-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DUkLYXHYSMa/X8YUFRRboP9+/Ad/AwpUqv3PEud9k+POrjXB/tQgz2O9LeIBbbBk xd9xR5l9XGFAg2L5B0knjw== 0000783603-99-000005.txt : 19990518 0000783603-99-000005.hdr.sgml : 19990518 ACCESSION NUMBER: 0000783603-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SAFETY INSURANCE GROUP LTD CENTRAL INDEX KEY: 0000783603 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14795 FILM NUMBER: 99626549 BUSINESS ADDRESS: STREET 1: 44 CHURCH STREET CITY: HAMILTON STATE: D0 BUSINESS PHONE: 4412955688 MAIL ADDRESS: STREET 1: 44 CHRUCH STREET CITY: HAMILTON STATE: D0 10-Q 1 AMERICAN SAFETY INSURANCE GROUP, LTD. SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 Commission File Number 333-42749 AMERICAN SAFETY INSURANCE GROUP, LTD. (Exact name of Registrant as specified in its charter) Bermuda Not Applicable (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 44 Church Street P.O. Box HM2064 Hamilton HM HX, Bermuda (Address, zip code of principal executive offices) (441) 296-8560 (Registrant's telephone number, including area code) -------------- Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No___ The aggregate number of shares outstanding of Registrant's common stock, $.01 par value, on May 3, 1999 was 6,061,550. AMERICAN SAFETY INSURANCE GROUP, LTD. FORM 10-Q TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements......................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 10 Item 3. Quantitative and Qualitative Disclosures About Market Risks............................................... 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................ 16 Item 2. Changes in Securities and Use of Proceeds.................... 16 Item 3. Defaults Upon Senior Securities.............................. 16 Item 4. Submission of Matters to a Vote of Security Holders.......... 16 Item 5. Other Information............................................ 16 Item 6. Exhibits and Reports on Form 8-K............................. 16 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Balance Sheets December 31, March 31, Assets 1998 1999 ------ ------------ --------- (unaudited) Investments: Securities available for sale, at fair value: Fixed maturities $45,308,326 $43,876,878 Common stock 3,453,123 3,383,021 Short-term investments 2,286,320 2,749,335 ----------- ----------- Total investments 51,047,769 50,009,234 Cash 4,737,132 2,397,550 Accrued investment and interest income 2,441,857 3,122,824 Notes receivable: Related parties 280,000 280,000 Other 15,939,894 17,970,210 Premiums receivable 5,838,567 10,141,436 Commissions receivable 22,569 12,680 Ceded unearned premium 1,742,021 1,750,062 Reinsurance recoverable 1,840,884 2,191,859 Due from affiliate 668,074 506,945 Income tax recoverable 277,292 300,926 Deferred income taxes 362,951 410,071 Property, plant and equipment 185,807 2,285,310 Goodwill 252,239 247,796 Other assets 510,416 455,612 ----------- ----------- Total assets $86,147,472 $92,082,515 =========== =========== Liabilities and Shareholders' Equity Liabilities: Unpaid losses and loss adjustment expenses $14,700,473 $16,139,827 Unearned premiums 3,894,568 5,039,376 Liability for deductible fees held 244,998 244,998 Reinsurance on paid loss and loss adjustment expenses 380,858 810,878 Reinsurance deposits on retroactive contract 332,430 291,416 Ceded premiums payable 4,382,922 4,987,781 Due to affiliate: Ceded premiums payable 201,778 1,263,503 Reinsurance on paid loss and loss adjustment expenses 52,151 65,914 Accounts payable and accrued expenses 2,688,001 2,287,789 Collateral held - 522,728 ----------- ----------- Total liabilities 26,878,179 31,654,210 ----------- ----------- Shareholders' equity: Preferred stock, $0.01 par value; authorized 5,000,000 shares; no shares issued and outstanding - - Common stock, $0.01 par value; authorized 15,000,000 shares; issued and outstanding at December 31, 1998, 6,074,770 shares, and at March 31, 1999, 6,077,750 shares 60,747 60,777 Additional paid-in capital 33,809,141 33,810,387 Retained earnings 24,705,471 26,424,649 Other comprehensive income 693,934 132,492 ----------- ----------- Total shareholders' equity 59,269,293 60,428,305 Total liabilities and shareholders' equity $86,147,472 $92,082,515 =========== ===========
See accompanying notes to consolidated financial statements (unaudited). 3 American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Earnings (Unaudited) Three Months Ended March 31 ----------------------------- 1998 1999 ---- ---- Revenues: Direct premiums earned $1,038,024 $1,410,051 Assumed premiums earned: Affiliate 541,359 810,716 Nonaffiliates 1,539,456 1,579,001 --------- --------- Total assumed premiums earned 2,080,815 2,389,717 --------- --------- Ceded premiums earned: Affiliate 715,593 1,090,695 Nonaffiliates 310,416 254,289 ------- --------- Total ceded premiums earned 1,026,009 1,344,984 --------- --------- Net premiums earned 2,092,830 2,454,784 --------- --------- Net investment income 626,649 699,335 Interest on notes receivable 268,215 926,102 Brokerage commission income 384,041 430,867 Management fees from affiliate 170,749 179,233 Net realized gains (losses) 37,146 (1,118) Other income 6,700 78,521 ----- ------ Total revenues 3,586,330 4,767,724 --------- --------- Expenses: Losses and loss adjustment expenses incurred 1,335,177 1,319,355 Acquisition expenses 213,379 323,444 Payroll and related expenses 802,738 1,003,636 Other expenses 157,066 447,841 ------- ------- Total expenses 2,508,360 3,094,276 --------- --------- Earnings before income taxes 1,077,970 1,673,448 Income taxes 54,237 (45,730) ---------- ---------- Net earnings $1,023,733 $1,719,178 ---------- ---------- Net earnings per share: Basic $ 0.23 $ .28 ========== ========== Diluted $ 0.23 $ .28 ========== ========== Common shares used in computing earnings per share: Basic 4,429,730 6,077,750 ========= ========= Diluted 4,510,455 6,108,541 ========= =========
See accompanying notes to consolidated financial statements (unaudited). 4 American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Cash Flow (Unaudited) Three months ended March 31, 1998 1999 Cash flow from operating activities: Net earnings $1,023,733 $1,719,178 Adjustments to reconcile net earnings to net cash provided by operating activities: Realized losses (gains) on sale of investments (37,146) 1,118 Amortization of deferred acquisition costs 158,426 344,325 Change in: Accrued investment and interest income (675,866) (680,967) Premiums receivable 591,927 (4,302,869) Commissions receivable (28,581) 9,889 Reinsurance recoverable and ceded unearned premiums (52,166) (359,016) Due from affiliate 48,438 161,129 Income taxes 47,557 (70,754) Unpaid losses and loss adjustment expenses 818,871 1,439,354 Unearned premiums 881,994 1,144,808 Liability for deductible fees held (503,596) (41,014) Ceded premiums payable (1,107,892) 604,859 Due to affiliate (141,957) 1,075,488 Accounts payable and accrued expenses 794,595 (340,007) Collateral - 522,728 Other, net (402,860) 163,353 ------- ------- Net cash provided by operating activities 1,415,477 1,391,602 --------- --------- Cash flow from investing activities: Purchases of fixed maturities (39,454,936) (988,954) Proceeds from maturity and redemption of fixed maturities 3,390,813 80,000 Proceeds from sale of fixed maturities 4,998,332 1,786,435 Proceeds from sale of common stock 304,140 1,062 Increase in short-term investments (215,391) (463,015) Decrease (increase) in notes receivable - other 22,070 (2,030,316) Purchase of fixed assets, net (7,427) (2,117,672) ----- --------- Net cash used in investing activities (30,962,399) (3,732,460) ---------- ---------- Cash flow from financing activities: Proceeds from sale of common stock 30,837,517 1,276 ---------- ----- Net cash used in financing activities 30,837,517 1,276 ---------- ----- Net increase (decrease) in cash 1,290,595 (2,339,582) Cash at beginning of period 2,768,831 4,737,132 --------- --------- Cash at end of period $4,059,426 $2,397,550 ========== ==========
See accompanying notes to consolidated financial statements (unaudited). 5 American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Comprehensive Earnings (Unaudited) Three months ended March 31, 1998 1999 ---- ---- Net earnings $1,023,733 1,719,178 Other comprehensive earnings before income taxes: Unrealized gains (losses) on securities available for sale (104,996) (584,332) Reclassification adjustment for realized gains included in net earnings 37,146 (1,118) ------ ----- Total other comprehensive earnings (loss) before taxes (67,850) (585,450) Income tax expense (benefit) related to items of comprehensive income (6,587) (24,008) ----- ------ Other comprehensive earnings (loss) net of income taxes (61,263) (561,442) ------ ------- Total comprehensive earnings $ 962,470 $1,157,736 ========== ==========
See accompanying notes to consolidated financial statements (unaudited). 6 American Safety Insurance Group, Ltd. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited interim consolidated financial statements of American Safety Insurance Group, Ltd. ("American Safety") and its subsidiaries (collectively, the "Company") are prepared in accordance with generally accepted accounting principles in the United States and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim period presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, based on the best information available, in recording transactions resulting from business operations. The balance sheet amounts that involve a greater extent of accounting estimates and actuarial determinations subject to future changes are the Company's liabilities for unpaid losses and loss adjustment expenses. As additional information becomes available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results. While management believes that the liability for unpaid losses and loss adjustment expenses is adequate to cover the ultimate liability, such estimates may be more or less than the amounts actually paid when claims are settled. The results of operations for the three months ended March 31, 1999 may not be indicative of the results that may be expected for the full year ending December 31, 1999. These unaudited interim consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of American Safety and its subsidiaries for the year ended December 31, 1998. The unaudited interim consolidated financial statements include the accounts of American Safety and each of its subsidiaries. All significant intercompany balances have been eliminated. Note 2 - Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 is effective for years beginning after December 15, 1998. The SOP specifies the types of costs that should be capitalized and those that should be expensed as incurred in connection with an internal-use software project. Capitalized costs begin amortizing when the software is ready for its intended use, regardless of when it is placed in service. Companies are required to evaluate capitalized costs for impairment using estimated future cash flows to determine if the asset is impaired. The Company expects that adoption of SOP 98-1 will have an immaterial impact on the Company's consolidated financial position and results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for years beginning after June 15, 1999. The standard requires that all derivatives be recorded as an asset or liability, at estimated fair value, regardless of the purpose or intent for holding the derivative. If a derivative is not utilized as a hedge, all gains or losses from the change in the derivative's estimated fair value are recognized in earnings. The gains or losses from the change in estimated fair value of certain derivatives utilized as hedges are recognized in earnings or other comprehensive income depending on the type of hedge relationship. Due to the Company's limited use of derivatives, the Company expects that adoption of SFAS No. 133 will have an immaterial impact on the Company's consolidated financial position and results of operations. In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." This SOP suggests methods to determine when an entity should recognize a liability for guaranty fund and other insurance-related assessments, how to measure that liability, and when an asset may be recognized for the recovery of such assessments through premium tax offsets or policy surcharges. This SOP is effective for 1999, and the effect of initial adoption is to be reported as a cumulative catch-up adjustment. Restatement of previously issued financial statements is not allowed. Implementation of this statement is not expected to have a material impact on the Company's financial position and results of operations. 7 In October 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". This SOP provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk. It applies to all entities and all insurance and reinsurance contracts that do not transfer insurance risk except for long-duration life and health insurance contracts. The method used to account for insurance and reinsurance contracts that do not transfer insurance risk is referred to in this SOP as deposit accounting. The SOP does not address when deposit accounting should be applied. This SOP is effective for financial statements for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. Restatement of previously issued annual financial statements would not be permitted. The effect of initially adopting this SOP should be reported as a cumulative effect of a change in accounting principle (in accordance with the provisions of Accounting Principles Board Opinion No. 20, Accounting Changes). Implementation of this statement is not expected to have a material impact on the Company's financial position and results of operations, Note 3 - Nature of Operations The following is a description of certain risks facing casualty insurers: Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates which will create additional expenses not anticipated by the insurer in pricing its products and beyond those recorded in the financial statements. Regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the Company operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the Company beyond those recorded in the financial statements. The Company attempts to mitigate this risk by writing insurance business in several states, thereby spreading this risk over a large geographic area. Potential Risk of United States Taxation of Bermuda Operations. Under current Bermuda law, American Safety is not required to pay any taxes in Bermuda on either income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda that will exempt American Safety from taxation until the year 2016 in the event of any such taxes being imposed. Whether a foreign corporation is engaged in a United States trade or business or is carrying on an insurance business in the United States depends upon the level of activities conducted in the United States. If the activities of a foreign company are "continuous, regular, and considerable," the foreign company will be deemed to be engaged in a United States trade or business. Due to the fact that American Safety will continue to maintain an office in Bermuda and American Safety and American Safety Re's 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 the same operational structure as American Safety. However, because the Internal Revenue Code of 1986, as amended, the Treasury Regulations and court decisions do not definitively identify activities that constitute being engaged in a United States trade or business, and because of the factual nature of the determination, there can be no assurance that the Internal Revenue Service will not contend that American Safety or its Bermuda subsidiary are engaged in a United States trade or business. In general, if American Safety or its Bermuda subsidiary are considered to be engaged in a United States trade or business, it would be subject to (i) United States Federal income tax on its taxable income that is effectively connected with a United States trade or business at graduated rates and (ii) the 30 percent branch profits tax on its effectively connected earnings and profits deemed repatriated from the United States. However, the United States subsidiaries of American Safety are subject to U.S. Federal and state income tax. Credit Risk is the risk that issuers of securities owned by the Company or secured notes receivable will default or that other parties, including reinsurers that have obligations to the 8 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. See Note 6. Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company attempts to mitigate this risk by attempting to match the maturities of its assets with the expected payouts of its liabilities. Note 4 - Investments The amortized cost and estimated fair values of investments at December 31, 1998 and March 31, 1999 are as follows: Amount Gross Gross at which Amortized unrealized unrealized Estimated shown in the cost gains losses fair value balance sheet --------- ---------- ---------- ---------- ------------- December 31, 1998: Securities available for sale: Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $13,365,480 332,997 50,997 13,647,480 13,647,480 Obligations of states and political subdivisions 6,465,377 284,486 1,179 6,748,684 6,748,684 Corporate securities 19,688,443 364,650 53,841 19,999,252 19,999,252 Mortgage-backed securities 5,008,835 7,820 103,745 4,912,910 4,912,910 ----------- ------- ------ ---------- ---------- Total fixed maturities 44,528,135 989,953 209,762 45,308,326 45,308,326 Equity investments - common stocks 3,439,710 23,962 10,549 3,453,123 3,453,123 ----------- ------- ------ ---------- ---------- Total $47,967,845 1,013,915 220,311 48,761,449 48,761,449 =========== ========= ======= ========== ========== March 31, 1999: Securities available for sale: Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $14,528,393 128,452 197,164 14,459,681 14,459,681 Obligations of states and political subdivisions 6,454,178 250,862 6,017 6,699,023 6,699,023 Corporate securities 18,351,464 76,599 43,348 18,384,715 18,384,715 Mortgage-backed securities 4,361,631 7,271 35,443 4,333,459 4,333,459 ----------- ------- ------ ---------- ---------- Total fixed maturities 43,695,666 463,184 281,972 43,876,878 43,876,878 Equity investments - common stocks 3,356,079 32,295 5,353 3,383,021 3,383,021 ----------- ------- ------ ---------- ---------- Total $47,051,745 495,479 287,325 47,259,899 47,259,899 =========== ======= ======= ========== ==========
Note 5 - Shareholder Matters On January 29, 1998, the Company effectuated a 1,310-for-one share split and increased its authorized capital to 15,000,000 common shares and 5,000,000 preferred shares in contemplation of the Company's initial public offering which became effective February 12, 1998. All share and per share amounts have been retroactively adjusted to effect this split. Note 6 - Subsequent Event On May 29, 1998, American Safety Reinsurance, Ltd. ("American Safety Re"), a subsidiary of Registrant, purchased an existing secured loan in the original principal amount of $8,850,000 (the "Project Loan") from an affiliate of Citibank Mortgage Corp., which loan was made to Ponce Marina, Inc. (the "Developer") in connection with its planned development of 710 condominium units, a marina with 142 condominium boat slips and a yacht club, a beach club and a par 3 golf course on a 172 acre site located in Ponce Inlet, Florida (the "Property"). American Safety Re purchased the Project Loan at a discount for $5,850,082, and made additional advances to the 9 Developer and incurred other Property related costs totaling $2,009,815 following its purchase of the Project Loan. The Developer was unable to obtain construction financing for the Property and failed to make a $6,400,000 payment on the Project Loan due March 31, 1999. Immediately following the Developer's default, American Safety Re obtained a judgment against the Developer for $12,117,857 (which includes accrued interest), foreclosed on the Property and received a certificate of title to the Property on April 13, 1999. American Safety Re has invested, to date, a total of $7,859,897 in the Project Loan and the Property. American Safety Re is currently marketing the Property for sale and is evaluating a proposal from a prospective purchaser. The Property has been recently appraised for a third party by an independent appraisal firm for an amount substantially in excess of American Safety Re's investment in the Project Loan. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General American Safety is a specialty insurance holding company which, through its subsidiaries, develops, underwrites, manages and markets primary casualty insurance and reinsurance programs in the alternative insurance market for (i) environmental remediation risks; (ii) employee leasing and staffing industry risks; and (iii) other specialty risks. The Company has demonstrated expertise in developing specialty insurance coverages and custom designed risk management programs not generally available in the standard insurance market. The Company's specialty insurance programs include coverages for general liability, pollution liability, professional liability, workers' compensation and surety, as well as custom designed risk management programs (including captive and rent-a-captive programs), for contractors, consultants and other businesses and property owners who are involved with environmental remediation or exposures, employee leasing and staffing, and other specialty risks. Through its U.S. brokerage and management services subsidiaries, the Company also provides specialized insurance program development, underwriting, risk placement, reinsurance, program management, brokerage, loss control, claims administration and marketing services. The Company insures and places risks through its U.S. insurance subsidiary, American Safety Casualty Insurance Company, as well as its non-subsidiary risk retention group affiliate, American Safety Risk Retention Group, Inc., and substantial unaffiliated insurance and reinsurance companies. The Company also reinsures and places, through its Bermuda reinsurance subsidiary, American Safety Reinsurance, Ltd., and substantial unaffiliated reinsurers, a portion of the risk underwritten directly by its U.S. insurance subsidiary, its risk retention group affiliate and other insurers. Substantially all of the reinsurance business that the Company currently assumes is for primary insurance programs that the Company has developed and underwritten. The Company is able to select its roles as program developer, primary underwriter, reinsurer, program manager and broker based on its assessment of each risk profile. After determining its roles, the Company utilizes its insurance and reinsurance subsidiaries, its insurance brokerage and management services subsidiaries, and its risk retention group affiliate to generate risk premium revenues, program management fees, insurance and reinsurance commissions and investment income as appropriate. A.M. Best Company ("A.M. Best"), an independent nationally recognized insurance rating service and publisher, has assigned a rating of "A (Excellent)" on a group basis to American Safety, as well as its U.S. insurance subsidiary and its non-subsidiary risk retention group affiliate. A.M. Best's ratings are an independent opinion of an insurer's ability to meet its obligations to policyholders, which opinion is of concern primarily to policyholders, insurance agents and brokers, and should not be considered an investment recommendation. The Company's financial position and results of operation are subject to change based on various factors, including competitive conditions in the insurance industry, unpredictable developments in loss trends, changes in loss reserves, market acceptance of new coverages and 10 enhancements, and changes in levels of general business activity and economic conditions. The Company's reported combined ratio for its insurance operations may not provide an indication of the Company's overall profitability from insurance and reinsurance programs due to the exclusion of fee and commission income and expenses generated in related management and agency subsidiaries. Certain of the Company's insurance policies and reinsurance assumed, including general and pollution liability policies covering environmental remediation risks, as well as workers' compensation policies, may be subject to claims brought years after an incident has occurred or the policy period has ended. The Company is required to maintain reserves to cover its estimated liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred. The Company engages an independent internationally recognized actuarial consulting firm to provide reserve studies, opinions and rate studies. Reserves are estimates at a given time, which are established from actuarial and statistical projections by the Company of the ultimate settlement and administration costs of claims occurring on or prior to such time, including claims that have not yet been reported to the insurer. The establishment of appropriate loss reserves is an inherently uncertain process, and there can be no assurance that the ultimate payments will not materially exceed the Company's reserves. Statements made in this Report that are not based on historical information are deemed to be "forward-looking statements" under applicable federal securities laws. Such forward-looking statements are based largely on current expectations and assumptions of management and are subject to a number of risks and uncertainties which could cause actual results to differ materially from those contemplated, including, without limitation, competitive conditions in the insurance industry, unpredictable developments in loss trends, changes in loss reserves, market acceptance of new coverages and enhancements, and changes in levels of general business activity and economic conditions. Results of Operations The following table sets forth the Company's consolidated revenues: Percent Increase (Decrease) Three Months Ended March 31, 1997 1998 1999 1997 1998 to 1998 to 1999 (Dollars in thousands) Net Premiums earned: Reinsurance: Workers' compensation................ $1,045 $1,464 1,395 40.1% (4.7)% General liability from affiliate..... 451 441 643 (2.2) 45.8 Auto Liability....................... - - 13 ------ ------ ----- Total reinsurance............. 1,496 1,905 2,051 27.3 7.7 Primary insurance: Surety............................... 87 188 404 116.1 114.9 ------ ------ ----- Total primary insurance....... 87 188 404 116.1 114.9 ------ ------ --- Total net premiums earned 1,583 2,093 2,455 32.2 17.3 ------ ------ ----- Net investment income................... 333 627 699 88.3 11.5 Interest on notes receivable............ 278 268 926 (3.6) 245.5 Commission and fee income: Brokerage commission income............. 617 384 431 (37.8) 12.2 Management fees from affiliate.......... 124 171 179 37.9 4.7 ----- ------ ----- Total commission and fee income...... 741 555 610 (25.1) 9.9 ----- ------ ----- Net realized gains (losses)............. 6 37 (1) 516.7 (102.7) Other income............................ 6 6 79 - 1,216.7 ----- ------ ----- Total Revenues...... $2,947 $3,586 4,768 21.7% 33.0% ------ ------ -----
11 The following table sets forth the components of the Company's GAAP combined ratio for the periods indicated: Three months ended March 31, 1997 1998 1999 ---- ---- ---- Insurance operations: Loss and loss adjustment expense ratio........... 63.4% 63.8% 53.7% Expense ratio.................................... 16.3 10.4 16.6 ---- ---- ---- Combined ratio................................ 79.7% 74.2% 70.3% ----- ----- -----
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998 Net Premiums Earned. Net premiums earned increased 17.3% from $2.1 million in the quarter ended March 31, 1998 to $2.5 million in the quarter ended March 31, 1999. The principal factor accounting for the increase was the Company's assumption of general liability reinsurance business from an affiliated insurance carrier, which increased by 45.8% from $441,000 in the quarter ended March 31, 1998 to $643,000 in the quarter ended March 31, 1999. This increase was a result of additional premiums from new insureds in this line of business. Another factor accounting for the increase was an increase of the Company's surety business by 114.9% from $188,000 in the quarter ended March 31, 1998 to $404,000 in the quarter ended March 31, 1999. This increase is attributable to additional premiums from new business and the Company's new reinsurance program. Net Investment Income. Net investment income increased 11.5% from $627,000 in the quarter ended March 31, 1998 to $699,000 in the quarter ended March 31, 1999 as a result of the investment of additional cash flows from insurance operations and from the timing of the investment of the Company's initial public offering proceeds which took place in the middle of the first quarter of 1998. The average annual pre-tax yield on investments was 5.6% in the quarter ended March 31, 1998 and 5.5% in the quarter ended March 31, 1999. The average annual after-tax yield on investments was 5.1% in the quarter ended March 31, 1999 and 5.2% in the quarter ended March 31, 1999. Interest from Notes Receivable. Interest from notes receivable increased 245.5% from $268,000 in the quarter ended March 31, 1998 to $926,000 in the quarter ended March 31, 1999 as a result of an increase of $13.0 million in outstanding secured notes receivable compared to the same period in 1998. The notes bear interest rates ranging from 9% to 25% and are payable on various dates. Brokerage Commission Income. Income from insurance brokerage operations increased 12.2% from $384,000 in the quarter ended March 31, 1998 to $431,000 in the quarter ended March 31, 1999 Management Fees. Management fees increased 4.7% from $171,000 in the quarter ended March 31, 1998 to $179,000 in the quarter ended March 31, 1999 as a result of increased service levels provided by the Company to its risk retention group affiliate. Net Realized Gains (Losses). Net realized gains (losses) decreased from a gain of $37,000 in the quarter ended March 31,1998 to a loss of $1,000 for the quarter ended 1999. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses decreased 1.5% from $1.34 million in the quarter ended March 31, 1998 to $1.32 million in the quarter ended March 31, 1999 primarily due to lower retentions from the Company's new reinsurance program that was effective January 1, 1999 and the mix of premiums earned. General liability and surety, which carry a lower loss ratio, had an increase in premiums earned while workers' compensation, which has a higher loss ratio, had a slight decrease in premiums earned. The Company continues to record loss and loss adjustments expense for workers' compensation to the aggregate stop-loss attachment point of its reinsurance. Acquisition Expenses. Policy acquisition expenses increased 51.6% from $213,000 in the quarter ended March 31, 1998 to $323,000 in the quarter ended March 31, 1999 as a result of 12 increased premiums production and the Company's new reinsurance program for surety business which eliminated ceding commissions that previously reduced the expense. Payroll and Other Expenses. Payroll and other expenses increased 51.1% from $960,000 in the quarter ended March 31, 1998 to $1,451,000 in the quarter ended March 31, 1999 as a result of salary and benefit and operating expense increases primarily due to increased staffing for new and existing programs. Income Taxes. Federal and state income taxes decreased from $54,000 in the quarter ended March 31, 1998 to a benefit of $46,000 in the quarter ended March 31, 1999 due to additional premiums being ceded to the Company's Bermuda reinsurance subsidiary and investment income earned in Bermuda. Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997 Net Premiums Earned. Net premiums earned increased 32.2% from $1.6 million in the quarter ended March 31, 1997 to $2.1 million in the quarter ended March 31, 1998. The principal factor accounting for the increase was the Company's assumption in 1998 of workers' compensation reinsurance business from an unaffiliated insurance carrier, which increased net premiums earned from workers' compensation reinsurance by 40.1% from $1.0 million in the quarter ended March 31, 1997 period to $1.46 million in the quarter ended March 31, 1998. This increase was a result of additional premiums from new insureds in this line of business. General liability reinsurance premiums remained substantially the same, from $451,000 in the quarter ended March 31, 1997 to $441,000 in the quarter ended March 31, 1998. In the Company's primary insurance business, new premiums earned from the Company's U.S. insurance subsidiary's surety program increased 116.6% from $87,000 in the quarter ended March 31, 1997 to $188,000 in the quarter ended March 31, 1998 as a result of new accounts written. Net Investment Income. Net investment income increased 88.3% from $333,000 in the quarter ended March 31, 1997 to $627,000 in the quarter ended March 31, 1998 as a result of the investment of additional cash flows from insurance operations and from investment of the Company's initial public offering proceeds. The average annual pre-tax yield on investments was 6.6% in the quarter ended March 31, 1997 and 5.6% in the quarter ended March 31, 1998. The average annual after-tax yield on investments was 5.8% in the quarter ended March 31, 1997 and 5.1% in the quarter ended March 31, 1998. Interest from Notes Receivable. Interest from notes receivable decreased 3.61% from $278,000 in the quarter ended March 31, 1997 to $268,000 in the quarter ended March 31, 1998. Brokerage Commission Income. Income from insurance brokerage operations decreased 37.8% from $617,000 in the quarter ended March 31, 1997 to $384,000 in the quarter ended March 31, 1998 because the Company initiated a substantial rent-a-captive program in January 1997 for an 18 month term. Management Fees. Management fees increased 37.9% from $124, 000 in the quarter ended March 31, 1997 to $171,000 in the quarter ended March 31, 1998 as a result of increased service levels provided by the Company to its risk retention group affiliate. Net Realized Gains. Net realized gains from the sale of investments increased from $6,000 in the quarter ended March 31, 1997 to $37,000 in the quarter ended March 31, 1998. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 31.8% from $1.0 million in the quarter ended March 31, 1997 to $1.3 million in the quarter ended March 31, 1998 due to the 32.2% increase in net premiums earned and a corresponding increase in reserves primarily due to the increase in the workers' compensation line of business. Acquisition Expenses. Policy acquisition expenses increased 36.0% from $157,000 in the quarter ended March 31, 1997 to $213,000 in the quarter ended March 31, 1998 as a result of increased premiums. 13 Payroll and Other Expenses. Payroll and other expenses increased 33.0% from $722,000 in the quarter ended March 31, 1997 to $960,000 in the quarter ended March 31, 1998 due to salary and benefit increases and increased staffing required to handle new and existing programs. Income Taxes. Federal and state income taxes decreased from $193,000 in the quarter ended March 31, 1997 to $54,000 in the quarter ended March 31, 1998 due to decreased taxable income in the Company's U.S. insurance subsidiary. Liquidity and Capital Resources The Company historically has met its cash requirements and financed its growth principally through cash flows generated from operations. The Company's primary sources of cash flow are proceeds from the sale or maturity of invested assets, premiums earned, investment income, commission income and management fees. The Company's short-term cash requirements are primarily for claims payments, reinsurance premiums, commissions, salaries, employee benefits and other operating expenses, and the purchase of investment securities, which have historically been satisfied from operating cash flows. Due to the uncertainty regarding settlement of unpaid claims, the long-term liquidity requirements of the Company may vary, and the Company has attempted to structure its investment portfolio to take into account the historical payout patterns. Management believes that the Company's current cash flows are sufficient for its short-term needs and the Company's invested assets are sufficient for its long-term needs. The Company also purchases reinsurance to mitigate the effect of large claims and to stabilize demands on its liquidity. The Company has repurchased 16,200 common shares in the open market, to date, pursuant to its stock repurchase program. On a consolidated basis, net cash provided from operations was $1.4 million for the quarter ended March 31, 1998 and $1.4 million for the quarter ended March 31, 1999. The positive cash flows for both periods were primarily attributable to net premiums written, net earnings, and increases in reserves for unpaid losses. Because workers' compensation and general liability claims may be paid over an extended period of time, the Company has established relatively large loss reserves for such lines of business. The assets supporting the Company's reserves continue to earn investment income until claims payments are made. Total assets increased from $86.1 million at December 31, 1998 to $92.1 million at March 31, 1999, primarily due to increases in premiums receivable, reinsurance recoverable and real estate investments. Cash, invested assets and notes receivable decreased from $72.0 million at December 31, 1998 to $70.6 million at March 31, 1999. American Safety is an insurance holding company whose principal assets are its investment portfolio and its investment in the capital stock of its subsidiaries. As an insurance holding company, American Safety's ability to pay dividends to its shareholders will depend, to a significant degree, on the ability of the Company's subsidiaries to pay dividends to American Safety. The jurisdictions in which American Safety and its insurance and reinsurance subsidiaries are domiciled place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers. In January 1997, the Securities and Exchange Commission approved rule amendments regarding disclosures concerning derivative financial instruments, other financial instruments and derivative commodity instruments (the "Release"). The Release requires inclusion in the footnotes to the financial statements of extensive detail about the accounting policies followed by a company in connection with its accounting for derivative financial instruments and derivative commodity instruments. As of March 31, 1999, the Company had no investments in derivative instruments. Income Taxes American Safety is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts American Safety and its shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance until March 28, 2016. The Company, exclusive of its United States 14 subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States. Inflation Property and casualty insurance premiums are established before the amounts of losses and loss adjustment expenses are known and therefore before the extent by which inflation may affect such expenses is known. Consequently, the Company attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, the Company may be limited in raising its premiums consistent with anticipated inflation, in which event the Company, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the Company's investment portfolio with a corresponding effect on the Company's investment income. Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. If not corrected, computer applications could fail or create erroneous results by or at the Year 2000. The Company, together with consulting outside vendors, has reviewed its information technology systems (i.e., underwriting, insureds, claims and accounting) and believes that the systems will process date information accurately and without interruption when required to process dates in the year 1999 and beyond. In the context of Year 2000 issues, the Company has identified the following general categories of business partners as material to the Company's ability to conduct its operations: software, hardware and telecommunication providers, banks and investment managers, insurance brokers, agents and producers, reinsurers and reinsurance intermediaries and utilities. The Company has been in contact with its material business partners to determine their state of readiness with regard to Year 2000 compliance and the potential impact on the Company. Based on the information available to the Company, the Company has not currently identified a material business partner that will not be compliant with respect to Year 2000 issues. However, there can be no assurance that such material business partners will be Year 2000 compliant, and such noncompliance could have a material affect on the Company's financial condition and results of operations. The Company has conducted a review of its underwriting guidelines and policies, and has determined that the insurance policies issued by the Company did not insure Year 2000 claims. However, changing social and legal trends may create unintended coverage for claims by reinterpreting insurance contracts and exclusions. It is impossible to predict what, if any, exposure insurance companies may ultimately have for Year 2000 claims whether coverage for the issue was specifically excluded or included. The Company anticipates that its information technology systems will be Year 2000 compliant on or before June 30, 1999. The Company's contingency plan for any Year 2000 noncompliance of its information technology systems involves the manual entering and outputting of business records. The Company believes it has sufficient employees and other staff available to maintain its current level of customer service. To date, the Company has spent less than $100,000 on hardware and software relating to Year 2000 compliance and the Company does not anticipate any significant additional expenditures with respect to the Year 2000 issue. Item 3. Quantitative and Qualitative Disclosures About Market Risks. The Company's market risk has not changed materially since December 31, 1998. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as part of this Report: Exhibit No. Description 11 Computation of Earnings Per Share 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the period covered by this Report. 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of May 1999. American Safety Insurance Group, Ltd. By: /s/ Lloyd A. Fox Lloyd A. Fox President and Chief Executive Officer By: /s/ Steven B. Mathis Steven B. Mathis Chief Financial Officer (Principal Financial Officer) 17 EX-11 2 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 American Safety Insurance Group, Ltd. and subsidiaries Computation of Earnings Per Share Three Months Ended March 31 March 31 1998 1999 -------- -------- Basic: Earnings Available to Common Shareholders....................................... $1,023,733 $1,719,178 ========== ========== Weighted Average Common Shares Outstanding........................................ 4,429,730 6,077,750 Basic Earnings Per Common Shares .................. $ .23 $ .28 ========== ========== Diluted: Earnings Available to Common Shareholders....................................... $1,023,733 $1,719,178 ========== ========== Weighted Average Common Shares Outstanding........................................ 4,429,730 6,077,750 Weighted Average Common Shares Equivalents Associated with Options 80,725 30,791 Total Weighted Average Common Shares............................................. 4,510,455 6,108,541 ========= ========= Diluted Earnings per Common Shares $ .23 $ .28 ========== ========== 18 EX-27 3 EXHIBIT
7 1,000 3-MOS DEC-31-1999 DEC-31-1998 MAR-31-1999 43,878 0 0 3,383 0 0 50,009 2,398 3,942 125 92,083 16,140 5,039 0 0 0 0 0 61 60,368 92,083 2,455 699 (1) 79 1,319 323 1,451 1,673 (46) 1,719 0 0 0 1,719 .28 .28 14,700 0 0 0 0 16,140 0
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