt) of the Premises, Building or Property or any portion thereof shall refuse or withhold its
                      approval or consent thereto.  Any requirement of Landlord pursuant to this Lease which is imposed pursuant to
                      the direction of any such mortgagee shall be deemed to have been reasonably imposed by Landlord if made in good
                      faith.

32.  Miscellaneous.   32.  (a)   The paragraph headings herein are for convenience of reference and shall in no way define, increase,
                      limit, or describe the scope or intent of any provision of this Lease.  The term "Landlord" as used in this
                      Lease shall include the Landlord, its successors and assigns.  In any case where this Lease is signed by more
                      than one person, the obligations hereunder shall be joint and several.  The term "Tenant" or any pronoun used
                      in place thereof shall indicate and include the masculine or feminine, the singular or plural number,
                      individuals, firms or corporations, and each of their respective successors, executors, administrators, and
                      permitted assigns, according to the context hereof.

                           (b)   Time is of the essence of this Lease and all of its provisions.  This Lease shall in all respects be
                      governed by the laws of the State of StateStateGeorgia.  This Lease, together with its exhibits, contains all
                      the agreements of the parties hereto and supersedes any previous negotiations.  There have been no
                      representations made by the Landlord or understandings made between the parties other than those set forth in
                      this Lease and its exhibits.  This Lease may not be modified except by a written instrument by the parties
                      hereto.

                           (c)   If for any reason whatsoever any of the provisions hereof shall be unenforceable or ineffective, all
                      of the other provisions shall be and remain in full force and effect.

                           (d)   All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination
                      of the term at this Lease shall survive the expiration or earlier termination of the term hereof.

                           (e)   If any clause, phrase, provision or portion of this Lease or the application thereof to any person
                      or circumstance shall be invalid or unenforceable under applicable law, such event shall not affect, impair or
                      render invalid or unenforceable the remainder of this Lease or any other clause, phrase, provision or portion
                      hereof, nor shall it affect the application of any clause, phrase, provision or portion hereof to other persons
                      or circumstances, and it is also the intention of the parties to this Lease that in lieu of each such clause,
                      phrase, provision or portion of this Lease that is invalid or unenforceable, there be added as a part of this
                      Lease a clause, phrase, provision or portion as similar in terms to such invalid or unenforceable clause,
                      phrase, provision or portion as may be possible and be valid and enforceable.

                           (f)   Whenever a period of time is herein prescribed for action to be taken by Landlord, the Landlord
                      shall not be liable or responsible for, and there shall be excluded from the computation for any such period of
                      time, any delays due to causes of any kind whatsoever which are beyond the control of Landlord.

                           (g)   Notwithstanding any other provisions of this Lease to the contrary, if the Commencement Date hereof
                      shall not have occurred before the twentieth (20th) anniversary of the date hereof, this Lease shall be null and
                      void and neither party shall have any liability or obligation to the other hereunder.  The purpose and intent of
                      this provision is to avoid the application of the rule against perpetuities to this Lease.

33.  Landlord's       33.  In addition to any statutory lien for rent in Landlord's favor, Landlord shall
     Lien.            have and Tenant hereby grants to Landlord a continuing security interest for all rentals and other sums of
                      money becoming due hereunder from Tenant, upon all goods, wares, equipment, fixtures, furniture, inventory,
                      accounts, contract rights, chattel paper and other personal property of Tenant situated on the Premises, and
                      such property shall not be removed therefrom without the consent of Landlord until all arrearages in rent as
                      well as any and all other sums of money then due to Landlord hereunder shall first have been paid and
                      discharged.  In the event of a default under this Lease, Landlord shall have, in addition to any other remedies
                      provided herein or by law, all rights and remedies under the Uniform Commercial Code, including without
                      limitation the right to sell the property described in this Paragraph 33 at public or private sale upon
                      providing the notice called for by the Uniform Commercial Code or if none is so supplied five (5) days notice
                      to Tenant.  Tenant hereby agrees that this Lease shall constitute a security agreement and further agrees to
                      execute such financing statements and other instruments necessary or desirable in Landlord's discretion to
                      perfect the security interest hereby created.  Any statutory lien for rent is not hereby waived, the express
                      contractual lien herein granted being in addition and supplementary thereto.








34.  Quiet            34.  Landlord represents and warrants that it has full right and authority to enter into
     Enjoyment.       this Lease and that Tenant, while paying the rental and performing its other covenants and agreements herein
                      set forth, shall peaceably and quietly have, hold and enjoy the Premises for the term hereof without hindrance
                      or molestation from Landlord subject to the terms and provisions of this Lease.  In the event this Lease is a
                      sublease, then Tenant agrees to take the Premises subject to the provisions of the prior leases.  Landlord
                      shall not be liable for any interference, nuisance or disturbance by other tenants or third persons, nor shall
                      Tenant be released from any of the obligations of this Lease because of such interference, nuisance or
                      disturbance.

35.  Landlord's       35.  In no event shall Landlord's liability for any breach of this Lease exceed the
     Liability.       amount of rental then remaining unpaid for the then current term (exclusive of any renewal periods which have
                      not then actually commenced).  This provision is not intended to be a measure or agreed amount of Landlord´s
                      liability with respect to any particular breach, and shall not be utilized by any court or otherwise for the
                      purpose of determining any liability of Landlord hereunder, except only as a maximum amount not to be exceeded
                      in any event.  Furthermore, any liability of Landlord hereunder shall be enforceable only out of the interest
                      of Landlord in the Building and the Property and in no event out of the separate assets of Landlord or any
                      shareholder or partner of Landlord.

36.  Right to         36.  [Intentionally omitted]
     Relocate.

37.  No Estate.       37.  This contract shall create the relationship of Landlord and Tenant, and no estate shall pass out of
                      Landlord.  Tenant has only a usufruct, not subject to levy and sale and not assignable by Tenant, except as
                      provided for herein and in compliance herewith.

38.  Lease            38.  Submission of this instrument for examination or signature by Tenant does
     Effective Date.  not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until
                      execution and delivery by both Landlord and Tenant.

39.  Rules and        39.  (a)   Tenant shall faithfully observe and comply with the rules and regulations
     Regulations.     printed on or annexed to this Lease as Exhibit "A" which is attached hereto and made a part hereof and all
                      reasonable modifications thereof and additions thereto from time to time put into effect by Landlord.  Landlord
                      shall supply Tenant with any changes or amendments to said rules.  Landlord shall not be responsible for the
                      nonperformance by any other tenant or occupant of the Building of any of said rules and regulations.  Tenant
                      shall faithfully observe and comply with the rules and regulations put into effect from time to time by the
                      owners of other buildings and property within the Atlanta Galleria complex.  Tenant will be responsible for
                      causing its employees, customers, subtenants, licensees, invitees, agents, concessionaires and contractors to
                      comply with all such rules and regulations.

                           (b)   Tenant acknowledges and agrees that Landlord may insist upon compliance with and enforce the rules
                      and regulations as well as any laws, statutes, ordinances or governmental rules or regulations as mentioned in
                      Paragraph 5 above, and may, pursuant to the Georgia Criminal Trespass Statute (Official Code of Georgia
                      Annotated, Section 16-7-21), prohibit any person including any of Tenant's employees, agents, customers,
                      licensees, guests, invitees, concessionaires, or contractors from entering or remaining upon all or any portion
                      of the Building, including the Premises, or any other building or property within the Atlanta Galleria complex,
                      including the hotel, office towers, parks, gardens, roadways, parking lots, parking decks, performance stages,
                      and all other buildings, land or property, if Landlord determines in its sole discretion that said person has
                      not complied with any law, ordinance, rule or regulation or poses a threat to the safety, welfare or health of
                      any person or to the maintenance or orderliness of the administration of the Building.  Tenant further agrees
                      that it shall not interfere with or object to Landlord's enforcement of any such laws, ordinances, rules and
                      regulations including Official Code of Georgia Annotated, Section 16-77-21 or any similar statute.






40.  Special          40.  Special Stipulations to this Lease are set forth on Exhibit "E" attached hereto
     Stipulations.    and made a part hereof.  In the event of any conflict between any provision set forth in Exhibit "E" and any
                      provision contained elsewhere in this Lease, the former in all events shall supersede, prevail and control.

41.  Guaranty.        41.  [Intentionally omitted]

42.  Condition.       42.  [Intentionally omitted]

43.  Brokerage        43.  Tenant represents that Tenant has not engaged or worked with any real estate
     Commissions.     brokers or agents other than Colliers Spectrum Cauble and Childress Klein Properties, Inc. (collectively,
                      “Broker”) in connection with this Lease for the Premises.  Tenant shall indemnify and hold harmless Landlord and
                      Landlord´s agents from and against any and all claims for commissions or other compensation, and any
                      liabilities, damages and costs relating thereto, that may be asserted by any person or entity other than Broker
                      to the extent that Tenant has engaged such person or such claim results from any action of Tenant.

44.  Exculpation      44.  This Lease is executed by certain employees of The State Teachers Retirement System of Ohio, not
                      individually, but solely on behalf of Landlord, the authorized nominee and agent for The State Teachers
                      Retirement Board of Ohio (“STRBO”).  In consideration for entering into this Lease, Tenant hereby waives any
                      rights to bring a cause of action against the individuals executing this Lease on behalf of Landlord (except
                      for any cause of action based upon lack of authority or fraud), and all persons dealing with Landlord must look
                      solely to Landlord´s assets for the enforcement of any claim against Landlord, and the obligations hereunder
                      are not binding upon, nor shall resort be had to the private property of any of, the trustees, officers,
                      directors, employees or agents of STRBO.  Nothing contained in this Paragraph 44 shall be deemed to limit the
                      provisions of Paragraph 35 above.

                      IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and year first above written.

                                                     LANDLORD: OTR, an StateStateOhio general partnership


                                                     By:
                                                            Name:
                                                            Title:


                                                     TENANT:  AMERICAN SAFETY INSURANCE SERVICES, INC., a StateStateGeorgia
                                                     corporation


                                                     By:
                                                            Name:
                                                            Title:


                                                     Attest:
                                                              Name:
                                                              Title:

                                                                       (CORPORATE SEAL)

Exhibit
                                                              EXHIBIT "A"

                                                         RULES AND REGULATIONS

l.       Sidewalks, halls, passages, exits, entrances, elevators, escalators and stairways shall not be obstructed by Tenants or used
         by them for any purpose other than for ingress and egress from their respective Premises.  The halls, passages, exits,
         entrances, elevators and stairways are not for the use of the general public and Landlord shall in all cases retain the
         right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, shall be prejudicial
         to the safety, character, reputation and interests of the Building and its Tenants, provided that nothing herein contained
         shall be construed to prevent such access to persons with whom any Tenant normally deals in the ordinary course of such
         Tenant's business unless such persons are engaged in illegal activities.  No Tenant, and no employees or invitees of any
         Tenant, shall go upon the roof of the Building, except as authorized by Landlord.

2.       No sign, placard, picture, name, advertisement, notice or other such item visible from the exterior of Premises shall be
         inscribed, painted, illuminated, affixed, installed or otherwise displayed by any Tenant either on its Premises or any part
         of the Building without the prior written consent of Landlord, and Landlord shall have the right to remove any such sign,
         placard, picture, name, advertisement, notice or other such item without notice to and at the expense of Tenant.

         If Landlord shall have given such consent to any Tenant at any time, whether before or after the execution of the Lease,
         such consent shall in no way operate as a waiver or release of any of the provisions hereof or of such Lease, and shall be
         deemed to relate only to the particular sign, placard, picture, name, advertisement or notice so consented to by Landlord
         and shall not be construed as dispensing with the necessity of obtaining the specific written consent of Landlord with
         respect to any other such sign, placard, picture, name, advertisement or notice.

         All approved signs or lettering on doors and walls shall be printed, painted, affixed and inscribed at the expense of the
         Tenant by a person approved by Landlord.

3.       The bulletin board or directory of the Building will be provided exclusively for the display of the name and location of
         Tenants only and Landlord reserves the right to exclude any other names therefrom, including the names of any subtenants of
         Tenant.

4.       No curtains, draperies, blinds, shutters, shades, screens or other coverings, awnings, hangings or decorations shall be
         attached to, hung or placed in, or used in connection with, any window or door on any Premises without the prior written
         consent of Landlord.  In any event with the prior written consent of Landlord, all such items shall be installed inboard of
         Landlord's standard window covering and shall in no way be visible from the exterior of the Building.  No articles shall be
         placed or kept on the window sills so as to be visible from the exterior of the Building.  No articles shall be placed
         against glass partitions or doors which might appear unsightly from outside Tenant's Premises.

5.       Landlord reserves the right to exclude from the Building between the hours of 6 pm and 8 am on Monday through Friday and at
         all hours on Saturdays, Sundays, and holidays all persons who are not Tenants or their accompanied guests in the Building.
         Each Tenant shall be responsible for all persons for whom it allows to enter the Building and shall be liable to Landlord
         for all acts of such persons.

         Landlord shall in no case be liable for damages for error with regard to the admission to or exclusion from the Building of
         any person.

         During the continuance of any invasion, mob, riot, public excitement or other circumstances rendering such action advisable
         in Landlord's opinion, Landlord reserves the right to prevent access to the Building by closing and/or locking the doors, or
         otherwise, for the safety of Tenants and protection of the Building and property in the Building.

6.       No Tenant shall employ any person or persons for the purpose of cleaning Premises unless otherwise agreed to by Landlord in
         writing.  Except with the written consent of Landlord no person or persons other than those approved by Landlord shall be
         permitted to enter the Building for the purpose of cleaning same.  No Tenant shall cause any unnecessary labor by reason of
         such Tenant's carelessness or indifference in the preservation of good order and cleanliness of the Premises.  Landlord
         shall in no way be responsible to any tenant for any loss of property on the Premises, however occurring, or for any damage
         done to the effects of any Tenant by the janitor or any other employee or any other person.

7.       No Tenant shall obtain or maintain for use upon its Premises or the Building coin-operated or other vending machines or
         accept barbering or bootblacking or carwashing services in its Premises or in the Building, or on the Property, except from
         persons authorized by Landlord.

8.       Each Tenant shall see that all doors of its Premises are closed and securely locked and must observe strict care and caution
         that all water faucets, water apparatus, coffee makers and any other electrical appliances or equipment are entirely shut
         off before the Tenant or its employees leave such Premises, and that all utilities shall likewise be carefully shut off so
         as to prevent waste or damage, and for any default or carelessness the Tenant shall make good all injuries sustained by
         other Tenants or occupants of the Building of Landlord.  On multiple tenancy floors, all Tenants shall keep the door or
         doors to the Building corridors closed at all times except for ingress and egress.









9.       As more specifically provided in the Tenant's Lease of the Premises, Tenant shall not waste electricity, water or
         air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's
         heating and air-conditioning, and shall refrain from attempting to adjust any controls.

10.      No Tenant shall alter any lock or access device or install a new or additional lock or access device or any bolt on any door
         of its Premises without the prior written consent of Landlord.

11.      No Tenant shall make or have made additional copies of any keys or access devices provided by Landlord.  Each Tenant, upon
         the termination of the Tenancy, shall deliver to Landlord all the keys or access devices for the Building, offices, rooms
         and toilet rooms which shall have been furnished Tenant or which Tenant shall have had made.  In the event of the loss of
         any keys or access devices so furnished by Landlord, Tenant shall pay Landlord therefor.

12.      The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for
         which they were constructed and no foreign substance of any kind whatsoever, including, but not limited to, coffee grounds
         shall be thrown therein, and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall
         be borne by the Tenant, who, or whose employees or invitees, shall have caused it.

13.      No Tenant shall use or keep in its Premises or the Building any kerosene, gasoline or flammable or combustible fluid or
         material other than limited quantities necessary for the operation or maintenance of office equipment.  No tenant shall use
         any method of heating or air-conditioning other than that supplied by Landlord.  In the event flammable or combustible
         fluids or materials are permitted by Landlord in the Premises, these materials must be maintained and secured so as to
         comply with all laws, rules and regulations governing such materials, including but not limited to, all fire codes.

14.      No Tenant shall use, keep or permit to be used or kept in its Premises any foul or noxious gas or substance or permit or
         suffer such Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the
         Building by reason of noise, odors and/or vibrations or interfere in any way with other Tenants or those having business
         therein, nor shall any animals or birds be brought or kept in or about any Premises of the Building.

15.      Except for the use by Tenant of a microwave oven, no cooking shall be done or permitted by any Tenant on its Premises
         without the consent of Landlord (except that use by the Tenant of Underwriters' Laboratory approved microwaves and/or
         equipment for the preparation of coffee, tea, hot chocolate and similar beverages for Tenants and their employees shall be
         permitted, provided that such equipment and use is in accordance with applicable federal, state and city laws, codes,
         ordinances, rules and regulations) nor shall Premises be used for lodging.

16.      Except with the prior written consent of Landlord, no Tenant shall sell, permit the sale, at retail, of newspapers,
         magazines, periodicals, theater tickets or any other goods or merchandise in or on any Premises, nor shall Tenant carry on,
         or permit or allow any employee or other person to carry on, the business of stenography, typewriting or any similar
         business in or from any Premises for the service or accommodation of occupants of any other portion of the Building, nor
         shall the Premises of any Tenant be used for the storage of merchandise or for manufacturing of any kind, or the business of
         a public barber shop, beauty parlor, nor shall the Premises of any Tenant be used for any improper, immoral or objectionable
         purpose, or any business activity other than that specifically provided for in such Tenant's lease.

17.      If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with,
         Landlord's instructions in their installation.

18.      Landlord will direct electricians as to where and how telephone, telegraph and electrical wires are to be introduced or
         installed.  No boring or cutting for wires will be allowed without the prior written consent of Landlord.  The location of
         burglar alarms, telephones, call boxes or other office equipment affixed to all Premises shall be subject to the written
         approval of Landlord.

19.      No Tenant shall install any radio or television antenna, loudspeaker or any other device on the exterior walls or the roof
         of the Building.  Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or
         elsewhere.

20.      No Tenant shall lay linoleum, tile, carpet or any other floor covering so that the same shall be affixed to the floor of its
         Premises in any manner except as approved in writing by Landlord.  The expense of repairing any damage resulting from a
         violation of this rule or the removal of any floor covering shall be borne by the Tenant by whom, or by whose contractors,
         employees or invitees, the damage shall have been caused.








21.      No furniture, freight, equipment, materials, supplies, packages, merchandise or other property will be received in the
         Building or carried up or down the elevators except between such hours and in such elevators as shall be designated by
         Landlord.  In the event Landlord permits use of the Building´s loading dock and/or elevators after normal Building hours,
         then Landlord shall have the right to impose reasonable charges on Tenant for such use.  Landlord shall have the right to
         prescribe the weight, size and position of all safes, furniture, files, bookcases or other heavy equipment brought into the
         Building.  Safes or other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness
         as determined by Landlord to be necessary to properly distribute the weight thereof.  Landlord will not be responsible for
         loss of or damage to any such safe, equipment or property from any cause, and all damage done to the Building by moving or
         maintaining any such safe, equipment or other property shall be repaired at the expense of Tenant.

         Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the
         structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in
         the Building shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices
         sufficient to eliminate noise or vibration.  The persons employed to move such equipment in or out of the Building must be
         acceptable to Landlord.

22.      No Tenant shall place a load upon any floor of the Premises which exceeds the load per square foot which such floor was
         designed to carry and which is allowed by law.  No Tenant shall mark, or drive nails, screws or drill into, the partitions,
         woodwork or plaster or in any way deface such Premises or any part thereof.

23.      There shall not be used in any space, or in the public areas of the Building, either by Tenant or others, any hand trucks
         except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve.
         No other vehicles of any kind shall be brought by any Tenant into or kept in or about the Premises.

24.      Each Tenant shall store all its trash and garbage within the interior of its Premises.  No materials shall be placed in the
         trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary
         manner of removing and disposing of trash and garbage in this area without violation of any law or ordinance governing such
         disposal.  All trash, garbage and refuse disposal shall be made only through entryways and elevators provided for such
         purposes and at such times as Landlord may designate.

25.      Canvassing, soliciting, distributing of handbills or any other written material, and peddling in the Building are prohibited
         and each Tenant shall cooperate to prevent the same.  No Tenant shall make room-to-room solicitation of business from other
         tenants in the Building.

26.      Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or
         under the influence of alcohol or drugs or who is in violation of any of the rules and regulations of the Building.

27.      Without the prior written consent of Landlord, Tenant shall not use the name of the Building in connection with or in
         promoting or advertising the business of Tenant except as Tenant's address.

28.      Tenant shall comply with all energy conservation, safety, fire protection and evacuation procedures and regulations
         established by Landlord or any governmental agency.

29.      Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes
         keeping doors locked and other means of entry to the Premises closed.

30.      The requirements of Tenants will be attended to only upon application at the office of the Building by an authorized
         individual.  Employees of Landlord shall not perform any work or do anything outside of their regular duties unless given
         special instructions from Landlord, and no employees will admit any person (Tenant or otherwise) to any office without
         specific instructions from Landlord.

31.      Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular Tenant or Tenants, but
         no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other Tenant or
         Tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all Tenants of the
         Building.

32.      Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time
         be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein.
         After receipt of said rules by Tenant, Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any
         additional rules and regulations which are adopted.

33.      All wallpaper or vinyl fabric materials which Tenant may install on painted walls shall be applied with a strippable
         adhesive.  The use of nonstrippable adhesives will cause damage to the walls when materials are removed, and repairs made
         necessary thereby shall be made by Landlord at Tenant's expense.









34.      All work proposed by Tenant in the Premises must be pre-approved by Landlord.  Tenant will refer all contractors,
         contractors representatives and installation technicians, rendering any service to Tenant, to Landlord for Landlord's
         supervision, approval, and control before performance of any contractual service.  This provision shall apply to all work
         performed in the Premises and other portions of the Building, including installations of telephones, telegraph equipment,
         electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows,
         ceilings, equipment or any other physical portion of the Building.

35.      Tenant shall give prompt notice to Landlord of any accidents to or defects in plumbing, electrical fixtures, or heating
         apparatus so that such accidents or defects may be attended to properly.

36.      Tenant shall be responsible for the observance of all of the foregoing Rules and Regulations by Tenant's employees, agents,
         clients, customers, invitees and guests.

37.      These Rules and Regulations are in addition to, and shall not be construed to in any way modify, alter or amend, in whole or
         in part, the terms, covenants, agreements and conditions of any Lease of Premises in the Building.

38.      All appliances, fixtures, equipment and other devices located in the Premises and to be connected to a water source,
         including, without limitation, dishwashers, ice making machines, coffee makers and refrigerators and freezers, shall be
         connected to such water source using only copper piping with either copper compression fittings, flanged fittings, or
         soldered connections.  No plastic tubing or other plastic lines, plastic connectors or plastic valves shall be used in the
         connection of any such items.

39.      Smoking shall be prohibited in all areas of the Building.  No Tenant shall allow smoking within the Premises.  Smoking shall
         be allowed only in those areas outside of the Building as are designated from time to time by Landlord as smoking areas.

                                                              EXHIBIT "B"

                                                         WORK LETTER AGREEMENT


1.       MATERIALS FURNISHED BY LANDLORD

         Landlord shall furnish and install within the Premises substantially in accordance with plans and specifications approved by
Tenant and Landlord, partitions, doors, lighting fixtures, acoustical ceiling, floor covering, electrical switches and outlets,
telephone outlets, air conditioning, and other improvements required by Tenant which are normally performed by the construction
trades.

2.       IMPROVEMENT COSTS TO BE PAID BY LANDLORD

         Landlord shall provide to Tenant a “Tenant Allowance” to undertake all or part of the improvements which Tenant desires to have
made to the Premises.  The Tenant Allowance shall be the actual cost of said improvements to a limit of (not to exceed) Thirty and
No/100 Dollars ($30.00) per rentable square foot contained in the Premises which is 46,978 rentable square feet.  The total Tenant
Allowance for the Premises shall not exceed One Million Four Hundred Nine Thousand Three Hundred Forty and No/100 Dollars
($1,409,340.00).  Notwithstanding the above, Tenant may, at Tenant´s discretion, use all or any portion of the Landlord Allowance for
costs related to design and construction of the Tenant Improvements, Tenant´s signage costs, and installation of Tenant´s furniture,
cabling, etc.; provided, however, that as a condition to Tenant´s right to use Landlord´s Allowance for the foregoing purposes, Tenant
first shall be required to improve and finish all portions of the Premises in accordance with the Plans.  In addition to the Tenant
Allowance, Landlord shall reimburse Tenant for up to $5,000.00 in costs incurred by Tenant in installing supplemental HVAC in the
Premises.

3.       IMPROVEMENT COSTS TO BE PAID BY TENANT

         The cost of any improvements in addition to those provided by Landlord in Paragraph 2 above shall be paid by Tenant, one
half (1/2) upon commencement of the construction and one half (1/2) upon completion of the construction.  Should Tenant request any
modifications to work which has already been completed under this agreement, Tenant shall pay the costs of all such modifications,
one half (1/2) upon commencement of the modifications and one half (1/2) upon competition of the modifications.

4.       APPROVAL OF PLANS AND COST

         (a)      Landlord and Tenant shall diligently pursue the preparation of all plans and specifications for the improvements.
All such plans and specifications including finishes shall have the approval of both Landlord and Tenant, which approval shall not be
unreasonably withheld by either party; in addition, all plans and specifications shall have the approval of all governmental agencies
and authorities, including but not limited to, the state and county fire marshal.  Plans and specifications and a cost estimate for
the portion of the work covered thereby to be borne by Tenant, if any, shall be approved by Landlord and Tenant no later than October
26, 2006, in accordance with the procedure set forth in the following Paragraph 4(b).

         (b)      As soon as practicable after execution of this Lease, Tenant shall provide Landlord with instructions sufficient to
enable Landlord to prepare plans and specifications for the improvements Tenant desires to have provided.  Thereafter, if per the
provisions of Paragraph 3 above, Tenant shall bear any of the costs of the improvements, a cost estimate for the improvements to be
paid for by Tenant shall be prepared by Landlord and submitted to Tenant for preliminary approval.  When the plans and specifications
are approved by Landlord and Tenant, Landlord shall obtain a quotation, and shall submit the same to Tenant for approval as the price
to be paid by Tenant to Landlord for said improvements.  Upon written approval of such price by Tenant, Landlord and Tenant shall be
deemed to have given final approval to the plans and specifications on the basis of which the quotation was made and Landlord shall
be authorized to proceed with the improvements of the Premises in accordance with such plans and specifications.  If Tenant
disapproves such price, or fails to approve or disapprove such price within seven (7) days after submission thereof by Landlord,
Landlord shall not be obligated to proceed with any improvement of the Premises until such time as Landlord and Tenant approve a
price for Tenant´s work.

         (c)      Tenant shall bear the cost of any changes in the work requested by Tenant after final approval of plans and
specifications under Paragraph 4(b) above.

                                                             EXHIBIT "C"

                                                   TENANT LEASE ESTOPPEL CERTIFICATE


Landlord:  __________________________

Tenant:   ___________________________

Premises: ___________________________

Area:                 Sq. Ft.                   Lease Date:


         The undersigned Tenant under the above-referenced lease (the “Lease”) hereby ratifies the Lease and certifies to
___________________________ (“Landlord”) as owner of the real property of which the premises demised under the Lease (the “Premises”)
is a part, as follows:

         1.       That the term of the Lease commenced on _____________, 200_ and the Tenant is in full and complete possession of the
Premises demised under the Lease and has commenced full occupancy and use of the Premises, such possession having been delivered by
Landlord and having been accepted by the Tenant.

         2.       That the Lease calls for monthly rent installments of $____________ to date and that the Tenant is paying monthly
installments of rent of $_____________ which commenced to accrue on the _______ day of ____________, 200_.

         3.       That no advance rental or other payment has been made in connection with the Lease, except rental for the current
month.  There is no “free rent” or other concession under the remaining term of the Lease, and the rent has been paid to and
including _____________, 200_.

         4.       That a security deposit in the amount of $_____________ is being held by Landlord, which amount is not subject to
any set off or reduction or to any increase for interest or other credit due to Tenant.

         5.       That all obligations and conditions under said Lease to be performed to date by Landlord or Tenant have been
satisfied, free of defenses and set-offs including all construction work in the Premises except
______________________________________________________________________________.

         6.       That the Lease is a valid lease and in full force and effect and represents the entire agreement between the
parties; that there is no existing default on the part of Landlord or the Tenant in any of the terms and conditions thereof and no
event has occurred which, with the passing of time or giving of notice or both, would constitute an event of default; and that said
Lease has:  (Initial One)

                  (        )        not been amended, modified, supplemented, extended, renewed or assigned.

                  (        )        been amended, modified, supplemented, extended, renewed or assigned as follows by the following
                                    described agreements:



         7.       That the Lease provides for a primary term of _______ months; the term of the Lease expires on the ____ day of
______________, 200_; and that:  (Initial One)

                  (        )        neither the Lease nor any of the documents listed in Paragraph 6 (if any), contain an option for
                                    any additional term or terms.

                  (        )        the Lease and/or the documents listed under Paragraph 6, above, contain an option for
                                     additional term(s) of _______ year(s) and ______________ month(s) (each) at a rent to be
                                   determined as follows:

         8.       That Landlord has not rebated, reduced or waived any amounts due from Tenant under the Lease, either orally or in
writing, nor has Landlord provided financing for, made loans or advances to, or invested in the business of Tenant.

         9.       That, to the best of Tenant´s knowledge, there is no apparent or likely contamination of the real property or the
Premises by hazardous materials, and Tenant does not use, nor has Tenant disposed of, hazardous materials in violation of
environmental laws on the real property or the Premises.

         10.      That there are no actions, voluntary or involuntary, pending against the Tenant under the bankruptcy laws of the
StateStateUnited States or any state thereof.

         11.      That this certification is made knowing that Landlord is relying upon the representations herein made.

                                                     Tenant:



Dated:                                               By:
                                                            Typed Name:
                                                            Title:

                                                              EXHIBIT “D”

                                                        FLOOR PLAN OF PREMISES

                                           Added to and made part of Lease Agreement between
                                      OTR, an StateStateOhio general partnership (“Landlord”) and
                                         American Safety Insurance Services, Inc. (“Tenant”).

                                                          Suite: 700 and 800
                                                     Rentable Square Feet: 46,978
                                                      Useable Square Feet: 43,498

                                                             EXHIBIT “E”

                                                       SPECIAL STIPULATIONS

                                           Added to and made part of Lease Agreement between
                                      OTR, an StateStateOhio general partnership (“Landlord”) and
                                         American Safety Insurance Services, Inc. (“Tenant”).

                                                          Suite: 700 and 800
                                                     Rentable Square Feet: 46,978
                                                      Useable Square Feet: 43,498


1.       Security Deposit.  The Security Deposit in the amount of Seventy Seven Thousand Eight Hundred Twenty Six and 89/100 Dollars
         ($77,826.89) and the First Month´s Rent in the amount of Seventy Five Thousand Three Hundred Sixty and 54/100 Dollars
         ($$75,360.54) are due and payable upon Lease execution by Tenant.  Check(s) should be made payable to OTR.

2.       Renewal.  Provided Tenant is not in default and as long as Tenant is still in occupancy of the Premises, Tenant shall have
         one (1) option to renew this Lease for the entire Premises for an additional sixty (60) month term with one hundred eighty
         (180) days prior written notice to Landlord of its intent to renew.  The rental rate for the renewal term shall be at the
         then current Building market rate.  For purposes hereof, the term “then current Building market rate” shall mean the rental
         rate at such time for comparable leases in the Building, taking into consideration relevant factors including amount of
         space, location of space, length of renewal term, base rental rate, escalations, base year operating expenses, whether such
         lease is for a new tenant or a renewing tenant, tenant improvement allowances, and lease concessions.

3.       Right of First Refusal.  Provided Tenant is not in default and subject to the rights of any existing tenant or tenants in
         the Building, Tenant shall have a right of refusal (a) beginning on the Commencement Date, on all of the fifth (5th) and
         sixth (6th) floors of the Building, and (b) beginning on January 4, 2010, on all of the twelfth (12th) floor of the
         Building.  Upon receipt of written notice (the “Offer Notice”) from Landlord that a third party has made a bonafide offer to
         lease all or a portion of the aforementioned space upon terms satisfactory to Landlord (the “Offer Terms”), Tenant shall
         respond to Landlord within ten (10) business days whether Tenant intends to lease all of such space covered by the
         third-party offer at the Offer Terms.  If Tenant indicates that it will not lease the space offered, Landlord may proceed to
         lease it to such third party on terms not more favorable to such third party than the Offer Terms within one hundred eighty
         (180) days following Tenant´s receipt of the Offer Notice and Tenant shall have waived its right to lease that space at that
         time, but the right of first refusal shall continue with regarding to future proposed leases.  If Tenant indicates that it
         will lease the space offered, Tenant and Landlord shall execute an amendment to this Lease for the space offered within ten
         (10) business days of notifying Landlord of its intention to lease the space offered.

4.       Termination  Option.  Provided  Tenant is not in default,  Tenant may terminate  this Lease at the end of the sixtieth  (60th)
         full  calendar  month of the term,  upon  giving six (6) months´  prior  written  notice to Landlord  and paying to Landlord a
         termination fee equal to all unamortized  tenant  improvement  costs,  unamortized  commissions  (including inside and outside
         commissions)  and free rent.  Tenant shall pay such  termination  fee within  fifteen (15) days after receipt from Landlord of
         an invoice for such fee.

5.       Parking.  Landlord shall provide to Tenant, and Tenant shall have the right to use, without charge, on a nonexclusive, first
         come-first serve basis, 3.5 parking spaces (whether covered or uncovered) per one thousand (1,000) square feet of usable
         area leased and occupied by Tenant.  Such parking spaces shall be available to Tenant in the parking deck and spaces located
         on the Property (“Parking Area”).  All such rights of Tenant shall be subject to all rules and regulations pertaining
         thereto as may be adopted by Landlord from time to time.  Landlord shall provide four (4) additional general visitors
         parking spaces for the Building in the Parking Area at a location designated by Landlord, and at no additional cost to
         Tenant.  Landlord shall have no obligation to monitor the use of such visitor spaces.

6.       Signage.  So long as American Safety Insurance Services, Inc. occupies all of the Premises, Tenant shall have the right to
         install its name on the exterior monument sign for the Building located on the north side of the Building.  If American
         Safety Insurance Services, Inc., as Tenant, has installed such sign, and thereafter ceases to occupy all of the Premises,
         Tenant, shall remove such sign and repair any damage therefrom at its expense.  All such signage shall be installed and
         removed at Tenant´s expense.  All such signage shall be subject to the prior written approval of Landlord, which approval
         shall not be unreasonably withheld or delayed, provided such signage is architecturally consistent with the existing signage
         on the monument sign and provided such signage and name is consistent with the operation of the Building as a first-class
         office building.  Tenant´s name on such building monument sign shall be located just beneath The Georgian Club name and
         shall be comparable in size to other tenant names on such monument sign and constructed of materials mutually agreeable to
         Landlord and Tenant.  If in the future American Safety Insurance Services, Inc. occupies at least fifty percent (50%) of the
         rentable square feet in the Building, then during such period of occupancy Landlord shall allow Tenant to install, at
         Tenant´s expense, signage on the exterior of the Building, the size, materials, design and location of such signage to be
         mutually agreed to between Landlord and Tenant.  In addition to the foregoing, Landlord agrees to provide Tenant with the
         Building standard tenant plaque at Tenant´s main entrance to the Premises and Tenant´s standard information on the Building
         electronic directory.  Any costs for the standard signage shall be deducted from the Tenant Allowance.

7.       Club Memberships.  Landlord shall cause to be waived the initiation fees for (a) up to twenty-five (25) new memberships to
         the Galleria Athletic Club located in the 300 Galleria Building, and (b) up to five (5) new memberships in The Georgian Club
         located in the Building.  All ongoing costs of membership, including monthly dues, shall be the sole responsibility of
         Tenant, and Landlord shall have no responsibility therefor.

8.       Contingency.  Notwithstanding any provisions to the contrary in this Lease, this Lease and all rights and duties of the
         parties hereunder are expressly conditioned upon the sale, on or before October 19, 2006, by the current owner to an
         unrelated third party, of that certain office building located at 1875 The Exchange, Atlanta, Georgia, said building being
         currently occupied in part by Tenant.  If such sale does not occur for any reason on or before October 19, 2006, then, at
         Tenant´s election given not later than such date, this Lease shall be of no force and effect.  If such sale does occur on or
         before October 19, 2006, then this Lease shall be fully binding upon Landlord and Tenant as if the conditions set forth in
         this paragraph were never a part of this Lease.  If the conditions set forth in this paragraph are not satisfied and this
         Lease terminates as a result thereof, then Tenant, within fifteen (15) days after demand by Landlord, shall reimburse
         Landlord for all costs incurred by Landlord in connection with this Lease, including, but not limited to, architectural fees
         and legal fees.

9.       Staffing.  Landlord agrees that the Building shall be staffed with not less than three (3) day porter employees, including
         one (1) outside porter, one (1) lead porter, and one (1) day maid.  Their responsibilities shall include:

         (i)      Interior Porter/Day Maid:  The day maid and lead porter maintain the interior common areas of the Building including
                  first floor lobby and upper elevator lobbies, public corridors and restrooms, checking every restroom at least one
                  time mid-morning and one time in the afternoon.  They shall service the restrooms by restocking all paper products
                  as necessary and spot mop the floor as necessary.

         (ii)     Exterior Porter:  The exterior porter shall patrol the parking deck to remove trash and debris and empty the trash
                  cans located at the exterior elevator landings and maintain the perimeter of the Building, entrances and loading
                  dock area.

         Landlord shall provide full-time security officers and security vehicles to patrol the parking decks and common roadways, 24
         hour a day, 7 days a week, which security may be provided in conjunction with other buildings in the Galleria complex of
         which the Building is a part.  Security coverage within the Building at the lobby security desk will be not less than 18
         hours per day, Monday through Friday, 16 hours per day on Saturdays, and 12 hours per day on Sundays.  Additionally, a
         security officer shall patrol the Building interior not less than 4 hours per night, 7 days per week.   A security
         operations center is located in the Galleria complex and provides 24 hours per day, 7 days per week security assistance.

11.      Building Amenities.  Landlord shall at all times throughout the term of this Lease use commercially reasonable efforts to
         provide the following amenities within the Building:

         (i)      Sandwich shop;

         (ii)     Newsstand;

         (iii)    Building conference room with audio visual capabilities; and

         (iv)     ATM.

12.      Confidentiality.  Tenant  covenants and agrees (the “Covenant of  Confidentiality”)  to treat the terms of this Lease and all
         offers and related  information  delivered by Landlord to Tenant with  respect  hereto (all of such  offers,  information  and
         lease terms,  collectively,  the “Confidential  Information”) as confidential pursuant to and in compliance with the following
         terms and  conditions.  Tenant agrees to keep strictly  confidential  the  Confidential  Information  and to cause all persons
         working for Tenant to do likewise.  Tenant agrees that the  Confidential  Information will be disclosed only to: (i) employees
         of Tenant,  and (ii) lawyers and  accountants  and other  similar  outside  consultants  working for Tenant who have a need to
         know,  and on tax  returns  filed  with  required  governmental  authorities;  otherwise,  no  disclosure  whatsoever  of said
         Confidential  Information  will be made by Tenant.  Tenant shall not be restricted in any way from  releasing  information  in
         response to a subpoena,  court order or legal  process,  but shall notify  Landlord of the demand for  information  before the
         requested party responds to such demand.

                                                              EXHIBIT "F"

                                                        [INTENTIONALLY OMITTED]

                                                              EXHIBIT "G"

                                                               INSURANCE


1.       COMMERCIAL GENERAL LIABILITY POLICY (1986 or later edition)

         General Liability Limits:

         $ 2,000,000 General Aggregate
         $ 2,000,000 Products and Completed Operations
         $ 1,000,000 Personal and Advertising Injury
         $ 1,000,000 Each Occurrence
         $   50,000 Fire Damage Limit (any one fire)
         $    5,000 Medical Expense Limit (any one person)

         Said policy shall have no deductible on Self Insured Retention without prior written approval.

2.       UMBRELLA / EXCESS LIABILITY


         General Limits:

         $ 1,000,000 Each Occurrence
         $ 1,000,000 General Aggregate


3.       WORKERS COMPENSATION

         The policy must comply with all statutory requirements

         Employer´s Liability:

         $ 100,000 Bodily injury by accident
         $ 500,000 Policy limit by disease
         $ 100,000 Bodily injury by disease each employee

4.       TENANT PROPERTY

         The policy must cover all direct physical loss equal to 100% replacement cost of Tenant’s personal property, all
improvements and alterations, fixtures and equipment provided by Landlord and/or Tenant (including but not limited to the
improvements described in Exhibit “B” of this Lease).

All of said policies shall: (i)name Landlord, Landlord’s agent, and Childress Klein Properties, Inc., together with their respective
affiliates, as additional insureds and insure Landlord's contingent liability under this Lease, (ii) be issued by an insurance
company licensed to do business in the State of Georgia which is acceptable to Landlord and rated at least "A" by A.M. Bests Rating
Guide, and (iii) provide that said insurance shall not be canceled unless thirty (30) days prior written notice shall have been given
to Landlord and Landlord’s property manager.  Said policies or certificates thereof shall be delivered to Landlord and Landlord’s
property manager by Tenant upon commencement of the term of the Lease and upon each renewal of said insurance.

EX-23

                                 AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

                                                  Exhibit 23.1

                         CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of DirectorsAmerican
Safety Insurance Holdings, Ltd.

We consent to incorporation by reference in Registration Statement No. 333-107203 on Form S-8 of our report dated March 13, 2007, relating to the consolidated financial statements of American Safety Insurance Holdings, Ltd. and subsidiaries as of December 31, 2006 and for the year then ended appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

/s/ BDO Seidman, LLP


Atlanta, Georgia
March 13, 2007

EX-31

AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

Exhibit 31.1

        Certification Pursuant to § 302 of the Sarbanes-Oxley Act of 2002

        I, Stephen R. Crim, certify that:

1) I have reviewed this report on Form 10-K of American Safety Insurance Holdings, Ltd.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

2) The registrant's other certifying officer(s), and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)Allsignificant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 Date: March 15, 2007
                                           /s/ Stephen R. Crim
                                           Stephen R. Crim
                                           Chief Executive Officer and President

EX-31

AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

      Exhibit 31.2

        CertificationPursuant to § 302 of the Sarbanes-Oxley Act of 2002

        I, William C. Tepe, certify that:

1) I have reviewed this report on Form 10-K of American Safety Insurance Holdings, Ltd.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer(s), and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

                Date: March 15, 2007

                                                      /s/ William C. Tepe 
                                                      William C. Tepe
                                                      Chief Financial Officer

EX-32

AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

         Exhibit 32.1

Certification Pursuant toss.906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)

The undersigned, as the chief executive and chief financial officers of American Safety Insurance Holdings, Ltd., respectively, certify that to the best of our knowledge, the Annual Report on Form 10-K for the period ended December 31, 2006, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934 and the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of American Safety Insurance Holdings, Ltd. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.

         Dated this 15th day of March 2007.


                                                             /s/ Stephen R. Crim 
                                                             Stephen R. Crim
                                                             President and Chief Executive Officer


                                                             /s/ William C. Tepe 
                                                             William C. Tepe
                                                             Chief Financial Officer