-----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, AxoXmssb0o1WFj8l4Sfxvo27AdIVVtHXU84Y2dDtF8vybzBIsUoIBQBjn2fkfGuX cKjBKwRYWZ2i7aEa8Nm4PA== 0001021408-98-000548.txt : 19980817 0001021408-98-000548.hdr.sgml : 19980817 ACCESSION NUMBER: 0001021408-98-000548 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SAFETY INSURANCE GROUP LTD CENTRAL INDEX KEY: 0000783603 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23771 FILM NUMBER: 98690786 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 June 30, 1998 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 Hamilton HM HX, Bermuda (Address, zip code of principal executive offices) (441) 295-5688 (Registrant's telephone number, including area code) ------------- Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- The aggregate number of shares outstanding of Registrant's common stock, $.01 par value, on August 14, 1998 was 6,074,770. 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........................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risks.................................................. 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................... 15 Item 2. Changes in Securities and Use of Proceeds....................... 15 Item 3. Defaults Upon Senior Securities................................. 15 Item 4. Submission of Matters to a Vote of Security Holders............. 15 Item 5. Other Information............................................... 15 Item 6. Exhibits and Reports on Form 8-K................................ 15
PART I- FINANCIAL INFORMATION ITEM 1. Financial Statements American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Balance Sheets
DECEMBER 31, JUNE 30, Assets 1997 1998 ------ ------------ ----------- (unaudited) Investments: Securities available for sale, at fair value: Fixed maturities $26,462,275 $48,242,591 Equity investments 1,054,549 2,958,287 Short-term investments 1,823,830 3,006,565 ----------- ----------- Total investments 29,340,654 54,207,443 Cash 2,768,831 2,737,574 Accrued investment and interest income 781,798 1,531,482 Notes receivable: Related parties 580,000 580,000 Other 4,697,804 12,556,750 Premiums receivable 6,809,436 7,361,704 Commissions receivable 18,630 59,641 Ceded unearned premium 649,175 800,267 Reinsurance recoverable 778,975 874,658 Due from affiliate 288,951 348,441 Income tax recoverable 152,802 141,743 Deferred income taxes 209,795 252,323 Goodwill 270,010 261,124 Other assets 321,339 371,458 ----------- ----------- Total assets $47,668,200 $82,084,608 =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Liabilities: Unpaid losses and loss adjustment expenses $11,571,539 $12,764,898 Unearned premiums 2,331,579 3,710,513 Liability for deductible fees held 3,539,032 2,334,650 Reinsurance on paid loss and loss adjustment expenses 256,085 293,956 Reinsurance deposits on retroactive contract 537,500 414,458 Ceded premiums payable 5,990,907 4,271,801 Due to affiliate: Ceded premiums payable 217,062 686,802 Reinsurance on paid loss and loss adjustment expenses 41,085 9,545 Income tax payable - - Accounts payable and accrued expenses 1,342,515 2,038,052 ----------- ----------- Total liabilities 25,827,304 26,524,675 ----------- ----------- 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, 1997, 2,925,230 shares and at June 30, 1998, 6,074,770 shares 29,252 60,747 Additional paid-in capital 2,751,789 33,823,269 Retained earnings 18,751,222 21,356,783 Other comprehensive income 308,633 319,134 ----------- ----------- Total shareholders' equity 21,840,896 55,559,933 ----------- ----------- Total liabilities and shareholders' equity $47,668,200 $82,084,608 =========== ===========
See accompanying notes to consolidated financial statements (unaudited). 3 American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Earnings (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 1997 1998 1997 1998 ---- ---- ---- ---- Revenues: Direct premiums earned $ 755,244 $ 997,178 $ 1,139,009 $ 2,035,202 Assumed premiums earned: Affiliate 692,221 872,634 1,256,409 1,413,993 Nonaffiliates 870,344 1,501,534 1,914,581 3,040,990 ---------- ---------- ----------- ----------- Total assumed premiums earned 1,562,565 2,374,168 3,170,990 4,454,983 ---------- ---------- ----------- ----------- Ceded premiums earned: Affiliate 298,087 718,524 536,722 1,434,117 Nonaffiliates 79,567 468,104 249,771 778,520 ---------- ---------- ----------- ----------- Total ceded premiums earned 377,654 1,186,628 786,493 2,212,637 ---------- ---------- ----------- ----------- Net premiums earned 1,940,155 2,184,718 3,523,507 4,277,548 ---------- ---------- ----------- ----------- Net investment income 377,857 855,121 711,332 1,481,770 Interest on notes receivable 178,981 427,403 456,565 695,618 Brokerage commission income 462,422 276,909 1,079,736 660,950 Management fees from affiliate 162,815 195,787 286,916 366,536 Net realized gains(losses) (763) 57,933 4,886 95,079 Other income 3,175 4,883 8,667 11,583 ---------- ---------- ----------- ----------- Total revenues 3,124,642 4,002,754 6,071,609 7,589,084 ---------- ---------- ----------- ----------- Expenses: Losses and loss adjustment expenses incurred 996,224 1,135,975 2,009,003 2,471,152 Acquisition expenses 456,925 206,840 613,782 420,219 Other expenses 869,517 1,092,691 1,591,218 2,052,495 ---------- ---------- ----------- ----------- Total expenses 2,322,666 2,435,506 4,214,003 4,943,866 ---------- ---------- ----------- ----------- Earnings before income taxes 801,976 1,567,248 1,857,606 2,645,218 Income taxes 97,749 (14,579) 291,084 39,658 ---------- ---------- ----------- ----------- Net earnings $ 704,227 $1,581,827 $1 ,566,522 $ 2,605,560 ========== ========== =========== =========== Net earnings per share: Basic $ 0.25 $ 0.26 $ 0.55 $ 0.50 ========== ========== =========== =========== Diluted $ 0.24 $ 0.26 $ 0.53 $ 0.49 ========== ========== =========== =========== Common shares used in computing earnings per share: Basic $2,872,830 $6,044,914 $ 2,872,830 $ 5,241,784 ========== ========== =========== =========== Diluted $2,963,931 $6,175,150 $ 2,963,931 $ 5,347,401 ========== ========== =========== ===========
See accompanying notes to consolidated financial statements (unaudited). 4 American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Cash Flow (Unaudited)
Six months ended June 30, ------- 1997 1998 ---- ---- Cash flow from operating activities: Net earnings $ 1,566,522 $ 2,605,560 Adjustments to reconcile net earnings to net cash provided by Realized losses (gains) on sale of investments (4,886) (95,079) Amortization of deferred acquisition costs 325,349 244,180 Change in: Accrued investment and interest income 541,114 (749,684) Premiums receivable (1,107,424) (552,268) Commissions receivable (28,739) (41,011) Reinsurance recoverable and ceded unearned premiums (173,786) (246,775) Due from affiliate (4,176) (59,490) Income taxes (25,153) (31,469) Unpaid losses and loss adjustment expenses 855,342 1,193,359 Unearned premiums 1,137,288 1,378,934 Liability for deductible fees held 2,290,817 (1,327,424) Ceded premiums payable 523,430 (1,719,106) Due to affiliate 32,301 438,200 Accounts payable and accrued expenses 340,297 695,539 Other, net (285,319) (713,879) ------------------------------ Net cash provided by operating activities 5,982,977 1,019,587 ------------------------------ Cash flow from investing activities: Purchases of fixed maturities (7,680,084) (60,751,975) Purchases of equity investments (708,560) (2,304,221) Proceeds from maturity and redemption of fixed maturities 2,000,440 3,941,489 Proceeds from sale of fixed maturities - 35,103,718 Proceeds from sale of equity investments 241,432 728,472 Proceeds from sale of preferred stock - - Decrease (increase) in short-term investments 102,959 (967,344) Increase in notes receivable-other 1,605,338 (7,881,016) (Increase) decrease in notes receivable-related parties 150,577 - Purchase of fixed assets, net (26,412) (22,942) ------------------------------ Net cash used in investing activities (4,314,310) (32,153,819) ------------------------------ Cash flow financing activities: Proceeds from sale of common stock - 31,102,975 ------------------------------ Net cash provided by financing activities - 31,102,975 ------------------------------ Net increase (decrease) in cash 1,668,667 (31,257) Cash at beginning of period 3,271,957 2,768,831 ------------------------------ Cash at end of period $ 4,940,624 $ 2,737,574 ==============================
See accompanying notes to consolidated financial statements (unaudited). 5 American Saftey Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Comprehensive Earnings (Unaudited)
Three months ended Six months ended June 30, June 30, ---------------------- ------------------------ 1997 1998 1997 1998 ---- ---- ---- ---- Net earnings $ 704,227 $1,581,827 $1,566,522 $2,605,560 Other comprehensive earnings before income taxes: Unrealized gains (losses) on securities available for sale 308,179 (4,017) (67,824) (109,013) Reclassification adjustment for realized gains included in net earnings (763) 57,933 4,886 95,079 --------- ---------- ---------- ---------- Total other comprehensive earnings before taxes 307,416 53,916 (62,938) (13,934) Income tax expense related to items of comprehensive income 41,527 (17,848) (4,028) (24,435) --------- ---------- ---------- ---------- Other comprehensive earnings net of income taxes 265,889 71,764 (58,910) 10,501 --------- ---------- ---------- ---------- Total comprehensive earnings $ 970,116 $1,653,591 $1,507,612 $2,616,061 ========= ========== ========== ==========
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 six months ended June 30, 1998 may not be indicative of the results that may be expected for the full year ending December 31, 1998. 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 subsidiaries for the year ended December 31, 1997. The unaudited interim consolidated financial statements include the accounts of American Safety and each of its subsidiaries. All significant intercompany balances have been eliminated. Note 2 - Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes standard for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The Company adopted Statement 130 effective January 1, 1998. The primary component of the differences between net income and comprehensive income for the Company is unrealized gains on securities. Total comprehensive income for the three months ended June 30, 1997 was $970,116 as compared to $1,653,591 for the three months ended June 30, 1998. Total comprehensive income for the six months ended June 30, 1997, was $1,507,612 as compared to $2,616,061 for the six months ended June 30, 1998. 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 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, and by obtaining reinsurance. Credit Risk is the risk that issuers of securities owned by the Company or secured notes receivable will default or that other parties, including reinsurers that have obligations to the insurer, will not pay or perform. The Company attempts to mitigate 7 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. Note 4 - Investments The amortized cost and estimated fair values of investments at December 31, 1997 and June 30, 1998 are as follows:
Amount Gross Gross at which Amortized Unrealized Unrealized Estimated Shown in the Cost gains losses fair value balance sheet ---------- ------------- ------------ ------------ ------------- December 31, 1997: Securities available for sale: Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $11,725,010 128,883 2,376 11,851,517 11,851,517 Obligations of states and political subdivisions 4,782,325 220,175 -- 5,002,500 5,002,500 Corporate securities 6,545,888 51,986 13,508 6,584,366 6,584,366 Mortgage-backed securities 3,016,040 30,693 22,841 3,023,892 3,023,892 ---------- ------------- ------------ ------------ ------------- Total Fixed maturities 26,069,263 431,737 38,725 26,462,275 26,462,275 Equity investments - common stocks 1,045,493 12,688 3,632 1,054,549 1,054,549 ---------- ------------- ------------ ------------ ------------- Total $27,114,756 444,425 42,357 27,516,824 27,516,824 ========== ============= ============ ============ ============= June 30, 1998: Securities available for sale: Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $20,676,406 120,072 20,017 20,776,461 20,776,461 Obligations of States and political subdivisions 5,304,428 187,874 906 5,491,396 5,491,396 Corporate securities 17,093,830 76,398 19,772 17,150,456 17,150,456 Mortgage-backed securities 4,826,711 7,892 10,326 4,824,277 4,824,277 ---------- ------------- ------------ ------------ ------------- Total Fixed maturities 47,901,375 392,236 51,021 48,242,590 48,242,590 Equity investments - common stocks 2,869,963 90,231 1,907 2,958,287 2,958,287 ---------- ------------- ------------ ------------ ------------- Total $50,771,338 482,467 52,928 51,200,877 51,200,877 ========== ============= ============ ============ =============
Note 5 - Notes Receivable Notes receivable represent indebtedness under various secured lending arrangements with related and unrelated parties. During the quarter, the Company made a loan to an unaffiliated borrower, which amounts to 8.3% of the Company's total assets. The note is secured by real estate and the personal guaranties of the principals of the borrower. 8 Note 6- 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. 9 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 specialty 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, 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, American Safety Casualty Insurance Company, 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. In January 1998, the Company formed American Safety Reinsurance, Ltd., a Bermuda reinsurance subsidiary, and transferred a substantial portion of its reinsurance business on a going forward basis to the subsidiary. 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. 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. On June 15, 1998, A.M. Best increased American Safety's financial size rating from a VI to a VII as a result of the Company's initial public offering on February 12, 1995. 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 enhancements, and changes in levels of general business activity and economic conditions. During this decade, the Company has operated in a soft market cycle which is characterized by excess insurance capacity and declining insurance premium rates. The Company's 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 non-insurance 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 had ended. The Company maintains reserves to cover its estimated liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred. The Company has reviewed its internal business systems and believes that the systems, primarily its computer system, will process date information accurately and without interruption when required to process dates in the year 1999 and beyond. The Company has not been required to expend significant resources to address the year 2000 issue and does not anticipate any significant expenditures. Statements made in this Report 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. 11 Results of Operations The following table sets forth the Company's consolidated revenues (dollars in thousands):
Percent Increase (Decrease) ------------------------------------------------------------------------- Three Six Three months ended Six months ended months months June 30, June 30, ended ended ------------------------------------------------------------------------- 1997 1998 1997 1998 1997 1998 ------------------------------------------------------------------------- Net earned premium Reinsurance: Workers' compensation............... $ 892 $1,427 $1,937 $2,891 60.0% 49.3% General Liability from affiliate.... 594 675 1,045 1,116 13.6% 6.8% ------ ------ ------ ------ Total reinsurance............ 1,486 2,102 2,982 4,007 41.5% 34.4% Primary insurance: Surety.............................. 455 83 542 271 -81.8% -50.0% ------ ------ ------ ------ Total primary insurance...... 455 83 542 271 -81.8% -50.0% ------ ------ ------ ------ Total net earned premium 1,941 2,185 3,524 4,278 12.6% 21.4% ------ ------ ------ ------ Net investment income.................. 378 855 711 1,482 126.2% 108.4% Interest on notes receivable........... 179 428 457 696 139.1% 52.3% Commission and fee income: Brokerage commission income............ 463 277 1,080 661 -40.2% -38.8% Management fees from affiliates........ 163 195 287 366 19.6% 27.5% ------ ------ ------ ------ Total commission and fee income..... 626 472 1,367 1,027 -24.6% -24.9% ------ ------ ------ ------ Net realized gains (losses)............ (1) 58 5 95 -5900.0% 1800.0% Other income........................... 2 5 8 11 150.0% 37.5% ------ ------ ------ ------ Total revenues..... $3,125 $4,003 $6,072 $7,589 28.1% 25.0% ====== ====== ====== ======
12 The following table sets forth the components of the Company's GAAP combined ratio for the periods indicated:
Three months ended Six months ended June 30 June 30 -------------------------------------------------- 1997 1998 1997 1998 ---- ---- ---- ---- Insurance operations: Loss and loss adjustment expense ratio.................. 51.4% 52.0% 57.0% 57.8% Expense ratio........................................... 29.7 12.4 20.3 11.4 ---- ---- ---- ---- Combined ratio....................................... 81.1% 64.4% 77.3% 69.2% ==== ==== ==== ====
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997 Net Premiums Earned. Net premiums earned increased 12.6% from $1.9 million in the quarter ended June 30, 1997 to $2.2 million in the quarter ended June 30, 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 60.0% from $892,000 in the quarter ended June 30, 1997 to $1.4 million in the quarter ended June 30, 1998. This increase was a result of additional premiums from new insureds in this line of business. General liability reinsurance premiums increased 13.6% from $594,000 in the quarter ended June 30, 1997 to $675,000 in the quarter ended June 30, 1998. In the Company's primary insurance business, net premiums earned from the Company's U.S. insurance subsidiary's surety program decreased from $455,000 in the quarter ended June 30, 1997 to $83,000 in the quarter ended June 30, 1998 primarily as a result of the discontinued bail bond program. Net Investment Income. Net investment income increased 126.2% from $378,000 in the quarter ended June 30, 1997 to $855,000 in the quarter ended June 30, 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 6.5% in the quarter ended June 30, 1997 and 6.0% in the quarter ended June 30, 1998. The average annual after-tax yield on investments was 5.5% in the quarter ended June 30, 1997 and 5.6% in the quarter ended June 30, 1998. Interest from Notes Receivable. Interest from notes receivable increased 139.1% from $179,000 in the quarter ended June 30, 1997 to $428,000 in the quarter ended June 30, 1998 as a result of increases in outstanding notes receivable. Brokage Commission Income. Income from insurance brokerage operations decreased 40.2% from $463,000 in the quarter ended June 30, 1997 to $277,000 in the quarter ended June 30, 1998 because of additional premiums being directly written by the Company's U.S. insurance subsidiary where acquisition expenses and brokerage income are eliminated due to consolidation. Management Fees. Management fees increased 19.6% from $163,000 in the quarter ended June 30, 1997 to $195,000 in the quarter ended June 30, 1998 as a result of increased service levels provided by the Company to its risk retention group affiliate. Net Realized Gains (Losses). Net realized gains from the sale of investments increased from a loss of $763 in the quarter ended June 30, 1997 to a gain of $58,000 in the quarter ended June 30, 1998. 13 Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 14.0% from $996,000 in the quarter ended June 30, 1997 to $1,136,000 in the quarter ended June 30, 1998 due to the 12.6% 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 decreased 54.7% from $457,000 in the quarter ended June 30, 1997 to $207,000 in the quarter ended June 30, 1998 as a result of increased premiums directly written by the Company's U.S. insurance subsidiary where acquisition expenses and brokerage income are eliminated due to consolidation. Other Expenses. Other expenses increased 33.0% from $870,000 in the quarter ended June 30, 1997 to $1.1 million in the quarter ended June 30, 1998 due to salary and benefit increases and increased staffing for new and existing programs. Income Taxes. Federal and state income taxes decreased from $98,000 in the quarter ended June 30, 1997 to a benefit of $15,000 in the quarter ended June 30, 1998 due to decreased taxable income in the Company's U.S. insurance subsidiary. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Net Premiums Earned. Net premiums earned increased 21.4% from $3.5 million in the six months ended June 30, 1997 to $4.3 million in the six months ended June 30, 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 49.3% from $1.9 million in the six months ended June 30, 1997 to $2.9 million in the six months ended June 30, 1998. This increase was a result of additional premiums from new insureds in this line of business. General liability reinsurance premiums increased 6.8% from $1.0 million in the six months ended June 30, 1997 to $1.1 million in the six months ended June 30, 1998. In the Company's primary insurance business, net premiums earned from the Company's U.S. insurance subsidiary's surety program decreased from $542,000 in the six months ended June 30, 1997 to $271,000 in the six months ended June 30, 1998 primarily as a result of the discontinued bail bond program. Net Investment Income. Net investment income increased 108.4% from $711,000 in the six months ended June 30, 1997 to $1.5 million in the six months ended June 30, 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 6.8% in the six months ended June 30, 1997 and 7.1% in the six months ended June 30, 1998. The average annual after-tax yield on investments was 5.7% in the six months ended June 30, 1997 and 6.5% in the six months ended June 30, 1998. Interest from Notes Receivable. Interest from notes receivable increased 52.3% from $457,000 in the six months ended June 30, 1997 to $696,000 in the six months ended June 30, 1998 as a result of increases in outstanding notes receivable. Brokerage Commission Income. Income from insurance brokerage operations decreased 38.8% from $1.1 million in the six months ended June 30, 1997 to $661,000 in the six months ended June 30, 1998 because of additional premiums being directly written by the Company's U.S. insurance subsidiary where acquisition expenses and brokerage income are eliminated due to consolidation. Management Fees. Management fees increased 27.5% from $287,000 in the six months ended June 30, 1997 to $366,000 in the six months ended June 30, 1998 as a result of increased services provided by the Company to its risk retention group affiliate. Net Realized Gains. Net realized gains from the sale of investments increased from $5,000 in the six months ended June 30, 1997 to $95,000 in the six months ended June 30, 1998. 14 Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 23.0% from $2.0 million in the six months ended June 30, 1997 to $2.5 million in the six months ended June 30, 1998 due to the 21.4% 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 decreased 31.5% from $614,000 in the six months ended June 30, 1997 to $420,000 in the six months ended June 30, 1998 as a result of increased premiums being directly written by the Company's U.S. insurance subsidiary where acquisition expenses and brokerage income are eliminated due to consolidation. Other Expenses. Other expenses increased 29.0% from $1.6 million in the six months ended June 30, 1997 to $2.1 million in the six months ended June 30,1998 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 $291,000 in the six months ended June 30, 1997 to $40,000 in the six months ended June 30, 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. On a consolidated basis, net cash provided from operations was $6.0 million for the six months ended June 30, 1997 and $1.0 million for the six months ended June 30, 1998. 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 $47.7 million at December 31, 1997 to $82.1 million at June 30, 1998, primarily due to proceeds of the Company's initial public offering in February 1998. Cash, invested assets and notes receivable increased from $37.4 million at June 30, 1997 to $70.1 million at June 30, 1998. 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 the Company 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. Managements believes it has significant liquidity in the near term to accomplish its business objectives. As of June 30, 1998 the Company had no investments in derivative financial instruments. 15 Income Taxes American Safety is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts American Safety and its shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance until March 28, 2016. The Company, exclusive of its United States subsidiaries, does not 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. Item 3. Quantitative and Qualitative Disclosures About Market Risks. Not Applicable. 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. On August 11, 1998, the Company announced that Stephen F. Clarke has resigned as the Company's chief financial officer to pursue private business interests. Steven B. Mathis, currently the Company's controller, has been named chief financial officer. Mr. Mathis has worked for the Company since 1992 and has over nine years of accounting experience in the insurance industry. 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. 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of August 1998. 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) 18 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 Six Months Ended -------------------------- -------------------------- June 30, June 30, June 30, June 30, 1997 1998 1997 1998 ------------- ------------ ------------- ------------ Basic: Earnings Available to Common Shareholders............................ $ 704,227 $1,581,827 $ 1,566,522 $2,605,560 ============= ============= ============= ============= Weighted Average Common Shares Outstanding............................. 2,872,830 6,044,914 2,872,830 5,241,784 Basic Earnings per Common Share......... $ .25 $ .26 $ .55 $ .50 ============= ============= ============= ============= Diluted: Earnings Available to Common Shareholders............................ $ 704,227 $1,581,827 $1,566,522 $ 2,605,560 ============= ============= ============= ============= Weighted Average Common Shares Outstanding............................. 2,872,830 6,044,914 2,872,830 5,241,784 Weighted Average Common Share Equivalents Associated with Options:.... 91,101 130,236 91,101 105,617 Total Weighted Average Common Shares.................................. 2,963,931 6,175,150 2,963,931 5,347,401 ============= ============= ============= ============= Diluted Earnings per Common Share....... $ .24 $ .26 $ .53 $ .49 ============= ============= ============= =============
EX-27 3 FINANCIAL DATA SCHEDULE
7 1,000 3-MOS DEC-31-1998 MAR-31-1998 JUN-30-1998 48,243 0 0 2,958 0 0 54,207 2,738 1,675 186 82,085 12,765 3,711 0 0 0 0 0 61 55,499 82,085 2,185 855 58 5 1,136 207 1,093 1,567 (15) 1,582 0 0 0 1,582 .26 .26 12,390 2,190 (676) 0 1,139 12,765 65
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